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EX-31.2 - CERTIFICATION - INTERNATIONAL CARD ESTABLISHMENT INCice_ex312.htm
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EX-32.2 - CERTIFICATION - INTERNATIONAL CARD ESTABLISHMENT INCice_ex322.htm
EX-31.1 - CERTIFICATION - INTERNATIONAL CARD ESTABLISHMENT INCice_ex311.htm


UNITED STATES
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, 2010
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
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 o 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 o 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 o   No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant 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 o Accelerated filer o Non-accelerated filer o 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 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Based on the closing price of June 30, 2010, 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 April 15, 2011.

DOCUMENTS INCORPORATED BY REFERENCE
 
NONE.

Transitional Small Business Disclosure Format (check one): Yes o No x
 


 
 

 
TABLE OF CONTENTS
 
PART I
 
ITEM 1.
Description Of Business
 3
ITEM 2.
Properties
 15
ITEM 3.
Legal Proceedings
 15
ITEM 4.
Removed and Reserved
 15

PART II

ITEM 5.
Market For Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
 15
ITEM 6.
Selected Financial Data
 17
ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations                    17
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk            21
ITEM 8.
Financial Statements and Supplementary Data
 22
ITEM 9.
Changes In And Disagreements With Accountants On Accounting Andfinancial Disclosure
 39
ITEM 9A.
Controls And Procedures    39
ITEM 9B.
Other Information    40

PART III

ITEM 10.
Directors, Executive Officers And Corporate Governance
 40
ITEM 11.
Executive Compensation
 43
ITEM 12.
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
 45
ITEM 13.
Certain Relationships And Related Transactions, And Director Independence
 46
ITEM 14.
Principal Accountant Fees And Services
 46

PART IV

ITEM 15.
Exhibits And Financial Statement Schedules
 47


 
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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.

PART I

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. 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.

In April 2010 management negotiated the sale of one of its merchant card portfolios to the Company’s bank card processor in a third party transaction. The Company received net proceeds of $761,510 from the transaction with a net gain of $536,215. The Company used the net proceeds from the sale of one of its merchant card portfolios to pay down its related party line of credit in the amount of $503,344. Subsequent to the sale of this portfolio, the company started recruiting independent sales agents to begin building a new merchant portfolio.
 
 
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In 2010 the Company developed a new sales model, the DRIVE program. Under this model,  ICE provides marketing services to merchants by selling cards to the public. These cards entitle the purchaser to discounts on stated products sold by the merchant.

As used herein, 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, Inc. ("ICE"), which provides electronic payment services (merchant services); and INetEvents, Inc. ("INET"), a Nevada corporation, which has been dormant since 2005.
 
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 consumers 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. 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 affected less by the current economic client.

The Business of Our Subsidiary ICE

Business Summary

The company 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.
 
 
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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.

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.
 
 
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Maintain A Stable And Growing Recurring Revenue Base

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.

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 (FTS) and Wells Fargo Bank, a processing bank and member of Visa and MasterCard. The Processing Agreement provides that Wells Fargo 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 charge backs 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 Wells Fargo 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.
 
 
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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 charge backs 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 charge backs 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.

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.
 
 
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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

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.

 
Ÿ
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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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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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.

NEOS' Hardware "Gift and Loyalty" products are:

 
Ÿ
POS TERMINALS - VeriFone 3750, VeriFone VX570, VeriFone and Schlumberger pin pads, and Schlumberger/AxaltoMagiC 6000 and 6100.

 
Ÿ
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 transactions. The magnetic stripe solution averages $.15 to $.25 per transaction. For instance, loyalty in one location, a coffee shop, 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, 2010, we have no patents, trademarks, franchises, concessions, royalty agreements or labor contracts.

Employees

As of December 31, 2010, we had 20 full-time and 1 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 the Company and its subsidiaries.
 
 
9

 

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 $37,412 and $259,340 for the years ended December 31, 2010 and 2009, respectively. We expect our cash needs to increase significantly for the next several years as we:

 
Ÿ
continue to expand our outside agent sales force;

 
Ÿ
increase awareness of our services; to expand our customer support and service operations;

 
Ÿ
hire additional marketing, customer support and administrative personnel; and

 
Ÿ
implement new and upgraded operational and financial systems, procedures and controls.

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 Wells Fargo Bank which is a member of the card associations. If this sponsorship is terminated and we are unable to secure a bank sponsor, we will not be able to process bankcard transactions. Furthermore, our agreement with our sponsoring bank gives the sponsoring bank 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 FDMS, FTS and Wells Fargo Bank. The Processing Agreement provides that ICE bears full liability for any unfulfilled charge backs 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 charge backs 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.
 
 
10

 

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.

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.
 
 
11

 

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.

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.
 
 
12

 

Changes to existing laws or the passage of new laws could, among other things:

 
Ÿ
create uncertainty in the marketplace that could reduce demand for our services;

 
Ÿ
limit our ability to collect and to use merchant and cardholder data;

 
Ÿ
increase the cost of doing business as a result of litigation costs or increased operating costs; or

 
Ÿ
in some other manner have a material adverse effect on our business, results of operations and financial condition.

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.

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.

 
13

 
 
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.

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:

 
Ÿ
that a broker or dealer approve a person's account for transactions in penny stocks; and

 
Ÿ
the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
 
 
14

 
 
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:

 
Ÿ
obtain financial information and investment experience objectives of the person; and

 
Ÿ
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.

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:

 
Ÿ
sets forth the basis on which the broker or dealer made the suitability determination; and

 
Ÿ
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

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 500 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. The combined monthly lease obligation on these properties is approximately $5,200 per month

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

PART II

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, 2010 and 2009, as reported by Stockhouse.com.

     
High
   
Low
 
2010
             
 
First Quarter
    0.021       0.016  
 
Second Quarter
    0.02       0.0819  
 
Third Quarter
    0.01       0.006  
 
Fourth Quarter
    0.02       0.008  
                   
2009
                 
 
First Quarter
    0.06       0.03  
 
Second Quarter
    0.14       0.03  
 
Third Quarter
    0.04       0.02  
 
Fourth Quarter
    0.03       0.02  

As of December 31, 2010, there are 84 shareholders of record of the Company's common stock.
 
 
15

 

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, 2010, there were 35,873,703 common shares and 54,000 Series A 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.

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.
 
 
16

 
 
 
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.

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 Securities 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

Not Applicable.

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.
 
 
17

 

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, 2010 ("Fiscal 2010") compared to the year ended December 31, 2009 ("Fiscal 2009"). 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, 2010.

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, 2010, 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.

In 2010 we began our DRIVE program under the LIFT Network division. The DRIVE program is a marketing vehicle for merchants which is accomplished via DRIVE card sales to the public. These cards entitle the purchaser to discounts on listed products from the merchant.

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:
 
 
18

 

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 charge backs. 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.

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, 2010 Compared with the Year Ended December 31, 2009

Results of operations consist of the following:
 
    December 31, 2010     December 31, 2009     Difference     Difference  
                 $       %  
                           
Net Revenues    $ 3,068,934     $ 5,836,785     $ (2,767,851     (47 )
Cost of Revenues       1,500,835       3,550,256       (2,049,421 )     (58 )
                                 
Gross Profit      1,568,099       2,286,529       (718,430     (31 )
Operating, General,
and Administrative Costs  
    2,122,989       2,466,880       (343,891     (14 )
                                 
Net Operating Gain (Loss)   $ (554,890   $ (180,351 )     $ (374,539 )     208  
 
Net revenues decreased by $2,767,851 or 47% from $5,836,785 to $3,068,934 for the year ending December 31, 2010 compared to the year ending December 31, 2009 due mainly to the sale of one of our merchant card portfolios in April 2010 as well as the poor economy. Residuals decreased by approximately $2.9 million due to the sale of the merchant portfolio as well as the attrition of gift and loyalty 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 $102,538 but were offset by increased sales in the Month-to-Month program of $241,988. 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 $19,004 in card sales. The decrease in cost of revenues of $2,049,421 or 58% from $3 550 256 to $1,500,835 is directly related to a comparable decrease in revenues.
 
 
19

 

Operating, general and administrative costs decreased by $343,891 or 10% from $2,466,880 to $2,122,989. The largest portion of this decrease was payroll expense of approximately $152,834 due to a reduced work force, a reduction in accrual of which are based on EBIDA and a decrease in Legal and Professional Fees of $187,354, $155,869 of which was reversal of over accrued fees. Additional payroll related reductions were $5,479 in auto expenses for in-house sales reps and $5,353 in reduced payroll taxes. Payroll reductions were offset by increases of $99,700 in Bonuses, $12,374 in employee benefits and $8,574 in insurance expenses. The amortization expense was reduced by $69,549 due to primarily to the sale of the merchant card portfolio. Other major decreases in expenses were a $92,867 reduction in advertising/ promo/trade show expenses resulting from not attending trade show during 2010, $19,776 decrease in interest expense due to the pay down of the Line of Credit with proceeds from the merchant portfolio sale, $5,522 equipment lease reduction resulting from completed leases, $5,072 reduction in state taxes and $5,274 reduction in phone expense. With the continued allocation equipment to fixed assets and the purchase of new production equipment there was a $24,050 increase of depreciation expense.  The loan renewal fee on the Line of Credit increased $25,000 due to a change in the terms of the agreement.

The change in position of cash, accounts payable and accrued expenses, and accounts receivable consist of the following:
 
    December 31, 2010     December 31, 2009     Difference     Difference  
                 $       %  
                           
 Cash    $ 31,762     $ 40,153     $ ( 8,391     (21 )
Accounts Payable and Accrued Expenses      $ 476,320     $ 570,818     $ (94,498 )     (17 )
 Accounts Receivable, net        $ 56,895     $ 5,296     $ 51,599       974  
 
Cash decreased by approximately $8,391 or 21% from $40,153 to $31,762 for the year ending December 31, 2010 compared to the year ending December 31, 2009 due primarily reduced residual income.

Accounts Payable and Accrued Expenses decreased by $94,498 or 17% from $570,818 to $476,320 for the year ending December 31, 2010 compared to the year ending December 31, 2009 primarily due to the payoff of outstanding debts.

Accounts Receivable rose by $51,599 or 974% from $5,296 to $56,895 for the year ending December 31, 2010 compared to the year ending December 31, 2009 due primarily to the new DRIVE program. Since the company is acting as the sales agent on behalf of the merchants represent, this is the one instance, in addition to leases, where payment is not received until after we actually ship the product to our sales reps. While the only product shipped is the cards, these cards have a higher face value $25 - $50 per car card) than our regular gift cards ($1.20 - $2.00 per card) which accounts for the higher Accounts Receivable. 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 and DRIVE programs 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.
 
 
20

 

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 $786,510 from the sale of the merchant portfolio, $675,000 on our line of credit with a related party and use of cash on hand. In 2010 we paid down the related party Line of Credit in April. At this time our only outstanding debt consists of our related party line of credit with an outstanding balance of $283,273 at year end, of which $100,000 was the line renewal fee. We are currently allocating approximately $50,000 for capital purchases to upgrade our network servers and production equipment. We believe that we will be able to meet all cash needs with the use of cash on hand and the line of credit during 2011.

We had $31,762 cash on jand as of December 31, 2010 compared to $40,153 cash on hand as"of December"31, 200;. We will continue to need additional cash during the following twelve months and these needs will coincide with thg cash demands resulving from our general operations and planned expcnsion. There is no assurance that we will be able to obvain additional capital cs required, or obtain the capital on acceptcble 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, 2010
CONTENTS
 
 
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      23  
         
Consolidated Balance Sheets as of December 31, 2010 and 2009      24  
         
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009 
    25  
         
Consolidated Statement of Stockholders' Equity from December 31, 2009 and December 31, 2010 
    26  
         
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009      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, 2010 and 2009, 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, 2010 and 2009, 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
April 15, 2011

 
23

 

INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
December 31, 2010
   
December 31, 2009
 
             
ASSETS
           
             
CURRENT ASSETS
           
Cash
  $ 31,762     $ 40,153  
Accounts receivable, net of allowance of $28,621 and $17,721 at December 31, 2010 and 2009, respectively
    56,895       5,296  
Note receivable, net of allowance of $50,000 at December 31, 2010 and 2009,  respectively
    8,500       -  
Inventory
    45,159       57,529  
Other receivables
    30,821       194,422  
Prepaid assets
    50,000       25,000  
Total current assets
    223,137       322,400  
FIXED ASSETS, net of accumulated depreciation of $3,043,745 and $2,999,836 at
               
December 31, 2010 and 2009, respectively
    35,279       42,719  
INTANGIBLE ASSETS
    988,958       1,405,026  
GOODWILL
    87,979       87,979  
OTHER NON-CURRENT ASSETS
    116,367       117,576  
                 
Total assets
  $ 1,451,712     $ 1,975,700  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable
  $ 46,037     $ 39,141  
Accrued expenses
    430,283       531,677  
Due to FTS – Underpayment
    -       55,697  
Line of credit, related party
    291,773       628,154  
Total current liabilities
    768,093       1,254,669  
COMMITMENTS & CONTINGENCIES
    -       -  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock; $0.01 par value; 10,000,000 shares authorized, 54,000 shares
               
issued and outstanding at December 31, 2010 and 2009, respectively
    540       540  
Common stock; $0.0005 par value; 100,000,000 shares authorized,
               
35,873,703 shares issued and outstanding at December 31, 2010
               
and 2009, respectively
    17,937       17,937  
Common stock subscribed
    30,000       30,000  
Additional paid-in capital
    19,628,401       19,628,401  
Accumulated deficit
    (18,993,259 )     (18,955,847 )
Total stockholders' equity
    683,619       721,031  
Total liabilities and stockholders' equity
  $ 1,451,712     $ 1,975,700  
 
See Accompanying Notes to Consolidated Financial Statements.

 
24

 

INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
For the Years Ended
 
   
December 31, 2010
   
December 31, 2009
 
             
Revenues:
           
Merchant services revenues
  $ 2,454,714     $ 5,355,851  
Equipment sales
    631,519       506,182  
Less: sales returns and allowances
    (17,299 )     (25,248 )
Net revenue
    3,068,934       5,836,785  
Cost of revenues:
               
Commissions
    514,780       625,379  
Cost of sales
    943,747       2,838,904  
Cost of sales - equipment
    42,308       85,973  
Cost of revenue
    1,500,835       3,550,256  
Gross profit
    1,568,099       2,286,528  
Operating, general and administrative expenses
    2,122,989       2,466,880  
Net operating loss
    (554,890 )     (180,351 )
Non-operating income (expense):
               
Interest income
    1,231       1  
Interest (expense)
    (21,958 )     (41,735 )
Gain on Sale of Fixed Assets and Merchant Portfolio
    538,205       1,381  
Other Expense – FTS
    -       (38,636 )
Total non-operating income (expense)
    517,478       (78,989 )
Net income (loss) before provision for income taxes:
    (37,412)       (259,340 )
Income tax benefit (provision)
    -       -  
Net loss
  $ (37,412 )   $ (259,340 )
Earnings per share - basic
  $ (0.00 )   $ (0.01 )
                 
Earnings per share - diluted
  $ (0.00 )   $ (0.01 )
                 
Weighted average number of shares of common stock outstanding – basic and diluted
    35,873,703       35,873,703  
   
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, 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  
                                                                 
Net loss, December 31, 2010
    -       -       -       -       -       -       (37,412 )     (37,412 )
Balance, December 31, 2010
    54,000     $ 540       35,873,703     $ 17,937     $ 19,628,401     $ 30,000     $ (18,993,259 )   $ 683,619  

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, 2010
   
December 31, 2009
 
Cash Flows from Operating Activities:
           
Net (loss) income
  $ (37,412 )   $ (259,340 )
                 
Adjustments to reconcile net (loss) income to cash provided by operating activities:
               
Depreciation
    44,022       16,972  
Gain on sale of fixed assets
    (1,989 )     (1,381 )
Write off of cancelled merchant accounts
    215,351       284,900  
Allowance for doubtful accounts, other receivables and accrued interest income, net of bad debt recoveries
    10,900       (32,456 )
Gain on Sale of Merchant Portfolio
    (536,216 )     -  
                 
Changes in assets and liabilities:
               
(Increase) decrease in accounts receivable
    (62,499 )     49,731  
Decrease in inventories
    411,606       381,968  
Decrease in other receivables
    163,601       61,209  
(Increase) decrease in prepaid expenses
    (25,000 )     3  
(Increase) decrease in other non-current assets
    1,210       (891 )
Increase in accounts payable
    6,900       16,227  
               (Decrease) in accrued expenses
    (101,397 )     (61,636 )
               Increase (decrease) in Due to FTS - Underpayment
    (55,697 )     55,697  
                 
Net cash provided by operating activities
    33,380       511,003  
Cash Flows from Investing Activities:
               
Acquisitions, net of attrition
    (68,136 )     (110,547 )
       Purchase of property and equipment
    (22,371 )        
Proceeds from sale of fixed assets
    2,685       -  
Proceeds from Merchant Portfolio Sale
    805,075       1,381  
(Advances made) payments received toward notes receivable
    (8,500 )     88  
                 
Net cash (used in) investing activities
    708,752       (109,078 )
Cash Flows from Financing Activities:
               
Noncash advances from line of credit, related party
    (931 )     54,121  
Payment on line of credit, related party
    (1,424,796 )     (1,219,297 )
Proceeds from line of credit, related party
    675,204       712,000  
                 
Net cash (used in) financing activities
    (750,523 )     (453,176 )
                 
Net decrease in cash
    (8,391 )     (51,251 )
Cash, beginning of period
    40,153       91,404  
                 
Cash, end of period
  $ 31,762     $ 40,153  
 
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,
2010
   
December 31,
2009
 
SUPPLEMENT DISCLOSURE OF CASH
           
  FLOW INFORMATION
           
Cash paid for interest
  $ 27,221     $ 38,945  
                 
NON-CASH INVESTING AND FINANCING TRANSACTIONS
               
Inventory purchased from line of credit, related party
  $ 414,143     $ 422,793  
    Inventory reclassified to fixed assets
  $ 16,708     $ 59,691  
 
See Accompanying Notes to Consolidated Financial Statements.
 
 
28

 
 
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009

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, 2010 and 2009, respectively.
 
 
29

 

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, 2010 and 2009 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, 2010 and 2009.

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 2010 and 2009, 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 6). 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 2010 and 2009, the Company purchased no merchant or gift card portfolios. The Company recognized direct write offs of $215,351 and $284.900  as of December 31, 2010 and 2009, which are included in Cost of Sales in the Statements of Operations.
 
 
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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 charge backs. 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, 2010 and 2009 were $16,498 and $109,365, 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.
 
 
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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 and DRIVE accounts which are accrued from date of shipment. Accounts receivable were $56,895 and $5,296, net of allowance of $28,621 and $17,721, at December 31, 2010 and 2009, respectively.

NOTE 3.  NOTE RECEIVABLE

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. However, the company received a confirmation of debt letter from the third parties auditors in early 2011.

NOTE 4.  OTHER RECEIVABLE

At December 31, 2010 and 2009, other receivables consisted of the following:

   
For the Years Ended
 
   
December 31, 2010
    December 31, 2009  
Merchant residuals receivable
  $ 14,394     $ 163,118  
Other receivables
    16,427       31,304  
  Total
  $ 30,821     $ 194,422  
 
 
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Other receivables are split between residuals due on merchant account transactions, a funds pool flow through repayment and employee advances.
 
NOTE 5.  FIXED ASSETS

Fixed assets and accumulated depreciation consists of the following:

   
For the Years Ended
 
   
December 31, 2010
   
December 31, 2009
 
             
Furniture and fixtures
  $ 21,784     $ 14,750  
Equipment and machinery
    227,961       197,805  
Software
    2,830,000       2,830,000  
Subtotal
    3,079,745       3,042,555  
Accumulated Depreciation
    (3,043,745 )     (2,999,836 )
    $ 36,000     $ 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 $44,022 and $16,972 for the year ended December 31, 2010 and 2009, respectively. The company is in the process of upgrading our network servers. To this end we are purchasing parts to custom build this equipment. Some of these purchases were made in late 2010 but have not been included in the depreciation calculation as the equipment has not yet been placed in service.

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 2010and 2009.  We have determined that, at present, the NEOS trade name has an indefinite life, which has been included in the Company’s annual impairment analysis.  In 2010 and 2009, the Company completed its impairment analysis that resulted in no impairment of goodwill being recognized.

In April 2010 management negotiated the sale of one of its merchant card portfolios to the Company’s bank card processor in a third party transaction. The Company received net proceeds of $761,510 from the transaction with a net gain of $536,216.

The Company's intangible assets consisted of the following:
 
   
December 31,
 
   
2010
   
2009
 
             
Merchant portfolios
  $ 553,950     $ 970,026  
Tradename
    435,000       435,000  
  Total intangible assets
  $ 988,950     $ 1,405,026  
                 
Goodwill
  $ 87,979     $ 87,979  
 
 
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NOTE 7.  ACCRUED EXPENSES

Accrued expenses consist of the following:

   
December 31,
 
   
2010
   
2009
 
             
Accrued wages and bonuses
  $ 209,780     $ 182,025  
Customer deposits
    112,720       109,609  
Accrued expenses, other
    105,209       , 229,885  
Accrued interest
    1,636       6,899  
Accrued sales tax
    938       3,259  
Reserve for charge backs
    -       -  
    $ 430,283     $ 531,677  

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. The outstanding balance of $55,697 was paid in full in April 2010.

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.
 
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 2010 and 2009, respectively.
 
 
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Net Income (Loss) Per Common Share

Earnings per share are 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 are 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.

At December 31, 2010 and 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 2010 and 2009,

   
2008
 
Expected volatility
    212.88 %
Weighted-average volatility
    70.96 %
Expected dividends
    0  
Expected term (in years)
    4  
Risk-free rate
    4.013 %

 
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NOTE 10.  STOCK OPTION PLAN - Continued

A summary of option activity under the Plan as of December 31, 2010 and 2009, 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, 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  
Outstanding at December 31, 2010
    7,502,000     $ 0.19       3.5     $ 1,079,658  
Exercisable at December 31, 2010
    7,502,000     $ 0.19       3.5     $ 1,079,658  

All options outstanding were fully vested as of December 31, 2010 and 2009.

NOTE 11.    INCOME TAXES

The consolidated provision for federal and state income taxes for the years ended December 31, 2010 and 2009 are as follows:
 
 
   
2010
   
2009
 
             
Current – State
  $ -     $ -  
Current – Federal
    -       -  
Deferred – State
    34,000       40,121  
Deferred – Federal
    133,000       158,849  
Valuation allowance
    (167,000 )     (198,970 )
                 
Income tax provision (benefit)
  $ -     $ -  
 
There were no amounts paid for federal income taxes during the years ended December 31, 2010 and 2009.

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.

 
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NOTE 11.   INCOME TAXES - Continue
 
As of December 31, 2010, the Company had federal net operating loss carryforwards of $12,348,500 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  
December 31, 2030     427,472   
    Total     $  12,348,500  
                                                                                                                                                                                                                                                        
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 2020 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:

 
 
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, 2010 and 2009 are as follows:

   
2010
   
2009
 
             
Deferred tax asset - current
  $ -     $ -  
Deferred tax asset – non current
    4,306,000       5,226,179  
Total deferred tax asset
    4,306,000       5,226,179  
                 
Deferred tax liability - current
    -       -  
Deferred tax liability – non current
    (167,000 )     (198,970 )
Total deferred tax liability
    (167,000 )     (198,970 )
                 
Current deferred tax asset (liability)
    -       -  
Non current deferred tax asset (liability)
    4,139,500       5,027,209  
Net deferred tax asset (liability)
    4,139.500       5,027,209  
                 
Valuation allowance
    (4,139,500 )     (5,027,209 )
                 
Net deferred tax asset (liability)
  $ -     $ -  

 
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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 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, 2010
   
December 31, 2009
 
             
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 2020.

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, 2010 upon the issuance of this filing. The U.S. federal returns are considered open tax years for years 2007 - 2010. 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 $291,773 and $628,154 as of December 31, 2010 and 2009, 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 was due to mature on June 30, 2010.  However, due to the sale of our merchant portfolio, the Line of Credit renegotiated as of June 6, 2010, and now matures on June 30, 2011. Due to higher risk position created by the sale of the merchant portfolio, the loan renewal fee was raised to $100,000. 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, 2010, 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 $299 to $3,952. As of January 2011 all equipment lease obligations have been paid in full and the only remaining obligations are rent for our various office premises.

Minimum future lease obligations for the five years immediately following the balance sheet date are as follows:

2011
  $ 63,024  
Thereafter
    5,200  
         
Total future minimum lease commitments
  $ 68,224  

The company leases its facilities for a total of $6,436 per month.  Our current offices are located in Camarillo and Mission Viejo, California, Centennial, Colorado, and Tampa, Florida. Total lease costs for the years ended December 31, 2010 and 2009 were $99,131 and $89,476, respectively.

NOTE 14   SUBSEQUENT EVENTS

Management evaluated all activity of the Company through April 15, 2011 (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.
 
 
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ITEM 9.  Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

None.

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, 2010, 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.
 
 
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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, 2010. 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, 2010, 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.

PART III

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
  48  
Chief Executive Officer, Secretary and Director
         
Candace Mills
  55  
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 preceding provides ample documentation of Mr. Lopshire’s qualifications to serve on our Board of Directors.
 
 
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CANDACE MILLS, Chief Financial Officer. Ms. Mills has over twelve 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.

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.

Meetings and Committees of the Board of Directors
 
Our Board of Directors did not hold any formal meeting during the fiscal year ended December 31, 2010.
 
We currently do not maintain any committees of the Board of Directors. Given our size and the development of our business to date, we believe that the board through its meetings can perform all of the duties and responsibilities which might be contemplated by a committee.  Our board of directors is expected to appoint an audit committee, nominating committee and compensation committee, and to adopt charters relative to each such committee, in the near future. We intend to appoint such persons to the committees of the board of directors as are expected to be required to meet the corporate governance requirements imposed by a national securities exchange, although we are not required to comply with such requirements until we elect to seek listing on a national securities exchange, and we are under no obligation to do so.
 
Except as may be provided in our bylaws, we do not currently have specified procedures in place pursuant to which whereby security holders may recommend nominees to the Board of Directors.
 
 
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Family Relationships
 
There are no family relationships between or among the above directors and/or executive officers.
 
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, 2010, 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.
 
 
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Board Leadership Structure and Role in Risk Oversight

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.

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
 
  SUMMARY COMPENSATION TABLE
Name and principal
   
Salary
   
Bonus
   
Stock Awards
   
Option
Awards
 
   
Non-Equity
Incentive Plan
Compensation
   
Nonqualified
Deferred
Compensation
Earnings
   
All Other Compensation
   
Total
 
position
Year
 
($)
   
($)
   
($)
   
($)
   
($)
   
($)
   
($)
   
($)
 
William Lopshire
2010
    113,077       54,320       0       0       0       0       0       167,397  
Chief Executive
2009
    126,923       58,925       0       0       0       0       0       185,848  
Officer,Director
                                                                 
 
2008
    122,308       57,476       0       0       0       0       0       179,784  
Candace Mills
2010
    67,149       12,000       0       0       0       0       0       79,149  
Chief Financial
2009
    68,535       12,000       0       0       0       0       0       80,535  
Officer
                                                                 
 
2008
    61,870       12,000       0       0       0       0       0       73,870  
Kjell Nesen
2010
    106,154       54,320       0       0       0       0       0       160,474  
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  
Dana Marlin
2010
    113,077       54,320       0       0       0       0       0       167,397  
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  
 
Stock based compensation is accounted for using the Equity-Based Payments to Non-Employee Topic of the FASB ASC.
 
 
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Number of Securities
Underlying
Unexercised Options
(#)
   
Number of Securities
Underlying
Unexercised Options
(#)
   
Equity
Incentive Plan
Awards:
Number of Securities
Underlying
Unexercised Unearned Options
   
Option
Exercise
Price
   
Option
Expiration
   
Number of Shares or Units of Stock That
Have
Not Vested
   
Market
value of
shares or
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
 
Name
 
Exercisable
   
Unexercisable
      (#)    
($)
   
Date
      (#)    
($)
      (#)       (#)  
William
    1,000,000       0       0       0.21       6-30-2015       0       0       0       0  
Lopshire
    1,000,000                       0.15       9-28-2012                                  
Candace
    0       10,000       0       0.15       9-28-2012       0       0       0       0  
Mills
                                                                       
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                       0.15       9-28-2012                                  

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  
Outstanding at December 31, 2010
    7,502,000     $ 0.19       3.5     $ 1,079,658  
Exercisable at December 31, 2010
    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

None.
 
 
44

 

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 April 15, 2011, based on 35,873,703 shares issued and outstanding:

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 April 15, 2011 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 April 15, 2011, based on 35,873,703 shares issued and outstanding:

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 %

 
45

 

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 $291,773 and $628,154 as of December 31, 2010 and 2009, 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, 2010. The Line of Credit was renewed for one year during the second quarter of 2010 and now matures on June 30, 2011.
 
Related party bonuses paid during the years ended December 31, 2010 and 2009 totaled $0 and $0, respectively.
 
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 $63,207 and $73,893, respectively, for the years ended December 31, 2010 and 2009.

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, 2010 or 2009.

All Other Fees

There were tax preparation fees of $2,025 and $2,293 billed for the fiscal years ended December 31, 2010 and 2009, respectively.
 
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
 
We do not currently have an Audit Committee.  The policy of our Board of Directors, which acts as our Audit Committee, is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
 
 
46