Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2011
Commission File Number: 001-16423
ISA INTERNATIONALE INC.
(Name of small business registrant in its charter)
Delaware 41-1925647
(State of incorporation) (I.R.S. Employer Identification No.)
2564 Rice Street, St. Paul, MN 55113
(Mailing address of principal executive offices) (Zip Code)
(Issuer's telephone number) (651) 484-9850
Securities registered under Section 12(g) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock OTC Bulletin Board
----------------------------------------------------------------------------
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [] No [X]
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No []
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes [] No []
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [] Accelerated filer []
Non-accelerated filer [] Smaller Reporting Company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [] No [X]
1
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
On May 23, 2011 there were 23,999,612 shares of the Registrant's common stock,
par value $.0001 per share and 1,781,000 shares of Convertible Preferred Stock,
par value $.0001 per share issued and outstanding. The Convertible Preferred
Stock would upon conversion at the option of the holder require the issuance of
an additional 17,810,000 shares of common stock.
Transitional Small Business Disclosure Format (check one). Yes [] No [X]
2
ISA INTERNATIONALE INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets 5
Consolidated Statements of Operations 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-16
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17-22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23
ITEM 4T. Controls and Procedures 23
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
ITEM 3. Defaults upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 24
Signatures 25
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
These consolidated financial statements have been prepared by ISA
Internationale Inc. (the Company) without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted in accordance with such SEC rules and regulations. In the opinion of
management, the accompanying statements contain all adjustments necessary to
present fairly the financial position of the Company as of March 31, 2011, and
its results of operations, stockholders' equity, and its cash flows for the
six month period ended March 31, 2011. The results for these interim periods
are not necessarily indicative of the results for the entire year. The
accompanying financial statements should be read in conjunction with the
financial statements and the notes thereto as a part of the Company's annual
report on Form 10-K filed on January 18, 2011. Reference should further be
made to Note 10 to these consolidated financial statements for information on
corrections to prior period reports for the year ended September 30, 2010 and
for the quarter ended December 31, 2010.
4
ISA INTERNATIONALE INC.
CONSOLIDATED BALANCE SHEETS
March 31,2011 September 30, 2010
(Unaudited) (Unaudited)(1)
ASSETS -------------------------------
Current Assets:
Cash and cash equivalents $ 52,716 $ 41,512
Trade Receivables 963 532
Prepaid expenses 4,500 4,500
------------ ---------
Total current assets 58,179 46,544
Fixed Assets
Fixed assets at cost less depreciation 46,592 50,161
------------ ---------
Total fixed assets 46,592 50,161
Other Assets:
Finance contract receivables, net of collections 247,935 268,389
Deposits - Long term 5,000 5,000
------------ ---------
Total other assets 252,935 273,389
------------ ---------
Total assets $ 357,706 $ 370,094
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade and taxes $ 146,270 $ 168,320
Credit lines payable 18,202 18,447
Notes payable other - current portion 3,462 3,379
Notes payable related party - current portion 33,542 23,311
Convertible notes payable - related party 790 339
------------ ---------
Total current liabilities 202,266 213,796
Long Term Liabilities
Notes payable other - long term portion 10,837 12,589
Notes payable - related party long term portion 48,833 54,676
------------ ---------
Total liabilities 261,936 281,061
------------ ------------
Stockholders' equity:
Preferred 12% cumulative convertible stock, par value $.0001
30,000,000 shares authorized, 1,781,000 shares
issued and outstanding at March 31, 2011 , 1,489,000
shares issued and outstanding at September 30, 2010 178 149
Preferred ISA Acceptance Corporation, par value $25
50,000 shares authorized, 22,400 shares issued and
outstanding at March 31, 2011 and at September 30, 2010 560,000 560,000
Common stock, $.0001 par value, 300,000,000 shares
authorized; 23,999,612 shares issued and outstanding
at March 31, 2011 and at September 30, 2010 2,400 2,400
Additional paid-in capital 10,679,616 10,386,150
Accumulated deficit (10,608,924) (10,322,165)
Treasury stock (537,500) (537,500)
------------ -----------
Total stockholders' equity 95,770 89,033
------------ ---------
Total liabilities and stockholders' equity $ 357,706 $ 370,094
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
(1) Refer to note 10 about corrections for the year ended September 30, 2010.
5
ISA INTERNATIONALE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
3 Months Ended 6 Months Ended
March 31, March 31, March 31, March 31,
2011 2010 2011 2010
-----------------------------------------------
Operating revenue:
Financing income $ 191 $ 81,058 $ 1,717 $ 95,083
Third party collections 47,679 - 80,742 -
Other collection fees 22,958 4,715 38,968 12,834
------- ------- -------- -------
Total operating revenue 70,828 85,773 121,427 107,917
Operating expenses:
Portfolio collection costs 71,446 113,651 162,612 203,518
General and administrative 53,371 97,708 140,485 207,955
------- ------- ------- -------
Operating expenses 124,817 211,359 303,097 411,473
-------- -------- -------- --------
Operating loss (53,989) (125,586) (181,670) (303,556)
Other expenses
Interest expense (7,475) 3,914) (11,022) (8,395)
-------- ------- -------- --------
Net loss (61,464) (129,500) (192,692) (311,951)
Dividends to preferred stockholders (49,029) 32,282) (94,066) (59,988)
--------- -------- -------- --------
Net loss attributable to common $(110,493) (161,782) (286,758) (371,939)
stockholders ========= ======== ========= ========
Basic loss per share $ (0.01) $ (.01) $ (0.01) $ (0.02)
========= ======== ======== ========
Weighted average common
Shares outstanding: Basic 23,999,612 23,999,612 23,999,612 23,999,612
========== ========== ========== ==========
Dividends per share of common stock none none none none
Dividends per share of preferred $0.028 0.025 $0.055 0.047
stock
The accompanying notes are an integral part of these consolidated financial statements.
6
ISA INTERNATIONALE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Six Months
Ended Ended
March 31, 2011 March 31, 2010
---------------- ----------------
Cash flows from operating activities:
Net loss $ (192,692) $ (311,951)
Adjustments to reconcile net loss from operations
to cash flow used in operating activities:
Depreciation and amortization 3,569 3,525
Reduction of debt receivable purchase price
due to gross collections received 33,153 27,013
Interest contributed to capital 1,497 2,252
Changes in operating assets and liabilities:
(Increase) decrease in Trade receivables (431) (161)
(Increase) decrease in prepaid expenses 0 395
Increase in accounts payable and accrued expenses (22,051) 24,265
---------- --------
Cash used in operating activities (176,955) (254,662)
Cash flows from investing activities:
Purchase of debt receivables (12,699) (31,538)
Purchase of office equipment - (12,522)
Purchase of automobile - (18,505)
---------- ---------
Cash used by investing activities (12,699) (62,565)
Cash flows from financing activities:
Proceeds from bank lines of credit 4,539 18,028
Payments for bank lines of credit (4,785) (9,419)
(Payments) proceeds from convertible notes
payable - related party 2,718 (280)
Proceeds from notes payable - related party 452 43,048
Proceeds from issuance of Preferred Stock 292,000 335,000
Preferred stock dividend (94,066) (59,988)
Proceeds from Notes Receivable 0 7,600
-------- ---------
Cash provided by financing activities 200,858 333,989
---------- ---------
Increase (decrease) in cash and cash equivalents 11,204 16,762
Cash at beginning of period 41,512 17,545
---------- ---------
Cash and cash equivalents at end of period $ 52,716 $ 34,307
========== ==========
Non-cash investing in financing transactions:
Additional paid in capital to related party
for indemnification agreement $ 1,497 $ 2,252
Accrued preferred stock dividend expense (94,066) (59,988)
Proceeds from issuance of ISAT Convertible
Preferred stock to related party 292,000 335,000
---------- --------
Total non-cash transactions $ 199,431 $ 277,264
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
7
ISA INTERNATIONALE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 NATURE OF BUSINESS AND SIGNIFICANT EVENTS
Nature of Business
ISA Internationale Inc. (the Company or ISAI) was incorporated on June 2,
1989, under the laws of the State of Delaware under a former name and became a
reporting publicly held corporation on November 15, 1999. On May 8, 1998,
Internationale Shopping Alliance Incorporated (Internationale), a Minnesota
corporation, was merged with the Company, a Delaware corporation, pursuant to
a merger agreement dated April 23, 1998. Upon consummation of the merger,
Internationale became a wholly owned subsidiary of the Company. During 2000,
the Company sold one subsidiary and discontinued the operations of its
ShoptropolisTV.com subsidiary. Since then, reorganization specialists,
Doubletree Capital Partners LLC, has internally reorganized the Company's
financial affairs and changed its direction to focus on the financial services
industry.
These consolidated financial statements include the parent Company, ISA
Internationale, Inc., its wholly owned subsidiary, ISA Financial Services,
Inc. (formerly ISA Acquisition Corporation), and its wholly owned subsidiary,
ISA Acceptance Corporation. The companies resumed operations in September 2005
as a result of a distressed consumer debt purchase agreement which commenced
on May 18, 2005, and currently operate as debt collection companies.
In the opinion of management, the condensed consolidated financial statements
include all normal recurring adjustments necessary for a fair presentation of
the balance sheet of the Company at March 31, 2011 and the results of its
operations and cash flows for the three and six months ended March 31, 2011
and 2010. Results of operations reported for interim periods are not
necessarily indicative of results for the entire year and should be read in
conjunction with the prior year 10-K.
Critical Accounting Policies
The Company utilizes the cost recovery method under guidance provided by FASB
ASC 310 to determine income recognized on finance receivables. The Company has
determined we cannot reasonably estimate the timing of the cash flows from our
portfolio receivables collections to effectively utilize the interest method
of revenue recognition under FASB ASC 310.
Under the cost recovery method of revenue recognition, the Company does not
recognize revenue until the original investment cost in the portfolio has been
recovered by gross collections less write-offs and impairments. The Company
began collecting on our own portfolios in 2005. Currently our accounting
procedure is to reduce the carrying inventory asset value by the gross amount
collected before fees and other collection costs are subtracted. Once the
portfolio is fully amortized we report additional collections as revenue. We
will continue to obtain and use appropriate input data including monthly
collection data and liquidation rates to evaluate our performance and project
future cash flows from our portfolios of receivables.
8
If in the opinion of management future cash collections will be inadequate to
amortize the current carrying balance or the resulting estimated fair market
value of the remaining portfolio debt receivables were to be less than the
carrying value, an impairment charge would need to be taken with a
corresponding write off of the "impaired" or deficient receivable carrying
value with a corresponding charge to profit and loss of the Company at that
time.
The Company believes the remaining portfolio debt receivable carrying costs of
$247,935 will be recovered by the Company from future gross collections to be
received over the next 60 months commencing from April 1, 2011 and forward.
The Company cannot guarantee all of the remaining receivable costs can be
recovered due to the aging and future write-offs of the receivables or may
sell portions of the portfolio debt receivable inventory.
In January 2010 the Company purchased another debt portfolio in the amount of
$25,008 and subsequently sold a major portion of the portfolio for $23,057. In
August 2010 an additional debt portfolio was purchased for $23,313. On
December 3, 2010, the Company purchased a distressed debt portfolio of
receivables for $12,699.
The agreements to purchase the aforementioned receivables include general
representations and warranties from the sellers covering account holder death
and accounts settled or disputed prior to sale. The representation and
warranty period permitting the return of these accounts from the Company to
the seller is typically 90 to 180 days. Any funds received from the seller of
debt receivables as a return of purchase price are referred to as buybacks.
Buyback funds are simply applied against the debt receivable inventory
balance. They are not included in the Company's cash collections from
operations nor are they included in the Company's cash collections applied to
revenue.
Gains on sale of debt receivables, representing the difference between sales
price and the unamortized value of the debt receivables, are recognized when
debt receivables are sold.
Changes in company owned portfolio debt receivables for the quarter ended
March 31, 2011:
Balance at beginning of period, December 31, 2010 $ 270,545
Acquisition of debt receivables 0
Sale of debt receivables 0
Cash collections applied to principal (22,610)
-----------------
Balance at the end of the period, March 31, 2011 $ 247,935
=================
Estimated Remaining Collections ("ERC")(Unaudited) * $ 326,541
The Estimated Remaining Collections refers to the sum of all future projected
cash collections from acquired portfolios. ERC is not a balance sheet item,
however, it is provided for informational purposes. Under FASB ASC 310
guidance, debt security impairment is recognized only if the fair market value
of the debt has declined below its amortizable costs. Currently, no additional
amortizable costs are below fair market value.
9
For our company owned portfolios revenue will be recognized based on FASB ASC
310. Since expected cash flows cannot be reasonably estimated, the Company
will continue to use the "Recovery Method" under which revenues are only
recognized after the initial cost of the investment has been recovered.
The cost recovery revenue recognized on debt receivables in the amount of
$1,717 was for the six months ended March 31, 2011 and recorded other
collection fees of $38,968. Also we had income from our third party
collections operations of $80,742 for a total income of $121,427. This
compares to a total income from the six months ended March 31, 2010 of
$107,917 from both our own portfolios of debt receivables and third party
collections on contract.
Note 2 LIQUIDITY AND GOING CONCERN MATTERS
The Company has incurred losses since its inception and, as a result, has an
accumulated deficit of $10,608,924 at March 31, 2011. The net loss for the six
month period ended March 31, 2011 from operating activities was $192,692
compared to a net loss of $311,951 for the same period last year. As of March
31, 2011, the Company had a principal balance due of $82,375 in notes payable
to finance portfolio purchases to related parties and $14,297 in a bank note
payable. The Company issued $292,000 in face value Preferred Stock shares to a
related party investor to redeem the notes payable plus accrued interest and
additional capital contribution to finance continuing operations. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
The Company's ability to continue as a going concern depends upon successfully
restructuring its debt, obtaining sufficient financing to maintain adequate
liquidity and provide for capital expansion until such time as operations
produce positive cash flow. The Company had been in reorganization and at the
present time is continuing to establish itself in the debt collection business
within the financial services industry. However, there can be no assurance
these actions will be successful.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which assumes continuity of operations and realization of
assets and liabilities in the ordinary course of business. These financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts of and classification of
liabilities that might be necessary in the event the company cannot continue
in existence.
Note 3 BASIS OF PRESENTATION
These financial statements and related notes have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Cash and Cash Equivalents:
For purposes of the Statements of Cash Flows, the Company considers liquid
investments with an original maturity of three months or less to be cash
equivalents.
10
Management's Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period.
Actual results may differ materially and adversely from the Company's
estimates. To the extent there are material differences between the estimates
and the actual results, future results of operations will be affected.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments including other current assets,
accounts payable and other current liabilities including accounts payable and
notes payable approximated fair value because of the immediate short-term
maturity of these instruments.
Income Taxes
The Company has adopted the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the
financial statement carrying amount and tax basis of assets and liabilities.
The Company provides for deferred taxes at the enacted tax rate that is
expected to apply when the temporary differences reverse.
Earnings (Loss) Per Share:
The Company reports earnings (loss) per share in accordance with FASB
Accounting Standards Codification Topic 260 (ASC 260-10), "Earnings Per
Share". This statement requires dual presentation of basic and diluted
earnings (loss) per share with a reconciliation of the numerator and
denominator of the loss per share computations. Basic earnings per share
amounts are based on the weighted average shares of common shares outstanding.
If applicable, diluted earnings per share assumes the conversion, exercise or
issuance of all common stock instruments such as options, warrants and
convertible securities, determined by the treasury stock method, unless the
effect is to reduce a loss or increase earnings per share. Accordingly, this
presentation has been adopted for the period presented. There were no
adjustments required for the period presented in the computation of diluted
earnings per share. Diluted loss per share is not reported because it would
report a lower loss per share.
Fixed Assets:
Fixed assets are recorded at cost and include expenditures that substantially
increase the productive lives of the existing assets. Maintenance and repair
costs are expensed as incurred. Depreciation is provided using the straight-
line method over management prescribed recovery periods. When a fixed asset is
disposed of, its cost and related accumulated depreciation are removed from
the accounts. The difference between un-depreciated cost and proceeds from
disposition is recorded as a gain or loss.
11
Long-Lived Assets:
In accordance with FASB ASC 360-10, "Property, Plant, and Equipment", the
carrying value of long-lived assets is reviewed by management on a regular
basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. Should there be impairment in the
future; the Company will recognize the impairment loss as the difference
between the carrying amount and fair value of the asset based on discounted
expected consolidated future cash flows from the impaired assets.
Contra Account presentation: Reference should be made to note 6 and 7 in these
notes to financial statements for additional information as to consolidated
financial statement presentation at March 31, 2011 for certain defaulted
convertible debenture notes payable and related accrued interest.
Stock Based Compensation: No shares of the Company's common stock were issued
as compensation for consulting services and settlement expenses during the six
months ended March 31, 2011.
Note 4 RECENT ACCOUNTING PRONOUNCEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
The amendments in this Update are effective for modifications of loans
accounted for within pools under Subtopic 310-30 occurring in the first
interim or annual period ending on or after July 15, 2010. The amendments are
to be applied prospectively. Early application is permitted. The Company does
not expect the provisions of ASU 2010-18 to have a material effect on the
financial position, results of operations or cash flows of the Company.
NOTE 5 STOCK ISSUANCE:
Preferred Stock
As of March 31, 2011, 1,781,000 shares of Convertible Preferred Stock were
issued and outstanding by the Parent Company with an issuance value of $1.00
per share. There also 22,400 shares of Preferred Stock issued and outstanding
at $25 per share by a subsidiary company of the Parent Company.
During the six months ended March 31, 2011, 292,000 preferred shares were
issued to Doubletree Capital Partners, Inc. (DCP) to satisfy loans and accrued
interest made to the Parent Company during the six months ended March 31,
2011. There were no shares issued by the subsidiary company in the similar six
month period of time.
The accumulated deficit for the six months ended March 31, 2011 was adjusted
and charged for a dividend distribution of $94,066 on 12% Convertible
Preferred Stock outstanding.
Common Stock
As of March 31, 2011, 23,999,612 shares of common stock were issued and
outstanding. No additional common shares were issued during the six months
ended March 31, 2011.
12
Stock Options
There were no stock options issued or exercised during the six months ended
March 31, 2011. All outstanding stock options expired as of September 30,
2009.
Note 6 CONVERTIBLE DEBENTURES
During 2003, the Company extended one previously defaulted $50,000 convertible
debenture to a future due date of March 31, 2006 with interest payable at that
date. The interest rate was lowered to 6% per annum. The debenture is
convertible into common shares of the Company at the rate of $3.00 per share
at the option of the holder. It is classified as a current liability and has
been offset by a contra-indemnification receivable. It is very unlikely the
remaining debenture holder would convert their debenture into common stock.
As of March 31, 2011, the currently due $50,000 in convertible debenture
principal and related interest payable of $24,014 has not been paid and is in
default. It is the position of the Company, this debt was sold to a related
financial entity (DLC) and DLC is now responsible for the debt and any related
shares that may be issued to effect any conversion per the Indemnification
Agreement with DLC as described below in Note 7.
Note 7 Indemnification Agreement - Related Party
On July 1, 2004, the Company approved the issuance of 1,200,000 common shares
to an affiliated company, Doubletree Liquidation Corporation (DLC). DLC is a
corporation owned 50% by the Company's President and 50% by an affiliated
stockholder, whose ownership exceeds, beneficially, 5% of the Company's common
stock. The affiliated company, DLC, has issued an indemnification guarantee to
the Company wherein it will process, review, and guarantee payment for certain
prior Company liabilities (both actual and contingent) that may arise during
the four years from June 30, 2004. The Company deemed the value of the
transaction to be $368,045 based upon the consideration given to the Company
in the indemnification agreement.
The four years of the agreement have expired, however DLC endeavored to
finalize and bring to a conclusion, the payment of prior operation's
liabilities. As the remaining liabilities are paid or resolved, the Company
will receive such notification of the resolution and may be allowed to reduce
the carrying value of the indemnification receivable. The remaining unpaid
liabilities can be summarized as one defaulted convertible debenture totaling
$50,000. This note is included on the books of the Company along with the
related accrued interest payable in the amount of $24,014, offset by the
contra-indemnification receivable account. The following is a summary of the
presentation of these liabilities in the Balance Sheet at March 31, 2011:
Description of debt indemnification: Current Long-term
Defaulted convertible debentures payable $ 50,000 $ --
Defaulted accrued interest payable 24,014 --
Less, contra-indemnification receivable (74,014) --
Balances per Balance Sheet, at --------- ---------
March 31, 2011: $ -- $ --
The Company believes that beyond the $74,014 referred to above, there will be
no additional charge or exposure for past liabilities, contingent or
otherwise, to the Company and if any do occur, they will be the responsibility
of DLC in accordance with their guarantee to the Company as enumerated in the
Indemnification Agreement. 13
Note 8 CREDIT LINES PAYABLE
During the quarter ended March 31, 2011, the Company borrowed $2,810 on its
available bank credit lines of $20,000, accrued interest expense of $1,729 and
paid back $4,785. The total balance due at March 31, 2011 and at September 30,
2010 was $18,202 and $18,447 respectively. The interest rate is 12.0% per
annum and the lines are payable on demand and unsecured. The lines are
personally guaranteed by the Company's President.
Note 9 RELATED PARTY TRANSACTIONS
Convertible or Secured Notes Payable
Two related party investors loaned the Company $175,436 during the six month
period ended March 31, 2011 for the financing of operations and related
growth. These funds were specifically used for the expanded employment in
collection operations and related higher collection system costs. Additional
costs for the six months include an accrual of $20,000 of management
consulting costs to the financial management company, interest costs of
$11,022 and $94,066 in declared preferred stock dividend expense. These loans
and costs were paid by the Company issuance of 292,000 shares of Convertible
Preferred Stock to the financial management company controlled by the two
related party investors applied to the Related Party Loan Payable.
The Company issued a 12% short-term secured promissory note to related party
investors for $790 with the Company's debt receivable assets pledged as
collateral on March 31, 2011. As of March 31, 2011 and September 30, 2010, the
secured loans totaled $790 and $338 respectively, are payable on demand to the
financial management company, bear interest at the rate of 12% per annum, and
are secured by the Company's debt receivable assets for collateral purposes.
Note 10 CORRECTIONS TO PRIOR PERIOD REPORTS
Corrections for the year ended September 30, 2010 and for the quarter ended
December 31, 2010.
An Amendment No. 1 on Form 10-Q/A to our annual report for the period ended
September 30, 2010 is being filed to correct errors in the revenues and costs
reported in our annual report filed with the Securities and Exchange
Commission on January 14, 2011. This event was reported in a Form 8-K
announcement filed on March 31, 2011. These errors were discovered in a
subsequent internal audit in March 2011.
Corrections were made in the Company's financial records to reduce Finance
Income and Collection Costs on our Company owned portfolio of receivables.
Correspondingly, the balance sheet item for Finance Contract Receivables was
reduced $12,423. Corrections to income include separating Finance Income and
Third Party Collections previously reported as a combined amount. Finance
Income was reduced by $86,105. Total Income reported on the original Form 10-K
filed was $346,629 compared to $260,524 to be reported on our revised Form 10-
K/A to be filed. Collection Costs were reduced by $69,182 for the same period.
The change in the net loss reported for the year was an increase of $16,923
The Company also recorded a legal settlement payable for $4,500 at September
30, 2010 that had been previously recorded as an expense in the quarter ended
December 31, 2010.
.
14
The consolidated financial statements and notes to the financial statements in
this report have been changed and commentary updated to reflect these
corrections. No other items of our income or expenses were affected.
Accordingly, the financial condition and results of operations disclosed in
prior periods can no longer be relied upon. The changes required by these
corrections have been incorporated into the accounting records and are
reflected in the financial statements presented in this quarterly filing.
Note 11 SUBSEQUENT EVENTS
The Company received a letter of inquiry from the SEC Division of Corporation
Finance on March 2, 2011 concerning questions regarding the filing of our
Annual Report on Form 10-K for the year ended September 30, 2010 on January
14, 2011. The Company responded to the SEC with a Correspondence filing on
April 6, 2010 and also filed Form 8-K containing section 4.02 - Non-Reliance
on Previously Issued Financial Statements or a Related Audit Report or
Completed Interim Review on April 1, 2011. This report has been amended to
respond to comments by the SEC regarding items needing clarification or
revised Management's Discussion and Analysis. The Company will be filing an
amended Form 10-K/A annual report for the year ended September 30, 2010 and
amended Form 10-Q/A reports for the quarters ended June 30, 2010 and December
31, 2010 to reflect corrected financial statements.
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
The information herein contains certain "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all
forward looking statements involve risks and uncertainties, including, without
limitation, the ability of the Company to continue its present business
strategy which will require it to obtain significant additional working
capital, changes in costs of doing business, identifying and establishing a
means of generating revenues at appropriate margins to achieve profitability,
changes in governmental regulations and labor and employee benefits and costs,
and general economic and market conditions. Such risks and uncertainties may
cause the Company's actual results, levels of activity, performance or
achievement to be materially different from those future results, levels of
activity, performance or achievements expressed or implied by such forward-
looking statements.
Although the Company believes that the assumptions and expectations reflected
in these forward looking statements are reasonable, any of the assumptions and
expectations could prove inaccurate or not be achieved, and accordingly there
can be no assurance the forward looking statements included in this Form 10-Q
will prove to be accurate. In view of the significant uncertainties inherent
in these forward-looking statements, their inclusion herein should not be
regarded as any representation by the Company or any other person that the
objectives, plans, and projected business results of the Company will be
achieved. Generally, such forward looking statements can be identified by
terminology such as "may," "could," "anticipate," "expect," "will,"
"believes," "intends," "estimates," "plans," or other comparable terminology.
15
Company History and Overview
ISA Internationale, Inc. ("ISAI") was incorporated in Delaware in 1989 under a
former name, and was inactive operationally for some time prior to its May
1998 recapitalization through an acquisition with ShoptropolisTV.com, Inc.
(f/k/a Internationale Shopping Alliance Inc.), which was a wholly owned
subsidiary of ISAI. Shoptropolis was engaged in the development of a
multimedia home shopping network generating direct retail sales of varied
products from TV viewers and internet shoppers. This subsidiary was acquired
when the former shareholders of this subsidiary acquired 89% of the
outstanding common stock of ISAI through a stock exchange. ISAI issued
11,772,600 shares of its common stock in exchange for all of the outstanding
common stock of ShoptropolisTV.com, Inc.
This merger was effected as a reverse merger for financial statement and
operational purposes. Accordingly, ISA regards its inception as being the
incorporation of ShoptropolisTV.com, Inc. on October 7, 1997. ISAI sold
ShoptropolisTV.com, Inc. on March 29, 2001. In January 1999, the Company
redeemed and cancelled 1,650,000 shares held by three of the founding
shareholders. No consideration was paid to the founding shareholders for the
redemption.
ISAI incorporated its precious metals subsidiary, International Strategic
Assets, Inc., as a Minnesota corporation in March 1999. Its business was
direct sales via outbound telemarketing of precious metals consisting mainly
of gold and silver coins and bars. ISAI sold International Strategic Assets,
Inc. on May 19, 2000 to an individual who was an officer and director of ISAI.
Between December 2000 and through May 2005, the Company was operationally
dormant and was actively reorganizing its financial affairs and actively
seeking merger or acquisition candidates offering growth and profit potential
for its shareholders.
On May 11, 2005, the Company, through its wholly owned subsidiary, ISA
Acquisition Corporation, purchased $36,097,726 of portfolio debt receivables
and commenced operations in the troubled debt collection business. Upon a
detailed examination of the individual debts and accounts purchased, the
Company determined that it should receive replacement debt receivables from
the Seller companies due to substitutions and replacement debt considered to
be non-collectible, as determined by the Company prior to September 30, 2005.
Accordingly, the Company was given and did receive additional consumer debt
receivables considered to be replacement debt in the additional net amount of
$7,635,274 bringing the total consumer debt receivable purchase to $43,733,000
as of September 30, 2005.
The substituted debts, as revised, amount to a larger face value of debt
purchased but have the same computed fair market value due to different
categories of debts received as well as different ages of the debts. For the
most part, the new and revised group of debts received in accordance with the
original purchase agreement is now considered to be older in age and of
slightly less individual value. The Company, through its third party
collection agent, has evaluated this overall debt purchase for its current
fair market value, future collectability and estimated net realizable value in
comparison to the original purchase price paid in the amount of $1,094,900
with the issuance of 1,250,000 of the Company's restricted common shares of
stock.
17
In 2009 and 2010, the Company, through its subsidiary companies, further
developed its in-house capabilities to collect debt portfolios in addition to
using third party agents. Our staff includes a Corporate Officer who
supervises our collections operations, a Staff Accountant, an Office
Administrative Assistant and six collectors in collection operations.
Currently, the Company considers itself to be operational but still in a
period of financial and structural reorganization. After successful completion
of its reorganization efforts, ISAI plans to pursue strategic alternatives
that may include the purchase of a business or acquisition by another entity.
At March 31, 2011, the current carrying value of the Company's purchased
finance contract receivables, net after gross collections from date of
original purchase and impairment write downs, is $247,935. The Company
believes this carrying value on its Balance Sheet is a fair carrying value and
the amount will be realized from the gross collections received after
incurring direct collection costs and third party collection fees.
Results of Operations for the six months ended March 31, 2011 and 2010.
Sales and Gross Profit
The Company recorded $80,742 in Third Party collection fee revenue, $38,968 in
service fee income and $1,717 in portfolio collection of our own inventory of
debt receivables using the cost recovery method of revenue recognition income
for the six months ended March 31, 2011. The Company, in addition to its in-
house staff, uses third party collection companies and outside legal firms to
assist in the collection efforts on the purchased debt receivables. Net
collection receipts from the debt portfolios in the amount of $33,153 were
collected in the six months ended March 31, 2011. This amount less $1,717 has
been recorded as a reduction of the purchase price carrying value of the
purchased debt receivables up to the inventory cost of the receivable. Any
funds received over the inventory cost are booked as revenue. The Company
believes the net cash flows received from collections on the current inventory
of debt receivables will not be sufficient to sustain Company operations in
the future. Efforts are being expended to purchase additional debt portfolio
receivables for future additional revenues.
Operating Expenses
Operating expenses included collection costs and general and administrative
expenses. Other expenses include interest expenses related to short term
financing notes, convertible debenture notes and convertible notes payable.
Direct collection costs incurred during the quarter were $162,612 compared to
$203,518 for the six months ended March 31, 2010 due to expanded operations
and employment in our collection operations. General and administrative
expenses were $140,485 for the six months ended March 31, 2011 compared to
$207,955 for the six months ended March 31, 2010 due to reduced overhead
expenses for administrative personnel. Interest expense for the six months
ended March 31, 2011 totaled $11,022 compared to $8,395 for the six month
period ended March 31, 2010 due to reduction in debenture interest accrued and
conversion of short term debt to Preferred Stock which pays a dividend.
Additional expenses are being incurred for interest, office, telephone,
consulting, and legal and professional expenses relating to the Company's
efforts in the growth and development of its direct collection business
operations.
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Liquidity and Capital Resources
As of March 31, 2011, the Company had total assets of $357,706 consisting of
$52,716 in cash, $963 in trade receivables, $4,500 in prepaid expenses,
$46,592 in office equipment, furniture, and vehicles net of depreciation,
$247,935 in finance contracts receivables net of collections, and $5,000 in
long-term deposits. It had $202,266 in current liabilities consisting of
$146,270 in accounts payable and accrued expenses, $3,462 in notes payable
other-current, $33,542 in notes payable to a related party current portion,
$790 in convertible notes payable related party, and bank credit lines payable
totaled $18,202. Total liabilities as of March 31, 2011 were $261,936.
The Company's current capital resources are not sufficient to supports its
development and operations. Additional capital will be necessary to support
future growth of the Company as well as general and administrative and
interest expenditures. The Company will continue its complete reorganization
of financial affairs and obligations as well as support its expanded
operational in-house collection agency activities and future debt receivable
purchases.
The Company is currently seeking additional sources of debt or equity
financing to replace the financing agreement consummated in November 2000 with
Doubletree Capital Partners, Inc. Until the reorganization process is fully
completed and sources of capital needs are determined and defined, the Company
cannot provide assurances as to its future viability or its ability to prevent
the possibility of a bankruptcy filing petition either voluntary or
involuntary by creditors of the Company.
As a result of the Company's history of operating losses and its need for
significant additional capital, the reports of the Company's independent
auditors on the Company's Form 10-K submission for the year ended September
30, 2010, should be read including explanatory paragraphs concerning the
Company's ability to continue as a going concern.
Income Tax Benefit
The Company has an income tax benefit from net operating losses, which is
available to offset any future operating profits. This benefit has not been
recorded in the accompanying financial statements because of the uncertainty
of future profits. The ability to utilize the net operating losses may be
limited due to ownership changes.
Impact of Inflation
The Company believes that inflation has not had any material effect on its
development or operations since its inception in 1997. Furthermore, the
Company has no way of knowing if inflation will have any material effect for
the foreseeable future. The Company forecasts a more challenging economic
environment for its operations in 2011 due to a recessionary economy that is
slowly recovering but still has relatively high unemployment in the work force
making it difficult for millions to meet their credit obligations.
19
Prior Business Ventures
With respect to the business strategy of developing and launching a multimedia
home shopping network, ISAI had only a very limited operating history on which
to base an evaluation of its business and prospects. The Board of Directors
decided in December 2000 to sell the Shoptropolis subsidiary and cease
development of the home shopping network. All efforts of the Company at the
present time have been directed to a complete reorganization of all of its
affairs. Therefore, the Company's prospects for new business ventures must be
considered in light of the many risks, expenses and difficulties encountered
frequently by companies in reorganization. Such major risks include, but are
not limited to, an evolving business model and the overall effective
management of future growth. To address the many startup risks and
difficulties the Company has encountered, it must in the future have the
ability to successfully execute any of its operational and marketing
strategies that it may develop in any new business venture.
There would be no assurance the Company would be successful in addressing the
many risks and difficulties it could encounter and the failure to do so would
continue to have a material adverse effect on the Company's business,
prospects, financial condition and results of any operations it pursues or
tries to develop, pending successful reorganization of its financial affairs.
There can be no assurance that ISAI can find and attract new capital for any
new business ventures and if successful in finding sufficient capital, that it
can successfully grow and manage the business or new business venture into a
profitable and successful operation. No assurance can be given on any of these
developments. The Company will continue to complete its financial
reorganization, attempt to develop a successful business in the debt
collection business and endeavor to find suitable candidates for merger or
acquisition.
History of Losses and Anticipated Further Losses
The Company has generated only limited revenues to date and has an accumulated
deficit as of March 31, 2011 of $10,608,924. Further, the Company expects to
continue to incur losses until it generates revenues at appropriate margins to
achieve profitability. There can be no assurance the Company will ever
generate revenues or that it will achieve profitability or that its future
operations will prove commercially successful or that it will establish any
means of generating revenues at appropriate margins to achieve profitability.
Need for Additional Financing
The Company's current capital resources are not sufficient to support the
Company's anticipated day-to-day operations. As such, the Company must obtain
significant additional new capital to support the Company's anticipated day-
to-day operations and fully settle the debt incurred by ISAI during its past
operations until it establishes a means of generating revenues at appropriate
margins to achieve profitability. The Company currently has an agreement with
Doubletree Capital Partners, Inc. (hereinafter referred to as the financial
company or DCP) to loan the Company, at the financial company's sole
discretion, funds to meet its day-to-day operational expense and settle
certain debt incurred by ISAI. The financial company is owned by two
individuals, one of which is ISAI's current President, CEO and Chairman of the
Board of Directors.
20
The financial company has commenced its best efforts to help the Company
resolve, consolidate, and reorganize the Company's present debt structure and
contractual liabilities. There is no assurance the financial company will
provide the Company any additional capital. Additional financing is
contemplated by the Company, but such financing is not guaranteed and is
contingent upon pending successful settlement of the Company's problems with
various creditors. There is no assurance the Company will be able to obtain
additional capital and the necessary additional financing will be available
when needed by the Company on terms acceptable to the Company. If the Company
is unable to obtain financing sufficient to meet its operating and development
needs, the Company will be unable to develop and implement a new business
strategy or continue its operations. As a result of the Company's history of
operating losses and need for significant additional capital, the Form 10-K
reports of the Company and notes to consolidated financial statements for the
fiscal year ended September 30, 2010, includes an explanatory paragraph
concerning the Company's ability to continue as a going concern.
Reliance on Key Personnel
The Company's future success will be dependent upon the ability to attract and
retain executive officers, board members, and certain other key persons. The
inability to attract such individuals or the loss of services of one or more
of such persons would have a material adverse effect on ISAI's ability to
implement its current plans or continue its operations. There can be no
assurance the Company will be able to attract and retain qualified personnel
as needed for its business.
Control By Existing Management
Three principal shareholders, Doubletree Capital Partners, Inc. (DCP),
Doubletree Liquidation Corporation and Bernard L. Brodkorb, beneficially own
approximately 93.24%, respectively of the Company's outstanding common stock
at March 31, 2011. DCP's and Mr. Brodkorb's beneficial ownership includes
common stock that can be converted from preferred stock owned by the one
principal shareholder as well as similar conversion of convertible loans and
related interest due. Brodkorb is a 50% owner of DCP and his beneficial shares
represented 100% of DCP's interest. DCP and Brodkorb accordingly have complete
control of the business and future development, including the ability to
manage all operations, establish all corporate policies, appoint future
executive officers, determine management salaries and other compensation, and
elect all members of the Board of Directors of ISAI.
Effects of Trading in the Over-the-Counter Market
The Company's common stock is traded in the over-the-counter market on the OTC
Electronic Bulletin Board and its stock symbol is ISAT. Consequently, the
liquidity of the Company's common stock may be impaired, not only in the
number of shares that may be bought and sold, but also through delays in the
timing of transactions, and coverage by security analysts and the news media
may also be reduced. As a result, prices for shares of the Company's common
stock may be lower than might otherwise prevail if the Company's common stock
were traded on a national securities exchange or listed on the NASDAQ Stock
Market. Further, the recent adoption of new eligibility standards and rules
for broker dealers who make a market in shares listed on the OTC Electronic
Bulletin Board may limit the number of brokers willing to make a market in the
Company's common stock.
21
Limited Market for Securities
There is a limited trading market for the Company's common stock, which is not
listed on any national stock exchange or NASDAQ. The Company's securities are
subject to the "penny stock rules" adopted pursuant to Section 15(g) of the
Securities Exchange Act of 1934, which applies to non-NASDAQ companies whose
common stock trades at less than $5 per share or has tangible net worth of
less than $2,000,000. These "penny stock rules" require, among other things,
that brokers who sell covered "penny stock" to persons other than "established
customers" complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in
the security, including a risk disclosure document and quote information under
certain circumstances.
Many brokers have decided not to trade "penny stock" because of the
requirements of the "penny stock rules" and, as a result, the numbers of
broker-dealers willing to act as market makers in such securities are limited.
There can be no assurance that an established trading market will develop, the
current market will be maintained or a liquid market for the Company's common
stock will be available in the future.
Liquidity and Going Concern Matters
The Company has incurred losses since its inception and, as a result, has an
accumulated deficit of $10,608,924 at March 31, 2011. The net loss for the six
month period ended March 31, 2011 was $192,692 before the dividend to
Preferred Shareholders is recorded. The Company currently owes $146,270 for
trade accounts payable and tax liabilities and $790 for a convertible note
payable to a related third party investment company. Bank credit lines as of
March 31, 2011 had a balance due of $18,202. Long Term liabilities amounting
to $59,670 include notes incurred in the second quarter. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern depends upon successfully
restructuring its debt, obtaining sufficient financing to maintain adequate
liquidity and provide for capital expansion until such time as operations
produce positive cash flow.
The accompanying financial statements have been prepared on a going concern
basis, which assumes continuity of operations and realization of assets and
liabilities in the ordinary course of business. The financial statements do
not include any adjustments that might result if the Company was forced to
discontinue its operations. The Company's current plans are to complete its
reorganization efforts and expand its direct collection operations. There can
be no assurance these actions will be successful.
The Company is in default under the terms of its obligation to make quarterly
interest payments on convertible 6% debentures issued between September 1999
and June 2000. The debenture now in default classified as current liabilities
totaled $50,000 in principal and $24,014 in accrued interest offset by a
contra account for a net balance of $0 as of March 31, 2011. No interest or
principal payments were ever made by the Company on the remaining debentures.
22
ITEM 3. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
This item is not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
4.1 Management's Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
The management of ISA International Inc., under the direction, supervision,
and participation of, our Chief Executive Officer and Chief Financial Officer
and effected by management and other personnel, has conducted an evaluation as
of the end of the period covered by this report, of the effectiveness of the
design and operation of disclosure controls and procedures (as defined as
defined in Rules 240.13a-15(e) and 240.15d-15(e) of the Securities Exchange
Act of 1934).
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of March 31, 2011, the Company's disclosure controls
and procedures were effective to ensure that material information is recorded,
processed, summarized and reported to the management of the Company on a
timely basis in order to comply with the Company's disclosure obligations
under the Exchange Act and the rules and regulations promulgated there under
to allow timely decisions regarding required disclosures.
(b) Management's Report on Internal Control Over Financial Reporting
The management of ISA Internationale Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). Under the direction, supervision,
and participation of, our Chief Executive Officer and Chief Financial Officer
and effected by management and other personnel, our management and certifying
officers conducted an evaluation as of the end of the period covered by this
report, of the effectiveness of internal control over financial reporting
based on the framework in Internal-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO-
Framework). Based on the results of this evaluation, our Chief Executive
Officer and CFO concluded that as of March 31, 2011, our controls were
effective to ensure that material information is recorded, processed,
summarized and reported by management of the Company on a timely basis in
order to comply with the Company's disclosure obligations under the Exchange
Act and the rules and regulations promulgated there under.
23
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
During the three months ending March 31, 2011, the Company was not sued in or
a plaintiff in any new legal matters except in the ordinary course of its
operational business to collect purchased finance receivables. The Company
considers small lawsuits regarding collection matters to be part of the normal
course of business. The Company engages outside attorneys to represent the
Company in court actions to recover funds due to the Company and obtain
judgments. Occasionally one of its subsidiaries is named as a plaintiff in a
civil action regarding violation of the Fair Debt Collection Practices Act
("FDCPA"). The Company has reviewed pending litigation and determined that
none would have a material impact on the financial condition of the Company
and the results reported. The Company has strict policies and procedures in
place designed to prevent any unlawful or unethical collection practices by
its employees.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None during the quarter ended March 31, 2011.
ITEM 3. Defaults Upon Senior Securities
The defaults previously present on the Convertible Debentures as of December
31, 2003 continue as of March 31, 2011, after partial conversions into common
stock of the Company. These defaults arose because the Company has missed
payment of quarterly interest payments since June 2000. The remaining defaults
consist of short-term convertible debt principal amounting to $50,000. The
accrued interest liability due on these notes combined amounting to $24,014 as
of March 31, 2011 has been assumed by an indemnification agreement with a
related investment party. (see note 7 in the notes to financial statements).
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
EX-31.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
EX-32.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K reports filed during quarter:
The Company filed Form 8-K on March 31, 2011 to report it was amending its
Form 10-K report filed for the year ended September 30, 2010 and also the Form
10-Q report filed for the quarter ended June 30, 2010 to adjust and restate
our financial statements and commentary notes.
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ISA INTERNATIONALE INC.
/s/ Bernard L. Brodkorb
By: Bernard L. Brodkorb
President, Chief Executive Officer, and Chief Financial Officer
Date: May 23, 2011
25
Please add an estimated time frame for the restatements discussed in note 11
25
