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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C., 20549

 

FORM 10-K/A

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2012


[  ] TRANSITION REPORT UNDER 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 of other jurisdiction of incorporation)

  

(I.R.S. Employer Identification No.)

  

  

  

325 College Blvd,

Oceanside, California

  

92057

(Address of Principal Executive Office)

  

(Zip Code)

 

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


Securities registered pursuant to Section 12(b) of the Act: NONE


Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.00001 par value


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 is not required to file reports pursuant to Section 13 or 15(d) of the 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 preceding 12 months (or 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 [ ]

 

i

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [ ] No [ ]

 

Indicate by check mark if disclosures of delinquent filers in response to Item 405 of Regulations S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [ ] 

 

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  []     

Accelerated filer  [ ]     

Non-accelerated filer  [ ]  

Smaller reporting company  [X]

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes [ ] No [X]

 

The aggregate market value of the voting stock and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of March 31, 2012, the last business day of our most recently completed second quarter, was approximately $0.

 

At December 16, 2012, the issuer had 233,824,960 shares outstanding of Common Stock, par value $0.00001 per share.

 

DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (i) any annual report to security holders; (ii) any proxy or information statement; and (iii) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (the "Securities Act"). The listed documents should be clearly described for identification purposes (e.g. annual reports to security holders for fiscal year ended December 24, 1990).

 

N/A

 

>Transitional Small Business Disclosure Format (Check one): Yes[ ] No [X]

 

Explanatory Note to 10-K/A

We are filing this amended 10-K as a result of finding typographical errors. The following changes were made in this amendment:

Statement of Changes in Stockholders' Equity -the amount for common stock issued for services during September 30,2011 has been changed to reflectthe accurate 171,111,000 amount.

In Footnote 3 of the Notes to the Audited Financial statements, the amount associated with the tax receivable balance at September 30, 2012 has been changed to reflect the accurate amount of $3 ,203.

Certifications 31.1; 31.2 and 32.1 and 32.2 have been changed to reflect the amended filing date of January 16,2013

Signature pages have been changed to reflect the amended filing date ofJanuary 16,2013


 

 

    

 

ii

TABLE OF CONTENTS

 

   

 

 

 

PART I

 

  

  

Item 1

Description of Business

3

Item 1B

Unresolved Staff Comments

7

Item 2

Properties

7

Item 3

Legal Proceedings

7

Item 4

Reserved

7

  

  

 

PART II

 

  

  

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

7

Item 6

Selected Financial Data

9

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

9

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

12

Item 8

Financial Statements and Supplementary Data

12

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

13

Item 9A

Controls and Procedures

13

Item 9B

Other Information

13

 

 

 

PART III

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

14

Item 11

Executive Compensation

15

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

16

Item 13

Certain Relationships and Related Transactions, and Director Independence

17

Item 14

Principal Accountant Fees and Services

18

Item 15

Exhibits

19

  

Signatures

23

 

  


1


Forward-Looking Information


Unless otherwise indicated, the terms “Citadel EFT, Inc.”, “Citadel”, “Company,” “we,” “our” and “us” are used in this report to refer to Citadel EFT, Inc., a Nevada corporation.


In this Annual Report on Form 10-K (“the Report”), we may make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We do not undertake to update, revise or correct any of the forward-looking information. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto.

 

The statements contained in this Report that are not historical fact 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 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,” “expects,” “may,” “will,” “should,” “intend,” “plan,” “could,” “is likely,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of Citadel, which, although considered reasonable by us, may not be realized. Because of the number and range of assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of us, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Therefore, our actual experience and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.

  

 




2


PART I

 

  

 

 

Item 1.

DESCRIPTION OF BUSINESS.


History

We were incorporated under the laws of the state of Nevada as Citadel EFT, Inc., on September 1, 2009. Even though we were incorporated recently, prior to our incorporation, our predecessor company was organized as a sole proprietorship in 1989 and since 1989 has been conducting the same business operations we continue to do now.   We provide credit card terminals and merchant account services to retailers.  Revenues are generated by residual percentages earned from contracted merchants that we are associated with. In 2009, we changed our fiscal year end from December 31 to September 30.

 

Our principal executive office is located at 1100 Irvine Blvd., Tustin, California, 92780. This is our mailing address as well. Our telephone number is (714) 730-8143. Our website is http://www.citadelbankcard.com. Our Registered agent for service of process is the National Registered Agents Inc. of NV, located at 1000 East William Street, Suite 204, Carson City, Nevada 89701. Our fiscal year end is September 30.

 

Business Overview

 

We have 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, which has continued through most of 2011, 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.

 

  Services, Products and Customers

 

We provide credit card merchant services to our client base.  Our market consists of established and new businesses.  They are composed of large companies consisting of over 100,000 Visa and MasterCard transactions per month and smaller companies with only a few thousand transactions per month. We believe the marketplace will stagnate in the short run, and by 2011 begin to grow again as new businesses start.


3

We have approximately 1,700 merchants with approximately $7 million a month in Visa and MasterCard charges.  The merchants are diverse in their geographic location and in the scope of what they do.

 

Marketing and Sales

 

Internet advertising has been the greatest marketing and sales-generating vehicle. We plan to continue to spend more advertising dollars on Internet advertising.

 

We will also use marketing experts to generate new clients for Citadel. This includes but is not limited to using blogs, chat rooms, internet promotion companies, search engine placement, opt-in email promotion, self- producing web sites, and referrals.

 

We “give away” the terminal. The reason for this is that most of the money we generate is through residuals. Residuals are a percentage of the customer base of credit card transactions. For example, if merchant A has $100,000 in credit card sales, Citadel will make a residual on each transaction of every customer that uses their credit card at merchant A’s location. The amount is based on the quote given to merchant A. The typical amount earned on each account is based on many factors including the discount rate, transaction fee, and the mid- and non-qualified rates. The mid- and non-qualified rates are for business, government, and foreign card transactions. The mid-qualified are for reward cards and keyed-in transactions. Also included are the compliance fees, annual fees, monthly minimums, statement fees to name a few. Visa and MasterCard have over one hundred different categories depending on the type of card used.  Terminals are not held in inventory by Citadel.  The entire cost of the terminal is expensed upon delivery to the customer.

 

Once a merchant is contracted with Citadel EFT and the processing company, the merchant can avail himself to an 800 number, provided to Citadel’s merchant-clients by a third-party vendor, for inquiries on statements. There is also an online statement at mymerchantdata.com where merchants can view their statements online. It is a transitional period which typically takes 1 day from submission of the application to the approval. The terminals are preprogrammed and shipped to the merchant for ease of use. They will receive a starter packet in the mail with Visa and MasterCard decals, instructions on ordering supplies and preventing fraud.

 

We plan to acquire smaller companies with their merchant base along with their residuals, for either cash, stock or a combination of both. Typically a merchant base buyout is based on the target company’s monthly residual volume, merchant type and length of time in business. The buyout ratio is anywhere from 15 to 25 times the monthly residual. We see this as a way to grow profits as well as hire new sales associates to promote the Citadel EFT brand.

 


4

 

We implemented our web and advertising strategy from October – December of 2010 to increase awareness of our service offering. While we already have an operational website at http://www.citadelbankcard.com our web strategy will consist of attempts to increase the traffic to our existing site, in particular through the use of web PR firms which can provide search engine optimization services. Search engine optimization is a specialized service wherein the PR firm will re-configure the site, its html coding and its links, to “optimize” or maximize the placement order of the site in search engine results for such search engines as msn, Google, Yahoo and Bing.

 

 Competition

 

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. Our main competitors are companies in our field of operations who advertise on the Internet. Currently our competitors are North American Bankcard, United Bankcard, Bank of America, Card Services International and Merchant Warehouse.

 

Government Regulation

 

We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to electronic commerce. However, the Internet is increasingly popular. As a result, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Furthermore, the growth of electronic commerce may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online service regarding the manner in which personal information is collected from users and provided to third parties. We will not provide personal information regarding our users to third parties. However, the adoption of such consumer protection laws could create uncertainty in Web usage and reduce the demand for our products.

 

We are not certain how business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, and import and export matters. The vast majority of such laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address such issues could create uncertainty in the Internet market place. Such uncertainty could reduce demand for services or increase the cost of doing business as a result of litigation costs or increased service delivery costs.  In addition, because our services are available over the Internet in multiple states, other jurisdictions may claim that we are required to qualify to do business in each such state. We are qualified to do business in all 50 states. Our failure to qualify in a jurisdiction where it is required to do so could subject it to taxes and penalties. It could also hamper our ability to enforce contracts in such jurisdictions. The application of laws or regulations from jurisdictions whose laws currently apply to our business could have a material adverse effect on our business, results of operations and financial condition.

 

Other than the foregoing, no governmental approval is needed for our electronic merchant services and our business conducted via our website.

 

 

5

 



We are at a competitive disadvantage in relation to many of these larger competitors, for the following reasons:

•   Since our industry runs on very low margins, a larger firm with more clients is better able to use economies of scale in reducing their cost of services, such as the purchasing of terminals and fees paid to processors.

 

•  Larger firms are able to use their size as a marketing point with prospective merchant-clients, equating their size with stability and other attractive traits.

 

•  Larger firms are able to withstand a greater number of their clients’ defections than we are, as each client represents a larger percentage of our client base than it does for a larger operator, forcing us to be more responsive to our merchant-clients respective demands, which puts pressure on our ability to increase prices.

 

•   Most, though not all, larger firms have other businesses besides credit card processing, and are therefore not as singularly dependent on the success of their credit card processing business as we are on ours.

 

•   Some large firms, such as Bank of America, can “bundle” various financial services for their clients, including banking, lending, and payroll and tax preparation, together with credit card processing. We cannot.

 

We intend to attempt to overcome these challenges and competitive disadvantages by:

 

•  Acquiring smaller companies with their merchant base along with their residuals, although nothing has been contemplated through 2012.

•  Increasing advertising in markets that we don’t currently pursue: we will advertise in trade magazines as well as business publications such as Entrepreneur magazine and Inc. magazine, and newspaper publications such as the Wall Street Journal.

•Continuing to “give away” the terminal to approved merchants. The reason for this is that most of the money we generate is through residuals. Residuals are a percentage of the customer base of credit card transactions.

•  Using marketing experts to generate new clients. This includes but is not limited to using blogs, chat rooms, social networks such as Facebook and Twitter, internet promotion companies such as Media760, search engine placement, opt-in email promotion, self- producing web sites, and referrals.

•  Offering our clients low transaction fees and pricing.

•  Contracting outbound telemarketers.   

•  Hiring stock promotion companies and announcement services.

•  Joining professional associations such as the Chamber of Commerce.

•  Forming Internet partnerships by exchanging website promotions.

 

With these marketing plans in place, we feel that we will increase our merchant base and therefore increase our profits.  

 

Employees

 

We had 1 employee, the principal owner of Citadel, as of December 15, 2012.  Our employee is not covered by collective bargaining agreements and we consider our employee relations to be good.  

 

Patents, Trademarks and Copyrights

 

 

6

 

We currently hold no patents covering our business.

 

 

 

Item 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

  

 

 

Item 2.

DESCRIPTION OF PROPERTY

 

Our principal corporate offices were relocated at 1100 Irvine Blvd., Tustin, California, 92780.  We believe that our current space is suitable, adequate and of sufficient capacity to support our current operations.

  

 

 

Item3.

LEGAL PROCEEDINGS

 

Periodically, we may be involved in legal proceedings arising in the normal course of business. As of the date of this Report, we are currently not involved in any pending, material legal proceedings.

 

  

 

 

Item 4.

RESERVED

 

This item is not applicable.

 

PART II

  

 

 

Item 5. 

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market for Common Stock

 

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.   Effective in June of 2011, our common stock is quoted on the OTC Markets’ OTCQB stock quotation service under the symbol CDFT.



7

 

Set forth below are the close prices for each quarter for the Common Stock as reported by the CDFT.OB for the year ended September 30, 2012.

        

 

QUARTER ENDED

 

CLOSE

 

 

 

December 31, 2011

 

 

$           0.18

 

 

 

 

March 31, 2012

 

 

0.07

 

 

 

 

June 30, 2012

 

 

0.03

 

 

 

 

September 30, 2012

 

 

0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

The source of these close prices was the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions. The high and low prices listed have been rounded up to the next highest two decimal places.

 

It is anticipated that the market price of our common stock will be subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market for the products we distribute, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance. On December 15, 2012, the closing price of our common stock as reported by the OTC Bulletin Board was $0.003 per share.  Trading on our Common Stock is extremely limited and sporadic.  Therefore, prices are not an accurate indication of the market value of our Common Stock.  

 

Holders

As of December 15, 2012, there were approximately 50 holders of record of our common stock.

 

Dividend Policy 

As of the date of this prospectus, we have not paid any cash dividends to stockholders. The declaration of any future cash dividend will be at the discretion of our board of directors and will depend upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

 

Equity Compensation Plan Information 

We have no equity compensation plans 

 

Recent Sales of Unregistered Securities

 

In October, 2011, Citadel issued 1,000,000 shares of common stock to a consultant for services rendered.  Citadel recorded stock based compensation of $50,000 related to the closing price on the date of issuance of $0.05.

 

In November, 2011, Citadel issued 2,050,000 shares of common stock to two consultants for services rendered.  Citadel recorded stock based compensation of $84,000 based on the respective closing prices on the dates of issuance of $0.04 and $0.08.

 

In December, 2011, Citadel issued an additional 2,000,000 shares a consultant that was issued shares in October for services rendered.  Citadel recorded stock based compensation of $300,000 based on the respective closing price on the date of issuance of $0.15.

 

8

In February, 2012, Citadel issued 6,000,000 shares to a consultant for services rendered.  Citadel recorded the stock based compensation of $960,000 based on the respective closing price on the date of issuance of $0.16.

 

In May 2012, Citadel issued 450,000 shares to a consultant for services rendered.  Citadel recorded the stock based compensation of $14,850 based on the respective closing price on the date of issuance of $0.03.  

 

During the year ended September 30, 2012, Citadel issued 27,500,000 common shares to various consultants for services.  Citadel recorded compensation expense of $550,000 based on the closing price of $0.02 per share on the issuance dates of the shares.

 

  

 

 

Item 6.

SELECTED FINANCIAL DATA

 

This item is not applicable for smaller reporting companies.

  

 

 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, our actual results may differ materially from those anticipated in our forward-looking statements.

 

General

 

We have 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 that has continued into much of 2012 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.

 

Executive Overview

 

Our specific goal is to continue the expansion of our business by increasing our customer base of merchant-clients and continue to be on the lookout for acquisition targets in the form of assets and businesses that would add to our business objectives.

 

9

Results of Operations

 

Revenues

 

                 

  

 

Year Ended September 30,

2012

 

 

Year Ended September 30,

2011

 

 

Change

 

 

%

 

Revenues

 

$

493,442

 

 

$

459,770

 

 

$

33,672

 

 

 

7.3

 

 

Revenues increased by $33,672, or 7.3 percent to $493,442 for the year ended September 30, 2012 from $459,770 for the previous year ended September 30, 2011.  The revenue rate increased due to the number of clients and the Visa/MasterCard volume for our high volume customers. 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

 

                 

  

 

Year Ended September 30,

2012

 

 

Year Ended September 30,

2011

 

 

Change

 

 

%

 

Operating expenses

 

$

2,387,682

 

 

$

24,913,836

 

 

$

(22,526,154)

 

 

 

90.2%

 

 

Our operating expenses decreased from $24,913,836 for the year ended September 30, 2011 to $2,387,682 for the year ended September 30, 2012.  Our largest expenditure for both periods was executive compensation which consisted primarily of stock based compensation to our sole officer, Mr. Gary DeRoos of $24,445,000 during 2011 and other consultants of $1,903,850 during 2012.

 

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.

 

10

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.

 

Our only debt relates to advances from our president and we have no loans or leases on property or equipment. We do not own any real estate. Revenues are generated by residuals from banks that we have contracts with. We generate our income as the third-party agent for point-of-sale credit card payment processing providers such as Best Payment Solutions, Moneris and National Processing Center. We have no financing debt associated with the business. Unlike banks and credit card issuers, we have no exposure to loss due to nonpayment and bad debt. The processing company and merchants are liable for such debt.  

Cash Flows

 

For the year ended September 30, 2012, cash provided by operating activities was approximately $148,539 as compared to cash used in operating activities of $58,276 for the year ended September 30, 2011. Our working capital deficit was $67,396 at September 30, 2012 as compared to working capital of $82,994 at September 30, 2011, due to larger accruals for consulting agreements entered into at September 30, 2012 We recorded the following non-cash charges during 2012 and 2011: share-based compensation of approximately $1,903,850 as compared to $24,460,600 for 2011.  

 

For the year ended September 30, 2012, cash used in financing activities was $160,000 for dividends paid to Mr. DeRoos on the preferred series A stock, as compared to $0 for the year ended September 30, 2011. 

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations is based on our 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, costs and estimated earnings incurred in excess of billings on uncompleted contracts, inventory, impairments of long-lived assets, including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, billings in excess of costs and estimated earnings on uncompleted contracts; contingencies and litigation, and share-based payments. 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.

 

We believe the following accounting policies are critical to our business operations and the understanding of our operations and include the more significant judgments and estimates used in the preparation of our consolidated financial statements.  The consolidated financial statements include the accounts of Deep Down, Inc. and its wholly-owned subsidiaries. 

 

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.


11

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.

 

Recent Accounting Pronouncements

 

Recent Accounting Pronouncements are included in “Part II, Item 8. Financial Statements” Note 1 to the consolidated financial statements, “Summary of Significant Accounting Policies.”

 

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.

 

Inflation and Seasonality

 

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

 

  

 

 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This item is not applicable for smaller reporting companies.

  

 

 

Item 8.

FINANCIAL STATEMENTS

 

The financial statements and schedules are included herewith commencing on page F-1.

 

  

 

 

Report of Independent Registered Public Accounting Firm

F-2

 

  

Balance Sheets

F-4

 

  

Income Statements

F-5

 

  

Statements of Changes in Stockholders’ Equity

F-6

 

  

Statements of Cash Flows

F-7

  

  

Notes to Financial Statements

F-8

 

12

 

  

 

 

 

Item 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

  

 

Item 9A.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.   

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, 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.

 

Management’s Report on Internal Control over Financial Reporting.   

 

Management is responsible for the fair presentation of the consolidated financial statements of Citadel EFT.  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 Citadel;

 

(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 Citadel 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.

 

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, 2012. 

 

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.



13

 

As of September 30, 2012, 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.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only the management's report in this annual report.

 

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 September 30, 2012 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 

 

Item 9B.

OTHER INFORMATION

None.    

 

 

PART III 

 

  

 

 

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following table sets forth the names, ages and positions of our directors and executive officers.

 

     

 

 

 

 

 

Name

  

Age

  

Position Held With Deep Down

Gary DeRoos*

  

51

  

President, Chief Executive Officer, Secretary, Chief Financial Officer, Principal Accounting Officer and Director

Maria Teresa DeRoos

  

47

  

Director

_________________________ 

*Gary and Maria DeRoos are married to each other.

 

Biographical information regarding each of our directors is as follows.  The following paragraphs also include specific information about each director’s experience, qualifications, attributes or skills that led the Board of Directors to the conclusion that the individual should serve on the Board as of the time of this filing, in light of our business and structure:

 

Gary DeRoos, President, Chief Executive Officer, Secretary, Chief Financial Officer, Principal Accounting Officer and Director. Mr. DeRoos (husband of Maria Teresa DeRoos) has been our President, Chief Executive Officer, Secretary/Treasurer, Chief Financial Officer, Principal Accounting Officer and a member of the Board of Directors. From 1989 to the present, Mr. DeRoos has been the owner of Citadel E.F.T., a sole proprietorship engaged in the business of providing credit card terminals and merchant account services in Tustin, California.



14

 

 

Maria Teresa DeRoos.    Mrs. DeRoos (wife of Gary DeRoos) has been a member of the Board of Directors. From 1994 to the present, Mrs. DeRoos has served as a financial and management information advisor for Citadel E.F.T, a sole proprietorship engaged in the business of providing credit card terminals and merchant account services in Tustin, California.

During the past ten years, neither Mr. nor Mrs. DeRoos have been the subject of any of the following events:

  

 

 

1.

Any bankruptcy petition filed by or against any business of which Mr. and/or Mrs. DeRoos were a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.

  

 

2.      

Any conviction in a criminal proceeding or being subject to a pending criminal proceeding.

  

3.      

An order, judgment, or decree, not subsequently reversed, suspended or vacated, or any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting Mr. or Mrs. DeRoos’ involvement in any type of business, securities or banking activities.

   

  

4.

Found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Future Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.


  

Section 16(a) Beneficial Ownership Reporting Compliance 

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.

 

Based solely upon a review of the copies of such forms furnished to us or written representations of our officers and directors, we believe that all Section 16(a) filing requirements were filed on a timely basis.

 

 

Item 11.

EXECUTIVE COMPENSATION

 

The following table sets forth information concerning the total compensation earned in the fiscal years ended September 30, 2012 and 2011 by our Chief Executive Officer and Secretary.  


Summary Compensation Table

Name and Principal Position

Year

 

Salary ($)

 

 

Bonus 

($) (1)

 

 

Stock

Awards 

($) (3)

 

 

Option Awards 

($)

 

 

All Other Compensation

($) (2)

 

 

Total

 

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gary DeRoos

2012

 

$

11,000

 

 

$

118,699

 

 

$

-

 

 

$

-

 

 

$

172,639

 

 

$

302,338

 

President, Chief Executive Officer , Chief Financial Officer and Director

2011

 

$

42,000

 

 

$

264,990

 

 

$

24,395,000

 

 

$

-

 

 

$

10,240

 

 

$

24,712,230

 

                          

Maria DeRoos, Secretary

2012


2011

  

$          6,000


 

-

 

 

 

-

 

 

-

  

-

 

 

-

   

-


-

   

-


-

   

$6,000


-

 
                          

    

(1) The amount in the “Bonus” column for 2012 and 2011 was paid at the sole discretion of the board of directors.  

(2)The amounts in the “All Other Compensation” column for 2012 and 2011 respectively were attributed to the following:



15


Dividends on preferred Series A of $160,000 and $0 for 2012 and 2011, respectively; a vehicle allowance of $0 and $1,744 in 2012 and 2011, respectively; and

healthcare expenses paid by the company on Mr. DeRoos’ behalf in the amount of $10,895 and $10,240 in 2012 and 2011, respectively.  

 

(3)  Compensation related to Stock awards is comprised of the following:

 

In May, 2011, we issued 71,000,000 shares of common stock to our sole officer Gary DeRoos for services rendered.  We recorded compensation expense in an amount equal to the fair market value of $3,550,000 according to the latest private placement per share amount of $0.05 given the common stock was not traded on an exchange, therefore the trading price could not be determined.  

In September, 2011, we issued 100,000,000 shares of common stock to our sole officer Gary DeRoos for services rendered.  We recorded compensation expense in an amount equal to the fair market value of $13,500,000 according to the closing price of $0.135 per share on the date of issuance.   

In September, 2011, we issued 51,000,000 shares of Series A preferred stock to our sole officer, Mr. Gary DeRoos for services rendered.  We recorded compensation expense in an amount equal to the fair value of the company’s common stock as the preferred shares are convertible at a one-to-one ratio into shares of common stock.  The fair market value of the company’s common stock was $7,395,000 according to the closing price of $0.145 on the date of issuance.  

  

Outstanding Equity Awards at September 30, 2012

 

There are no outstanding equity awards at September 30, 2012.  

 

 Compensation of Directors

 

Each of our directors who also serve as our executive officers do not receive any additional compensation for their performance of services as directors.  We may agree to provide compensation to these directors in the future.

  

 

 

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information, as of November 27, 2012, concerning the beneficial ownership of shares of Common Stock of Citadel EFT, Inc. by (i) each person known by us to beneficially own more than 5 percent of the  outstanding shares of our common stock; (ii) each Director; (iii) our “Named Executive Officers” (as determined under Item 402(m) of Regulation S-K); and (iv) all directors and executive officers of Citadel as a group. To our knowledge, all persons listed in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared with their respective spouse under applicable law. In addition, all persons named below can be reached at Citadel EFT, Inc. at 1100 Irvine Blvd, Tustin, California 92780.


 

16

 

      

 

Name of Beneficial Owner (1)

Shares of

Common

Stock

Beneficially

Owned

  

Percent of

Common Stock

Outstanding

 

 

Gary DeRoos (2)

168,501,551

  

72.1 %

 

 

Maria Teresa DeRoos (2)

-

  

- %

 

 

All directors and officers as a group (2 persons)

         

168,501,551

 

72.1 %

 

 

* - Less than 1%

   

 

 

 

  

(1)

A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the date set forth above through the exercise of any option, warrant or right. Shares of common stock subject to options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options, warrants or rights, but are not deemed outstanding for computing the percentage of any other person. The amounts and percentages are based upon 233,824,960 shares of common stock outstanding as of December 15, 2011.

  

(2)

Mr. and Mrs. DeRoos are husband and wife.

 

(3)

In addition, Mr. DeRoos owns 51,000,000 of Series A Preferred Stock which is convertible into common shares on a one-to-one ratio. This amount is excluded from the calculation above.  Mr. DeRoos owns 40,000,000 shares of Series C preferred stock which are converted into common shares at a 1 to 100,000 ratio.

 

Disclosure regarding our equity compensation plans as required by this item is incorporated by reference to the information set forth under Item 5 “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II of this report.     

  

 

 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Review and Approval of Related Person Transactions

 

Our Board of Directors and Management recognize that related person transactions present a heightened risk of conflicts of interest, and therefore we review all relationships and transactions in which we and our directors, director nominees and executive officers or their immediate family members, as well as holders of more than 5% of any class of our voting securities and their family members, have a direct or indirect material interest.  As required under SEC rules, transactions that are determined to be directly or indirectly material to us or a related person are disclosed in our annual Form 10-K statement.


17

 Gary DeRoos and Maria Teresa DeRoos are deemed “promoters” of our company, within the meaning of such term under the Securities Act of 1933, since they co-founded and organized our company. Mr. and Ms. DeRoos are our only “promoters”.  In September 2009, we issued 12,000,000 shares of common stock as restricted securities to Gary DeRoos, our sole officer and a director, in consideration of $0.00001 per share or a total of $120. Neither Mr. nor Ms. DeRoos has received, nor are either entitled to receive any additional consideration for their services as our promoters.

  

 

 

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

We retained MaloneBailey, LLC (“Malone”) as our principal accountant in 2010.  We had no relationship with Malone prior to their retention as our principal accountant. The following table sets forth the aggregate fees paid to Malone for audit services rendered in connection with our consolidated financial statements and reports for the year ended September 30, 2012 and 2011.  In 2011, this includes $1,600 to GBH CPAs.  


                 

         

 

 

 

 

 

 

 

 

 

  

 

September  30, 2012

 

 

September 30, 2011

 

(i) Audit Fees

 

$

15,200

 

 

$

14,300

 

(ii) Audit Related Fees

 

 

-

 

 

 

-

 

(iii) Tax Fees

 

 

-

 

 

 

-

 

(iv) All Other Fees

 

 

-

 

 

 

-

 

 

Audit Fees: Consists of fees billed for professional services rendered for the audit of Citadel’s financial statements, the review of interim condensed consolidated financial statements included in quarterly reports, registration statements and other offering documentation, services that are normally provided in connection with statutory and regulatory filings or engagements and attest services, except those not required by statute or regulation.

 

Audit-Related Fees: Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit and review of Citadel’s consolidated financial statements and are not reported under "Audit Fees."

 

Tax Fees: Consists of tax compliance, tax preparation and other tax services. Tax compliance and tax preparation consists of fees billed for professional services related to assistance with tax returns. Other tax services consist of fees billed for other miscellaneous tax consulting.

 

All Other Fees:  None.


18

Pre-Approval of Audit and Permissible Non-Audit Services of Independent AuditorsThe Board of Directors pre-approves all audit and permissible non-audit services provided by Citadel’s principal accountant. These services may include audit services, audit-related services, tax services and other services. The Board of Directors may also pre-approve particular services on a case-by-case basis and may delegate pre-approval authority to one or more directors. If so delegated, the director must report any pre-approval decision to the Board of Directors at its first meeting after the pre-approval was obtained.


PART IV

  

 

 

Item 15.

Exhibits, Financial Statement Schedules

 

  

 

 

(a)

Financial Statements and Schedules.  See the financial statements and related schedules commencing on page F-1 of this report.

 

 

(b)

Exhibits.

 

 

 

  

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CITADEL EFT, INC.

(Registrant)

 

/s/ GARY DEROOS

Gary DeRoos, President and Chief Executive Officer

Dated: December 16, 2012


/s/ GARY DEROOS

Gary DeRoos

Chief Financial Officer

Dated: December 16, 2012

 

 

POWER OF ATTORNEY

 

KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints GARY DEROOS, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

    

 

 

 

 

Signatures

 

 

Title

 

Date

 

/s/ GARY DEROOS              

 

President, Chief Executive Officer and Director

  

Gary DeRoos

 

 

(Principal Executive Officer)

 

January 16, 2013

  

 

  

  

/s/ GARY DEROOS       

 

Chief Financial Officer and Director

  

Gary DeRoos 

 

(Principal Financial Officer and Principal Accounting Officer) 

January 16, 2013

 

 

23

INDEX TO FINANCIAL STATEMENTS


  

 

 

Report of Independent Registered Public Accounting Firm

F-2

  

  

Balance Sheets

F-4

  

  

Income Statements

F-5

  

  

Statements of Changes in Stockholders’ Equity

F-6

  

  

Statements of Cash Flows

F-7

  

  

Notes to the Financial Statements

F-8


 

F-1

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Citadel EFT, Inc.

Tustin, California

 

We have audited the accompanying balance sheets of Citadel EFT, Inc. (“Citadel”) as of September 30, 2012 and 2011, and the related income statements, statements of stockholders' equity, and statement of cash flows for the years then ended.  These financial statements are the responsibility of Citadel’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Citadel is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Citadel’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Citadel EFT, Inc. as of September 30, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ MALONEBAILEY, LLP

 

www.malonebailey.com

Houston, Texas

December 15, 2012


F-2


Citadel EFT, Inc.

Balance Sheets

 

         

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

September 30, 2011

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,871

 

 

$

54,332

 

Accounts receivable

 

 

34,205

 

 

 

38,449

 

Tax receivable

 

 

3,203

 

 

 

 7,713

 

Total current assets

 

 

80,279

 

 

 

100,494

 

Total assets

 

$

80,279

 

 

$

100,494

 

  

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

147,675

 

 

$

17,500

 

Total current liabilities

 

 

147,675

 

 

 

17,500

 

Total liabilities

 

 

147,675

 

 

 

17,500

 

  

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

Stockholders' (deficit) equity:

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, 100,000,000 shares authorized, $0.00001 par value; 51,000,000 and -  shares issued and outstanding

 

 

510

 

 

 

510

 

Series B Preferred Stock, 10 shares authorized, $0.00001par value; - shares outstanding, respectively

  

-

   

-

 

Series C Convertible Preferred Stock, 30,000,000 shares authorized, $0.00001par value; - shares outstanding, respectively

  

-

   

-

 

Series D Convertible Preferred Stock, 18 shares authorized, $0.00001 par value; - shares outstanding, respectively

  

-

   

-

 

Common stock, $0.00001 par value, 1,000,000,000 shares authorized, 223,324,960 and 184,324,960 issued and outstanding, respectively

 

 

2,235

 

 

 

1,844

 

Additional paid-in capital

 

 

26,262,523

 

 

 

24,519,064

 

Accumulated deficit

 

 

(26,332,664)

 

 

 

(24,438,424)

 

Total stockholders' (deficit) equity

 

 

(67,396)

 

 

 

82,994

 

Total liabilities and stockholders' equity

 

$

80,279

 

 

$

100,494

 

 

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

 

  

 

F-3

 

Citadel EFT, Inc.

Income Statements

 

    

 

 

 

 

 

 

 

 

Year Ended

September 30, 2012

 

Year Ended

September 30, 2011

 

 

 

 

 

 

 

 

REVENUE

$                493,442

$

459,770

 

 

 

 

 

 

 

 

OPERATING EXPENSES

2,387,682

 

24,913,836

 

   

OPERATING LOSS BEFORE TAXES

(1,894,240)

 

(24,454,066)

 

 

 

 

Income tax expense

-

 

(2,640)

 

 

 

 

NET LOSS

$        (1,894,240)

$

(24,456,706)

 

 

 

 

NET LOSS PER COMMON SHARE, BASIC AND DILUTED

$                  (0.01)

$

(0.49)

 

 

 

 

Weighted Average

 

 

 

Shares Outstanding-Basic

193,193,539

 

50,026,083

 

 

 

 


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


  

 

F-4


Citadel EFT, Inc.
Statements of Changes in Stockholders’ Equity
 

        

 

Preferred Stock

Common Stock    

 

 

 

Shares

 

 

Amount

($0.00001)

 

 

 

Shares

  

 

 

Amount

($0.00001)

   

 

Additional Paid-in 

Capital

   

Retained

Earnings

(Accumulated

Deficit)

   

 

Total

Stockholder’s

Equity

Balance, September 30, 2010

 

 

-

$       

13,213,960

 

132

 

 $

60,686

 

 $

18,282

  $

79,100

 

  

 

 

 

 

 

 

 

 

 

 

   

 

Stock issued for services

 

 

-

 

 

-

171,111,000

 

 

1,712

 

 

17,063,888

 

 

-

   

17,065,600

 

  

 

 

 

 

 

 

 

 

 

 

   

 

Shares issued for services at $0.145 per share

 

 

 

 

51,000,000

 

 

 

 

510

-

 

 

-

 

 

7,394,490

 

 

-

   

7,395,000

 

  

 

 

 

 

 

 

 

 

 

 

   

 

Net loss

  

-

 

 

-

 

 

-

 

 

(24,456,706)

   

(24,456,706)

Balance, September 30, 2011

 

 

51,000,000

 

 

$    510

184,324,960

 

    1,844

 

24,519,064

 

(24,438,424)

   

82,994

Stock issued for services

 

 

-

 

 

-

 

39,000,000

  

391

   

1,903,459

   

-

   

1,903,850

                       

Dividends

-

-

-

  

-

   

(160,000)

   

-

   

(160,000)

                       

Net Loss

-

-

-

  

-

   

-

   

(1,894,240)

   

(1,894,240)

                       

Balance, September 30, 2012

 

 

51,000,000

 

 

$  510

223,324,960

  

$  2,235

   


$26,262,523

   

$(26,332,664)

   

$(67,396)

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

  The accompanying notes are an integral part of the audited financial statements

 

 

 

F-6

 

Citadel EFT, Inc.

Statements of Cash Flows 

         

 

 

Year Ended September 30, 2012

 

 

Year Ended September 30, 2011

 

Cash flows from operating activities:

 

 

 

 

 

 

Net (loss) income

 

$

(1,894,240)

 

 

$

(24,456,706)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Share-based compensation

 

 

1,903,850

 

 

 

24,460,600

 

         

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,244

 

 

 

(6,352

)

Prepaid expenses

 

 

-

 

 

 

-

 

Income tax receivable

 

 

4,510

 

 

 

 (7,713)

 

Income tax liability

 

 

-

 

 

 

(62,230)

 

Accounts payable and accrued liabilities

 

 

130,175

 

 

 

14,125

 

Net cash provided by (used in) operating activities

 

 

148,539

 

 

 

(58,276)

 

  

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividend payment on preferred stock

  

(160,000)

   

-

 

       Net cash used in financing activities

 

 

(160,000)

 

 

 

-

 

Change in cash and equivalents

 

 

(11,461)

 

 

 

(58,276)

 

Cash and cash equivalents, beginning of period

 

 

54,332

 

 

 

112,608

 

Cash and cash equivalents, end of period

 

$

42,871

 

 

$

54,332

 

  

 

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

 

 

 

     Cash paid for interest

 

$

-

 

 

$

-

 

     Cash paid for taxes

 

$

-

 

 

$

72,933

 


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

 

  

F-7



Citadel EFT, Inc.
Notes to Financial Statements
For the Years Ended September 30, 2012 and 2011

 

NOTE 1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Nature of Business. Citadel EFT, Inc. (“we”, “our” or “Citadel”) was incorporated in the state of Nevada on September 1, 2009. Prior to its formation, Citadel was a sole proprietorship formed in 1989 for the purpose of offering credit card transaction processing and merchant account services to businesses located in North America. Today, Citadel provides the retail industry with the tools and services for credit transactions.

 

Basis of Presentation.  Citadel prepared its financial statements in accordance with accounting principles generally accepted in the United States of America.

 

Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Recently Issued Accounting Pronouncements. Citadel does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 
Cash and Cash Equivalents. Citadel considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Income Taxes. Deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes. Deferred taxes are calculated by applying enacted statutory tax rates and tax laws to future years in which temporary differences are expected to reverse. The impact on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the rate change is enacted.

 

A deferred tax valuation reserve is established if it is more likely than not that a deferred tax asset will not be realized. 

 

Citadel recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.  

 

 Revenue Recognition and Accounts Receivable. Citadel derives 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.


F-8

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.

Accounts receivable are primarily comprised of amounts due from our clearing and settlement banks from revenues earned, net of related interchange and bank processing fees, on transactions processed during the month ending on the balance sheet date. Such balances are typically received from the clearing and settlement banks within 30 days following the end of each month. Bad debt expense is recognized based on management’s estimate of likely losses per year, based on the nature of the revenues and subsequent month receipt. As of September 30, 2011 and 2010 respectively, no allowance for doubtful accounts was deemed necessary.

 

Advertising Costs. Citadel’s policy regarding advertising is to expense advertising when incurred.  For the years ended September 30, 2012and 2011 Citadel incurred advertising expenses of approximately $73,090 and $66,952, respectively.

Financial Instruments. Citadel believes the carrying amounts of financial instruments As of September 30, 2012 and 2011, including cash and accounts receivable approximate fair value. Due to the short maturities of the cash and cash equivalents and accounts receivable, carrying amounts approximate the respective fair values

Basic and diluted net income (loss) per share. Basic income (loss) per share is computed using the weighted average number of shares of common stock outstanding during each period.  Diluted income (loss) per share includes the dilutive effects of common stock equivalents on an “as if converted” basis. For the years ended September 30, 2012 and 2011, the Company had 51,000,000 of Series A Convertible preferred shares outstanding which are convertible into one common share which are  potentially dilutive securities if considered on a “as if converted” method.  

 

NOTE 2. STOCKHOLDER’S EQUITY

 

Series A Convertible Redeemable Preferred Stock

In September 2009, Citadel issued 51,000,000 shares of Series A Convertible Preferred Stock to its sole officer, Gary DeRoos for services rendered.  The Company recorded compensation expense at the fair market value of $7,395,000 which was equal to its common stock conversion share price of $0.145 on the date of issuance.  Each share of Series A Convertible Preferred Stock shall be convertible at any time at the option of the holder into one common share.  Any amount of accrued and unpaid dividends is convertible into common shares at its trading price on the OTC Market.  The holders of the Series A Convertible preferred Stock will have two hundred voting rights for each share of Series A Convertible Preferred Stock held of record. The Company may redeem the Series A Convertible Preferred Stock at $0.0001 per share.  

Series B Preferred Stock

On September 26, 2012, Citadel amended its articles of incorporation to approve the designation of 10 shares of Series B preferred stock, at a par value of $0.00001.  The Series B stock does not have any conversion rights associated with them.  The Series B stock have voting rights equal to two times the sum of (i) the total  number of shares of common stock which are issued and outstanding at the time of voting plus (ii) the total number of shares of any preferred stocks which are issued and outstanding.  

Series C Convertible Preferred Stock


F-9

On September 26, 2012, Citadel amended its articles of incorporation to approve the designation of 30,000,000 shares of Series B convertible preferred stock, (“Series C stock”) at a par value of $0.00001.  The Series C stock has liquidation rights upon any liquidation, dissolution or winding up of the Company whether voluntary or involuntary and shall be paid out of the assets of the Company equal to $1.00 per share or in the event of an aggregate subscription by a single subscriber for Series C stock in excess of $100,000, $0.997 per share, plus all declared but unpaid dividends.  The Series C stock is convertible at any time, but not before six months or twelve months depending on the Company’s filing of certain public reports, into the number of shares of common stock equal to the price of the Series C stock divided by the par value of the common stock.  The Series C stock has voting rights equal to ten votes for any election or other vote placed before the shareholders of the company.  

 

Series D Convertible Preferred Stock

On September 26, 2012, Citadel amended its articles of incorporation to approve the designation of 18,000,000 shares of Series D convertible preferred stock, (“Series D stock”) at a par value of $0.00001.  The Series C stock has liquidation rights upon any liquidation, dissolution or winding up of the Company whether voluntary or involuntary and shall be paid out of the assets of the Company equal to $1.00 per share or in the event of an aggregate subscription by a single subscriber for Series D stock in excess of $100,000, $0.997 per share, plus all declared but unpaid dividends.  The Series D stock is convertible at any time, but not before six months or twelve months depending on the Company’s filing of certain public reports, into the number of shares of common stock equal to the price of the Series C stock divided by the par value of the common stock.  The Series D stock has voting rights equal to ten votes for any election or other vote placed before the shareholders of the company.  

 

Dividends

During the year ended September 30, 2012, Citadel declared and paid dividends totaling $160,000 on the shares of Series A Preferred Stock.  The CEO, Mr. Gary DeRoos is the owner of all the outstanding preferred shares of the company.  

Common Stock

During the year ended September 30, 2012, Citadel issued 11,500,000 common shares to various consultants for services.  Citadel recorded compensation expense of $1,408,850 based on the closing prices ranging from $0.03 to $0.16 per share on the issuance dates.  

 

During the year ended September 30, 2012, Citadel further issued 27,500,000 common shares to various consultants for services.  Citadel recorded compensation expense of $495,000 based on the closing price of $0.018 per share on the issuance dates of the shares.

 

During the year ended September 30, 2011, Citadel issued 71,000,000 common shares to our sole officer Gary DeRoos for services rendered.  Citadel recorded compensation expense of $3,550,000 according to the latest private placement per share amount of $0.05 given the common stock was not traded on an exchange.

 

During the year ended September 30, 2011, Citadel issued 11,000 common shares to a third party for consulting services.  Citadel recorded consulting expense in an amount equal to the fair market value of $1,100 according to the closing price on the date of issuance of $0.10 per share.

 

During the year ended September 30, 2011, Citadel issued 100,000,000 shares of common stock to our sole officer Gary DeRoos for services rendered.  Citadel recorded compensation expense in an amount equal to the fair market value of $13,500,000 according to the closing price of $0.135 per share on the date of issuance.   

 

F-10

During the year ended September 30, 2011, Citadel issued 100,000 shares of common stock to a third party for consulting services. Citadel recorded consulting expense in the amount equal to the fair market value of $14,500 according to the closing price of $0.145 per share on the date of issuance.  

 

NOTE 3. INCOME TAXES

 

Income tax expense for the years ended September 30, 2012 and 2011 is as follows:

 

2012

2011

Current:

 

 

  Current - Federal

$ -

$   1,661

  Current – State

-

 979

  Deferred

-

-

 

$-

$2,640

  

A reconciliation of the actual taxes to the statutory U.S. taxes for the period ended September 30, 2012 and 2011 is as follows:

 

2012

2011

Income tax expense (benefit) at the statutory federal rate (15%)

-

$   (3,669,689)

Increase (decrease) resulting from:

 

 

  Permanent differences

-

3,671,350

  State tax expense

-

979

Income tax expense

-

 $  2,640

 

As of September 30, 2012 and 2011 Citadel has a current tax receivable of $3,203 and $7,713, respectively.  

 

NOTE 4. SUBSEQUENT EVENTS

 

 On October 11, 2012, Citadel entered into an initial asset purchase agreement with Art to Go, Inc., a New York Corporation for the purchase of various sports memorabilia.  In exchange for the assets, Citadel agreed to issue 1,200,000 Series C preferred stock.  On October 24, 2012, Citadel entered into a second asset purchase agreement with Art to Go, Inc. for the same assets and which was finalized on October 24, 2012.  Additional consideration of 2,800,000 Series C preferred stock.  A total of 4,000,000 Series C stock was issued in November 2012.  Based on an independent valuation of the assets purchased, the fair market value of the assets was $10,389,046.

In November 2012, Citadel issued 1 share of Series B preferred stock to Mr. Gary DeRoos.  

In November 2012, Citadel issued 40,000,000 shares of Series C preferred stock to Mr. Gary DeRoos.

In November 2012, Citadel issued 400,000 shares of Series C preferred stock to various consultants.

 


F-11