UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2011

 

OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 333-164882

 

CITADEL EFT, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		80-0473573
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
825 College Blvd, Ste. 102-328 Oceanside, CA 92057		92780
(Address of Principal Executive Office)		(Zip Code)

 

Registrant’s telephone number, including area code: (714) 730-8143

 

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, and (2) has been subject to such filing requirements for the past 90 days. 

 x Yes  ¨   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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 ¨Yes  x   No  

 

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

 

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]

At August 3, 2011 there were 84,213,960 shares of common stock outstanding.

 

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

Unless otherwise indicated, references to “we,” “us,” and “our” in this Quarterly Report on Form 10-Q refer collectively to Citadel EFT, Inc., a Nevada corporation.

 

Readers should consider the following information as they review this Quarterly Report on Form 10-Q:

Forward-Looking Statements

The statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“the “Exchange Act”).  All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements.  Forward-looking statements include any statement that may project, indicate or imply future results, events, performance or achievements.  The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expect,” “may,” “will,” “should,” “intend,” “plan,” “could,” “estimate” or “anticipate” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.

Given the risks and uncertainties relating to forward-looking statements, investors should not place undue reliance on such statements.  Forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this Report and are not guarantees of future performance.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, such expectations may prove to have been incorrect.  All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Subsequent Events

All statements contained in this Quarterly Report on Form 10-Q, including the forward-looking statements discussed above, are made as of August 15, 2011, unless those statements are expressly made as of another date.  We disclaim any responsibility for the accuracy of any information contained in this Quarterly Report on Form 10-Q to the extent such information is affected or impacted by events, circumstances or developments occurring after August 15, 2011 or by the passage of time after such date.  Except to the extent required by applicable securities laws, we expressly disclaim any obligation or undertakings to release publicly any updates or revisions to any statement or information contained in this Quarterly Report on Form 10-Q, including the forward-looking statements discussed above, to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement or information is based.

  

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

 

 

		Page No.
Item 1.	Combined Financial Statements
	Unaudited Combined Balance Sheets at June 30, 2011 and September 30, 2010	1
	Unaudited Combined Statements of Operations for the Three and Nine Months Ended June 30, 2011 and 2010	2
	Unaudited Combined Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010	3
	Notes to Unaudited Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 4.	Controls and Procedures	8
PART II OTHER INFORMATION
Item 1.	Leg Legal Proceedings	11
Item 2.	Reg Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 5.	Oth Other Information	11
Item 6.	Exh Exhibits	11
Signatures		12

 

 

 

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PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CITADEL EFT, INC.

COMBINED BALANCE SHEETS

 (Unaudited)

 

		June 30, 2011				September 30, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	82,930			$	112,608
Accounts receivable			38,999				32,097
Total assets		$	121,929			$	144,705
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	-			$	3,200
Income tax liability			6,403				62,405
Total current liabilities			6,403				65,605
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.00001 par value, 100,000,000 shares authorized, none issued and outstanding			-				-
Common stock, $0.00001 par value, 100,000,000 shares authorized, 84,213,960 shares issued and outstanding			842				132
Additional paid-in capital			3,609,976				60,686
Accumulated deficit			(3,495,292)				18,282
Total stockholders' equity			115,526				79,100
Total liabilities and stockholders' equity		$	121,929			$	144,705

 

The accompanying notes are an integral part of the unaudited financial statements.

 

  

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CITADEL EFT, INC.

COMBINED STATEMENTS OF OPERATIONS

 (Unaudited)

		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues, net		$	127,648			$	91,852			$	349,428			$	244,875
Operating expenses:
Selling, general and administrative			3,663,656				39,097				3,852,474				177,465
Income (loss) before income taxes			(3,536,008)				52,755				(3,503,046)				67,410
Income tax (expense) benefit			-				(9,496)				(10,528)				(11,694)
Net (loss) income		$	(3,536,008	)		$	43,259			$	(3,513,574)			$	55,716
Net (loss) income per share, basic and diluted		$	(0.07)			$	(0.00	)		$	(0.13)			$	0.00
Weighted-average common shares outstanding, basic and diluted			52,811,762				13,213,960				26,413,227				13,913,960

 

 

The accompanying notes are an integral part of the unaudited financial statements.

  

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CITADEL EFT, INC.

COMBINED STATEMENTS OF CASH FLOWS

 (Unaudited)

 

		For the Nine Months Ended
		June 30,
		2011				2010
Cash flows from operating activities:
Net (loss) income		$	(3,513,574)			$	55,716
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock based compensation			3,550,000				37,398
Changes in assets and liabilities:
Accounts receivable			(6,902)				(1,898)
Prepaid expenses			-				10,000
Accounts payable and accrued liabilities			(3,200)				-
Income taxes payable			(56,002	)			11,694
Net cash (used in) provided by operating activities			(29,678)				112,910
Cash flows from investing activities:			-				-
Cash flows from financing activities:
Cash provided from issuance of common stock			-				23,300
Borrowings from advances from shareholder			-				-
Repayments of advances from shareholder			-				(56,999	)
Net cash used in by financing activities			-				(33,699)
Change in cash and equivalents			(29,678	)			79,211
Cash and cash equivalents, beginning of period			112,608				29,391
Cash and cash equivalents, end of period		$	82,930			$	108,602

 

The accompanying notes are an integral part of the unaudited financial statements.

  

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CITADEL EFT, INC.

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS

Note 1:   Basis of Presentation

Citadel EFT, Inc. (the “Company”) prepares its combined financial statements in accordance with accounting principles generally accepted in the United States of America.  The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the Company’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine-month periods ended June 30, 2011 are not necessarily indicative of the results for the full years. While management of the Company believes that the disclosures presented herein and adequate and not misleading, these interim financial statements should be read in conjunction with the audited combined financial statements and the footnotes thereto for the periods ended September 30, 2010 and 2009 filed in its annual report on Form 10-K.

Note 2:  Common Stock

In May and June 2011, Citadel issued 1,000,000 common shares to various consultants for services performed.  In addition, Citadel issued 70,000,000 common shares to its CEO for compensation.  Citadel estimated the fair market value of these shares to be $0.05 per share based on a previous private placement and recorded a total of $3,550,000 of compensation expense during the quarter ended June 30, 2011.

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

The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical financial statements which are included in our Form 10-K for the fiscal year ended September 30, 2010 filed with the Commission on January 13, 2011 and our unaudited consolidated financial statements and notes thereto included with this Quarterly Report on Form 10-Q in Part I. Item 1.

General

We have about 1,700 merchant-clients that use our terminals to process their credit card transaction which has allowed us to be profitable, even in our infancy. A further drop in U.S. economic activity beyond the severe slowdown since 2008 will undoubtedly have an effect on our revenues, as we make our money principally on “residuals”. Residuals are based off a pre-negotiated and contracted percentage rate for each transaction that our merchant-client incurs by its customers. Although we have a standard contract, the rates at which we have negotiated with each of our merchant-clients may vary slightly.

The main challenges we face are continued competition from new entrants into the industry, and limiting our exposure to any erosion of our client base as a result of any possible further deterioration of the economy.

Our other chief concern is competition. Our industry has relatively low barriers to entry. We believe this may lead, in the near-term, to a further splintering of this market industry, but in the mid- to long-term will lead to a consolidation through mergers and acquisitions within this industry. We believe that by streamlining our operations into one public vehicle, we will be in a better position to maximize our value during this foreseen splintering, and then consolidating phases.

 

Prior to the effective date of our Registration Statement on Form S-1, on September 29, 2010, no public market in our common stock existed. On April 20, 2011, we received approval for a priced quotation on the OTC Markets’ OTCQB stock quotation service  under the symbol CDFT from  the Financial Industry Regulatory Authority (FINRA.

Industry and Executive Outlook

Our specific goal is to continue the expansion of our business by developing our web campaign, joining social networking sites such as Facebook and Twitter and actively promoting our product.  In the six months ended June 30, 2011, we fully implemented our web strategy and will ascertain over the next quarter the success.  Success will be measured in the number of new merchants signed up.

 

  

Results of Operations

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues

		Three Months Ended June 30, 2011					Three Months Ended June 30, 2010							Change							%
Revenues		$	127,648					$	91,852						$	35,796							39.0

 

    

  

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Revenues increased by $35,796, or 39 percent to $127,648 for the three months ended June 30, 2011 from $91,852 for the three months ended June 30, 2010.  The revenue rate increased due to larger number of merchants and transactions. Revenues are reported net of amounts paid to sponsor banks, as well as interchange and assessments paid to credit card associations (MasterCard and Visa) under revenue sharing agreements pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants.   

 

Operating Expenses. 

		Three Months Ended June 30, 2011				Three Months Ended June 30, 2010				Change				%
Operating expenses		$	3,663,656			$	39,097			$	3,624,559				9270.0

 

Our operating expenses increased from $39,097 for the three months ended June 30, 2010 to $3,663,656 for the three months ended June 30,  2011.  The primary reason for the increase was related to the recording of compensation expense in the amount of $3,550,000 for 71,000,000 shares of common stock issued to various consultants and the CEO valued at $0.05 per share.

Nine Months Ended June 30, 2011 Compared to Nine Months Ended June30, 2010

Revenues

		Nine Months Ended June 30, 2011				Nine Months Ended June 30, 2010				Change				%
Revenues		$	349,428			$	244,875			$	104,553				42.7

 

Revenues increased by $104,553, or 42.7 percent to $349,428 for the six months ended June 30, 2011 from $244,875 for the six months ended June 30, 2010.  The revenue rate increased due to larger number of merchants and transactions. Revenues are reported net of amounts paid to sponsor banks, as well as interchange and assessments paid to credit card associations (MasterCard and Visa) under revenue sharing agreements pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants.   

 

Operating Expenses. 

		Six Months Ended June 30, 2011				Six Months Ended June 30, 2010				Change				%
Operating expenses		$	3,852,474			$	177,465			$	3,675,009				2071.0

 

Our operating expenses increased from $177,465 for the six months ended June 30, 2010 to $3,852,474 for the six months ended June 30, 2011.  The primary reason for the increase was $3,550,000 in compensation

expense recorded for the fair market value of 71,000,000 shares of common stock issued to the CEO and various consultantsfor services performed and $52,500 of bonus payments made to our sole executive officer offset by a reduction in accounting and auditing fees associated with our registration statement on Form S-1 in the prior year.  

 

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Capital Resources and Liquidity

Overview

Over the course of the past three years of operations, including the operations of our predecessor company, we have not seen large, sudden shifts in revenues, although because our business model is reliant on the size of consumer transactions, we have seen, over the past three years, a slight, general increase in revenues likely owing to gradual inflation. We have made no attempt to quantify the amount of increase in our revenue that is due to inflation, although we suspect that it tracks the U.S. Bureau of Labor Statistics Consumer Price Index of approximately 5% over the past three years, owing to the breadth of goods and services in which credit cards are used.

Our primary source of liquidity is cash from operations. Were our residuals from credit card processing transactions to drop steeply, we would not be able to quickly or automatically make up the liquidity through other sources. However, through the economic downtrend, our cash flow has remained steady and has had a slight uptrend.

 

While one of the strong current trends in the consumer credit markets is for the paying down of personal debt and the increase of personal savings among consumers, our management believes, based only upon our own activity and revenue data which it has observed, that this trend is most likely occurring in the form of paying off a larger portion of each respective consumers' monthly credit card bills, and not through a reduced use of the card itself. Our management's belief is that consumers still use their credit cards for purchases in a slow economic climate; even increasing the amount they spend on a credit card, as a way to manage their own contracted or uncertain cash flows.

Cash Flow from Operating Activities

During the nine months ended June 30, 2011, cash used from operating activities was $29,678 as compared to cash flows provided by operating activities during the same prior year period of $112,910.  We can attribute the primary reason for the decrease in income taxes paid during the nine months ended June 30, 2011.     

  

Cash Flow from Financing Activities

During the first nine months of 2011 cash used in financing activities was $0 as compared to cash used in financing activity of $33,699 for the nine months ended June 30, 2010.  

Critical Accounting Policy Updates

The discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in accordance with US GAAP requires us to make estimates and judgments that may affect assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and related allowances and income taxes including the valuation allowance for deferred tax assets.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

 

7

 

Revenue Recognition  

We derive revenues primarily from the electronic processing of credit, charge and debit card transactions that are authorized and captured through third-party networks. Typically, merchants are charged for these processing services based on a percentage of the dollar amount of each transaction and in some instances, additional fees are charged for each transaction. Certain merchant customers are charged a flat fee per transaction and may also be charged miscellaneous fees, including fees for handling charge backs, monthly minimums, equipment rentals, sales or leasing and other miscellaneous services.

Revenues are reported net of amounts paid to sponsor banks, as well as interchange and assessments paid to credit card associations (MasterCard and Visa) under revenue sharing agreements pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants.

We follow the requirements of ASC 605-45, “Revenue Recognition, Principal Agent Considerations,” in determining our revenue reporting. Generally, we report revenues at the time of sale on a net basis where we are not the primary obligor in the arrangement, have minimal latitude in establishing the price of the services, do not change the product and perform part of the service, do not have discretion in supplier selection, do not have latitude in determining the product and service specifications to meet our client’s needs and do not assume credit risk. 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

See Note 1, “Recent Accounting Pronouncements,” in the notes to unaudited consolidated financial statements for information regarding recently issued accounting standards.

Refer to Part II. Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended September 30, 2010 for a discussion of our Critical Accounting Policies.

Inflation and Seasonality

We do not believe that our operations are significantly impacted by inflation.  Our business is not significantly seasonal in nature.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.   We carried out an evaluation, under the supervision and with the participation of our management, including our sole Executive officer serving in both the Chief Executive Officer and Chief Financial Officer capacities, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective due to the material weakness described below to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods and 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.

Changes in Internal Control over Financial Reporting.    There have been no changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred

 

during the fiscal quarter ended June 30, 2011 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Management’s Report on Internal Control over Financial Reporting.   Management is responsible for the fair presentation of the consolidated financial statements of Citadel EFT, Inc. Management is also responsible for establishing and maintaining a system of internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

 

During the Annual 10-K review process for the year ended September 30, 2010, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, our management concluded our internal control over financial reporting was not effective as of September 30, 2010 and the deficiencies reported continue to be deficiencies as of June 30, 2011. 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  We have identified the following material weakness.

As of June 30, 2011, we did not maintain effective controls over the control environment.  The Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert.  We did not maintain the following controls: sufficient policies and procedures over the administration of our accounting and fraud risk policies, and a sufficient segregation of duties to decrease the risk of inappropriate accounting since there is only 1 employee. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. Additionally, this control deficiency could result in another material weakness that could result in a material misstatement of the consolidated financial statements that would not be prevented or detected.

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 PART II – OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Periodically, we are involved in legal proceedings arising in the normal course of business. As of the date of this Quarterly Report on Form 10-Q, we are currently not involved in any pending, material legal proceedings.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

ITEM 5.  OTHER INFORMATION

 

None

ITEM 6.  EXHIBITS

None

11

 

SIGNATURES

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

CITADEL EFT, INC.

(Registrant)

 

Signature		Title		Date
/s/ GARY DEROOS		President, CEO and Director		August 3, 2011
Gary DeRoos		(Principal Executive Officer)
/s/ GARY DEROOS		Chief Financial Officer		August 3,2011
Gary DeRoos		(Principal Financial Officer)

 

 

  

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