Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Card Activation Technologies IncFinancial_Report.xls
EX-31.1 - EXHIBIT 31.1 - Card Activation Technologies Incex31_1.htm
EX-32.1 - EXHIBIT 32.1 - Card Activation Technologies Incex32_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q

 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2011
 
or
 
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 Number: 0-52556
 

 
Card Activation Technologies Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
20-5769015
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1930 Village Center Cirle #3-722
 
Las Vegas, Nevada 60604-3749
(Address of principal executive offices)
(Zip Code)
 
(312) 972-1662
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required 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 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 o
 
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.
Large accelerated filer  o Accelerated filer o
Non–Accelerated filer (Do not check if a smaller reporting company) o 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   o  No x
 
As of February 10, 2011, the issuer had 180,072,719 shares of common stock, $0.0001 par value per share, outstanding.
 


 
 

 
 
 
1
   
1
   
CARD ACTIVATION TECHNOLOGIES INC.
 
   
1
   
CARD ACTIVATION TECHNOLOGIES INC.
 
   
2
   
CARD ACTIVATION TECHNOLOGIES INC.
 
   
3
   
6
   
9
   
9
   
9
   
9
   
ITEM 6.  EXHIBITS
10
 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
CARD ACTIVATION TECHNOLOGIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
 
             
   
December 31,
2011
   
September 30,
2011
 
CURRENT ASSETS
           
Cash
  $ 10,516     $ 49,750  
Advances to affiliate
    -       -  
Total current assets
    10,516       49,750  
                 
TOTAL ASSETS
  $ 10,516     $ 49,750  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY:
               
                 
CURRENT LIABILITIES:
               
Accounts payable
    2,232,821       2,204,355  
Accrued expenses
    13,903       13,525  
Note payable
    15,000       -  
Disputed liabilities
    20,000       20,000  
Total current liabilities
    2,281,724       2,237,880  
                 
TOTAL LIABILITIES
    2,281,724       2,237,880  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $.001 par value, 1,000,000 shares authorized;none issued and outstanding as of December 31, 2011and September 30, 2011, respectively
    -       -  
Common stock, $.0001 par value, 300,000,000 shares authorized;180,072,719 and 174,782,045 shares issued and outstanding as of December 31, 2011 and September 30, 2011 respectively
    18,008       18,008  
Additional paid-in capital
    1,095,716       1,095,716  
Accumulated deficit
    (3,384,932 )     (3,301,854 )
Total stockholders' equity
    (2,271,208 )     (2,188,130 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 10,516     $ 49,750  

The accompanying notes are an integral part of these financial statements.
 
 
CARD ACTIVATION TECHNOLOGIES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
 
   
Three Months Ended
December 31,
 
   
2011
   
2010
 
             
       
REVENUE
           
Litigation revenue
  $ -     $ 164,000  
Total
    -       164,000  
                 
COSTS AND EXPENSES
               
Cost of Revenue
    -       57,400  
General and administrative
    97,162       424,911  
Total operating expenses
    97,162       482,311  
OPERATING INCOME (LOSS)
    (97,162 )     (318,311 )
                 
OTHER (INCOME) AND EXPENSES
               
Interest income
    (14,461 )     (13,532 )
Interest expense
    377       345  
Total other (income) expense
    (14,084 )     (13,187 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    (83,078 )     (305,124 )
                 
INCOME TAX (BENEFIT) PROVISION
    -       -  
                 
NET INCOME (LOSS)
  $ (83,078 )   $ (305,124 )
                 
Weighted Average Common Share Outstanding:
               
Basic and diluted:
    180,072,719       176,730,616  
                 
Net Income (Loss) Per Share
               
Basic and diluted:
  $ (0.00 )   $ (0.00 )

The accompanying notes are an integral part of these financial statements.
 
 
CARD ACTIVATION TECHNOLOGIES, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

   
Three Months Ended
 December 31,
 
   
2011
   
2010
 
             
             
       
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ (83,078 )   $ (305,124 )
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Discount on common stock issued under subscription agreements
    -       34,358  
Reserve for bad debts
    14,461       13,510  
Changes in assets and liabilities:
               
Other assets
    -       (6,775 )
Accounts payables
    28,466       274,568  
Accrued expenses and disputed liabilities
    378       (1,794 )
Net cash provided by (used in) operating activities
    (39,773 )     8,743  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Advances to affiliates
    (14,461 )     (15,995 )
Proceeds from note payable
    15,000       -  
Proceeds from the sale of common stock, net
    -       64,050  
Net cash provided by (used in) financing activities
    539       48,055  
                 
INCREASE IN CASH
    (39,234 )     56,798  
CASH, BEGINNING OF YEAR
    49,750       -  
CASH, END OF YEAR
  $ 10,516     $ 56,798  
                 
Supplemental Cash Flow Information:
               
Issuance of subscribed stock
  $ -     $ 35,250  
                 
Common stock received as loan repayment
  $ -     $ 695,777  
 
The accompanying notes are an integral part of these financial statements
 
 
CARD ACTIVATION TECHNOLOGIES INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1. Background
 
Card Activation Technologies Inc. ("we," "us," "our" or the "Company") was incorporated in the state of Delaware on August 29, 2006. The Company was formed to own and commercially develop our patented point-of-sale technology for the activation and processing of transactions related to debit-styled cards, which include gift cards, phone cards and other stored value cards.  The payment technology is covered by one patent (U.S. Patent No. 6.032,859, entitled ‘METHOD FOR PROCESSING DEBIT PURCHASE TRANSACTIONS USING A COUNTER-TOP TERMINAL SYSTEM’, referred to herein as the “’859 Patent”).  The ‘859 Patent covers the technology and process for taking a card with a magnetic strip or other data capture mechanism and activating the card by down loading a determined monetary value onto the card for use at a later date for different types of transactions.
 
Currently, our business strategy consists exclusively of attempting to enter into license agreements with third parties to license our rights under our ‘859 Patent and in pursuing patent litigation in an effort to protect our intellectual property and obtain recourse against alleged infringement of our ‘859 Patent.  Our ability to continue to pursue licensing agreements and patent litigation to protect our intellectual property is subject to our pending appeals regarding the validity of the '859 Patent, our principal asset, as discussed below.  The ‘859 Patent was transferred to us by MedCom USA, Incorporated (“MedCom’) upon our formation in exchange for 146,770,504 shares of our common stock.
 
Note 2. Basis of Presentation
 
The accompanying condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") which contemplate continuation of the Company as a going concern.   During the three months ended December 31, 2011, the Company recognized a net loss of $83,078.  The Company has incurred an accumulated net loss from the period August 29, 2006 (inception) through December 31, 2011 of $3,384,932.  Further, the Company has inadequate working capital to maintain or develop its operations and is dependent upon funds from private investors and the support of certain stockholders.
 
These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.  In this regard, our management is proposing to raise any necessary additional funds through a financial institution or through the sale of equity, debt, or a combination of equity and debt, if the Company does not receive additional funding through litigation settlements. There is no assurance that the Company will be successful in raising additional capital.
 
 
The accompanying condensed financial statements included herein have been prepared by us, without audit, in accordance with the accounting policies described in our audited financial statements and notes thereto for the fiscal year ended September 30, 2011, as presented in our annual report on Form 10-K, and pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.  In the opinion of our management, the accompanying condensed financial statements include all adjustments (consisting only of those of a normal recurring nature), which are necessary for a fair presentation of the results for the interim periods presented.  Interim results are not necessarily indicative of results to be expected for any future interim period or for the entire fiscal year.
 
These condensed financial statements should be read in conjunction with the notes to the audited financial statements presented in our annual report on Form 10-K for the year ended September 30, 2011, filed with the SEC.  Our reports are available electronically by visiting the SEC website at http://www.sec.gov.
 
Recent Accounting Guidance
 
           None.
 
Note 3. Related Party Transactions
 
As of December 31, 2011, the Company was managed by its sole officer and director, Robert Kite.  Mr. Kite serves as sole director and Chairman of the Company's Board of Directors and acts as the Company's principal executive and principal financial officer.  Mr. Kite also serves as chairman of the board of directors, president and chief executive officer of MedCom, a related party, and owns shares of common stock of both MedCom and the Company.  MedCom is also a significant shareholder of the Company.
 
On September 30, 2010, the Company entered into an agreement with MedCom to repay the amount due from advances made in the amount of $1,478,526.  The Company agreed to accept shares of its common stock valued at the closing price on the date received.  On October 1, 2010, the Company received 8,697,210 shares of its common stock valued at $0.08 per share or $695,777.  The Company recorded a reserve for bad debt on the remaining balance of $782,749 for the year ended September 30, 2010.

The Company advances funds to MedCom at a 7% interest rate per annum.  As of December 31, 2011 and September 30, 2011 the Company had receivables from affiliate advances of zero.
 
Note 4.  Disputed Liabilities
 
The Company allegedly is party to a note payable with a principle amount of $20,000 at a 7% interest rate with no due date.  The Company is disputing this obligation as management believes that the party entering into the note on behalf of the Company did not have the authority to do so.
 
 
Note 5.  Note Payable
 
On December 27, 2011, the Company entered into a note payable in the amount of $15,000 due December 26, 2012, bearing interest at 20%.  The holder has an option to convert the note to common stock at $0.005 per share during the term of the note.  The Company has the right to purchase the note, including interest and conversion rights for $37,500 during the term of the note.
 
Note 6.  Commitments and Contingencies
 
The Company enters into contingency agreements with law firms that represent the Company in certain of its patent litigations.  Under these agreements, the Company typically pays a law firm 35% of the settlement amounts received by the Company and amounts based on future patent litigation successes.  Other cases are handled on an hourly fee basis.
 
Note 7.  Litigation
 
In an action pending in the United States District Court for the District of Delaware, the Court recently ruled that the ‘859 Patent owned by the Company is invalid.  The Company’s only significant asset is the ‘859 Patent.  Management disagrees with the Court’s findings and continues to prosecute an appeal of this decision before the United States Court of Appeals for the Federal Circuit.  Pursuant to a reexamination proceeding, the United States Patent and Trademark Office has issued an Final Office Action ruling that all claims of the '859 Patent are invalid.  Management also disagrees with the findings and determination made by the United States Patent and Trademark Office and continues to prosecute an appeal of the determination to the Board of Patent Appeals and Interferences.
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
With the exception of historical facts, the matters discussed in this quarterly report on Form 10-Q are forward-looking statements.  Forward-looking statements may relate to, among other things, future actions, future performance generally, business development activities, future capital expenditures, strategies, the outcome of contingencies such as legal proceedings, future financial results, financing sources and availability and the effects of regulation and competition.  When we use the words "believe," "intend," "expect," "may," "will," "should," "anticipate," "could," "estimate," "plan," "predict," "project," or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements.  When we describe strategy that involves risks or uncertainties, we are making forward-looking statements.
 
These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated.  These factors include, but are not limited to, our ability to protect our patented technology, our failure to satisfy our working capital needs from operations and the availability of and costs associated with potential sources of financing.
 
We warn you that forward-looking statements are only predictions.  Actual events or results may differ as a result of risks that we face.  Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update them.
 
 
The following discussion contains management's discussion and analysis of financial condition and results of operations.  Management's discussion and analysis should be read in conjunction with "Item 1.  Financial Statements" of this quarterly report on Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in our annual report on Form 10-K/A for the fiscal year ended September 30, 2010.
 
Overview
 
We own and commercially develop our patented method of processing debit purchase transactions, which include gift cards, phone cards and other stored value cards.  Currently, our business strategy consists exclusively of attempting to enter into license agreements with third parties to license our rights under our ‘859 Patent and in pursuing patent litigation in an effort to protect our intellectual property and obtain recourse against alleged infringement of our ‘859 Patent.  Our ability to continue to pursue licensing agreements and patent litigation to protect our intellectual property is subject to our pending appeals regarding the validity of the ‘859 Patent.  If the pending appeals concerning the ‘859 Patent result in a favorable determination of validity, we intend to aggressively enforce our rights during the remaining life of the ‘859 patent, and to seek royalty payments from all infringing parties until the ‘859 Patent expires in 2017.
 
Results of Operations
 
Three Months Ended December 31, 2011, Compared to Three Months Ended December 31, 2010
 
Revenues decreased to zero for the three months ended December 31, 2011, compared to $164,000 for the three months ended December 31, 2010.  The decrease in revenues was due to no settlements for the three months ended December 31, 2011 compared to three for the three months ended December 31, 2010.
 
Operating expenses consist of cost of revenue, general and administrative expenses and sales and marketing costs.
 
Cost of revenue consists of contingency fees paid to legal counsel equal to 35% of settlement revenue.  Certain of our settlements are not subject to contingency fees.  Cost of revenue decreased to zero for the three months ended December 31, 2011 from $57,400 for the three months ended December 31, 2010 as a result of no settlements for the three months ended December 31, 2011 compared to three for the comparable period in 2010.
 
General and administrative expenses consist of salaries and benefits, legal, professional and consulting fees, corporate costs, facilities costs, insurance, travel and entertainment.  General and administrative costs decreased 77.1% to $97,162 for the three months ended December 31, 2011 from $424,911 for the three months ended December 31, 2010.  This increase was primarily due to decreased legal fees.
 
 
Liquidity and Capital Resources
 
Our primary sources of liquidity are the sale of our common stock, cash borrowings and cash generated from operations.  We borrowed $15,000 with a 12 month term and interest rate of 20% during the three months ended December 31, 2011.
 
The Company’s operating requirements have historically been funded from the sale of our common stock and litigation settlement revenue.  Subject to the pending appeals regarding the ‘859 Patent discussed above, we expect our future operations will be funded from the litigation revenue settlements as well as revenues from licensing our technology.  In addition the Company is researching potential business combinations that would utilize our technology or enhance our strategy, although no such target acquisition has been identified.
 
In order to develop our business plan, we will require funds for working capital.  We are attempting to raise additional working capital through the sale of equity, debt or a combination of equity and debt.  We do not presently have any firm commitments for additional working capital and there are no assurances that such capital will be available to us when needed or upon terms and conditions which are acceptable to us.  If we are able to secure additional working capital through the sale of equity securities, the ownership interests of our current stockholders will be diluted.  If we raise additional working capital through the issuance of debt or additional dividend paying securities our future interest and dividend expenses will increase.  If we are unable to secure additional working capital as needed, our ability to grow our sales, meet our operating and financing obligations as they become due and continue our business and operations could be in jeopardy.
 
The Company is currently being funded by the sale of its common stock and revenue from litigation settlements.  Subject to the pending appeals regarding the ‘859 Patent discussed above, the Company anticipates increasing its sources of funds in the future by entering into license agreements with third parties to license the use of its ‘859 patent.  However, no such agreements have been entered into at this time, and the Company cannot predict when, if ever, it will enter into such agreements.  Management anticipates that the Company’s current funds will be able to sustain the Company through the next three to six months, at which point the Company may be required to seek additional financing through a financial institution or through the sale of equity, debt, or a combination of equity and debt, if the Company has not received additional funding through litigation settlements at that time.  The Company does not have any contractual commitments that would be impacted by a loss of funding at this time.
 
From time to time the Company advances funds to MedCom.  As of December 31, 2011 there were no outstanding amounts due from related parties.
 
Recently Issued Accounting Guidance
 
None.
 
 
Other Considerations
 
In an action pending in the United States District Court for the District of Delaware, the Court recently ruled that the ‘859 Patent owned by the Company is invalid.  The Company’s only significant asset is the ‘859 Patent.  Management disagrees with the Court’s findings and continues to prosecute an appeal of this decision before the United States Court of Appeals for the Federal Circuit.  Pursuant to a reexamination proceeding, the United States Patent and Trademark Office has issued an Final Office Action ruling that all claims of the '859 Patent are invalid.  Management also disagrees with the findings and determination made by the United States Patent and Trademark Office and continues to prosecute an appeal of the determination to the Board of Patent Appeals and Interferences.
 
There are numerous factors that affect the business and the results of our operations.  Sources of these factors include general economic and business conditions, federal and state regulation of business activities, the level of demand for our product, and the ability to develop new products based on new or evolving technology and the market's acceptance of those products.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our principal executive officer, who also serves as our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report.  Based on that evaluation, our principal executive officer has concluded that our disclosure controls and procedures are not effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.  We are in the process of evaluating our disclosure controls and procedures in an effort to develop remedial measures to correct the deficiencies.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (the quarter ended December 31, 2011) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II - OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
In an action pending in the United States District Court for the District of Delaware, the Court recently ruled that the ‘859 Patent owned by the Company is invalid.  The Company’s only significant asset is the ‘859 Patent.  Management disagrees with the Court’s findings and continues to prosecute an appeal of this decision before the United States Court of Appeals for the Federal Circuit.  Pursuant to a reexamination proceeding, the United States Patent and Trademark Office has issued an Final Office Action ruling that all claims of the '859 Patent are invalid.  Management also disagrees with the findings and determination made by the United States Patent and Trademark Office and continues to prosecute an appeal of the determination to the Board of Patent Appeals and Interferences.
 
 
In the ordinary course of business, we are the subject of, or party to, various pending or threatened legal actions, including various counterclaims in connection with our intellectual property enforcement activities.  The Company, through its attorneys, has sent letters to over 600 potential infringers of the patent, placing the infringers on notice of the patent and seeking a license agreement under the patent. While we believe that any liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flows, we can make no assurances that we will not lose all or some of the claims covered by our patent as the result of such actions.
 
Information regarding the Company's legal proceedings outside the ordinary course of business is disclosed under Notes 3 and 4 to the Company's Condensed Financial Statements (unaudited) of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
 
ITEM 6.  EXHIBITS
 
Certification of Principal Executive and Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 
Certification of Principal Executive and Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
 
101.INS
XBRL Instance Document
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
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.
 
   
Card Activation Technologies Inc.
     
Dated: February 10, 2011
By:
/s/ Robert Kite
   
Robert Kite
   
Chairman, President and Chief Executive Officer
   
(Principal Executive Officer and Principal Financial Officer)
 
 
 11