Attached files

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

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CITADEL EFT, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

Citadel prepares its financial statements in accordance with accounting principles generally accepted in the United States of America.  The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the Company’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended June 30, 2013 are not necessarily indicative of the results for the full years. While management of the Company believes that the disclosures presented herein and adequate and not misleading, these interim financial statements should be read in conjunction with the audited financial statements and the footnotes thereto for the periods ended September 30, 2012 filed in its annual report on Form 10-K.

Note 2: Investments

Citadel accounts for any investments in equity securities according to the requirements in ASC 320, “Investments – Debt and Equity Securities,” and follows the requirements of subsequent measurement in ASC 320-10-35.  

During the nine months ended June 30, 2013, Citadel received a partial assignment of an original convertible note receivable held by a publicly traded company.  For $1,000, Citadel assumed $1,000 of a convertible note receivable.  During the quarter, Citadel converted the investment into 100,000,000 shares of freely trading common stock.  Citadel has classified these shares as trading securities at its original cost of $1,000, as its intention is to hold the investment for a short time.   At March 31, 2013, Citadel subsequently measured the shares at their fair market value of $20,000 based on the closing price on that date, and recognized an unrealized gain of $19,000 in the statement of operations.  On June 10, 2013, Citadel sold the 100,000,000 shares for $10,000 (net of fees of $1,865) and recorded a realized gain of $9,000.

During the nine months ended June 30, 2013, Citadel received a partial assignment of an original convertible note receivable held by another publicly traded company.  For $570 Citadel assumed $570 of a convertible note receivable.  During the quarter, Citadel converted the investment into 57,000,000 shares of freely trading common shares.  Citadel has classified these shares as trading securities at its original cost of $570 as its intention is to hold the investment for a short time.  At June 30, 2013, Citadel subsequently measured the shares at their fair market value of $85,500 based on the closing price on June 30 and recorded an unrealized gain of $84,930 in the statement of operations.

Note 3: Other Assets

In November 2012, Citadel purchased various sports memorabilia from Art to Go, Inc., a New York Corporation for 4,000,000 shares of Series C preferred stock and valued at $2,972,000.

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Note 4:  Stockholders’ Equity

Preferred Stock

On November 7, 2012 Citadel amended the designation of Series C preferred stock to increase the number of shares from 30,000,000 to 70,000,000 shares.

In November 2012, Citadel issued 4,000,000 Series C Preferred Shares for the acquisition of sports memorabilia.

Additionally during the six months ended March 31, 2013, Citadel issued another 443,000 Series C Preferred shares to various consultants for services rendered and valued at $329,148.  Also, 13,500 Series C Preferred shares were issued to various consultants to settle liabilities of $61,875. A loss on settlement of liabilities of $8,625 was recorded. All of these shares were also valued based on the independent valuation method. In March 2013, Citadel cancelled 13,500 shares of Series C Preferred shares and as such recorded $10,030 as an offset to stock based compensation.  

In January 2013, Citadel issued 1 Series B Preferred share to Mr. DeRoos for services rendered.  The share is to ensure future voting control only and thus is recorded at par value which is considered fair value.

On February 18, 2013, Citadel issued 8,000 shares of Series C Preferred shares to an investor for $20,000.

In March 2013, Citadel entered into a consulting agreement to issue 15,200 shares of Series C Preferred shares.  The obligation has been recorded as stock payable in the amount of $11,296.  The shares were issued prior to June 30, 2013.  

In April 2013, the Company amended its articles of incorporation to authorize 1,000,000,000 common shares with $0.00001 par value and 250,000,000 preferred shares with $0.00001 par value.

In April 2013, the Company authorized Series E, F, and G Preferred stock. There are 2,000,000 Series E Preferred shares authorized. They are convertible into the number of common shares equal to the price of the Series E Preferred Stock divided by the par value of the common stock. Each Series E Preferred share has ten votes.

There are 2,000,000 Series F Preferred shares authorized. They are convertible into the number of common shares equal to the price of the Series F Preferred Stock divided by the par value of the common stock. Each Series F Preferred share has ten votes.  None are issued yet.

There are 2,000,000 Series G Preferred shares authorized. They are convertible into the number of shares of the Company’s common stock equal to the price of the Series G Preferred stock divided by the par value of the Common Stock. Each Series G Preferred share has ten votes.  None are issued yet.

During the nine months ending June 30, 2013, Citadel cancelled 40,000,000 of Series A Preferred stock previously issued to Mr. Gary DeRoos.  The company recorded a contribution to equity equal to the par value of the stock cancelled of $400.

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During the nine months ending June 30, 2013, Citadel issued 639,379 shares of Series D Convertible preferred stock as a stock dividend to all of its existing common shareholders in contemplation of its reverse stock split.  Citadel recorded a reduction in additional paid in capital of $7, equal to the par value of the preferred shares.  

During the nine months ending June 30, 2013, Citadel issued 20,000 shares of Series E Convertible preferred stock to Mr. DeRoos for the cancellation of 117,000,000 (pre-reverse split; 9,750 post reverse split) shares of common stock previously held by Mr. DeRoos. The company recorded this at par value.  

During the nine months ending June 30, 2013, Citadel issued 800 shares of Series C preferred stock for $2,000.  

Common Stock

During the nine months ended June 30, 2013, Citadel settled its remaining obligations with Mr. Radcliff for $0 and recorded $10,625 in gain on settlement of accrued liabilities which was the balance owed under the previous consulting arrangement.  During the nine months ended June 30, 2013, , Citadel entered into separate settlement agreement with various other  consultants of certain accrued obligations owed for no additional consideration and recorded a gain on settlement of accrued liabilities of $62,500

During the nine months ended June 30, 2013, Citadel issued 58,000,000 (pre-reverse split, 4,833 post-reverse split) common shares to settle liabilities due to various consultants for services.  Citadel settled liabilities of $65,000 and recorded a net gain on liabilities of $20,769.  The values are based on the closing prices ranging from $0.0013 to $0.0029 per share on the issuance dates.  

During the nine months ending June 30, 2013, Citadel issued 14,000,000 (pre-reverse split; 1,167 post – reverse split) shares of common stock to a consultant for services rendered.  Citadel recorded the fair market value of the stock of $131,600, based on the closing price on March 20, 2013 of $0.0094, as stock based compensation.  

During the nine months ending June 30, 2013, Citadel did a 1:12,000 reverse stock split of its common shares outstanding.  

During the nine months ending June 30, 2013, Citadel issued 24,300,000 shares of common stock (post-reverse split) for the conversion of 1 share of Series C preferred stock and 243 shares of Series D preferred stock.  

Dividends

During the nine months ended June 30, 2013 and 2012, Citadel declared and paid dividends totaling $235,000 and $100,000 on the shares of Series A Preferred Stock, respectively.  The CEO, Mr. Gary DeRoos, is the owner of all the outstanding Series A Preferred shares of the company.

Note 5: Related Party

The Company paid $9,100 to a related party for rent during the nine months ended June 30, 2013.

Note 6: Fair Value

The Company measures fair value in accordance with a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

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The following table sets forth the Company's consolidated financial assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Note 7: Subsequent Events

Subsequent to June 30, 2013, Citadel entered into a business development consulting agreement a third party relating to Citadel performing target acquisition business development services.  Fees receivable under the arrangement due 10 days from signing is $1,250 and 150,000 shares of the third party’s preferred stock.  

On July 30, 2013, Citadel entered into a Forward acquisition agreement with a Dominican corporation.  According to the agreement, the corporation will become a wholly owned subsidiary of Citadel. The Dominican corporation owns a property on the island of the Dominican Republic.  Citadel acquired the interests in said property for 110,000 Series C Convertible Preferred Shares of Citadel.

Subsequent to June 30, 2012, Citadel issued 2,200,000 shares of common stock upon conversion of 22 Series D preferred shares.

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

The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition. This information should be read in conjunction with our audited historical financial statements which are included in our Form 10-K for the fiscal year ended September 30, 2012 and our unaudited financial statements and notes thereto included with this Quarterly Report on Form 10-Q in Part I. Item 1.

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 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.

Industry and Executive Outlook

Our specific goal is to continue the expansion of our business by Growing our customer base.  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.

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Results of Operations

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenues

Revenues decreased by $7,270, or 6 percent to $111,684 for the three months ended June 30, 2013 from $118,954 for the three months ended June 30, 2012.  The revenue rate decreased due to smaller transactions across the relative same number of merchants. 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. 

Our operating expenses decreased from $42,731 for the three months ended June 30, 2012 to $37,557 for the three months ended June 30, 2013.   

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Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012

Revenues

Revenues decreased by $78,746, or 20 percent to $313,655 for the nine months ended June 30, 2013 from $392.401 for the nine months ended June 30, 2012.  The revenue rate decreased due to smaller transactions across the relative same number of merchants. 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.   

Operating Expenses. 

Our operating expenses decreased from $1,636,985 for the nine months ended June 30, 2012 to $639,701 for the nine months ended June 30, 2013.  The primary reason for the decrease was $460,749 recorded as stock based compensation during 2013 and $1,408,000 of stock based compensation recorded during the nine months ended June 30, 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.

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

Cash Flow from Operating Activities

During the nine months ended June 30, 2013, cash provided from operating activities was $192,892  as compared to cash flows used in operating activities during the same prior year period of $141,559.  

Cash Flow from Investing Activities

During the six months ended March 31, 2013, Citadel assumed $1,000 of a convertible note receivable from a publicly traded company.  Citadel received 100,000,000 shares at a cost of $1,000.  Citadel intends to hold the stock for investment purposes.  As such, we recognized an unrealized gain on the market value of the stock held at March 31, 2013 of $19,000.  On June 10, 2013, Citadel sold the 100,000,000 shares for $10,000 (including fees of $1,865) and recorded a realized gain of $9,000.

During the three months ended June 30, 2013, Citadel received a partial assignment of an original convertible note receivable held by another publicly traded company.  For $570 Citadel assumed $570 of a convertible note receivable ..  During the quarter, Citadel converted the investment into 57,000,000 shares of freely trading common shares.  Citadel has classified these shares as trading securities at its original cost of $570 as its intention is to hold the investment for a short time.  At June 30, 2013, Citadel subsequently measured the shares at their fair market value of $85,500 based on the closing price on June 30 and recorded an unrealized gain of $84,930 in the statement of operations

Cash Flow from Financing Activities

During the first nine months of 2013 cash used in financing activities was $213,000 as compared to cash used in financing activity of $100,000 for the nine months ended June 30, 2012.  We sold shares of Preferred stock for $22,000 during the nine-months ended June 30, 2013.  Dividends of $235,000 and $100,000 during the nine months ended June 30, 2013 and 2012, respectively, were paid to our CEO and sole preferred shareholder.

Critical Accounting Policy Updates

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

Revenue Recognition  

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

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

We follow the requirements of ASC 605-45, “Revenue Recognition, Principal Agent Considerations,” in determining our revenue reporting. Generally, we report revenues at the time of sale on a net basis where we are not the primary obligor in the arrangement, have minimal latitude in establishing the price of the services, do not change the product and perform part of the service, do not have discretion in supplier selection, do not have latitude in determining the product and service specifications to meet our client’s needs and do not assume credit risk. This amount includes interchange paid to card issuing banks and assessments paid to credit card associations pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants

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

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

Inflation and Seasonality

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

Off-Balance Sheet Arrangements

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

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ITEM 4. CONTROLS AND PROCEDURES

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

Changes in Internal Control over Financial Reporting.    There have been no changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 30, 2013 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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

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

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

During the Annual 10-K review process for the year ended September 30, 2012, 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 and the deficiencies reported continue to be deficiencies as of June 30, 2013. 

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

As of June 30, 2013, 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 financial statements that would not be prevented or detected.

 PART II – OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

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

During the three months ending June 30, 2013, Citadel cancelled 40,000,000 of Series A Preferred stock previously issued to Mr. Gary DeRoos.  The company recorded a contribution to equity equal to the par value of the stock cancelled of $400.

During the three months ending June 30, 2013, Citadel issued 639,379 shares of Series D Convertible preferred stock as a stock dividend to all of its existing common shareholders in contemplation of its reverse stock split.  Citadel recorded a reduction in additional paid in capital of $7, equal to the par value of the preferred shares.  

During the three months ending June 30, 2013, Citadel issued 20,000 shares of Series E Convertible preferred stock to Mr. DeRoos for the cancellation of 117,000,000 (pre-reverse split; 9,750 post reverse split) shares of common stock previously held by Mr. DeRoos. The company recorded this at par value.  

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During the three months ending June 30, 2013, Citadel issued 800 shares of Series C preferred stock for $2,000.  

During the three months ending June 30, 2013, Citadel did a 1:12,000 reverse stock split of its common shares outstanding.  

During the three months ending June 30, 2012, Citadel cancelled 117,000,000 (pre-reverse split; 9,750 post reverse split) common shares previously issued to Mr. Gary DeRoos.  Citadel recorded a reduction in additional paid in capital for $1,170 or the par value of the common shares. See note above in Preferred regarding Series E preferred shares issued to Mr. DeRoos.

During the three months ending June 30, 2013, Citadel issued 24,300,000 shares of common stock (post reverse split) for the conversion of 1 share of Series C preferred stock and 243 shares of Series D preferred stock.  

During the six months ended March 31, 2013, Citadel issued another 443,000 Series C Preferred shares to various consultants for services rendered and valued at $329,149.  Also, 13,500 Series C Preferred shares were issued to various consultants to settle liabilities of $61,875. A loss on settlement of liabilities of $8,625 was recorded. All of these shares were also valued based on the independent valuation method.

In March 2013, Citadel cancelled 13,500 shares of Series C Preferred shares and as such recorded $10,030 as an offset to stock based compensation.  

During the nine months ended June 30, 2013, Citadel issued 58,000,000 (pre-reverse split; 4,833 post reverse split) common shares to settle liabilities due to various consultants for services. Citadel settled liabilities of $65,000 and recorded a gain on liabilities of $20,769. The values are based on the closing prices ranging from $0.0013 to $0.0029 per share on the issuance dates. During the nine months ending June 30, 2013, Citadel issued 14,000,000 (pre-revese split; 1,167 post reverse split) shares of common stock to a consultant for services rendered. Citadel recorded the fair market value of the stock of $131,600, based on the closing price on March 20, 2013 of $0.0094, as stock based compensation.  

During the nine months ended June 30, 2012, Citadel issued 24,300,000 shares of common stock (post-reverse split) for the conversion of 1 share to Series C preferred stock and 243 shares of Series D preferred stock .  

ITEM 5.  OTHER INFORMATION

None

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ITEM 6. EXHIBITS

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.

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