Attached files
SECURITIES
AND EXCHANGE COMMISSION
Washington D.C.
20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF
1934
For the
Fiscal Year Ended: December 31, 2009
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
FOR
THE TRANSITION PERIOD FROM __ TO __
COMMISSION
FILE NO. 000-33129
INTERNATIONAL
CARD ESTABLISHMENT, INC.
(Exact
Name of Small Business Issuer as Specified in its Charter)
|
Delaware
95-4581903
_______________________________ ___________________
(State
or other jurisdiction
of
(I.R.S.
Employer
incorporation
or
organization)
Identification
No.)
555 Airport Way, Suite
A
Camarillo,
California 93010
________________________________________ __________
(Address
of principal executive
offices) (Zip
code)
|
Issuer’s
telephone number: (866) 423-2491
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
common
stock, par value $.0005 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 [ ] No
[ ]
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 [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller
reporting company [X]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
Based on
the closing price of December 31, 2009, the aggregate market value of common
stock held by non-affiliates of the registrant was $987,579.
The
number of common shares outstanding of the registrant was 35,873,703 as of March
31, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
NONE.
Transitional
Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE
OF CONTENTS
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PART
I
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ITEM
1.
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Description
Of Business
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4
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ITEM
2.
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Properties
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16
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ITEM
3.
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Legal
Proceedings
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16
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ITEM
4.
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Reserved
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16
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PART
II
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ITEM
5.
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Market
For Registrant's Common Equity, Related Stockholder Matters And Issuer
Purchases Of Equity Securities
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16
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ITEM
6.
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Selected
Financial Data
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18
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ITEM
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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ITEM
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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21
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ITEM
8.
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Financial
Statements and Supplementary Data
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22
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ITEM
9.
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Changes
In And Disagreements With Accountants On Accounting Andfinancial
Disclosure
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39
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ITEM
9A.
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Controls
And Procedures
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39
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ITEM
9B.
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Other
Information
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40
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PART
III
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ITEM
10.
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Directors,
Executive Officers And Corporate Governance
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40
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ITEM
11.
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Executive
Compensation
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42
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ITEM
12.
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Security
Ownership Of Certain Beneficial Owners And Management And Related
Stockholder Matters
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43
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ITEM
13.
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Certain
Relationships And Related Transactions, And Director
Independence
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44
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ITEM
14.
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Principal
Accountant Fees And Services
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44
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PART
IV
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ITEM
15.
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Exhibits
And Financial Statement Schedules
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44
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STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
In this
annual report, references to "International Card Establishment, Inc.," "ICE",
"the Company," "we," "us," and "our" refer to International Card Establishment,
Inc. and its subsidiaries.
Except
for the historical information contained herein, some of the statements in this
Report contain forward-looking statements that involve risks and uncertainties.
These statements are found in the sections entitled "Business," "Management's
Discussion and Analysis or Plan Operation," and "Risk Factors." They include
statements concerning: our business strategy; expectations of market and
customer response; liquidity and capital expenditures; future sources of
revenues; expansion of our proposed product line; and trends in industry
activity generally. In some cases, you can identify forward-looking statements
by words such as "may," "will," "should," "expect," "plan," "could,"
"anticipate," "intend," "believe," "estimate," "predict," "potential," "goal,"
or "continue" or similar terminology. These statements are only predictions and
involve known and unknown risks, uncertainties and other factors, including, but
not limited to, the risks outlined under "Risk Factors," that may cause our or
our industry's actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. For example, assumptions that could cause actual results to vary
materially from future results include, but are not limited to: our ability to
successfully develop and market our products to customers; our ability to
generate customer demand for our products in our target markets; the development
of our target markets and market opportunities; our ability to manufacture
suitable products at competitive cost; market pricing for our products and for
competing products; the extent of increasing competition; technological
developments in our target markets and the development of alternate, competing
technologies in them; and sales of shares by existing shareholders. Although we
believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Unless we are required to do so under US federal securities
laws or other applicable laws, we do not intend to update or revise any
forward-looking statements.
ITEM
1. Description
Of Business
History
International
Card Establishment, Inc. (formerly Summit World Ventures, Inc.) was incorporated
on December 18, 1986, under the laws of the State of Delaware to engage in any
lawful corporate activity, including, but not limited to, selected mergers and
acquisitions. Prior to July 28, 2000, we were in the developmental stage, whose
sole purpose was to locate and consummate a merger or acquisition with a private
entity, and we did not have any operations. On July 28, 2000, we acquired
iNetEvents, Inc., a Nevada corporation and commenced operations. iNetEvents,
Inc., a Nevada corporation, was incorporated on February 3, 1999, and provided
Internet support and supply software for real time event/convention information
management.
On
January 16, 2003, we entered into a Plan and Agreement of Reorganization with
International Card Establishment, Inc., a Nevada corporation, and its
shareholders. International Card Establishment, Inc., a Nevada corporation, was
incorporated on July 26, 2002. As part of the acquisition, a reorganization in
the form of a reverse merger, International Card Establishment, Inc. became our
wholly-owned subsidiary, and there was a change of our control. Following the
International Card Establishment, Inc. acquisition we changed our corporate name
from iNetEvents, Inc. to International Card Establishment, Inc. and reverse
split our outstanding shares of common stock on a one for two share
basis.
Effective
September 8, 2004, we entered into a Plan and Agreement of Reorganization with
Neos Merchant Solutions, Inc., a Nevada corporation, and its shareholders.
Effective September 8, 2004, Neos Merchant Solutions, Inc. became our wholly
owned subsidiary.
In May
2008 we started LIFT Network, a new sales division focused on marketing for
small to medium sized businesses. LIFT Network is based in our corporate offices
in Camarillo, California with a small office in Tampa, Florida.
In
January 2009 we began a new month-to-month “rental” (“LiftMySales”) program. The
first sales under this program were booked in February 2009. Under this program,
there is no long-term contract and the merchant pays an all inclusive fee for
the loan of a terminal and monthly fees for all services. These services have
been expanded to include assistance to the merchant in marketing their company
including on-line “coupon” and sales tools. This program is being marketed under
the LIFT name. A video detailing the program is available at www.liftmysales.com.
Under this program, the merchant is provided a “loaner” terminal.
As used
in these Notes to the Consolidated Financial Statements, the terms the
"Company", "we", "us", "our" and similar terms refer to International Card
Establishment, Inc. and, unless the context indicates otherwise its consolidated
subsidiaries. The Companies subsidiaries include NEOS Merchant Services
("NEOS"), a Nevada corporation, which provides smart card loyalty programs in an
integrated vertical system for its customers, as well as other electronic
payment services (merchant services); International Card Establishment ("ICE"),
which provides electronic payment services (merchant services); and INetEvents,
Inc. ("INET"), a Nevada corporation, which has been dormant since
2005.
4
Industry
Overview
The use
of card-based forms of payment, such as credit and debit cards, by consumers in
the United States has steadily increased over the past ten years. The
proliferation of credit and debit cards has made the acceptance of card-based
payment a necessity for businesses, both large and small, in order to remain
competitive. In its 2008 publication on transaction processing, leading equity
research firm Raymond James Financial reported that overall credit card
transactions will grow domestically from an estimated 26.6 billion transactions
in 2006 to 36.2 billion by 2010. Raymond James reported that total credit card
purchase volume will grow from $1.8 trillion in 2006 to $2.6 trillion by 2010,
with average tickets increasing from $70.10 per transaction to $71.50 over the
same period.
We
believe that the card-based payment processing industry will continue to benefit
from the following trends:
FAVORABLE
DEMOGRAPHICS. As consumers age, we expect that they will continue to use the
payment technology to which they have grown accustomed. Consumers are beginning
to use card-based and other electronic payment methods for purchases at an
earlier age. As these consumers who have witnessed the wide adoption of card
products, technology and the Internet comprise a greater percentage of the
population and increasingly enter the work force, we expect that purchases using
card-based payment methods will comprise an increasing percentage of total
consumer spending.
INCREASED
CARD ACCEPTANCE BY SMALL BUSINESSES. The proliferation of credit and debit cards
has made the acceptance of card-based payment a necessity for businesses, both
large and small, in order to remain competitive. As a result, many of these
small to medium-sized businesses are seeking, and we expect many new small to
medium-sized businesses to continue to seek, to provide customers with the
ability to pay for merchandise and services using credit or debit cards,
including those in industries that have historically accepted cash and checks as
the only forms of payment for their merchandise and services. Historically,
larger acquiring banks have marketed credit card processing services to national
and regional merchants and have not focused on small to medium-sized merchants,
as small to medium-sized merchants are often perceived as too difficult to
identify and expensive to service. International Card Establishment, Inc.
("ICE") targets these small to medium-size merchants as its primary customer
base. These merchants generally have a lower volume of credit card transactions,
are difficult to identify and have traditionally been underserved by credit card
processors.
GROWTH IN
CARD-NOT-PRESENT TRANSACTIONS. Market researchers expect dramatic growth in
card-not-present transactions due to the rapid growth of the Internet. US online
retail reached $175 billion in 2007 in the USA and is projected to grow to $335
billion by 2012, as forecasted by Forrester Research, Inc. This growth is based
on two primary factors:
Ÿ continued
shift of sales away from stores and to online and catalog purchases,
and
Ÿ online
shoppers appear to be effected less by the current economic client.
The
Business Of Our Subsidiary ICE
Business
Summary
International
Card Establishment, Inc. ("ICE") targets small to medium-size merchants as its
primary customer base. These merchants generally have a lower volume of credit
card transactions, are difficult to identify and have traditionally been
underserved by credit card processors. Management of ICE estimates that there
are approximately 5.7 million merchant locations in the United States currently
accepting Visa and MasterCard credit cards in the small merchant market segment
and that approximately 4.2 million of such small merchant locations utilize
electronic processing for credit card transactions. Management believes the
small and medium-sized merchant market offers ICE significant growth
opportunities for the "first time" installation and subsequent servicing of
credit card authorization and payment systems because this market has
traditionally not been targeted by larger credit card companies.
ICE
utilizes contractual relationships with agents to reach merchants that would
otherwise be difficult to identify and locate using customary marketing
practices. Pursuant to these relationships, agents endorse the processing
systems marketed and serviced by ICE and participate in originating new
customers for ICE. Through the use of independent outside agents, management
believes ICE's cost structures will continue to be competitive with the cost
structures of its competitors.
ICE
provides comprehensive customer service and support to its merchants requiring
consultative problem solving and account management. ICE also provides value
added products such as Gift & Loyalty, through our NEOS Merchant Solutions
subsidiary, that distinguish ICE from its competitors. Management believes that
providing cost-effective, reliable and responsive service and value added
services and products is an effective long-term strategy to retain its merchant
base. Through agent based acquisitions of merchant accounts, merchant retention
and the increasing use and acceptance of credit cards, management believes ICE
will develop a stable and growing recurring base of revenues.
5
Market
Outlook
Historically,
larger acquiring banks have marketed credit card processing services to national
and regional merchants, not emphasizing small to medium-sized merchants, as
small merchants are often difficult to identify and expensive to service. This
created an opportunity for non-banks, including independent sales organizations
("ISO") such as ICE, which recognized the business potential of providing
electronic processing to these small merchants. Management estimates that there
are approximately 5.7 million small merchant locations nationwide accepting Visa
and MasterCard credit cards. The transaction processing industry has undergone
rapid consolidation over the last several years with the controlling over 50% of
the market share (First Data - 49.51%, BA Merchant Services - 13.09% and
Nova/Key - 8.41%) according to the March 2008 Nilson Report. Merchant
requirements for improved customer service and the demands for additional
customer applications have made it difficult for some community and regional
banks and ISO's to remain competitive. Many of these providers are unwilling or
unable to invest the capital required to meet those evolving demands, and are
leaving the transaction processing business or otherwise seeking partners to
provide transaction processing for their customers. Despite this ongoing
consolidation, the industry remains fragmented with respect to the number of
entities providing merchant services. Management believes that these factors
will result in continuing industry consolidation over the next several
years.
Operating
Strategy
FOCUS ON
SMALL TO MEDIUM-SIZED MERCHANTS. ICE has focused its marketing efforts on small
to medium-sized merchants, which have traditionally been underserved by
processing banks. Management believes it understands the unique characteristics
of this market segment and has tailored its marketing and servicing efforts
accordingly. ICE believes it is able to provide credit and debit card processing
at rates that are generally competitive with those available from other
processors, as well as value added products such as Gift &
Loyalty.
INCREASE
AGENT BASE. ICE utilizes contractual relationships with agents to reach
merchants that would otherwise be difficult to identify and locate using
customary marketing practices. Pursuant to these relationships, agents endorse
the processing systems marketed and serviced by ICE and participate in
originating new customers for ICE. Using the leads generated by its agents
provides ICE with a cost-effective means of contacting small merchants that
traditionally have been difficult to reach. ICE actively recruits new agents and
is focused on expansion of its agent base as a means of increasing overall
revenues.
DELIVER
CUSTOMER SERVICE SUPPORT AND VALUE ADDED PRODUCTS SERVICES. Management believes
providing cost-effective, reliable and responsive service and value added
products and services is an effective long-term strategy to retain its merchant
base. The size of ICE's merchant base enables it to support a customer service
program designed to provide consultative problem solving and account management.
ICE also distinguishes itself from many competitors by offering value added
products such as Gift & Loyalty and will continue to broaden its product and
service offerings which management believes will appeal to small to medium size
merchants.
INCREASE
OPERATING EFFICIENCIES. Currently, ICE outsources many aspects of its processing
services to third-parties which have excess capacity and the expertise to handle
ICE's needs.
Management
believes because its merchant base generates significant transaction volume in
the aggregate, ICE has been able to negotiate competitive pricing from its
processing providers at favorable rates. Management believes that it will
achieve significant reductions in certain operating expenses through operational
efficiencies, economies of scale and improved labor productivity as overall
revenues increase. ICE intends to continue to outsource certain components of
its processing services as long as it is economically more attractive than to
develop and support these services within ICE, allowing management to focus on
its core business of sales, marketing and customer service.
Through
merchant retention, increased credit card use, and increased direct marketing
efforts ICE has developed a stable and recurring base of revenues. In addition
to its high customer service level, ICE's endorsements from agents provide an
additional link to its merchants that tend to reduce attrition.
Furthermore,
management believes that the relative smaller size of the merchants it services
make the merchants less likely to change providers because of the up-front costs
associated with a transfer.
6
Growth
Strategy
ICE's
growth strategy is twofold:
1.
to pursue external growth by constantly expanding its independent agent base,
and
2.
to utilize its proprietary Gift & Loyalty platform to reach an even greater
number of merchants through value-added products.
Through
the use of its agent relationships, ICE obtains new merchant accounts by
offering merchants technologically advanced products, such as our proprietary
Gift & Loyalty program, and programs with better levels of service than
those obtainable from other sources.
Marketing
ICE's
marketing strategy is to solicit prospective merchants primarily through
independent outside agents. Our independent outside agents use a variety of
self-directed marketing methods to reach potential merchants. Under these
arrangements, ICE often obtains the exclusive endorsement of the outside
agents.
Processing
Relationships
ICE
markets credit and debit card based payment processing services pursuant to a
contractual relationship (the "Processing Agreement") with First Data Merchant
Services Corporation ("FDMS"), Financial Transactions Services, LLC and
BancorpSouth Bank, a processing bank and member of Visa and MasterCard. The
Processing Agreement provides that BancorpSouth Bank will process merchant
credit card transactions as an Acquiring bank and that FDMS is responsible for
all other processing and accounting functions relating to the clearing and
settlement of credit card transactions, including merchant processing and
settlement; merchant credit research; merchant activation and approval; merchant
security and recovery; merchant customer services; merchant chargeback and
retrieval services; and other related back office services. The Processing
Agreement provides ICE is paid its aggregate merchant's net processing revenue
and ancillary fees, on a monthly basis, for as long as the merchants utilize ICE
for bank card processing.
Under the
Processing Agreement ICE bears full liability for any unfulfilled chargebacks or
merchant fraud. The Processing Agreement may be terminated by any of the parties
in the event of default of obligations, insolvency or receivership, or failure
to make payments when due or to abide by the rules and regulations of Visa and
MasterCard. ICE solicits merchants to process transactions under the Processing
Agreement.
The
Processing Agreement contains aspects of both marketing and service. The
marketing portions of the agreements permit ICE and its authorized agents to
originate new merchants, which then enter into contractual agreements with
BancorpSouth Bank and ICE for processing of credit card transactions. The
service portion of the agreements permits ICE to provide appropriate service
(including terminal programming and shipping, employee training, equipment
supply and repair and operational support) to the merchants solicited to process
under the Processing Agreement. Although the marketing portion of the Processing
Agreement is limited as to time, the service portion is not. Accordingly, ICE
has a right to continue to receive revenues under the Processing Agreement, so
long as ICE remains in compliance with the provisions of the Processing
Agreement.
Merchant
Clients
ICE
serves a diverse portfolio of small to medium-sized merchant clients, primarily
in general retail industries. Currently, no one customer accounts for more than
10% of ICE's charge volume. This client diversification has contributed to ICE's
growth despite the varying economic conditions of the regions in which its
merchants are located.
Merchant
attrition is an expected aspect of the credit card processing business.
Historically, ICE's attrition has related to merchants going out of business,
merchants returning to local processing banks or merchants transferring to
competitors for rates ICE was unwilling to match.
Merchant fraud is another expected aspect
of the credit card processing business. ICE is responsible for any unfulfilled
chargebacks or merchant fraud services pursuant to the Processing Agreement.
Examples of merchant fraud include inputting false sales transactions or false
credits. The parties to the Processing Agreement monitor merchant charge volume,
average charge and number of transactions, as well as check for unusual patterns
in the charges, returns and chargebacks processed. As part of its fraud
avoidance policies, ICE generally will not process for certain types of
businesses which provide future services wherein incidents of fraud have been
common.
7
ICE also
engages the services of and receives residual income from other processing
companies such as Card Service International RBS Lynk Systems, and Network One
Financial. These processing companies maintain 100% of the risk, including
liabilities arising from merchant chargeback or cardholder fraud. No obligations
have been incurred significant or otherwise by ICE in these revenue sharing
programs.
ICE's
independent agents solicit merchants to utilize our processing services. The
agents must abide by Visa, MasterCard and NACHA regulations for acceptable
merchants, the prevention of fraud, and must perform up to an agreed upon
standard and abide by general obligations such as Confidentiality,
Indemnification, Disclaimer of all Warranties, and Limitation of Liability. ICE
bills an agent for equipment shipped (classified as merchant service revenue and
cost of sale). Commissions are expensed and paid upon the acceptance and
installation of equipment. Residual payments are recorded in the month the
liabilities are incurred and paid within 60 days.
Merchant
Services
Management
believes providing cost-effective, reliable and responsible service is an
effective method of retaining merchant clients. ICE maintains personnel and
systems necessary for providing such services directly to merchants and has
developed a comprehensive program involving consultative problem solving and
account management. ICE maintains a help desk to respond to inquiries from
merchants regarding terminal, communication and training issues. Service
personnel provide terminal application consultation by telephone and regularly
reprogram terminals via telephone lines to accommodate particular merchant needs
regarding program enhancements, terminal malfunctions and Visa and MasterCard
regulations. In addition, merchants may obtain direct, personal assistance in
reconciling network and communications problems, including problems with network
outages and local phone company services. ICE continually reviews its customer
service program to further enhance the customer service it provides and to
accommodate future growth of ICE's merchant base. ICE's terminals are
"downloadable," meaning additional services, such as authorization or payment
services for additional credit cards, can be installed in the terminal
electronically from ICE's offices without the necessity of replacement equipment
or an on-site installation visit. Additionally, peripheral equipment such as pin
pads and printers can easily be forwarded to the merchants upon request. ICE
also loans, tests and ships POS equipment directly to merchant locations, and
provides complete repair-or-replacement services for malfunctioning terminals.
Generally, ICE can arrange for delivery of replacement terminals by overnight
courier.
Competition
The
market for providing electronic bank card authorization and payment systems to
retail merchants is highly competitive. ICE competes in this market primarily on
the basis of price, technological capability, customer service and breadth of
product and services. Many small and large companies compete with us in
providing payment processing services and related services for card-not-present
and card-present transactions to a wide range of merchants. There are a number
of large transaction processors, including First Data Merchant Services
Corporation, National Processing, Inc., Global Payments, Inc. and Elavon, Inc.
(a subsidiary of U.S. Bancorp), that serve a broad market spectrum from large to
small merchants and provide banking, ATM and other payment-related services and
systems in addition to card-based payment processing. There are also a large
number of smaller transaction processors that provide various services to small
and medium sized merchants. Many of our competitors have substantially greater
capital resources than ICE and operate as subsidiaries of financial institutions
or bank holding companies, which may allow them on a consolidated basis to own
and conduct depository and other banking activities that we do not have the
regulatory authority to own or conduct. We believe that our specific focus on
small to medium size merchants and our breadth of products and services, such as
Gift & Loyalty, in addition to our understanding of the needs and risks
associated with providing payment processing services to these merchants, gives
ICE a competitive advantage over larger competitors, which have a broader market
perspective and often are not able to accommodate the demands of small to medium
size merchants.
The
Business Of Our Subsidiary NEOS
On
September 9, 2004, the Company completed an Agreement and Plan of Merger with
NEOS Merchant Solutions, Inc. ("NEOS"), a Nevada corporation. With, NEOS
becoming our wholly-owned subsidiary, we provide turnkey "Smart Card"-based as
well as traditional "Magnetic Stripe Card"-based solutions for merchants wishing
to offer automated gift and loyalty services. These programs provide small
merchants additional value through integrated loyalty programs which drive
repeat business and through other optional integrated products offering
merchants automated data capture and storage of personal information on the
merchant's customer base. The merchant is provided customized merchant branded
proprietary gift and loyalty cards. NEOS incorporates a merchant's existing logo
and artwork, or designs custom artwork for an additional fee, for use on the
gift and loyalty cards.
NEOS is
an information and financial transaction application service provider
specializing in "Gift and Loyalty" products and point of sale (POS) financial
transaction services to small and medium retail merchants. NEOS integrates its
proprietary "Gift and Loyalty" software with existing point of sale payment
processing (i.e. traditional credit, debit, check verification, I.D.
verification), thereby consolidating its retail merchant revenue enhancing
solutions with commodity driven payment processing services. NEOS' primary
product is a unique full function, turnkey front and back-end gift and loyalty
solution, primarily utilizing the fast emerging smart card technology as well as
magnetic stripe, today's prominent medium for transaction processing. NEOS
controls the entire environment for this product by utilizing a closed loop
software platform consisting of transaction based terminal software and hardware
and integrated POS solutions at the point of sales that process all activity
through the NEOS host called "MATRIXX" for all smart and magnetic stripe card
related gift and loyalty card activity. The system split dials or re-directs
electronic payment processing related transactions to the appropriate processing
entity for credit, debit, check and other commodity transaction
elements.
Products
8
PAYMENT
PROCESSING SOFTWARE - credit, debit, and check verification are integrated into
the POS terminal to consolidate merchant level functionality, system and support
requirements. Terminals presently support Vital, Lynk, Concord EFS, and First
Data. All terminals have the capability to split dial e-commerce related
requests to the appropriate processor. NEOS' Software "Gift and Loyalty"
products are as follows:
|
|
Ÿ
|
MATRIXX
- the NEOS proprietary host manages the processing functions to include
transaction posting, reporting, inquiry and statement issuance of all gift
and loyalty related transactions. The host system resides at an external
third party hosting facility with a redundant backup at the corporate
offices in Camarillo, California.
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Ÿ
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POS
TERMINAL APPLICATION SOFTWARE - proprietary software allows up to eight
standard variations of gift and loyalty to facilitate various key market
criteria and I.D. verification capable of reading line three of a
magnetic-stripe card.
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Ÿ
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CHIP
LEVEL (SMART CARD) OPERATING SYSTEM - an application that mirrors ongoing
transaction data and stores customer specific or merchant specific
information to assist I.D., buying trends, demographics,
etc.
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Ÿ
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VIRTUAL
MERCHANT DATABASE - at minimum, merchants can retrieve real-time
information about customer purchases, sales patterns, contribution
amounts, gift and loyalty activity, balances, etc. Also known as Loyalty
Management Database and/or Merchant Data
Center.
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NEOS'
Hardware "Gift and Loyalty" products are:
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|
Ÿ
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POS
TERMINALS - VeriFone 3750, VeriFone VX570, VeriFone and Schlumberger pin
pads, and Schlumberger/AxaltoMagiC 6000 and
6100.
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Ÿ
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PRIVATE
LABEL SMART/MAGNETIC-STRIPE CARDS - Smart and magnetic-strip cards are
customized with the merchant's logo, picture, or other identifying
information, or can be created for a non-profit organization to use in a
preferred merchant program. From art-work selections to final delivery,
the entire creation process takes only a few days, even for the minimum
300-card order. This entire process is done internally for orders of less
than 5,000 cards.
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Market
Outlook
Statistics
show "Gift and Loyalty" products enhance retention of existing customers and
increase new customers resulting in additional revenue to the retail business.
We believe "Gift and Loyalty" is more than a valuable method of
payment, but a preferred method of
payment. The TowerGroup, a subsidiary of MasterCard, estimated that total 2006
gift card sales topped $80 billion, a 20 percent increase over 2005. The
National Retail Federation estimates that gift card sales in the 2008 holiday
season will total $24.9 billion, a 5 percent decrease from the $26.3 billion in
2007 holiday sales. This decline is attributed to the tighter economy with many
consumers choosing to buy deeply discounted merchandise as opposed to gift cards
as reported in a Chicago Tribune article on December 27, 2008. As for gift
cards, never before has a product enabled a retailer to have his own "currency".
Once value is placed on a gift card, it can only be redeemed at that merchant's
location. This money goes directly into the retailers account prior to investing
in inventory or any other business expense. Retail returns have historically
meant cash back, and the money usually walks out the front door and is spent on
another retailer's goods or services. With this program the retailer's policy
places the return value on the gift card requiring the consumer to spend those
dollars in their establishment. This policy has become the standard rather than
the exception in many retailers across the country.
In
addition, most major retail gift and return programs are magnetic stripe based,
requiring each transaction to dial to a host just as a credit card authorization
or debit transaction. Each transaction creates a communication or access fee, a
"per transaction fee". The cost associated with this "per transaction fee" is
the primary reason that loyalty programs have experienced limited use. The NEOS
solution performs the entire gift and loyalty transaction at the terminal level
and posts the transaction data on the terminal for once-a-day batch processing
to the host and posts to the smart card as well, eliminating fraud. NEOS, in
most instances, charges a fixed monthly fee for unlimited
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transactions.
The magnetic stripe solution averages $.15 to $.25 per transaction. For
instance, loyalty in one location, a coffee could perform 300 loyalty
transactions a day or approximately 9,000 transactions a month for a monthly
transaction cost of between $1,350 and $2,250. This is the first technology that
brings gift and loyalty to one card and makes it affordable for small, medium
and large tier retailers. Gift and loyalty product is considered a value-added
lead product and possesses a high retention characteristic in the small to
medium enterprise ("SME") segment over traditional payment processing solutions.
Payment processing has become a commodity, which has eroded profitability and
made retention of customers an increasingly difficult task. Recognizing the
merchant retention benefits of "Gift and Loyalty" and the merchant benefit of
integrating other electronic payment transactions options onto one platform
gives NEOS a significant strategic and competitive advantage at the point of
sale. Leveraging these electronic payment transactions options provide the
merchant real value enhancement from a consolidation of system and support. We
believe our future value will be based on four primary variables: our
proprietary technology, "Gift and Loyalty" revenue, payment processing revenue
and the combined "Gift and Loyalty" and credit card merchant
portfolios.
Operating
Strategy
NEOS
focuses on small to medium size merchants for its Gift and Loyalty product
offering. We believe that the ability to offer these merchants custom branded
Gift and Loyalty cards as well as a robust loyalty program will significantly
increase the merchants business and distinguish it from its competitors. NEOS
solicits prospective merchants through the ICE network of outside independent
agents and through its LIFT Network division.
Software
Development
All
components of the NEOS MATRIXX host and terminal application system have been
thoroughly tested and have been installed live in over 5,000
locations.
Growth
Strategy And Competitors
Due to
our proprietary technology and the retail market demand for "Gift and Loyalty",
NEOS is positioned to be a significant provider in this market. NEOS "Gift and
Loyalty" solutions are designed to help merchants increase their sales and to
retain loyal customers. NEOS' believes it has an opportunity to aggressively
penetrate the SME segment of the merchant market place for Gift and Loyalty
solutions. NEOS believes there is a tremendous need for differentiating
products and services in this sector of
the industry. The Company plans to generate continuous growth through strategies
involving and leveraging its Gift and Loyalty platform through the ICE
independent outside sales force and through strategic relationships with other
businesses that market products to the SME merchant segment.
Patents,
Trademarks, Licenses, Franchises, Concessions, Royalty Agreements Or Labor
Contracts, Including Duration
As of
December 31, 2009, we have no patents, trademarks, franchises, concessions,
royalty agreements or labor contracts.
Employees
As of
December 31, 2009, we had 22 full-time and 2 part time employees. Management
believes that its relationship with its employees is excellent. None of our
employees are members of a collective bargaining unit.
ITEM
1A. Risk
Factors
In
addition to the risks and other considerations discussed elsewhere in this
annual report, set forth below is a discussion of certain risk factors relating
to our business and operations. These risk factors are drafted in "Plain
English" format in accordance with Rule 421 of the Securities Act. Accordingly,
references to "we" and "our" refer to ICE and its subsidiaries.
RISKS
RELATING TO OUR BUSINESS
WE HAVE A
HISTORY OF OPERATING LOSSES AND WILL NEED TO GENERATE SIGNIFICANT REVENUES TO
ACHIEVE OR MAINTAIN OUR PROFITABILITY.
Since
inception, we have been engaged in activities relating to the establishment of
our payment processing business and developing a portfolio of merchant accounts
to grow our business, both of which require substantial capital and other
expenditures. As a result, we have not sustained profitability, and may continue
to incur losses in the future. We had a net loss of $259,340 and a net income of
$64,323 for the years ended December 31, 2009 and 2008, respectively. We expect
our cash needs to increase significantly for the next several years as
we:
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continue
to expand our outside agent sales
force;
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increase
awareness of our services; to expand our customer support and service
operations;
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hire
additional marketing, customer support and administrative personnel;
and
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implement
new and upgraded operational and financial systems, procedures and
controls.
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As a
result of these continuing expenses, we need to generate significant revenues to
achieve and maintain profitability. If we do not continue to increase our
revenues, our business, results of operations and financial condition could be
materially and adversely affected.
WE RELY
ON BANK SPONSORS, WHICH HAVE SUBSTANTIAL DISCRETION WITH RESPECT TO CERTAIN
ELEMENTS OF OUR BUSINESS PRACTICES, IN ORDER TO PROCESS BANKCARD TRANSACTIONS;
IF THESE SPONSORSHIPS ARE TERMINATED AND WE ARE NOT ABLE TO SECURE OR
SUCCESSFULLY MIGRATE MERCHANT PORTFOLIOS TO NEW BANK SPONSORS, WE WILL NOT BE
ABLE TO CONDUCT OUR BUSINESS.
Because
we are not a bank, we are unable to belong to and directly access the Visa and
MasterCard bankcard associations. Visa and MasterCard operating regulations
require us to be sponsored by a bank in order to process bankcard transactions.
We are currently registered with Visa and MasterCard through the sponsorship of
BancorpSouth Bank and Wells Fargo Bank which are members of the card
associations. If these sponsorships are terminated and we are unable to secure a
bank sponsor, we will not be able to process bankcard transactions. Furthermore,
our agreements with our sponsoring banks give the sponsoring banks substantial
discretion in approving certain elements of our business practices, including
our solicitation, application and qualification procedures for merchants, the
terms of our agreements with merchants, the processing fees that we charge, our
customer service levels and our use of independent sales organizations. We
cannot guarantee that our sponsoring banks' actions under these agreements will
not be detrimental to us.
WE ASSUME
THE RISK OF UNFULFILLED MERCHANT CHARGEBACK AND FRAUD PURSUANT TO THE PROCESSING
AGREEMENT AND IF WE ARE NOT ABLE TO SUCCESSFULLY MITIGATE MERCHANT PORTFOLIO
CHARGEBACK AND FRAUD RISKS, WE WILL NOT BE ABLE TO CONDUCT OUR BUSINESS.
ICE
markets credit and debit card based payment processing services pursuant to the
Processing Agreement with FTS and BancorpSouth Bank. The Processing Agreement
provides that ICE bears full liability for any unfulfilled chargebacks or
merchant fraud. ICE began boarding merchants under the Processing Agreement in
late March of 2005. In line with industry standards, we will continue to
maintain a reserve of .0005 of aggregate Visa/MasterCard sales volume of
processing merchant accounts and analyze on a monthly basis, the need to adjust
such reserve to appropriately properly mitigate merchant chargebacks and/or
fraud.
IF WE OR
OUR BANK SPONSOR FAILS TO ADHERE TO THE STANDARDS OF THE VISA AND MASTERCARD
CREDIT CARD ASSOCIATIONS, OUR REGISTRATIONS WITH THESE ASSOCIATIONS COULD BE
TERMINATED AND WE COULD BE REQUIRED TO STOP PROVIDING PAYMENT PROCESSING
SERVICES FOR VISA AND MASTERCARD.
Substantially
all of the transactions we process involve Visa or MasterCard. If we or our bank
sponsor fails to comply with the applicable requirements of the Visa and
MasterCard credit card associations, Visa or MasterCard could suspend or
terminate our registration. The termination of our registration or any changes
in the Visa or MasterCard rules that would impair our registration could require
us to stop providing payment processing services.
WE RELY
ON OTHER CARD PAYMENT PROCESSORS AND SERVICE PROVIDERS; IF THEY FAIL OR NO
LONGER AGREE TO PROVIDE THEIR SERVICES, OUR MERCHANT RELATIONSHIPS COULD BE
ADVERSELY AFFECTED AND WE COULD LOSE BUSINESS.
We rely
on agreements with other large payment processing organizations, primarily First
Data Merchant Services Corporation, to enable us to provide card authorization,
data capture, settlement and merchant accounting services and access to various
reporting tools for the merchants we serve. Many of these organizations and
service providers are our competitors and we do not have long-term contracts
with any of them. Typically, our contracts with these third parties are for
one-year terms and are subject to cancellation upon limited notice by either
party.
The
termination by our service providers of their arrangements with us or their
failure to perform their services efficiently and effectively may adversely
affect our relationships with the merchants whose accounts we serve and may
cause those merchants to terminate their processing agreements with
us.
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TO
ACQUIRE AND RETAIN MERCHANT ACCOUNTS, WE DEPEND ON INDEPENDENT OUTSIDE
AGENTS.
We rely
primarily on the efforts of independent outside agents to market our services to
merchants seeking to establish an account with a payment processor. These agents
are individuals and companies that seek to introduce both newly established and
existing small merchants, including retailers, restaurants and service
providers, such as physicians, to providers of transaction payment processing
services. In certain instances agents that refer merchants to us are not
exclusive to us and have the right to refer merchants to other service
providers. Our failure to maintain our relationships with our existing agents
and those serving other service providers that we may acquire, and to recruit
and establish new relationships with other agents could adversely affect our
revenues and internal growth and increase our merchant attrition.
ON
OCCASION, WE EXPERIENCE INCREASES IN INTERCHANGE AND SPONSORSHIP FEES; IF WE
CANNOT PASS THESE INCREASES ALONG TO OUR MERCHANTS, OUR PROFIT MARGINS WILL BE
REDUCED.
We pay
interchange fees or assessments to card associations for each transaction we
process using their credit and debit cards. From time to time, the card
associations increase the interchange fees that they charge processors and the
sponsoring banks. In its sole discretion, our sponsoring bank has the right to
pass any increases in interchange fees on to us. In addition, our sponsoring
bank may seek to increase its Visa and MasterCard sponsorship fees to us, all of
which are based upon the dollar amount of the payment transactions we process.
If we are not able to pass these fee increases along to merchants through
corresponding increases in our processing fees, our profit margins will be
reduced.
THE LOSS
OF KEY PERSONNEL OR DAMAGE TO THEIR REPUTATIONS COULD ADVERSELY AFFECT OUR
RELATIONSHIPS WITH AGENTS, CARD ASSOCIATIONS, BANK SPONSORS AND OUR OTHER
SERVICE PROVIDERS, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS.
Our
success depends upon the continued services of our senior management and other
key employees, many of whom have substantial experience in the payment
processing industry and the small merchant markets in which we offer our
services. In addition, our success depends in large part upon the reputation and
influence within the industry of our senior managers, who over their years in
the industry, developed long standing and highly favorable relationships with
agents, ISOs, card associations, bank
sponsors and other payment processing and service providers. We would expect
that the loss of the services of one or more of our key employees would have an
adverse effect on our operations. We would also expect that any damage to the
reputation of our senior managers, would adversely affect our business. We do
not maintain any "key person" life insurance on any of our
employees.
THE
PAYMENT PROCESSING INDUSTRY IS HIGHLY COMPETITIVE AND SUCH COMPETITION IS LIKELY
TO INCREASE, WHICH MAY FURTHER ADVERSELY INFLUENCE OUR PRICES TO MERCHANTS, AND
AS A RESULT, OUR PROFIT MARGINS.
The
market for card processing services is highly competitive. The level of
competition has increased in recent years, and other providers of processing
services have established a sizable market share in the small merchant
processing sector. Some of our competitors are financial institutions,
subsidiaries of financial institutions or well-established payment processing
companies that have substantially greater capital and technological, management
and marketing resources than we have. There are also a large number of small
providers of processing services that provide various ranges of services to
small and medium sized merchants. This competition may influence the prices we
can charge and requires us to control costs aggressively in order to maintain
acceptable profit margins. In addition, our competitors continue to consolidate
as large banks merge and combine their networks. This consolidation may also
require that we increase the consideration we pay for future acquisitions and
could adversely affect the number of attractive acquisition opportunities
presented to us.
INCREASED
ATTRITION IN MERCHANT CHARGE VOLUME DUE TO AN INCREASE IN CLOSED MERCHANT
ACCOUNTS THAT WE CANNOT ANTICIPATE OR OFFSET WITH NEW ACCOUNTS MAY REDUCE OUR
REVENUES.
We
experience attrition in merchant charge volume in the ordinary course of
business resulting from several factors, including business closures, transfers
of merchants' accounts to our competitors and account "closures" that are
initiated due to heightened credit risks relating to, and contract breaches by,
a merchant. In addition, substantially all of our processing contracts with
merchants may be terminated by either party on relatively short notice, allowing
merchants to move their processing accounts to other providers with minimal
financial liability and cost. Increased attrition in merchant charge volume may
have a material adverse effect on our financial condition and results of
operations. We cannot predict the level of attrition in the future, particularly
in connection with our acquisitions of portfolios of merchant accounts. If we
are unable to increase our transaction volume and establish accounts with new
merchants in order to counter the effect of this attrition, or, if we experience
a higher level of attrition in merchant charge volume than we anticipate, our
revenues will decrease.
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WE FACE
UNCERTAINTY ABOUT ADDITIONAL FINANCING FOR OUR FUTURE CAPITAL NEEDS, WHICH MAY
PREVENT US FROM GROWING OUR BUSINESS.
To
achieve our business objectives we may require significant additional financing
for working capital and capital expenditures that we may raise through public or
private sales of our debt and equity securities, joint ventures and strategic
partnerships. No assurance can be given that such additional funds will be
available to us on acceptable terms, if at all. When we raise additional funds
by issuing equity securities, dilution to our existing stockholders will result.
If adequate additional funds are not available to us, we may be required to
significantly curtail the development of one or more of our projects and our
projections and results of operations would be materially and adversely
affected.
WE
CURRENTLY RELY SOLELY ON COMMON LAW TO PROTECT OUR INTELLECTUAL PROPERTY; SHOULD
WE SEEK ADDITIONAL PROTECTION IN THE FUTURE, WE MAY FAIL TO SUCCESSFULLY
REGISTER OUR TRADEMARKS, CAUSING US TO POTENTIALLY LOSE OUR RIGHTS TO USE THESE
MARKS.
Currently,
we do not have any patents, copyrights or registered marks. We rely on common
law rights to protect our marks and logos. We do not rely heavily on the
recognition of our marks to obtain and maintain business. We may apply for
trademark registration for certain of our marks in the future. However, we
cannot assure you that any such applications will be approved. Even if they are
approved, these trademarks may be successfully challenged by others or
invalidated. If our trademark registrations are not approved because third
parties own these trademarks, our use of these trademarks will be restricted or
completely prohibited unless we enter into agreements with these parties which
may not be available on commercially reasonable terms, or at all.
NEW AND
POTENTIAL GOVERNMENTAL REGULATIONS DESIGNED TO PROTECT OR LIMIT ACCESS TO
CONSUMER INFORMATION COULD ADVERSELY AFFECT OUR ABILITY TO PROVIDE THE SERVICES
WE PROVIDE OUR MERCHANTS.
Due to
the increasing public concern over consumer privacy rights, governmental bodies
in the United States and abroad have adopted, and are considering adopting
additional laws and regulations restricting the purchase, sale and sharing of
personal information about customers. For example, the Gramm-Leach-Bliley Act
requires non-affiliated third party service providers to financial institutions
to take certain steps to ensure the privacy and security of consumer financial
information. We believe our present activities fall under exceptions to the
consumer notice and opt-out requirements contained in this law for third party
service providers to financial institutions. The law, however, is new and there
have been very few rulings on its interpretation. We believe that current
legislation permits us to access and use this information as we do now. The laws
governing privacy generally remain unsettled, however, even in areas where there
has been some legislative action, such as the Gramm-Leach-Bliley Act and other
consumer statutes, it is difficult to determine whether and how existing and
proposed privacy laws will apply to our business. Limitations on our ability to
access and use customer information could adversely affect our ability to
provide the services we offer to our merchants or could impair the value of
these services.
Several
states have proposed legislation that would limit the uses of personal
information gathered using the Internet. Some proposals would require
proprietary online service providers and website owners to establish privacy
policies. Congress has also considered privacy legislation that could further
regulate use of consumer information obtained over the Internet or in other
ways. The Federal Trade Commission has also recently settled a proceeding with
one on-line service regarding the manner in which personal information is
collected from users and provided to third parties. Our compliance with these
privacy laws and related regulations could materially affect our
operations.
Changes
to existing laws or the passage of new laws could, among other
things:
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create
uncertainty in the marketplace that could reduce demand for our
services;
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limit
our ability to collect and to use merchant and cardholder
data;
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increase
the cost of doing business as a result of litigation costs or increased
operating costs; or
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in
some other manner have a material adverse effect on our business, results
of operations and financial
condition.
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RISKS
RELATING TO ACQUISITIONS
We may
acquire other providers of payment processing services and portfolios of
merchant processing accounts. These acquisitions entail risks in addition to
that incidental to the normal conduct of our business.
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REVENUES
GENERATED BY ACQUIRED BUSINESSES OR ACCOUNT PORTFOLIOS MAY BE LESS THAN
ANTICIPATED, RESULTING IN LOSSES OR A DECLINE IN PROFITS, AS WELL AS POTENTIAL
IMPAIRMENT CHARGES.
In
evaluating and determining the purchase price for a prospective acquisition, we
estimate the future revenues from that acquisition based on the historical
transaction volume of the acquired provider of payment processing services or
portfolio of merchant accounts. Following an acquisition, it is customary to
experience some attrition in the number of merchants serviced by an acquired
provider of payment processing services or included in an acquired portfolio of
merchant accounts. Should the rate of post-acquisition merchant attrition exceed
the rate we have forecasted, the revenues generated by the acquired providers of
payment processing services or portfolio of accounts may be less than we
estimated, which could result in losses or a decline in profits, as well as
potential impairment charges.
WE MAY
FAIL TO UNCOVER ALL LIABILITIES OF ACQUISITION TARGETS THROUGH THE DUE DILIGENCE
PROCESS PRIOR TO AN ACQUISITION, EXPOSING US TO POTENTIALLY LARGE, UNANTICIPATED
COSTS.
Prior to
the consummation of any acquisition, we perform a due diligence review of the
provider of payment processing services or portfolio of merchant accounts that
we propose to acquire. Our due diligence review, however, may not adequately
uncover all of the contingent or undisclosed liabilities we may incur as a
consequence of the proposed acquisition.
WE MAY
ENCOUNTER DELAYS AND OPERATIONAL DIFFICULTIES IN COMPLETING THE NECESSARY
TRANSFER OF DATA PROCESSING FUNCTIONS AND CONNECTING SYSTEMS LINKS REQUIRED BY
AN ACQUISITION, RESULTING IN INCREASED COSTS FOR, AND A DELAY IN THE REALIZATION
OF REVENUES FROM, THAT ACQUISITION.
The
acquisition of a provider of payment processing services, as well as a portfolio
of merchant processing accounts, requires the transfer of various data
processing functions and connecting
links to our systems and those of our own third party service providers. If the
transfer of these functions and links does not occur rapidly and smoothly,
payment processing delays and errors may occur, resulting in a loss of revenues,
increased merchant attrition and increased expenditures to correct the
transitional problems, which could preclude our attainment of, or reduce, our
profits.
SPECIAL
NON-RECURRING AND INTEGRATION COSTS ASSOCIATED WITH ACQUISITIONS COULD ADVERSELY
AFFECT OUR OPERATING RESULTS IN THE PERIODS FOLLOWING THESE
ACQUISITIONS.
In
connection with some acquisitions, we may incur non-recurring severance
expenses, restructuring charges and change of control payments. These expenses,
charges and payments, as well as the initial costs of integrating the personnel
and facilities of an acquired business with those of our existing operations,
may adversely affect our operating results during the initial financial periods
following an acquisition. In addition, the integration of newly acquired
companies may lead to diversion of management attention from other ongoing
business concerns.
OUR
FACILITIES, PERSONNEL AND FINANCIAL AND MANAGEMENT SYSTEMS MAY NOT BE ADEQUATE
TO EFFECTIVELY MANAGE THE FUTURE EXPANSION WE BELIEVE NECESSARY TO INCREASE OUR
REVENUES AND REMAIN COMPETITIVE.
We
anticipate that future expansion will be necessary in order to increase our
revenues. In order to effectively manage our expansion, we may need to attract
and hire additional sales, administrative, operations and management personnel.
We cannot assure you that our facilities, personnel and financial and management
systems and controls will be adequate to support the expansion of our
operations, and provide adequate levels of service to our merchants, agents and
ISOs. If we fail to effectively manage our growth, our business could be
harmed.
RISKS
RELATING TO OUR COMMON STOCK
THE
POSSIBLE RULE 144 SALES BY EXISTING SHAREHOLDERS MAY HAVE AN ADVERSE EFFECT ON
THE MARKET VALUE OF THE COMPANY AND THE PRICE OF THE STOCK.
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Of our
presently outstanding 35,873,703 shares of common stock 3,565,000 are
"restricted securities" for purposes of the federal securities laws, and in the
future they may be sold in compliance with Rule 144 adopted under the Act. Rule
144 provides in part that a person who is not an affiliate and who holds
restricted securities for a period of one year may sell all or part of such
securities. In addition, since we will be filing certain informational reports
with the Securities and Exchange Commission, and if certain other conditions are
satisfied, Rule 144 will allow a person (including an affiliate) holding
restricted securities for a period of six months to sell each three months,
provided he or she is not part of a control group acting in concert to sell, an
amount equal to the greater of the average weekly reported trading volume of the
stock during the four calendar weeks preceding the sale, or one percent of the
our outstanding common stock. We cannot predict the effect, if any, that any
such sales of common stock, or the availability of such common stock for sale,
may have on the market value of the common stock prevailing from time to time.
Sales of substantial amounts of common stock by shareholders, particularly if
they are affiliates, could have a material adverse effect upon the market value
of the common stock.
THERE MAY
BE A VOLATILITY OF OUR STOCK PRICE.
Since our
common stock is publicly traded, the market price of the common stock may
fluctuate over a wide range and may continue to do so in the future. The market
price of the common stock could be subject to significant fluctuations in
response to various factors and events, including, among other things, the depth
and liquidity of the trading market of the common stock, quarterly variations in
actual or anticipated operating results, growth rates, changes in estimates by
analysts, market conditions in the industry (including demand for Internet
access), announcements by competitors, regulatory actions and general economic
conditions. In addition, the stock market from time to time experiences
significant price and volume fluctuations, which have particularly affected the
market prices of the stocks of high technology companies, and which may be
unrelated to the operating performance of particular companies. As a result of
the foregoing, our operating results and prospects from time to time may be
below the expectations of public market analysts and investors. Any such event
would likely result in a material adverse effect on the price of the common
stock.
WE DO NOT
INTEND TO PAY CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE
FUTURE.
We
currently anticipate that we will retain all future earnings, if any, to finance
the growth and development of our business and do not anticipate paying cash
dividends on our common stock in the foreseeable future. Any payment of
cash dividends will depend upon our
financial condition, capital requirements, earnings and other factors deemed
relevant by our board of directors.
OUR
COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING
MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:
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that
a broker or dealer approve a person's account for transactions in penny
stocks; and
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the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
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In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:
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obtain
financial information and investment experience objectives of the person;
and
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make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
ITEM
2. Properties
Our
principal executive offices are located in approximately 3,950 square feet of
leased office space at 555 Airport Way, Suite A, Camarillo, CA 93010. The
offices of our technical personnel are located in approximately 1,000 square
feet at 23631 Crown Valley Parkway, Mission Viejo, CA 92691. The offices of our
LIFT Network division are located in approximately 150 square feet at 5010 W.
Carmen St., Tampa, FL 33609. We believe that these facilities are adequate for
our current operations and, if necessary, can be replaced with little disruption
to our company.
ITEM
3. Legal
Proceedings
There are
no material legal proceedings pending or, to our knowledge, threatened against
us or any of our subsidiaries.
ITEM
4. Reserved
ITEM
5. Market
For Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases
Of Equity Securities
(a) Market
Information.
The
Company's common stock is currently traded on the Over-the-Counter ("OTC")
Bulletin Board System under the symbol "ICRD." The following table sets forth
the trading history of the common stock on the OTC Bulletin Board for each
quarter of fiscal years ended December 31, 2009 and 2008, as reported by
Stockhouse.com.
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Low
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2009
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First
Quarter
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0.06
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0.03
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Second
Quarter
|
0.14
|
0.03
|
||
|
Third
Quarter
|
0.04
|
0.02
|
||
|
Fourth
Quarter
|
0.03
|
0.02
|
||
|
2008
|
||||
|
First
Quarter
|
0.15
|
0.07
|
||
|
Second
Quarter
|
0.105
|
0.055
|
||
|
Third
Quarter
|
0.07
|
0.031
|
||
|
Fourth
Quarter
|
0.05
|
0.021
|
As of
December 31, 2009, there are 84 shareholders of record of the Company's common
stock.
Capital
Stock
We are
authorized to issue 100,000,000 shares of common stock $0.0005 par value and
10,000,000 shares of preferred stock at $0.01 par value. As of December 31,
2009, there were 35,873,703 common shares and 54,000 preferred shares issued and
outstanding. All shares of common stock outstanding are validly issued, fully
paid and non-assessable.
Voting
Rights
Each
share of common stock entitles the holder to one vote, either in person or by
proxy, at meetings of shareholders. The holders are not permitted to vote their
shares cumulatively. Accordingly, the holders of common stock holding, in the
aggregate, more than fifty percent of the total voting rights can elect all of
our directors and, in such event, the holders of the remaining minority shares
will not be able to elect any of such directors. The vote of the holders of a
majority of the issued and outstanding shares of common stock entitled to vote
thereon is sufficient to authorize, affirm, ratify or consent to such act or
action, except as otherwise provided by law.
16
Quasi-California
Corporation
Section
2115 of the California General Corporation law provides that a corporation
incorporated under the laws of a jurisdiction other than California, but which
has more than one-half of its "outstanding voting securities" and which has a
majority of its property, payroll and sales in California, based on the factors
used in determining its income allocable to California on its franchise tax
returns, may be required to provide cumulative voting until such time as the
Company has its shares listed on certain national securities exchanges, or
designated as a national market security on NASDAQ (subject to certain
limitations). Accordingly, holders of the our common stock may be entitled to
one vote for each share of common stock held and may have cumulative voting
rights in the election of directors. This means that holders are entitled to one
vote for each share of common stock held, multiplied by the number of directors
to be elected, and the holder may cast all such votes for a single director, or
may distribute them among any number of all of the directors to be
elected.
Our
existing directors who are also shareholders, acting in harmony, may be able to
elect a majority of the members of our board of directors even if Section 2115
is applicable.
Dividend
Policy
All
shares of common stock are entitled to participate proportionally in dividends
if our board of directors declares them out of the funds legally available and
subordinate to the rights, if any, of the holders of outstanding shares of
preferred stock. These dividends may be paid in cash, property or additional
shares of common stock. We have not paid any dividends since our inception and
presently anticipate that all earnings, if any, will be retained for development
of our business. Any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, our future earnings,
operating and financial condition, capital requirements, and other factors.
Therefore, there can be no assurance that any dividends on the common stock will
be paid in the future.
Miscellaneous
Rights And Provisions
Holders
of common stock have no preemptive or other subscription rights, conversion
rights, redemption or sinking fund provisions. In the event of our dissolution,
whether voluntary or involuntary, each share of common stock is entitled to
share proportionally in any assets available for distribution to holders of our
equity after satisfaction of all liabilities and payment of the applicable
liquidation preference of any outstanding shares of preferred
stock.
Rights
Of The Preferred Stock
Collectively,
the Series A Convertible Preferred Stock contain the following
features:
|
|
Ÿ
|
Dividends:
Each share of Series A Preferred Stock pays a mandatory monthly dividend,
at an annual rate equal to the product of multiplying (i) $100.00 per
share, by (ii) six and one-half percent (6.5%). Dividends are payable
monthly in arrears on the last day of each month, in cash, and prorated
for any partial month periods. From and after the Effective Date of the
Registration Statement, dated July 17, 2006, no further MANDATORY
DIVIDENDS shall be payable on the Series A Preferred
Stock.
|
|
|
Ÿ
|
Liquidation
Preferences: Series A Preferred Stock is entitled to be paid first out of
the assets of the Corporation available for distribution to shareholders,
whether such assets are capital, surplus or earnings, an amount equal to
the Series A Purchase Price per share of Series A Preferred Stock held (as
adjusted for any stock splits, stock dividends or recapitalizations of the
Series A Preferred Stock) and any declared but unpaid dividends on such
share, before any payment is made to the holders of the common stock, or
any other stock of the Corporation ranking junior to the Series A
Preferred Stock with regard to any distribution of assets upon
liquidation, dissolution or winding up of the
Corporation.
|
|
|
Ÿ
|
Voting
Rights: None
|
|
|
Ÿ
|
Conversion
Rights: Series A Preferred Stock may, at the option of the holder, be
converted at any time or from time to time into fully paid and
non-assessable shares of common stock at the conversion rate in effect at
the time of conversion, provided, that a holder of Series A Preferred
Stock at any given time convert only up to that number of shares of Series
A Preferred Stock so that, upon conversion, the aggregate beneficial
ownership of the Corporation's common stock is not more than 9.99% of the
Corporation's common stock then outstanding. The "Conversion Price" per
share for the Series A Preferred Stock shall be equal to Eighty-Five
percent (85%) of the Market Price, rounded to the nearest penny; in no
event shall the Conversion Price be less than $0.375 per share (the "Floor
Price") or exceed $0.47 (the "Ceiling
Price").
|
17
|
|
Ÿ
|
Reservation
of Stock Issuable Upon Conversion: The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of
common stock, solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock 15,000,000 shares of common
stock.
|
Recent
Sales Of Unregistered Securities
None.
Securities
Authorized For Issuance Under Equity Compensation Plans
ICE has
adopted its 2003 Stock Option Plan, an equity incentive program for its
employees, directors and advisors that was approved by its stockholders pursuant
to which options, rights or warrants may be granted.
|
Plan
Category
|
Number
of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
(A)
|
Weighted
Average Exercise Price of Outstanding Options, Warrants and
Rights
(B)
|
Number
of Sercurities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in Column
(A))
(C)
|
|
Equity
compensation plans approved by security holders
|
4,428,000
|
$0.22
|
572,000
|
|
Equity
compensation plans not approved by security holders
|
3,074,000
|
$0.15
|
-0-
|
|
Total
|
7,502,000
|
$0.19
|
572,000
|
ITEM
6. Selected
Financial Data
ITEM
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. References in
this section to "International Card Establishment, Inc.," the "Company," "we,"
"us," and "our" refer to International Card Establishment, Inc. and our direct
and indirect subsidiaries on a consolidated basis unless the context indicates
otherwise.
This
annual report contains forward looking statements relating to our Company's
future economic performance, plans and objectives of management for future
operations, projections of revenue mix and other financial items that are based
on the beliefs of, as well as assumptions made by and information currently
known to, our management. The words "expects, intends, believes, anticipates,
may, could, should" and similar expressions and variations thereof are intended
to identify forward-looking statements. The cautionary statements set forth in
this section are intended to emphasize that actual results may differ materially
from those contained in any forward looking statement.
Our
Management, Discussion and Analysis ("MD&A") is provided as a supplement to
our audited financial statements to help provide an understanding of our
financial condition, changes in financial condition and results of operations.
The MD&A section is organized as follows:
|
|
Ÿ
|
Overview.
This section provide a general description of the Company's business, as
well as recent developments that we believe are important in understanding
our results of operations as well as anticipating future trends in our
operations.
|
|
|
Ÿ
|
Critical
Accounting Policies. This section provides an analysis of the
significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses, and the related disclosure of
contingent assets and liabilities.
|
|
|
Ÿ
|
Results of
Operations. This section provides an analysis of our results of
operations for the year ended December 31, 2009 ("Fiscal 2009") compared
to the year ended December 31, 2008 ("Fiscal 2008"). A brief description
of certain aspects, transactions and events is provided, including
related-party transactions that impact the comparability of the results
being analyzed.
|
|
|
Ÿ
|
Liquidity
and Capital Resources. This section provides an analysis of our
financial condition and cash flows as of and for the year ended December
31, 2009.
|
18
Overview
We are in
the business of providing merchant payment processing services and custom
branded gift and loyalty card products to the small medium enterprise (“SME”)
segment of the merchant marketplace. As of December 31, 2009, we provided our
services to thousands of merchants located across the United States. Our payment
processing services enable merchants to process traditional card-present, or
swipe transactions, as well as card-not-present transactions. A traditional
card-present transaction occurs whenever a cardholder physically presents a
credit or debit card to a merchant at the point-of-sale. Card-not-present
transactions occur whenever the customer does not physically present a payment
card at the point-of-sale and may occur over the Internet or by mail, fax or
telephone. Our proprietary Gift and Loyalty product allows merchants to issue
custom branded gift and loyalty cards.
Most of
our SME merchants are traditional physical “brick-and-mortar” businesses. Our
merchants represent a diverse range of industries including restaurants, spas
and salons, automotive repair and service, golf courses, home decor, sporting
goods, car washes, gas stations, clothing stores and general
retail.
In May
2008 we formed our LIFT Network division to focus on expanding our proprietary
gift and loyalty product offerings. The LIFT Network division emphasizes the
promotion and marketing capabilities of our gift and loyalty products. In August
2008 we completed the development of our virtual terminal application which
allows merchants to offer our gift and loyalty solution using an internet
protocol without the need for a physical terminal.
Management
believes that a majority of the Company’s new sales will come from the gift and
loyalty segment of our business.
Critical
Accounting Policies
The
methods, estimates and judgments we use in applying our accounting policies have
a significant impact on the results we report in our financial statements, which
we discuss under the heading "Results of Operations" following this section of
our MD&A. Some of our accounting policies require us to make difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Our most critical accounting estimates include
the assessment of recoverability of long-lived assets and intangible assets,
which impacts operating expenses when we impair assets or accelerate their
amortization or depreciation.
We
believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our consolidated financial
statements:
Allowance
for Doubtful Accounts
The
Company estimates its accounts receivable risks and provides allowances for
doubtful accounts accordingly. The Company believes that its credit risk for
accounts receivable is limited because of its large number of customers and the
relatively small account balances for most of its customers. Also, the Company's
customers are dispersed across different business and geographic areas. The
Company evaluates the adequacy of the allowance for doubtful accounts on a
periodic basis. The evaluation includes historical loss experience, length of
time receivables are past due, adverse situations that may affect a customer's
ability to repay and prevailing economic conditions. The Company makes
adjustments to its allowance if the evaluation of allowance requirements differs
from the actual aggregate reserve. This evaluation is inherently subjective and
estimates may be revised as more information becomes available.
Revenue
and Cost Recognition
Substantially
all of our revenues are generated from fees charged to merchants for card-based
payment processing services and monthly gift and loyalty program fees. We
typically charge these merchants a bundled rate, primarily based upon the
merchant's monthly charge volume and risk profile. Our fees principally consist
of discount fees, which are a percentage of the dollar amount of each credit or
debit transaction. We charge all merchants higher discount rates for
card-not-present transactions than for card-present transactions in order to
compensate ourselves for the higher risk of underwriting these transactions. We
derive the balance of our revenues from a variety of fixed transaction or
service fees, including fees for monthly minimum charge volume requirements,
statement fees, annual fees and fees for other miscellaneous services, such as
handling chargebacks. We recognize discounts and other fees related to payment
transactions at the time the merchants' transactions are processed. We recognize
revenues derived from service fees at the time the service is performed. Related
interchange and assessment costs are also recognized at that time.
19
We follow
the FASB ASC Principle Agent Considerations Topic in determining our revenue
reporting. Generally, where we have merchant portability, credit risk and
ultimate responsibility for the merchant, revenues are reported at the time of
sale on a gross basis equal to the full amount of the discount charged to the
merchant. This amount includes interchange paid to card issuing banks and
assessments paid to credit card associations pursuant to which such parties
receive payments based primarily on processing volume for particular groups of
merchants. Interchange fees are set by Visa and MasterCard and are based on
transaction processing volume and are recognized at the time transactions are
processed.
Goodwill
and Intangibles
We
capitalize intangible assets such as the purchase of merchant and gift loyalty
accounts from portfolio acquisitions (i.e., the right to receive future cash
flows related to transactions of these applicable merchants) and, at least
quarterly, amortize accounts at the time of attrition. Additionally, under the
provisions of the FASB ASC Intangibles – Goodwill and Other Topic, at least
annually, the Company performs a census of merchant accounts received in such
acquisitions, analyzing the expected cash flows, and adjusts the intangible
asset accordingly to the lower of cost or market.
Results
of Operations for the Year Ended December 31, 2009 Compared with the Year Ended
December 31, 2008
|
December
31, 2009
|
December
31, 2008
|
Difference
|
Difference
|
|||||||||||||
| $ | % | |||||||||||||||
|
Net
Revenues
|
$ | 5,836,785 | $ | 7,599,557 | $ | (1,762,772 | ) | (23 | ) | |||||||
|
Cost
of Revenues
|
3,550,256 | 4,722,398 | (1,172,142 | ) | (25 | ) | ||||||||||
|
Gross
Profit
|
2,286,529 | 2,877,159 | (590,630 | ) | (21 | ) | ||||||||||
|
Operating,
General,
|
||||||||||||||||
|
and
Administrative Costs
|
2,466,880 | 2,743,513 | (276,633 | ) | (10 | ) | ||||||||||
|
Net
Operating Gain/(Loss)
|
$ | (180,351 | ) | $ | 133,646 | $ | (313,997 | ) | (235 | ) | ||||||
Net
revenues decreased by $1,762,772 or 23% from $7,599,557 to $5,836,785 due mainly
to the poor economy as well as continued attrition of merchant accounts.
Residuals decreased by approximately $1.7 million. This decrease was due in part
to the attrition of merchant accounts but the primary factor was the faltering
economy which affected us in two ways. First, reduced merchant sales led
directly to reduced residuals. Secondly, many small businesses closed shop last
year due to the lagging economy. A number of merchants simply closed their doors
and bank accounts, precluding us from even collecting their early termination
fees. Sales in our traditional markets dropped by approximately $293,560 but
were offset sales in the Month-to-Month program of $149,280. This program has
been attractive to merchants since they are not required to make a long term
commitment and we provide them technological marketing tools not previously
available to them. Merchant attrition, caused by better offers from competitors
as well as closing businesses, is a common aspect of our industry. However, we
believe our new marketing models will help stop attrition to some extent. The
gain in Month to Month sales was enhanced by an increase of $80,400 in card
sales. The decrease in cost of revenues of $1,172,142 or 25% from $4,722,399 to
$3,550,256 is directly related to a comparable decrease in
revenues.
Operating,
general and administrative costs decreased by $276,633 or 10% from $2,743,513 to
$2,466,880. The largest portion of this decrease was payroll expense of
approximately $245,700. This reduction was due to a reduced work force and a
reduction in accrual of executive bonuses which are based on EBIDA. Additional
payroll related reductions included $12,000 for insurance and $8,200 in auto
expenses for in-house sales reps. The amortization expense was reduced by
$42,350 due to slowed attrition of the portfolio. Other major decreases in
expenses were a $10,200 reduction in consulting fees resulting from bringing
work in-house, $10,760 for professional and legal fees, a $7,500 decrease in
office expenses, a $7,900 equipment lease reduction resulting from completed
leases and $10,000 reduction in state taxes. With the implementation of the new
Month-to-Month program in February 2009 we began allocating equipment to fixed
assets and depreciating the equipment over a 36 month period for an approximate
$16,700 increase of depreciation expense. In addition, we had an
$61,820 increase in marketing expenses for the new month-to-month
program.
The
change in position of cash, accounts payable and accrued expenses, and accounts
receivable consist of the following:
20
|
December
31, 2009
|
December
31, 2008
|
Difference
|
Difference
|
|||||||||||||
| $ | % | |||||||||||||||
|
Cash
|
$ | 40,153 | $ | 91,404 | $ | (51,251 | ) | (56 | ) | |||||||
|
Accounts
Payable and
|
||||||||||||||||
|
Accrued
Expenses
|
$ | 570,819 | $ | 616,229 | $ | (45,410 | ) | (7 | ) | |||||||
|
Accounts
Receivable, net
|
$ | 5,296 | $ | 22,572 | $ | (17,276 | ) | (77 | ) | |||||||
Cash
decreased by approximately $51,251 or 56% from $91,404 to $40,153 due primarily
reduced residual income and the repayment of the underbilling by a primary
residual source.
Accounts
Payable and Accrued Expenses decreased by $45,410 or 7% from $616,229 to
$570,819 primarily due to the payoff of outstanding debts including the related
party note payable.
Accounts
Receivable fell by $17,276 or 77% from $22,572 to $5,296 due primarily to
tighter credit policies and adherence to a cash collection policy of cash
received prior to shipping. All new Month-to-Month agreements are paid in full
up front. With the decline in leases we have fewer sales in which full payment
is not collected up front. This is also accounted for by standard fluctuation of
outstanding lease invoices where we have been guaranteed payment by the lease
company upon installation at the merchant’s location.
Management
believes that it is moving toward sustained profitability. We plan to sustain
profitability and meet cash flow needs going forward as follows:
|
|
•
|
Management
believes that the increase in income we have experienced through the
Month-to-Month program will continue. We feel this is possible by pursuing
external growth by constantly expanding our independent agent base and
utilizing our proprietary Gift & Loyalty platform to reach an even
greater number of merchants through value-added
products.
|
|
|
•
|
Continued
cost control through tight credit
policies.
|
Liquidity
and Capital Resources
We are
currently seeking to expand our merchant services offerings in gift and loyalty.
In addition, we are investigating additional business opportunities and
potential acquisitions of either additional portfolios or businesses;
accordingly we will require additional capital to complete the expansion and to
undertake any additional business opportunities. We are currently investigating
potential sources of financing.
We have
financed our operations during the year primarily through the receipt of
proceeds of $712,000 from our line of credit with a related party and use of
cash on hand. In 2008 we paid down all outstanding debt and the related party
note payable. At this time our only outstanding debt consists of our related
party line of credit and we have no capital purchases planned at this time. We
believe that we will be able to meet all cash needs with the use of cash on hand
during 2009.
We had
$40,153 cash on hand as of December 31, 2009 compared to $91,404 cash on hand as
of December 31, 2008. We will continue to need additional cash during the
following twelve months and these needs will coincide with the cash demands
resulting from our general operations and planned expansion. There is no
assurance that we will be able to obtain additional capital as required, or
obtain the capital on acceptable terms and conditions.
ITEM
7A. Quantitative
and Qualitative Disclosures About Market Risk
Not
Applicable.
21
ITEM
8. Financial
Statements and Supplementary Data
INTERNATIONAL
CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2009
CONTENTS
|
REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
23
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
24
|
|
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
25
|
|
Consolidated
Statements of Stockholders' Equity from December 31, 2007 through December
31, 2009
|
26
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
27
|
|
Notes
to Consolidated Financial Statements
|
29
|
22
REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders'
of
International Card Establishment, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of International Card
Establishment, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2009 and 2008, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of International Card
Establishment, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
MENDOZA
BERGER & COMPANY, LLP
Irvine,
California
March 31,
2010
23
INTERNATIONAL
CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
|
$ | 40,153 | $ | 91,404 | ||||
|
Accounts receivable, net of
allowance of $17,721 and $50,178 at December
31, 2009 and 2008,
respectively
|
5,296 | 22,572 | ||||||
|
Note receivable, net of allowance
of $50,000 at December 31, 2009 and
2008, respectively
|
- | 88 | ||||||
|
Inventory
|
57,529 | 76,394 | ||||||
|
Other
receivables
|
194,422 | 255,631 | ||||||
|
Prepaid assets
|
25,000 | 25,003 | ||||||
|
Total current
assets
|
322,400 | 471,092 | ||||||
|
FIXED
ASSETS, net of accumulated depreciation of $2,999,836 and $2,983,007
at
|
||||||||
|
December 31, 2009 and 2008,
respectively
|
42,719 | - | ||||||
|
INTANGIBLE
ASSETS
|
1,405,026 | 1,579,378 | ||||||
|
GOODWILL
|
87,979 | 87,979 | ||||||
|
OTHER
NON-CURRENT ASSETS
|
117,576 | 116,685 | ||||||
|
Total assets
|
$ | 1,975,700 | $ | 2,255,134 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 39,141 | $ | 22,915 | ||||
|
Accrued
expenses
|
531,677 | 593,312 | ||||||
|
Due to FTS -
Underpayment
|
55,697 | - | ||||||
|
Line of credit, related
party
|
628,154 | 658,536 | ||||||
|
Total current
liabilities
|
1,254,669 | 1,274,763 | ||||||
|
COMMITMENTS
& CONTINGENCIES
|
- | - | ||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||
|
Preferred stock; $0.01 par
value; 10,000,000 shares authorized, 54,000 shares
|
||||||||
|
issued and outstanding at
December 31, 2009 and 2008, respectively
|
540 | 540 | ||||||
|
Common stock; $0.0005 par
value; 100,000,000 shares authorized,
|
||||||||
|
35,873,703 shares issued and
outstanding at December 31, 2009
|
||||||||
|
and 2008,
respectively
|
17,937 | 17,937 | ||||||
|
Common stock
subscribed
|
30,000 | 30,000 | ||||||
|
Additional paid-in
capital
|
19,628,401 | 19,628,401 | ||||||
|
Accumulated
deficit
|
(18,955,847 | ) | (18,696,507 | ) | ||||
|
Total stockholders'
equity
|
721,031 | 980,371 | ||||||
|
Total liabilities and
stockholders' equity
|
$ | 1,975,700 | $ | 2,255,134 | ||||
|
See
Accompanying Notes to Consolidated Financial Statements.
24
|
||||||||
INTERNATIONAL
CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the Years Ended
|
||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Revenues:
|
||||||||
|
Merchant services
revenues
|
$ | 5,355,851 | $ | 6,985,598 | ||||
|
Equipment sales
|
506,182 | 645,085 | ||||||
|
Less: sales returns and
allowances
|
(25,248 | ) | (31,126 | ) | ||||
|
Net revenue
|
5,836,785 | 7,599,557 | ||||||
|
Cost
of revenues:
|
||||||||
|
Commissions
|
625,379 | 731,923 | ||||||
|
Cost of sales
|
2,838,904 | 3,845,668 | ||||||
|
Cost of sales -
equipment
|
85,973 | 144,807 | ||||||
|
Cost of revenue
|
3,550,256 | 4,722,398 | ||||||
|
Gross profit
|
2,286,528 | 2,877,159 | ||||||
|
Operating,
general and administrative expenses
|
2,466,880 | 2,743,513 | ||||||
|
Net operating income
(loss)
|
(180,351 | ) | 133,646 | |||||
|
Non-operating
income (expense):
|
||||||||
|
Interest income
|
1 | 94 | ||||||
|
Interest
(expense)
|
(41,735 | ) | (69,417 | ) | ||||
|
Gain on Sale of Fixed
Assets
|
1,381 | - | ||||||
|
Other Expense –
FTS
|
(38,636 | ) | - | |||||
|
Total non-operating income
(expense)
|
(78,989 | ) | (69,323 | ) | ||||
|
Net
income (loss) before provision for income taxes:
|
(259,340 | ) | 64,323 | |||||
|
Income
tax benefit (provision)
|
- | - | ||||||
|
Net
income (loss)
|
$ | (259,340 | ) | $ | 64,323 | |||
|
Earnings
per share - basic
|
$ | (0.01 | ) | $ | 0.00 | |||
|
Earnings
per share - diluted
|
$ | (0.01 | ) | $ | 0.00 | |||
|
Weighted
average number of shares of common stock outstanding -
basic
|
35,873,703 | 35,499,850 | ||||||
|
Weighted
average number of shares of common stock outstanding -
diluted
|
35,873,703 | 35,764,556 | ||||||
|
See
Accompanying Notes to Consolidated Financial Statements.
25
|
||||||||
INTERNATIONAL
CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
Preferred
Stock
|
Common
Stock
|
||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid-In Capital
|
Common
Stock Subscribed
|
Accumulated
Deficit
|
Total
|
||
|
Balance,
December 31, 2007
|
54,000
|
$ 540
|
35,286,449
|
$17,643
|
$19,544,354
|
$ 100,064
|
$(18,760,830)
|
$901,771
|
|
|
Stock
based compensation
|
-
|
-
|
-
|
-
|
14,027
|
-
|
-
|
14,027
|
|
|
Stock
for services
|
-
|
-
|
250,000
|
125
|
125
|
-
|
-
|
250
|
|
|
Common
Stock subscribed released
|
-
|
-
|
337,254
|
169
|
69,895
|
(70,064)
|
-
|
-
|
|
|
Net
income, December 31, 2008
|
-
|
-
|
-
|
-
|
-
|
-
|
64,323
|
64,323
|
|
|
Balance,
December 31, 2008
|
54,000
|
$ 540
|
$35,873,703
|
$17,937
|
$19,628,401
|
$ 30,000
|
$(18,696,507)
|
$ 980,371
|
|
|
Net
loss, December 31, 2009
|
-
|
-
|
-
|
-
|
-
|
-
|
$ (259,340)
|
$(259,340)
|
|
|
Balance,
December 31, 2009
|
54,000
|
$ 540
|
35,873,703
|
$17,937
|
$19,628,401
|
$ 30,000
|
$(18,955,847)
|
$ 721,031
|
|
See
Accompanying Notes to Consolidated Financial Statements.
26
INTERNATIONAL
CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For
the Years Ended
|
||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net (loss) income
|
$ | (259,340 | ) | $ | 64,323 | |||
|
Adjustments to reconcile net
(loss) income to cash provided by operating
activities:
|
||||||||
|
Depreciation
|
16,972 | - | ||||||
|
Gain on sale of fixed
assets
|
(1,381 | ) | - | |||||
|
Write off of cancelled merchant
accounts
|
284,900 | 327,250 | ||||||
|
Allowance for doubtful accounts,
other receivables and accrued interest income, net of bad debt
recoveries
|
(32,456 | ) | (26,015 | ) | ||||
|
Compensation for stock
awards
|
- | 14,027 | ||||||
|
Write off of software consulting
originally capitalized as fixed asset
|
- | 6,320 | ||||||
|
Changes in assets and
liabilities:
|
||||||||
|
Decrease in accounts
receivable
|
49,731 | 30,503 | ||||||
|
Decrease in
inventories
|
381,968 | 394,820 | ||||||
|
Decrease in other
receivables
|
61,209 | 13,148 | ||||||
|
(Increase) decrease in prepaid
expenses
|
3 | (25,003 | ) | |||||
|
(Increase) decrease in other
non-current assets
|
(891 | ) | 1,012 | |||||
|
(Decrease) in accounts
payable
|
16,227 | (83,480 | ) | |||||
|
Increase (decrease) in accrued
expenses
|
(61,636 | ) | 80,333 | |||||
|
Increase
(decrease) in Due to FTS - Underpayment
|
55,697 | - | ||||||
|
Net cash provided by operating
activities
|
511,003 | 797,238 | ||||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Acquisitions, net of
attrition
|
(110,547 | ) | (86,328 | ) | ||||
|
Proceeds from the sale of fixed
assets
|
1,381 | - | ||||||
|
Payments received toward notes
receivable
|
88 | 6,340 | ||||||
|
Net cash (used in) investing
activities
|
(109,078 | ) | (79,988 | ) | ||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Payment on notes
payable
|
- | (42,613 | ) | |||||
|
Noncash advances from line of
credit, related party
|
54,121 | 101,024 | ||||||
|
Payment on line of credit,
related party
|
(1,219,297 | ) | (1,060,656 | ) | ||||
|
Proceeds from line of credit,
related party
|
712,000 | 650,000 | ||||||
|
Payment on notes payable, related
party
|
- | (400,000 | ) | |||||
|
Proceeds from sale of common
stock
|
- | 250 | ||||||
|
Net cash (used in) financing
activities
|
(453,176 | ) | (751,995 | ) | ||||
|
Net decrease in
cash
|
(51,251 | ) | (34,745 | ) | ||||
|
Cash,
beginning of period
|
91,404 | 126,149 | ||||||
|
Cash,
end of period
|
$ | 40,153 | $ | 91,404 | ||||
|
See
Accompanying Notes to Consolidated Financial Statements.
|
||||||||
27
INTERNATIONAL
CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(CONTINUED)
|
For
the Years Ended
|
||
|
December
31,
2009
|
December
31,
2008
|
|
|
SUPPLEMENT
DISCLOSURE OF CASH
|
||
|
FLOW
INFORMATION
|
||
|
Cash
paid for interest
|
$ 38,945
|
$ 65,307
|
|
Cash
paid for income taxes
|
$ -
|
$ -
|
|
NON-CASH
INVESTING AND FINANCING TRANSACTIONS
|
||
|
Inventory
purchased from line of credit, related party
|
$ 422,793
|
$ 361,587
|
|
Common
stock subscribed
|
$ -
|
$ 70,064
|
|
Recovery
of bad debt
|
$ -
|
$ 149,232
|
|
Inventory
reclassified to fixed assets
|
$ 59,691
|
$ -
|
|
See
Accompanying Notes to Consolidated Financial Statements.
|
||
28
INTERNATIONAL
CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
NOTES
TO THECONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
NOTE
1. BASIS
OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF
PRESENTATION AND ORGANIZATION
International
Card Establishment, Inc. (the “Company”), a Nevada corporation, is a provider of
diversified products and services to the electronic transaction processing
industry, offering merchant accounts for the acceptance and processing of credit
and debit cards, as well as a proprietary "smart card" based gift and loyalty
program. The Company's Merchant Card Services division establishes "merchant
accounts" for businesses that enable those businesses to accept credit cards,
debit cards, and other forms of electronic payments from their customers;
supplies the necessary card readers and other point-of-sale transaction systems;
facilitates processing for the accounts; and, provides e-commerce solutions.
Through its NEOS Subsidiary the Company also markets a proprietary "Smart
Card"-based system that enables merchants to economically offer private label
gift and loyalty cards - one of the fastest growing product categories in the
industry.
As used
in these Notes to the Consolidated Financial Statements, the terms the
“Company”, “we”, “us”, “our” and similar terms refer to International Card
Establishment, Inc. and, unless the context indicates otherwise its consolidated
subsidiaries. The Companies subsidiaries include NEOS Merchant
Services (“NEOS”), a Nevada corporation, which provides smart card loyalty
programs in an integrated vertical system for its customers, as well as other
electronic payment services (merchant services); International Card
Establishment (“ICE”), which provides electronic payment services (merchant
services); and INetEvents, Inc. (“INET”), a Delaware Corporation, which has been
dormant since 2005.
The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany transactions and accounts
have been eliminated in consolidation.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH
All
highly liquid investments with maturity of three months or less are considered
to be cash equivalents. The company had no cash equivalents as of December 31,
2009 and 2008, respectively.
CONCENTRATIONS
The
Company maintains cash balances at several financial institutions in California.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to $250,000. At December 31, 2009 and 2008 the Company
had no accounts in excess of the $250,000 insured amount.
Due to
the number of customers that we process credit card transactions for we are not
dependant on a limited number of customers for the generation of
revenues.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
The
Company estimates its accounts receivable risks and provides allowances for
doubtful accounts accordingly. The Company believes that its credit risk for
accounts receivable is limited because of its large number of customers and the
relatively small account balances for most of its customers. Also, the Company’s
customers are dispersed across different business and geographic areas. The
Company evaluates the adequacy of the allowance for doubtful accounts on a
periodic basis. The evaluation includes historical loss experience, length of
time receivables are past due, adverse situations that may affect a customer’s
ability to repay and prevailing economic conditions. The Company makes
adjustments to its allowance if the evaluation of allowance requirements differs
from the actual aggregate reserve. This evaluation is inherently subjective and
estimates may be revised as more information becomes available.
INVENTORY
Inventories
are stated at the lower of cost or market. Cost is determined using the first
in, first out (FIFO) method. The Company's inventories consist primarily of
electronic merchant processing machines. There were no reserves for slow moving
or obsolete inventory at December 31, 2009 and 2008.
FIXED
ASSETS
Furniture,
fixtures and equipment are stated at cost less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
on a straight-line basis.
Estimated
service lives of property and equipment are as follows:
Furniture and fixtures
3 years
Terminals 18
months
Equipment and machinery 3
- 5 years
Software 5
years
INCOME
TAXES
Income
taxes are provided for using the liability method of accounting in accordance
with the Income Taxes Topic of the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). Deferred tax assets and liabilities
are determined based on differences between the financial reporting and tax
basis of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. A
valuation allowance is established when necessary to reduce deferred tax assets
to the amount expected to be realized. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The computation of limitations relating to the amount of such tax assets, and
the determination of appropriate valuation allowances relating to the realizing
of such assets, are inherently complex and require the exercise of judgment. As
additional information becomes available, we continually assess the carrying
value of our net deferred tax assets.
FAIR
VALUE
The
carrying amounts reflected in the consolidated balance sheets for cash, accounts
receivables, net, accounts payable, and accrued expenses approximate their
respective fair values due to the short maturities of these items. The Company
does not hold any investments that are available-for-sale.
GOODWILL
AND INTANGIBLES
Goodwill
represents the excess of purchase price over tangible and other intangible
assets acquired less liabilities assumed arising from business acquisitions. In
2009 and 2008, the Company’s annual goodwill impairment test did not identify an
impairment of these assets.
The
Company capitalizes intangible assets such as the purchase of merchant and gift
loyalty accounts from portfolio acquisitions (i.e., the right to receive future
cash flows related to transactions of these applicable merchants) (See Note 4).
At least annually, the Company performs a census of merchant accounts received
in such acquisitions, analyzing the expected cash flows, and adjusts the
intangible asset accordingly to the lower of cost or market. In 2009 and 2008,
the Company purchased no merchant or gift card portfolios. The Company
recognized direct write offs of $284,900 and $327,250 as of December 31, 2009
and 2008, which are included in Cost of Sales in the Statements of
Operations.
29
REVENUES
The
Company provides merchant services and customer support for merchants and other
Merchant Services providers, and sells merchant point-of-sale and credit card
processing equipment. Revenues are recognized as customer services are
provided.
The
Company provides merchant services to customers for acceptance and processing of
electronic payments. Credit card processing fees are recognized as incurred.
Sales and cost of sales of equipment are recognized when the equipment is
provided and the customer accepts responsibility for the payment of the
equipment.
Substantially
all of our revenues are generated from fees charged to merchants for card-based
payment processing services and monthly gift and loyalty program fees. We
typically charge these merchants a bundled rate, primarily based upon the
merchant's monthly charge volume and risk profile. Our fees principally consist
of discount fees, which are a percentage of the dollar amount of each credit or
debit transaction. We charge all merchants higher discount rates for
card-not-present transactions than for card-present transactions in order to
compensate ourselves for the higher risk of underwriting these transactions. We
derive the balance of our revenues from a variety of fixed transaction or
service fees, including fees for monthly minimum charge volume requirements,
statement fees, annual fees and fees for other miscellaneous services, such as
handling chargebacks. We recognize discounts and other fees related to payment
transactions at the time the merchants' transactions are processed. We recognize
revenues derived from service fees at the time the service is performed. Related
interchange and assessment costs are also recognized at that time.
We follow
the FASB ASC Principle Agent Considerations Topic in determining our revenue
reporting. Generally, where we have merchant portability, credit risk and
ultimate responsibility for the merchant, revenues are reported at the time of
sale on a gross basis equal to the full amount of the discount charged to the
merchant. This amount includes interchange paid to card issuing banks and
assessments paid to credit card associations pursuant to which such parties
receive payments based primarily on processing volume for particular groups of
merchants. Interchange fees are set by Visa and MasterCard and are based on
transaction processing volume and are recognized at the time transactions are
processed.
ADVERTISING
Advertising
costs are charged to operations as incurred. Advertising costs for the years
ended December 31, 2009 and 2008 were $109,365 and $47,545,
respectively.
RECENTLY
ADOPTED AND RECENTLY ISSUED ACCOUNTING GUIDANCE
Adopted
On
September 30, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of GAAP. These changes establish the FASB Accounting
Standards CodificationTM as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The FASB no longer issues new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead the FASB issues Accounting Standards Updates.
Accounting Standards Updates are not authoritative in their own right as they
only serve to update the Codification. These changes and the Codification itself
do not change GAAP. Other than the manner in which new accounting guidance is
referenced, the adoption of these changes had no impact on the Financial
Statements.
In April
2009, the FASB issued authoritative guidance for “Interim Disclosures about Fair
Value of Financial Instruments,” which requires disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This guidance also requires those
disclosures to be in summarized financial information at interim reporting
periods. This guidance is effective for interim reporting periods ending after
June 15, 2009. The Company adopted this guidance in the second quarter of 2009
and it did not have a material impact on the financial statements.
In April 2009, the FASB issued authoritative guidance for the “Recognition and Presentation of Other-Than-Temporary Impairments” in order to make existing guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The Company adopted this guidance in the second quarter of 2009 and it did not have a material impact on the financial statements.
In April
2009, the FASB issued authoritative guidance for “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” This guidance
provides additional direction for estimating fair value in accordance with
established guidance for “Fair Value Measurements,” when the volume and level of
activity for the asset or liability have significantly decreased. This guidance
also includes direction on identifying circumstances that indicate a transaction
is not orderly. This guidance is effective for interim and annual reporting
periods ending after June 15, 2009. The Company adopted this guidance in the
second quarter of 2009 and it did not have a material impact on the financial
statements.
30
In June
2009, the FASB issued authoritative guidance which establishes general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
This guidance applies to both interim financial statements and annual financial
statements and is effective for interim or annual financial periods ending after
June 15, 2009. This guidance does not have a material impact on our financial
statements.
Issued
In June
2009, the FASB issued authoritative guidance for “Accounting for Transfers of
Financial Assets,” which eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets, and
requires additional disclosures in order to enhance information reported to
users of financial statements by providing greater transparency about transfers
of financial assets, including securitization transactions, and an entity’s
continuing involvement in and exposure to the risks related to transferred
financial assets. This guidance is effective for fiscal years beginning after
November 15, 2009. The Company will adopt this guidance in fiscal 2010 and does
not expect that the adoption will have a material impact on the consolidated
financial statements.
In June
2009, the FASB issued authoritative guidance amending existing guidance. The
amendments include: (1) the elimination of the exemption for qualifying special
purpose entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess
who should consolidate a variable-interest entity. This guidance is effective
for the first annual reporting period beginning after November 15, 2009 and for
interim periods within that first annual reporting period. The Company will
adopt this guidance in fiscal 2010. The Company does not expect that the
adoption will have a material impact on the consolidated financial
statements.
In
October 2009, the FASB issued changes to revenue recognition for
multiple-deliverable arrangements. These changes require separation of
consideration received in such arrangements by establishing a selling price
hierarchy (not the same as fair value) for determining the selling price of a
deliverable, which will be based on available information in the following
order: vendor-specific objective evidence, third-party evidence, or estimated
selling price; eliminate the residual method of allocation and require that the
consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method, which allocates any
discount in the arrangement to each deliverable on the basis of each
deliverable’s selling price; require that a vendor determine its best estimate
of selling price in a manner that is consistent with that used to determine the
price to sell the deliverable on a standalone basis; and expand the disclosures
related to multiple-deliverable revenue arrangements. These changes become
effective on January 1, 2011. The Company has determined that the adoption
of these changes will not have an impact on the consolidated financial
statements, as the Company does not currently have any such arrangements with
its customers.
NOTE
2. ACCOUNTS
RECEIVABLE
Accounts
receivable is composed of all sales from our day to day business which includes
credit card terminals, gift and loyalty sales and our Guardian replacement
program. Management reserves all accounts over 90 days with the exception of the
Guardian accounts which are accrued from date of shipment. Accounts receivable
were $5,296 and 22,572, net of allowance of $17,721 and $50,178, at December 31,
2009 and 2008, respectively.
In the
April 2007, we issued a note receivable for $50,000 to an independent third
party. This receivable bears no interest and is convertible to a
maximum of 10% of the third party’s outstanding common stock in the event of
default. Repayment was expected to begin in October of 2007; however, in
September 2007, we fully allowed for the entire balance of this note as
uncollectable. The holder of the note acknowledged the debt as a line item in
its SEC filings as recently as September 30, 2008 and has failed to file any
financial statements with the SEC since that date.
NOTE
4. OTHER
RECEIVABLE
At
December 31, 2009 and 2008, other receivables consisted of the
following:
|
For
the Years Ended
|
|||
|
December
31, 2009
|
December
31, 2008
|
||
|
Merchant
residuals receivable
|
$ 163,118
|
$ 226,717
|
|
|
Other
receivables
|
31,304
|
28,914
|
|
|
Total
|
$ 194,422
|
$
255,631
|
|
Other
receivables are split between residuals due on merchant account transactions, a
funds pool flow through repayment and employee advances with $6,900 of a $15,000
advance made to our top sales rep outstanding. The residual receivables
decreased approximately $63,599 due to reduced sales by merchants caused by the
recession. Our merchants experienced approximately a 29% decrease in sales
between December 31, 2008, and December 31,, 2009. Tighter credit policies have
reduced the number of new accounts that we acquire, thereby increasing the
quality of earnings by taking the most conservative forecast of the
collectability of residuals.
31
NOTE
5. FIXED
ASSETS
Fixed
assets and accumulated depreciation consists of the following:
|
For
the Years Ended
|
||||||||
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Furniture
and fixtures
|
$ | 14,750 | $ | 14,750 | ||||
|
Equipment
and machinery
|
197,805 | 138,257 | ||||||
|
Software
|
2,830,000 | 2,830,000 | ||||||
|
Subtotal
|
3,042,555 | 2,983,007 | ||||||
|
Accumulated
Depreciation
|
(2,999,836 | ) | (2,983,007 | ) | ||||
| $ | 42,719 | $ | - | |||||
In 2009,
the Company began a new program where new merchants are provided with loaner
terminals for the life of their account. These terminals are recorded as Fixed
Asset items and depreciated monthly. If a merchant closes their account and the
terminal is returned prior to the end of the depreciation period, depreciation
is stopped and the terminal is held for reissue. When the terminal is reissued,
it is at the book value at the time of return and continues to depreciate from
that point. Depreciation expense is $16,972 and $0 for the year ended December
31, 2009 and 2008, respectively.
NOTE
6. GOODWILL
AND INTANGIBLE ASSETS
Goodwill
and Intangible assets were purchased with the acquisition NEOS Merchant
Solutions, Inc. The purchase price allocation at fair market values included
values assigned to intangible assets and a portion allocated to goodwill. The
Company has determined that the intangibles purchased have an indefinite useful
life except as noted below. The provisions of the FASB ASC
Intangibles – Goodwill and Other Topic, require the completion of an annual
impairment test with any impairment recognized in current earnings.
The
Company obtained an outside appraisal to assist in the determination of any
impairment in intangibles or goodwill for both 2009 and 2008. We have
determined that, at present, the NEOS tradename has an
indefinite life, which have been included in the Company’s annual
impairment analysis. In 2009 and 2008, the Company completed its
impairment analysis that resulted in no impairment of goodwill being
recognized.
The
Company's intangible assets consisted of the following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Merchant
portfolios
|
$ | 970,026 | $ | 1,144,378 | ||||
|
Tradename
|
435,000 | 435,000 | ||||||
|
Total
intangible assets
|
$ | 1,405,026 | $ | 1,579,378 | ||||
|
Goodwill
|
$ | 87,979 | $ | 87,979 | ||||
NOTE
7. ACCRUED
EXPENSES
Accrued
expenses consist of the following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accrued
wages
|
$ | 182,025 | $ | 284,311 | ||||
|
Customer
deposits
|
109,609 | 103,745 | ||||||
|
Accrued
expenses, other
|
229,885 | 166,280 | ||||||
|
Accrued
interest
|
6,899 | 4,109 | ||||||
|
Accrued
sales tax
|
3,259 | 2,129 | ||||||
|
Reserve
for chargebacks
|
- | 32,738 | ||||||
| $ | 531,677 | $ | 593,312 | |||||
32
NOTE
8. DUE
TO FTS - UNDERPAYMENT
In June
2009, one of our residual sources notified us that between November 2008 and
April 2009 they had undercharged us by $111,393. An agreement was reached
whereby the vendor would deduct an additional $9,283 per month in fees over the
next 12 months. The $111,393 was split with $72,757 being offset against the
second quarter residual income and $38,636 (representing the November and
December 2008 portion) was treated as Other Expense. At December 31, 2009 the
outstanding balance payable was $55,697.
NOTE
9. STOCKHOLDERS'
EQUITY
The
authorized common stock of the Company consists of 100,000,000 shares of common
shares with par value of $0.0005 and 10,000,000 shares of preferred stock with a
par value of $0.01.
In 2008,
the company has the following common stock transactions:
|
|
Ÿ
|
We
had 183,000 stock options vest in 2008. We had no unvested stock options
as of December 31, 2009, and 2008.
|
|
|
Ÿ
|
Issued
250,000 shares for services valued at $250, or $0.01 per
share.
|
|
|
Ÿ
|
Issued
$70,064 of common stock
subscriptions.
|
Preferred
Stock
Collectively,
the Series A Convertible Preferred Stock contain the following
features:
|
|
Ÿ
|
Dividends:
Each share of Series A Preferred Stock pays a mandatory monthly dividend,
at an annual rate equal to the product of multiplying (i) $100.00 per
share, by (ii) six and one-half percent (6.5%). Dividends are payable
monthly in arrears on the last day of each month, in cash, and prorated
for any partial month periods. From and after the Effective Date of the
Registration Statement, dated July 17, 2006, no further mandatory
dividends shall be payable on the Series A Preferred
Stock.
|
|
|
Ÿ
|
Liquidation
Preferences: Series A Preferred Stock is entitled to be paid first out of
the assets of the Corporation available for distribution to shareholders,
whether such assets are capital, surplus or earnings, an amount equal to
the Series A Purchase Price per share of Series A Preferred Stock held (as
adjusted for any stock splits, stock dividends or recapitalizations of the
Series A Preferred Stock) and any declared but unpaid dividends on such
share, before any payment is made to the holders of the common stock, or
any other stock of the Corporation ranking junior to the Series A
Preferred Stock with regard to any distribution of assets upon
liquidation, dissolution or winding up of the
Corporation.
|
|
|
Ÿ
|
Voting
Rights: None
|
|
|
Ÿ
|
Conversion
Rights: Series A Preferred Stock may, at the option of the holder, be
converted at any time or from time to time into fully paid and
non-assessable shares of common stock at the conversion rate in effect at
the time of conversion, provided, that a holder of Series A Preferred
Stock at any given time convert only up to that number of shares of Series
A Preferred Stock so that, upon conversion, the aggregate beneficial
ownership of the Corporation's common stock is not more than 9.99% of the
Corporation's common stock then outstanding. The "Conversion Price" per
share for the Series A Preferred Stock shall be equal to Eighty-Five
percent (85%) of the Market Price, rounded to the nearest penny; in no
event shall the Conversion Price be less than $0.375 per share (the "Floor
Price") or exceed $0.47 (the "Ceiling
Price").
|
|
Ÿ
|
Reservation
of Stock Issuable Upon Conversion: The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of
common stock, solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock 15,000,000 shares of common
stock.
|
The
Company had no shares of preferred stock convert in 2009 and 2008,
respectively.
Net Income (Loss) Per Common
Share
Earnings
per share is calculated in accordance with the Earnings per Share Topic of the
FASB ASC. The weighted-average number of common shares outstanding during each
period is used to compute basic earnings (loss) per share. Diluted earnings per
share is computed using the weighted average number of shares plus dilutive
potential common shares outstanding. Potentially dilutive common shares consist
of employee stock options, warrants, and other convertible securities, and are
excluded from the diluted earnings per share computation in periods where the
Company has incurred net loss.
33
|
For
the Year Ended December 31, 2009
|
||||||||||||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
||||||||||
|
Net
income
|
||||||||||||
|
Basic
EPS:
|
$ | 64,323 | ||||||||||
|
Income
available to common stockholders
|
$ | 64,323 | 35,499,850 | $ | 0.00 | |||||||
|
Options
|
- | - | ||||||||||
|
Preferred
shares
|
- | 264,706 | ||||||||||
|
Diluted
EPS:
|
||||||||||||
|
Income
available to common stockholders
|
||||||||||||
|
plus
assumed conversions
|
$ | 64,323 | 35,764,556 | $ | 0.00 | |||||||
At
December 31, 2009, the Company had a net loss, which resulted in no dilution of
any common stock equivalents, such as options or preferred shares
NOTE
10. STOCK
OPTION PLAN
The
Company’s 2003 Stock Option Plan (as amended) for Directors, Executive Officers,
and Employees of and Key Consultants to the Company (the “Plan”), which is
shareholder approved, permits the grant of share options and shares to its
employees for up to 10,000,000 shares of common stock. The Company
believes that such awards better align the interests of its employees and key
consultants with those of its shareholders. Option awards are
generally granted with an exercise price equal to market price of the Company
stock at the date of grant, unless otherwise defined in the option agreement
with the grantee.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table. Expected volatilities are based on volatilities from
the Company’s traded common stock since the acquisition of INetEvents, Inc. in
July 2003. The expected term of options granted is estimated at half
of the contractual term as noted in the individual option agreements and
represents the period of time that options granted are expected to be
outstanding. The risk-free rate for the periods within the
contractual life of the option is based on the U.S. Treasury bond rate in effect
at the time of grant for bonds with maturity dates at the estimated term of the
options. There were no stock option grants in 2009.
|
2008
|
|
|
Expected
volatility
|
212.88%
|
|
Weighted-average
volatility
|
70.96%
|
|
Expected
dividends
|
0
|
|
Expected
term (in years)
|
4
|
|
Risk-free
rate
|
4.013%
|
34
NOTE
10. STOCK
OPTION PLAN - Continued
A summary
of option activity under the Plan as of December 31, 2009 and 2008,
respectively, and changes during the periods then ended are presented
below:
|
Options
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2007
|
7,430,000
|
$ 0.19
|
3.5
|
$ 1,079,811
|
|
Granted
|
74,000
|
$ 0.15
|
||
|
Exercised
|
-
|
-
|
||
|
Forfeited
or expired
|
(2,000)
|
$ 0.15
|
(153)
|
|
|
Outstanding
at December 31, 2008
|
7,502,000
|
$ 0.19
|
3.5
|
$ 1,079,658
|
|
Exercisable
at December 31, 2008
|
7,502,000
|
$ 0.19
|
3.5
|
$ 1,079,658
|
|
Outstanding
at December 31, 2009
|
7,502,000
|
$ 0.19
|
3.5
|
$ 1,079,658
|
|
Exercisable
at December 31, 2009
|
7,502,000
|
$ 0.19
|
3.5
|
$ 1,079,658
|
All
options outstanding were fully vested as of December 31, 2009 and
2008.
NOTE
11. INCOME
TAXES
The
consolidated provision for federal and state income taxes for the years ended
December 31, 2009 and 2008 are as follows:
|
2009
|
2008
|
|||||||
|
Current
– State
|
$ | - | $ | 2,400 | ||||
|
Current
– Federal
|
- | - | ||||||
|
Deferred
– State
|
40,121 | (48,500 | ) | |||||
|
Deferred
– Federal
|
158,849 | (192,000 | ) | |||||
|
Valuation
allowance
|
(198,970 | ) | 238,100 | |||||
|
Income
tax provision (benefit)
|
$ | - | $ | - | ||||
There
were no amounts paid for federal income taxes during the years ended December
31, 2009 and 2008.
The
income tax provision differs from the expense that would result from applying
statutory tax rates to income before taxes because of certain expenses that are
not deductible for tax purposes and the effect of the valuation
allowance.
35
NOTE
11. INCOME
TAXES - Continued
As of
December 31, 2009, the Company had federal net operating loss carryforwards of
$11,921,028 that can be deducted against future taxable income. These
tax carryforward amounts expire as follows:
|
December
31, 2023
|
102,762
|
|
December
31, 2024
|
3,238,813
|
|
December
31, 2025
|
2,810,321
|
|
December
31, 2026
|
4,019,899
|
|
December
31, 2027
|
487,703
|
|
December
31, 2028
|
548,670
|
|
December
31, 2029
|
712,860
|
|
Total
|
$11,921,028
|
However,
such carry forwards are not available to offset federal alternative taxable
income. Internal Revenue Code Section 382 imposes limitations on our
ability to utilize net operating losses if we experience an ownership change and
for the NOL’s acquired in the acquisitions of subsidiaries. An
ownership change may result from transactions increasing the ownership of
certain stockholders in the stock of the corporation by more than 50 percentage
points over a three-year period. The value of the stock at the time
of an ownership change is multiplied by the applicable long-term tax exempt
interest rate to calculate the annual limitation. Any unused annual
limitation may be carried over to later years.
The state
operating losses will expire between 2012 and 2019 if not utilized.
The
Company accounts for income taxes in accordance with the Income Taxes Topic of
the FASB ASC, whereby deferred taxes are provided on temporary differences
arising from assets and liabilities whose bases are different for financial
reporting and income tax purposes. Deferred taxes are attributable to
the effects of the following items:
|
|
Ÿ
|
Differences
in calculating depreciation on property, plant and equipment, differences
in calculating amortization and/or impairments on intangible assets,
allowance for bad debt, and tax loss carry
forwards.
|
The
Company’s total deferred tax assets and deferred tax liabilities at December 31,
2009 and 2008 are as follows:
|
2009
|
2008
|
|||||||
|
Deferred
tax asset - current
|
$ | - | $ | - | ||||
|
Deferred
tax asset – non current
|
5,226,179 | 5,397,000 | ||||||
|
Total deferred tax
asset
|
5,226,179 | 5,397,000 | ||||||
|
Deferred
tax liability - current
|
- | - | ||||||
|
Deferred
tax liability – non current
|
(198,970 | ) | (241,000 | ) | ||||
|
Total deferred tax
liability
|
(198,970 | ) | (241,000 | ) | ||||
|
Current
deferred tax asset (liability)
|
- | - | ||||||
|
Non
current deferred tax asset (liability)
|
5,027,209 | 5,156,000 | ||||||
|
Net deferred tax asset
(liability)
|
5,027,209 | $ | 5,156,000 | |||||
|
Valuation
allowance
|
(5,027,209 | ) | (5,156,000 | ) | ||||
|
Net
deferred tax asset (liability)
|
$ | - | $ | - | ||||
36
NOTE
11. INCOME
TAXES – Continued
Deferred
tax assets are to be reduced by a valuation allowance if it is more likely than
not that some portion or all of the deferred tax asset will not be
realized. The valuation allowance decreased $111,255 and increased
$265,668 during the years ended December 31, 2009 and 2008 respectively, based
upon management’s expectation of future taxable income. The Company
will continue to assess the valuation allowance and to the extent it is
determined that such allowance is no longer required, the tax benefit of the net
deferred tax asset will be recognized in the future. Reconciliation of the differences
between the statutory tax rate and the effective income tax rate is as
follows:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Statutory
federal tax (benefit) rate
|
(35.00 | )% | (35.00 | )% | ||||
|
Statutory
state tax (benefit) rate
|
(8.84 | )% | (8.84 | )% | ||||
|
Effective income tax rate
(net)
|
(43.84 | )% | (43.84 | )% | ||||
|
Valuation
allowance
|
43.84 | % | 43.84 | % | ||||
|
Effective
income tax rate
|
0.00 | % | 0.00 | % | ||||
The
Company had no gross unrecognized tax benefits that, if recognized, would
favorably affect the effective income tax rate in future periods. The Company
has not accrued any additional interest or penalties. No tax benefit has been
reported in connection with the net operating loss carry forwards in the
consolidated financial statements as the Company believes it is more likely than
not that the net operating loss carry forwards will expire unused. Accordingly,
the potential tax benefits of the net operating loss carry forwards are offset
by a valuation allowance of the same amount. Net operating loss carry forwards
start to expire in 2019.
The
Company files income tax returns in the United States federal
jurisdiction. With a few exceptions, the Company is no longer subject
to U.S. federal, state or non-U.S. income tax examination by tax authorities on
tax returns filed before December 31, 2005. The Company will file its U.S.
federal return for the year ended December 31, 2009 upon the issuance of this
filing. The U.S. federal returns are considered open tax years for years 2006 -
2009. No tax returns are currently under examination by any tax
authorities.
NOTE
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On
September 30, 2006, the Company entered into an agreement for a revolving line
of credit worth $1,000,000 with Worldwide Business Services Group to be used
primarily for working capital. The balance due on the line was
$628,154 and $658,536 as of December 31, 2009 and 2008,
respectively. In the third quarter of 2006, the CEO of Worldwide
Business Services Group became the Company’s General Manager. Due to
this, we have reflected the outstanding line of credit as related
party.
Our Line
of Credit with Worldwide Business Services Group matured on June 30,
2009. The Line of Credit was renewed for one year during the second
quarter of 2009 and now matures on June 30, 2010. The lender has stated its
intention to renew the note for an additional one year period.
NOTE
13. COMMITMENTS
AND CONTINGENCIES
In July
2006, the Company entered into another line of credit agreement with the same
vendor for $2,000,000. As of December 31, 2009, the Company has not
drawn on the line of credit.
The
Company is engaged in various non-cancelable operating leases for office
facilities and equipment. Under the related lease agreements, the Company is
obligated to make monthly payments ranging from $271 to $3,952 with expiration
dates through January 2011.
Minimum
future lease obligations for the five years immediately following the balance
sheet date are as follows:
|
2010
|
$ | 12,173 | ||
|
2011
|
10,803 | |||
|
Thereafter
|
- | |||
|
Total
future minimum lease commitments
|
$ | 22,976 |
37
The
company leases its facilities for a total of $5,877 per month. Our current
offices are located in Camarillo and Mission Viejo, California and Tampa,
Florida. Total lease costs for the years ended December 31, 2009 and 2008 were
$89,476 and $74,037, respectively.
NOTE
14. SUBSEQUENT EVENTS
Management
evaluated all activity of the Company through March 31, 2010 (the issue date of
the Financial Statements) and concluded that no subsequent events have occurred
that would require recognition in the Financial Statements or disclosure in the
Notes to the Financial Statements.
ITEM
9. Changes
In And Disagreements With Accountants On Accounting Andfinancial
Disclosure
ITEM
9A. Controls
And Procedures
Evaluation
Of Disclosure Controls And Procedures
We
maintain "disclosure controls and procedures," as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management was required to apply its judgment in evaluating
the cost-benefit relationship of possible disclosure controls and procedures.
The design of any disclosure controls and procedures also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
As of
December 31, 2009, we carried out an evaluation, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in our
periodic reports is recorded, processed, summarized and reported, within the
time periods specified for each report and that such information is accumulated
and communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Management's
Report On Internal Control Over Financial Reporting
The
management of International Card Establishment, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers and effected by the company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America and includes those policies and
procedures that:
|
|
Ÿ
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
company;
|
|
|
Ÿ
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America and that
receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and
|
|
|
Ÿ
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial
statements.
|
38
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material misstatements may
not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
Management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2009. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.
Based on
its assessment, management concluded that, as of December 31, 2009, the
Company's internal control over financial reporting is effective based on those
criteria.
This
annual report does not include an attestation report of the Company's registered
accounting firm regarding internal control over financial reporting. The
management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission
Changes
In Internal Control Over Financial Reporting
No
changes in the Company's internal control over financial reporting have come to
management's attention during the Company's last fiscal quarter that have
materially affected, or are likely to materially affect, the Company's internal
control over financial reporting.
ITEM
9B. Other
Information
None.
ITEM
10. Directors,
Executive Officers And Corporate Governance
The
members of our board of directors serve until the next annual meeting of the
stockholders, or until their successors have been elected. The officers serve at
the pleasure of the board of directors. Information as to our directors and
executive officers is as follows:
|
Name
|
Age
|
Position
|
|
William
Lopshire
|
47
|
Chief
Executive Officer, Secretary and Director
|
|
Candace
Mills
|
54
|
Chief
Financial Officer
|
The
principal occupation and business experience during the last five years for each
of our directors and executive officers are as follows:
WILLIAM
J. LOPSHIRE, Chief Executive Officer, Secretary, and a director. Mr. Lopshire
co-founded International Card Establishment, Inc. with another individual in
2002, bringing 15 years of diversified experience in the fields of law,
strategic planning, finance, securities, and technology. He was appointed to his
present positions in January 2003. In 1989, Mr. Lopshire founded the law firm of
Lopshire & Barkan (Woodland Hills, CA), specializing in corporate and
securities law. Mr. Lopshire subsequently accepted a partnership in the law firm
of Manning, Marder, Kass, Ellrod & Rameriz (Los Angeles, CA), where he
specialized in corporate finance, securities law, mergers and acquisitions, and
international business transactions. In 1999, Mr. Lopshire became a principal in
a private equity group that invested in, and provided managerial support to,
several developing companies in the U.S. and abroad with diverse interests
ranging from automotive parts to software development. Mr. Lopshire graduated
from Michigan State University in 1985, with a Bachelor of Arts degree in
Business Administration/ Accounting; and earned his Juris Doctor degree from
Pepperdine University School of Law in 1988. He is admitted to practice law in
California and before the United States Tax Court. Mr. Lopshire also serves on
the Board of Directors of LBO Capital Corp. In addition, Mr. Lopshire previously
served on the Board of Directors for III DM, PLC in the United
Kingdom.
We believe that the preceeding provides ample documentation of Mr.
Lopshire's qualifications to serve on our Board of Directors.
CANDACE
MILLS, Chief Financial Officer. Ms. Mills has over ten years of accounting and
bookkeeping experience. Prior to joining the Company Ms. Mills has been employed
in various accounting and managerial positions with small to medium size
companies including Learning Group International, Price Waterhouse, Bugle Boy
Industries, Inc. all based in Southern California. Ms. Mills owned and operated
The Bookkeeper, a business that offered clients bookkeeping and accounting
services, from March 2000 until being appointed as Chief Financial Officer of
the Company. Ms. Mills holds an Associate of Arts in Business Management from
the University of Akron where she graduated in 1982.
39
The
officers and directors may be deemed parents and promoters of the Company as the
Securities Act of 1933 defines those terms, as amended. All directors hold
office until the next annual stockholders' meeting or until their death,
resignation, retirement, removal, disqualification, or until their successors
have been elected and qualified. Officers of the Company serve at the will of
the board of directors.
There are
no agreements or understandings for any of our officers or directors to resign
at the request of another person and none of the officers or directors are
acting on behalf of or will act at the direction of any other
person.
Committees
Of The Board Of Directors
Currently,
the Company's Board of Directors acts as the audit committee. The Company's sole
director, Mr. Lopshire, is not an "audit committee financial expert" within the
applicable definition of the Securities and Exchange Commission. The Company
will not have an "audit committee financial expert" until the Board is expanded
and additional directors are added.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who beneficially own more than ten percent of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of change in ownership of common stock and other equity
securities of our Company. Officers, directors and greater than ten percent
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. Based solely upon our review of copies of Forms
3, 4 and 5, and any subsequent amendments thereto, furnished to the Company by
our directors, officers and beneficial owners of more than ten percent of our
common stock, we are not aware of any Forms 3, 4 and/or 5 which certain of our
directors, officers or beneficial owners of more than ten percent of our common
stock that, during our fiscal year ended December 31, 2008, failed to file on a
timely basis reports required by Section 16(a) of the Securities Exchange Act of
1934.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
|
|
Ÿ
|
been
convicted in a criminal proceeding or been subject to a pending criminal
proceeding (excluding traffic violations and other minor
offences);
|
|
|
Ÿ
|
had
any bankruptcy petition filed by or against any business of which he was a
general partner or executive officer, either at the time of the bankruptcy
or within two years prior to that
time;
|
|
|
Ÿ
|
been
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities, futures, commodities or
banking activities; or
|
|
|
Ÿ
|
been
found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or
vacated.
|
Director
Independence
Our board
of directors has determined that currently none of it members qualify
as “independent” as the term is used in Item 407 of Regulation S-K as
promulgated by the SEC and in the listing standards of The Nasdaq Stock Market,
Inc. - Marketplace Rule 4200.
Leadership
Structure
Although we have not adopted a formal policy on whether the Chairman
and Chief Executive Officer positions should be separate or combined, we have
traditionally determined that it is in the best interests of the Company and its
shareholders to partially combine these roles. Due to the small size of the
Company, we believe it is currently most effective to have the Chairman and
Chief Executive Officer positions partially combined.
The company currently has one full director, William Lopshire, who
also serves as the company's Chief Executive Officer. The company is actively
seeking other qualified individuals to serve on the Company's Board of
Directors. At this time, the Company does not have Directors and Officers
liability insurance which has been a deterring factor in seeking other qualified
directors. The full director, as CEO of the company as actively involved in
oversight of the company's day to day activities.
40
Code of
Ethics
The
Company adopted a Code of Ethics that applies to all of our directors, officers
and employees, including our principal executive officer, principal financial
officer and principal accounting officer.
Compensation
of Directors
We do not
currently pay our directors for attending meetings of our Board of Directors. We
also have no standard arrangement pursuant to which our directors are
compensated for any services provided as a director or for committee
participation or special assignments.
ITEM
11. Executive
Compensation
The
following tables set forth for the fiscal year indicated the compensation paid
by our company to our Chief Executive Officer and other executive officers with
annual compensation exceeding $100,000:
|
SUMMARY
COMPENSATION TABLE
|
|||||||||||||||||||||||||||||||||
|
ANNUAL
COMPENSATION
|
|||||||||||||||||||||||||||||||||
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($)
|
Total
($)
|
||||||||||||||||||||||||
|
William
Lopshire
Chief
Executive Officer,Director
|
2009
|
126,923 | 58,925 | 0 | 0 | 0 | 0 | 0 | 185,848 | ||||||||||||||||||||||||
|
2008
|
122,308 | 57,476 | 0 | 0 | 0 | 0 | 0 | 179,784 | |||||||||||||||||||||||||
|
2007
|
116,769 | 93,320 | 0 | 76,649 | 0 | 0 | 0 | 286,738 | |||||||||||||||||||||||||
|
Candace
Mills Chief Financial Officer
|
2007
|
43,195 | 6,000 | 0 | 0 | 0 | 0 | 0 | 49,145 | ||||||||||||||||||||||||
|
2008
|
61,870 | 12,000 | 0 | 0 | 0 | 0 | 0 | 73,870 | |||||||||||||||||||||||||
|
2009
|
68,535 | 12,000 | 0 | 0 | 0 | 0 | 0 | 80,534 | |||||||||||||||||||||||||
|
Kjell
Nesen
VP
of Operations
|
2009
|
124,616 | 58,925 | 0 | 0 | 0 | 0 | 0 | 183,541 | ||||||||||||||||||||||||
|
2008
|
122,308 | 57,476 | 0 | 0 | 0 | 0 | 0 | 179,784 | |||||||||||||||||||||||||
|
2007
|
116,195 | 93,320 | 0 | 76,649 | 0 | 0 | 0 | 286,164 | |||||||||||||||||||||||||
|
Dana
Marlin
General
Manager
|
2009
|
126,923 | 58,925 | 0 | 0 | 0 | 0 | 0 | 185,848 | ||||||||||||||||||||||||
|
2008
|
122,308 | 57,476 | 0 | 0 | 0 | 0 | 0 | 179,784 | |||||||||||||||||||||||||
|
2007
|
116,769 | 93,320 | 0 | 76,649 | 0 | 0 | 0 |
286,738
|
|||||||||||||||||||||||||
Stock based compensation is accounted for using the Equity-Based Payments
to Non-Employee Topic of the FASB ASC.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
||||||||||||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#) Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#) (
|
Market
Value of Shares of Units of Stock That Have Not Vested ($)
|
Equity
Incentive Plan Awards Number of Unearned Shares, Units or Other rights
That Have Not Vested (#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested (#)
|
|||||||||||||||||||||||||||
|
William
Lopshire
|
1,000,000 | 0 | 0 | 0.21 | 6-30-2015 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| 1,000,000 | 0.15 | 9-28-2012 | ||||||||||||||||||||||||||||||||||
|
Candace
Mills
|
0 | 10,000 | 0 | 0.15 | 9-28-2012 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
|
Kjell
Nesen
|
1,000,000 | 0 | 0 | 0.21 | 6-30-2015 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| 1,000,000 | 0.15 | 9-28-2012 | ||||||||||||||||||||||||||||||||||
|
Dana
Marlin
|
1,000,000 | 0 | 0 | 0.21 | 6-30-2015 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
|
|
1,000,000 | 0 | 0 | 0.15 | 9-28-2012 | |||||||||||||||||||||||||||||||
41
Option
Grants In Last Fiscal Year
Officers,
directors, and employees received option grants as follows:
|
Options
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at December 31, 2007
|
7,430,000 | $ | 0.19 | 3.5 | $ | 1,079,811 | ||||||||||
|
Granted
|
74,000 | $ | 0.15 | |||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited
or expired
|
(2,000 | ) | $ | 0.15 | (153 | ) | ||||||||||
|
Outstanding
at December 31, 2008
|
7,502,000 | $ | 0.19 | 3.5 | $ | 1,079,658 | ||||||||||
|
Exercisable
at December 31, 2008
|
7,502,000 | $ | 0.19 | 3.5 | $ | 1,079,658 | ||||||||||
|
Outstanding
at December 31, 2009
|
7,502,000 | $ | 0.19 | 3.5 | $ | 1,079,658 | ||||||||||
|
Exercisable
at December 31, 2009
|
7,502,000 | $ | 0.19 | 3.5 | $ | 1,079,658 | ||||||||||
During
the year of 2004, the Company adopted a 401(k) plan for its employees. The
Company does not provide matching on the employees contributions to the
plan.
Other
than the Company's 2003 Stock Option Plan and its 401(k) plan, no pension,
profit sharing, stock option or other similar programs have been adopted by the
Company for the benefit of its employees.
Option
Exercises In Last Fiscal Year And Fiscal Year-End Option Values
ITEM
12. Security
Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters
(a)
Security Ownership of Certain Beneficial Owners
The
following table sets forth the security and beneficial ownership for each class
of our equity securities for any person who is known to be the beneficial owner
of more than five percent of the Company as of March 19, 2009:
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|
Common
|
Charles
Salyer
555
Airport Way, Suite A
Camarillo,
CA 93010
|
2,250,000
|
6.38%
|
|
Common
|
Randy
Simoneaux
555
Airport Way, Suite A
Camarillo,
CA 93010
|
2,224,793
|
6.30%
|
The total
of our outstanding Common Shares as of March 31, 2010 are held by 85
shareholders of record.
(b)
Security Ownership of Management
The
following table sets forth the ownership for each class of our equity securities
owned beneficially and of record by all directors and officers of the Company as
of March 19, 2010:
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|
Common
|
William
Lopshire
555
Airport Way, Suite A
Camarillo,
CA 93010
|
1,600,000
|
4.53%
|
|
Common
|
Candace
Mills
555
Airport Way, Suite A
Camarillo,
CA 93010
|
0
|
0%
|
|
Common
|
All
Officers and Directors as a Group (Two (2) individuals)
|
1,600,000
|
4.53%
|
42
ITEM
13. Certain
Relationships And Related Transactions, And Director Independence
On
September 30, 2006, the Company entered into an agreement for a revolving line
of credit worth $1,000,000 with Worldwide Business Services Group to be used
primarily for working capital. The balance due on the line was $658,536 and
$606,582 as of December 31, 2008 and 2007, respectively. In the third quarter of
2006, the CEO of Worldwide Business Services Group became the Company's General
Manager. Due to this, we have reflected the outstanding line of credit as
related party.
Our Line
of Credit with Worldwide Business Services Group matured on June 30, 2009. The
Line of Credit was renewed for one year during the third quarter of 2009 and now
matures on June 30, 2010.
Related
party bonuses paid during the years ended December 31, 2008 and 2007 totaled $0
and $0, respectively.
During
the year ended December 31, 2006, the Company also purchased merchant portfolios
from a related party for $1,040,000. Payments of $40,000 are required for 26
months. This note contains interest of 6% per annum. This is our Notes Payable,
Related Party on our accompanying balance sheet and was $0 and $0 as of December
31, 2009 and 2008, respectively. No portfolios were purchased in 2008 or 2007
from the related party.
ITEM
14. Principal
Accountant Fees And Services
Audit
Fees
The
aggregate fees billed for professional services rendered by our principal
accountants for the audit of our financial statements, for the reviews of the
financial statements included in our annual report on Form 10-K, and for other
services normally provided in connection with statutory filings were $73,893 and
$56,168, respectively, for the years ended December 31, 2009 and
2008.
Audit
Related Fees
The
Company did not incur any audited related fees and services not included Audit
Fees above for the years ended December 31, 2009 or 2008.
All
Other Fees
There
were tax preparation fees of $2,293 and $11,805 billed for the fiscal years
ended December 31, 2009 and 2008, respectively.
ITEM
15. Exhibits
And Financial Statement Schedules
|
3.1
|
Amended
and Restated Certificate of Incorporation of International Card
Establishment, Inc. (incorporated by reference to the Registrant's
Schedule 14C Definitive Information Statement filed with the Commission on
October 1, 2003).
|
|
4.1
|
Certificate
of Designation and Rights of Series A Convertible Preferred Stock of ICRD
dated as of September 16, 2004 (incorporated by reference to our Form 8-K
filed on December 10, 2004).
|
|
4.2
|
Amendment
to the Certificate of Designation and Rights of Series A Convertible
Preferred Stock of ICRD dated as of December 6, 2004 (incorporated by
reference to our Form 8-K filed on December 10, 2004).
|
|
31.1
|
Certification
by Chief Executive Officer pursuant to Sarbanes Oxley Section
302.
|
|
31.2
|
Certification
by Chief Financial Officer pursuant to Sarbanes Oxley Section
302.
|
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S. C. Section
1350.
|
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S. C. Section
1350.
|
43
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DATE:
March 31, 2010
INTERNATIONAL
CARD ESTABLISHMENT, INC.
|
BY
:
|
/s/
WILLIAM LOPSHIRE
|
|
WILLIAM
LOPSHIRE
|
|
|
CHIEF
EXECUTIVE OFFICER
|
|
|
(PRINCIPAL
EXECUTIVE OFFICER),
|
|
|
SECRETARY
AND DIRECTOR
|
|
|
BY
:
|
/s/
CANDACE MILLS
|
|
CANDACE
MILLS
|
|
|
CHIEF
FINANCIAL OFFICER
|
|
|
(PRINCIPAL
ACCOUNTING OFFICER)
|
44
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
|
/s/
WILLIAM LOPSHIRE
|
CHIEF
EXECUTIVE OFFICER,
|
March
31, 2010
|
|
SECRETARY
AND DIRECTOR
|
||
|
WILLIAM
LOPSHIRE
|
||
|
/s/
CANDACE MILLS
|
CHIEF
FINANCIAL OFFICER
|
March
31, 2010
|
|
CANDACE
MILLS
|
45