UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB/A-2
(Amendment No. 2)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended: December 31, 2007
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __ TO __
COMMISSION FILE NO. 000-33129
INTERNATIONAL CARD ESTABLISHMENT, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-4581903
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 Airport Way, Suite A
Camarillo, California 93010
________________________________________ __________
(Address of principal executive offices) (Zip code)
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Issuer's telephone number: (866) 423-2491
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
common stock, par value $.0005 per share
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or
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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part II of this Form 10-KSB or any amendments to this Form 10-KSB.
[ ]
State the registrant's revenues for its most recent fiscal year: $9,259,520 as
of December 31, 2007.
State the aggregate market value of the voting 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 a
specified date within the past 60 days. $2,358,051 as of March 09, 2008.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
1
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of March 20, 2008, there were
35,286,449 shares of the registrant's common stock, $.0005 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
EXPLANATORY NOTE
We are filing this Amendment No. 2 on Form 10-KSB/A to our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2007, as originally filed with the
Securities and Exchange Commission (the "Commission") on March 31, 2008 (the
"Original Filing"), an amended on May 7, 2008 (the "First Amendment") for the
purpose of properly disclosing the details of our related party line of credit
activity on our Statement of Cash Flows in accordance with the United States
Generally Accepted Accounting Principles and to amend information disclosed in
Item 8A, regarding the effectiveness of our internal controls and procedures.
The changes in the Statement of Cash Flows did not affect the Company's net
income, earnings per share or overall cash balance and did not impact the
discussion on liquidity in Item 6.
Specific 2007 lines items that are affected by this change:
AS ORIGINALLY FILED AMENDED
FOR THE YEAR ENDED FOR THE YEAR ENDED
12/31/2007 12/31/2007 DIFFERENCE
_________________________________________________________________________________________________________________
Cash Flows From
OPERATING ACTIVITIES
Inventories (37,919) 663,012 700,931
NET CASH PROVIDED BY OPERATING ACTIVITIES 657,731 1,358,662 700,931
FINANCING ACTIVITIES
Proceeds from line of credit, related party 754,396 626,000 (128,396)
Noncash advances from line of credit, related party 739,565 83,653 (655,912)
Payment on line of credit, related party (1,398,008) (1,314,631) 83,377
NET CASH (USED IN) FINANCING ACTIVITIES (448,520) (1,149,451) (700,931)
Specific 2006 lines items that are affected by this change:
AS ORIGINALLY FILED AMENDED
FOR THE YEAR ENDED FOR THE YEAR ENDED
12/31/2006 12/31/2006 DIFFERENCE
_________________________________________________________________________________________________________________
Cash Flows From
OPERATING ACTIVITIES
Inventories (21,025) 383,753 (404,778)
NET CASH (USED IN) OPERATING ACTIVITIES (547,040) (142,262) (404,778)
FINANCING ACTIVITIES
Proceeds from line of credit, related party 447,600 444,000 3,600
Noncash advances from line of credit, related party 533,221 29,441 503,780
Payment on line of credit, related party (470,192) (367,590) (102,602)
NET CASH (USED IN) FINANCING ACTIVITIES (211,516) (616,294) 404,778
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2
This Amendment No. 2 does not change any of the information contained in the
Original Filing or the First Amendment, except as discussed in this Explanatory
Note. This Amendment No. 2 continues to speak as of the date of the Original
Filing and we have not updated or amended the disclosures contained therein to
reflect events that have occurred since the date of the Original Filing.
3
ITEM 7. FINANCIAL STATEMENTS.
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
DECEMBER 31, 2006
4
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONTENTS
Page
REPORT OF THE INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON THE
CONSOLIDATED FINANCIAL STATEMENTS 24
________________________________________________________________________________
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 25
Consolidated Statements of Operations 26
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 31
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23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders' of International Card Establishment,
Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of International
Card Establishment, Inc. (a Delaware corporation) as of December 31, 2007 and
2006, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits 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 the Company'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 consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International Card
Establishment, Inc. as of December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the years then ended, except for the
Restated Statement of Cash Flows as noted in the Explanatory Note at the
beginning of this amendment and dated as of May 19, 2009, in conformity with
accounting principles generally accepted in the United States of America.
MENDOZA BERGER & COMPANY, LLP
Irvine, California
March 24, 2008/May 19, 2009
24
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2007 2006
____________ ____________
ASSETS
CURRENT ASSETS
Cash $ 126,149 $ 157,528
Accounts receivable, trade, net of allowance of $225,425 and $280,595
as of December 31, 2007 and 2006, respectively 27,059 87,705
Inventory 109,628 71,709
Other receivables 268,779 372,995
Notes receivable, net of allowance of $50,000 and $0 as
of
December 31, 2007 and 2006, respectively 6,428 15,154
____________ ____________
Total current assets 538,043 705,091
____________ ____________
FIXED ASSETS, net of accumulated depreciation of $2,983,007 and $2,222,776
as of December 31, 2007 and 2006, respectively 6,320 859,551
INTANGIBLE ASSETS 1,820,300 5,270,141
GOODWILL 87,978 87,978
OTHER NON-CURRENT ASSETS 117,700 117,818
____________ ____________
Total assets $ 2,570,341 $ 7,040,579
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 106,394 $ 256,908
Accrued expenses 512,981 608,428
Current portion of notes payable 42,613 104,473
Current portion of notes payable, related parties 400,000 480,000
Line of credit, related parties 606,582 510,629
Current portion of capital lease - 19,775
____________ ____________
Total current liabilities 1,668,570 1,980,213
NOTES PAYABLE, RELATED PARTY - 360,000
NOTES PAYABLE, LONG TERM - 42,613
LONG-TERM PORTION OF CAPITAL LEASE - 63,849
____________ ____________
Total liabilities 1,668,570 2,446,675
COMMITMENTS & CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock: $.01 par value; authorized 10,000,000 shares;
issued and outstanding: 54,000 and 58,500 shares at
December 31, 2007 and 2006, respectively 540 585
Common stock: $.0005 par value; authorized 100,000,000 shares;
issued and outstanding: 35,286,449 and 33,951,698 shares
at December 31, 2007 and 2006, respectively 17,643 16,976
Common stock subscribed 100,064 100,064
Additional paid-in capital 19,544,354 19,281,810
Accumulated deficit (18,760,830) (14,805,531)
____________ ____________
Total stockholders' equity 901,771 4,593,904
____________ ____________
Total liabilities and
stockholders' equity $ 2 ,570,341 $ 7,040,579
============ ============
See Accompanying Notes to Consolidated Financial Statements.
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25
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
December 31, December 31,
2007 2006
____________ ____________
Revenues:
Merchant services revenues $ 8,304,759 $ 9,760,028
Equipment sales 954,761 1,162,582
Less: sales returns and allowances (36,861) (156,784)
____________ ____________
Net revenue 9,222,659 10,765,826
Cost of revenue:
Commissions 1,005,914 1,245,800
Cost of sales 4,720,855 5,346,343
Cost of sales - equipment 288,175 565,260
____________ ____________
Cost of revenue 6,014,944 7,157,403
____________ ____________
Gross profit 3,207,715 3,608,423
____________ ____________
Operating, general, and administrative expenses:
General, administrative and selling expenses 2,540,923 5,286,889
Restructuring charges - 207,335
Depreciation 781,931 1,021,246
Impairment of merchant portfolios 3,649,711 -
____________ ____________
Total operating, general, and
administrative expenses 6,972,565 6,515,470
____________ ____________
Net operating loss (3,764,850) (2,907,047)
Non-operating income (expense):
Interest income 559 644
Interest expense (130,858) (131,855)
Legal settlement (8,451) -
Loss on lease settlement (51,699) -
____________ ____________
Total non-operating(loss) (190,449) (131,191)
____________ ____________
Net loss before discontinued operations (3,955,299) (3,038,238)
Discontinued operations:
Loss from operations of discontinued segment
(including loss on disposal of $543,069) - (516,993)
____________ ____________
Net loss before preferred dividends (3,955,299) (3,555,231)
Dividends paid on preferred shares - 199,844
____________ ____________
Net loss allocable to common shareholders $ (3,955,299) $ (3,755,075)
============ ============
26
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INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
Years ended
December 31, December 31,
2007 2006
____________ ____________
Earnings per share from continuing operations $ (0.11) $ (0.10)
============ ============
Earnings per share from discontinued operations $ - $ (0.02)
============ ============
Earnings per share $ (0.11) $ (0.12)
============ ============
Average number of shares
of common stock outstanding-Basic and Diluted 34,748,752 30,916,668
============ ============
Dividends Per Share $ - $ 3.42
============ ============
See Accompanying Notes to Consolidated Financial Statements.
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27
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common or
Preferred Stock Common Stock Additional Preferred
_______________ ____________________ Paid-In Stock Accumulated
Shares Amount Shares Amount Capital Subscribed Deficit Total
______ ______ __________ _______ ___________ __________ ____________ ___________
Balance, December 31,
2005 62,000 $ 620 29,337,392 $14,669 $17,987,902 $ - $(11,050,456) $ 6,952,735
Common stock subscribed 100,064 100,064
Preferred stock dividend (199,844) (199,844)
Preferred stock dividend
paid via common stock 1,450,973 725 233,347 234,072
Legal settlement 80,000 40 21,560 21,600
Common stock sold at
$0.10 per share 2,150,000 1,075 213,925 215,000
Stock based compensation 825,508 825,508
Conversion of preferred
shares to common shares (3,500) (35) 933,333 467 (432) -
Net loss, December 31, 2006 (3,555,231) (3,555,231)
______ ______ __________ _______ ___________ __________ ____________ ___________
Balance, December 31,
2006 58,500 585 33,951,698 16,976 19,281,810 100,064 (14,805,531) 4,593,904
______ ______ __________ _______ ___________ __________ ____________ ___________
Stock based compensation 240,124 240,124
Conversion of preferred
Shares to common shares (4,500) (45) 1,200,000 600 (555) -
Anti-dilution clause of 2003
common stock financing 134,751 67 22,975 23,042
Net Loss, December 31, 2007 (3,955,299) (3,955,299)
______ ______ __________ _______ ___________ __________ ____________ ___________
Balance, December 31,
2007 54,000 $ 540 35,286,449 $17,643 $19,544,354 $ 100,064 $(18,760,830) $ 901,771
====== ====== ========== ======= =========== ========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
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28
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
December 31, December 31,
2007 2006
____________ ____________
Cash Flows From
Operating Activities:
Net loss $(3,955,299) $(3,555,231)
Loss on disposal - 543,069
Restructuring charges - 207,335
Loss on lease settlement 51,699 -
Depreciation 781,931 1,021,246
Allowance for doubtful accounts (5,169) 248,864
Common stock subscribed for salaries - 43,064
Stock issued for consulting fees - 21,600
Stock issued for anti-dilution clause 23,042 -
Stock award compensation 240,124 825,508
Impairment of merchant portfolios 3,649,711 -
Other non-cash items, net - 30,269
Non-cash items due to
discontinued operations - 26,623
Adjustments to reconcile net loss to cash
used in operating activities:
Changes in assets and liabilities
Decrease in accounts receivable 115,816 158,500
Increase in inventory 663,012 383,753
Increase in other receivables 104,215 (259,348)
Decrease in prepaid expenses - 343,848
(Increase)decrease in other non-current assets (435) 5,810
Decrease in accounts payable (214,536) (120,378)
Decrease in accrued expenses (95,449) (66,793)
___________ ___________
Net cash provided by (used in)
operating activities 1,358,662 (142,262)
___________ ___________
Cash Flows From Investing Activities:
Acquisitions, net of attrition (199,871) (483,089)
Purchase of equipment - (35,310)
Proceeds from the sale of discontinued segment - 701,443
Issuance of notes receivable (50,000) (15,000)
Payments received toward notes receivable 9,281 -
___________ ___________
Net cash (used in) provided
by investing activities (240,590) 168,044
___________ ___________
29
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INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years ended
December 31, December 31,
2007 2006
____________ ____________
Cash Flows From Financing Activities:
Related party notes payable, net - (76,333)
Proceeds from notes payable 70,000 -
Proceeds from line of credit, related party 626,000 444,000
Non-cash advancements from line of
credit, related party 83,653 29,441
Payments on capital lease - (9,376)
Payments on notes payable, related party (440,000) (200,000)
Payments on notes payable (174,473) (651,436)
Payments on line of credit, related party (1,314,631) (367,590)
Proceeds from sale of common stock - 215,000
___________ ___________
Net cash (used in) provided by
financing activities (1,149,451) (616,294)
___________ ___________
Net decrease in cash (31,379) (590,512)
Cash, beginning of period 157,528 748,040
___________ ___________
Cash, end of period $ 126,149 $ 157,528
=========== ===========
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 91,936 $ 113,526
Cash paid for income taxes $ - $ -
Non-cash financing and investing activities:
Notes payable reclassified from accounts payable $ - $ 291,589
Capital lease, accounting software $ - $ 93,000
Merchant portfolios purchased through common
stock subscription $ - $ 57,000
Merchant portfolios purchased through related-
party notes payable $ - $ 1,040,000
Payment of accrued preferred stock dividend with
common stock; accrual December 2005 -
June 2006 $ - $ 234,073
Abandonment of fixtures due to relocation $ - $ 5,131
Preferred share dividends paid via common stock $ - $ 199,844
Preferred share conversions to common stock -
see Shareholder's Equity $ - $ -
Increase in inventory due to direct payment from
the related party line of credit $ 700,931 $ 404,778
Reclassification of capital lease to accounts payable
due to settlement agreement $ 64,023 $ -
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30
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND ORGANIZATION
International Card Establishment, Inc. (the "Company"), a Nevada corporation, is
a provider of diversified products and services to the electronic transaction
processing industry, offering merchant accounts for the acceptance and
processing of credit and debit cards, as well as a proprietary "smart card"
based gift and loyalty program. The Company's Merchant Card Services division
establishes "merchant accounts" for businesses that enable those businesses to
accept credit cards, debit cards, and other forms of electronic payments from
their customers; supplies the necessary card readers and other point-of-sale
transaction systems; facilitates processing for the accounts; and, provides
e-commerce solutions. Through its NEOS Subsidiary the Company also markets a
proprietary "Smart Card"-based system that enables merchants to economically
offer store-branded gift and loyalty cards - one of the fastest growing product
categories in the industry.
As used in these Notes to the Consolidated Financial Statements, the terms the
"Company", "we", "us", "our" and similar terms refer to International Card
Establishment, Inc. and, unless the context indicates otherwise its consolidated
subsidiaries. The Company's subsidiaries include NEOS Merchant Services
("NEOS"), a Nevada corporation, which provides smart card loyalty programs in an
integrated vertical system for its customers, as well as other electronic
payment services (merchant services); International Card Establishment ("ICE"),
which provides electronic payment services (merchant services); and INetEvents,
Inc. ("INET"), a Delaware Corporation, which has been dormant since 2005.
The Company's subsidiary, GlobalTech Leasing ("GLT"), a California corporation,
which provides lease funding for equipment supplied by the Company to its
customers, as well as numerous other unrelated merchant service providers, was
sold in 2006. GTL comprised the Company's entire Leasing Services segment of the
Company.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ESTIMATES
The preparation of financial statements in conformity with 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.
CASH
For the Statements of Cash Flows, all highly liquid investments with maturity of
three months or less are considered to be cash equivalents. There were no cash
equivalents as of December 31, 2007 and 2006.
CONCENTRATIONS
The Company maintains cash balances at several highly-rated financial
institutions in California. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31,
2007 and 2006 the Company had one account in excess of the $100,000 insured
amount.
Due to the number of customers that we process credit card transactions for we
are not dependant on a limited number of customers for the generation of
revenues.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company estimates its accounts receivable risks and provides allowances for
doubtful accounts accordingly. The Company believes that its credit risk for
accounts receivable is limited because of its large number of customers and the
relatively small account balances for most of its customers. Also, the Company's
customers are dispersed across different business and geographic areas. The
Company evaluates the adequacy of the allowance for doubtful accounts on a
periodic basis. The evaluation includes historical loss experience, length of
time receivables are past due, adverse situations that may affect a customer's
ability to repay and prevailing economic conditions. The Company makes
adjustments to its allowance for doubtful accounts if the evaluation of
allowance requirements differs from the actual aggregate reserve. This
evaluation is inherently subjective and estimates may be revised as more
information becomes available.
31
INVENTORY
Inventories are stated at the lower of cost or market. Cost is determined using
the first in, first out method. The Company's inventories consist primarily of
electronic merchant processing machines, gift and loyalty cards, and their
corresponding printing supplies.
FIXED ASSETS
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided for in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on a straight-line basis. Leased
assets qualifying for capital lease treatment have been included in Fixed Assets
and related Accumulated Depreciation accounts in these financial statements.
Leased assets consist of laptops, which are depreciated in accordance with the
Company's policy.
Estimated service lives of property and equipment are as follows:
Furniture and fixtures 3 years
Equipment and machinery 3 - 5 years
Software 5 years
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INCOME TAXES
Income taxes are provided for using the liability method of accounting in
accordance with SFAS No. 109 "Accounting for Income Taxes," and clarified by FIN
48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109." A deferred tax asset or liability is recorded for all
temporary differences between financial and tax reporting. Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws and rates on the
date of enactment.
During the year ended December 31, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), which supplements SFAS No. 109,
"Accounting for Income Taxes," by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
Interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained based solely on its technical
merits as of the reporting date. The more-likely-than-not threshold represents a
positive assertion by management that a company is entitled to the economic
benefits of a tax position, If a tax position is not considered
more-likely-than-not to be sustained based solely on its technical merits. No
benefits of the tax position are to be recognized. Moreover, the
more-likely-than-not threshold must continue to be met in each reporting period
to support continued recognition of a benefit. With the adoption of FIN 48,
companies are required to adjust their financial statements to reflect only
those tax positions that are more-likely-than-not to be sustained. Any necessary
adjustment would be recorded directly to retained earnings and reported as a
change in accounting principle.
FAIR VALUE
The carrying amounts reflected in the consolidated balance sheets for cash,
accounts receivables, net, accounts payable, and accrued expenses approximate
the respective fair values due to the short maturities of these items. The
Company does not hold any investments that are available-for-sale.
GOODWILL AND INTANGIBLES
Goodwill represents the excess of purchase price over tangible and other
intangible assets acquired less liabilities assumed arising from business
acquisitions. In 2007 and 2006, the Company's annual goodwill impairment test
did not identify an impairment of goodwill.
The Company capitalizes intangible assets such as the purchase of merchant and
gift loyalty accounts from portfolio acquisitions (i.e. the right to receive
future cash flows related to transactions of these applicable merchants) (See
Note 5). At least annually, the Company performs a census of merchant accounts
received in such acquisitions, analyzing the expected cash flows, and adjusts
the intangible asset accordingly. In 2006, the Company purchased merchant and
gift card portfolios in the amount of $1,825,177 and $25,720 respectively, that
were not related to a business combination or acquisition; at December 31, 2006
the Company recognized direct write offs of $229,228. At December 31, 2007, the
Company recognized an impairment of $3,649,711 in merchant and gift card
portfolios by writing them down to their appraised value.
DERIVATIVES
The Company occasionally issues financial instruments that contain an embedded
instrument. At inception, the Company assesses whether the economic
characteristics of the embedded derivative instrument are clearly and closely
related to the economic characteristics of the financial instrument (host
contract), whether the financial instrument that embodies both the embedded
32
derivative instrument and the host contract is currently measured at fair value
with changes in fair value reported in earnings, and whether a separate
instrument with the same terms as the embedded instrument would meet the
definition of a derivative instrument.
If the embedded derivative instrument is determined not to be clearly and
closely related to the host contract, is not currently measured at fair value
with changes in fair value reported in earnings, and the embedded derivative
instrument would qualify as a derivative instrument, the embedded derivative
instrument is recorded apart from the host contract and carried at fair value
with changes recorded in current-period earnings. As of December 31, 2007 and
2006 we determined that none of our embedded financial instruments qualified for
this treatment and that the embedded instruments qualified for the derivative
accounting exemption as they are both indexed to our stock and classified in the
stockholders' equity section of our consolidated balance sheets. We have
accounted for any calculated beneficial conversion feature as either interest
expense or dividends paid, based on the nature of the host contract.
REVENUES
The Company provides merchant services, customer support for merchants and other
Merchant Services providers, and sells merchant point-of-sale and credit card
processing equipment. Revenue is recognized as customer services are provided.
The Company provides merchant services to customers for the acceptance and
processing of electronic payments. Credit card processing fees are recognized as
incurred. Sales and cost of sales of equipment are recognized when the equipment
is provided and the customer accepts responsibility for the payment of the
equipment.
ADVERTISING
Advertising costs are charged to operations as incurred. Advertising costs for
the years ended December 31, 2007 and 2006 were $58,187 and $551, respectively.
RECLASSIFICATION
Certain reclassifications, which have no effect on net loss, have been made in
the prior period financial statements to conform to the current presentation.
RESTATEMENT
We have restated our Statement of Cash Flows for the Years Ended December 31,
2007 and 2006. During both of these periods, our related party line of credit
extended credit to us in three forms: 1) cash proceeds, 2) direct payment of
inventory items and 3) direct payment of expendable items (e.g. office
supplies). Upon further review of the transactions in this account, we have
restated our numbers in association with these transactions, and the cash
payments toward the line of credit. Overall net income and total cash did not
change, nor did this restatement affect our earnings per share.
Specific 2007 lines items that are affected by this change:
AS ORIGINALLY FILED AMENDED
FOR THE YEAR ENDED FOR THE YEAR ENDED
12/31/2007 12/31/2007 DIFFERENCE
_________________________________________________________________________________________________________________
Cash Flows From
OPERATING ACTIVITIES
Inventories (37,919) 663,012 700,931
____________________________________________________
NET CASH PROVIDED BY OPERATING ACTIVITIES 657,731 1,358,662 700,931
FINANCING ACTIVITIES
Proceeds from line of credit, related party 754,396 626,000 (128,396)
Noncash advances from line of credit, related party 739,565 83,653 (655,912)
Payment on line of credit, related party (1,398,008) (1,314,631) 83,377
____________________________________________________
NET CASH (USED IN) FINANCING ACTIVITIES (448,520) (1,149,451) (700,931)
|
33
Specific 2006 lines items that are affected by this change:
AS ORIGINALLY FILED AMENDED
FOR THE YEAR ENDED FOR THE YEAR ENDED
12/31/2006 12/31/2006 DIFFERENCE
_________________________________________________________________________________________________________________
Cash Flows From
OPERATING ACTIVITIES
Inventories (21,025) 383,753 (404,778)
____________________________________________________
NET CASH (USED IN) OPERATING ACTIVITIES (547,040) (142,262) (404,778)
FINANCING ACTIVITIES
Proceeds from line of credit, related party 447,600 444,000 3,600
Noncash advances from line of credit, related party 533,221 29,441 503,780
Payment on line of credit, related party (470,192) (367,590) (102,602)
____________________________________________________
NET CASH (USED IN) FINANCING ACTIVITIES (211,516) (616,294) 404,778
|
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 provides guidance for using fair value to measure assets and
liabilities. SFAS 157 addresses the requests from investors for expanded
disclosure about the extent to which companies measure assets and liabilities at
fair value, the information used to measure fair value and the effect of fair
value measurements on earnings. SFAS 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value, and does
not expand the use of fair value in any new circumstances. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and will be adopted by the Company in the first quarter of fiscal year
2008. We do not expect that the adoption of SFAS 157 will have a material impact
on our financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS--AN AMENDMENT OF ARB NO. 51" ("SFAS No. 160").
SFAS 160 requires companies with noncontrolling interests to disclose such
interests clearly as a portion of equity but separate from the parent's equity.
The noncontrolling interest's portion of net income must also be clearly
presented on the Income Statement. SFAS 160 is effective for financial
statements issued for fiscals years beginning after December 15, 2008 and will
be adopted by the Company in the first quarter of fiscal year 2009. We do not
expect that the adoption of SFAS 160 will have a material impact on our
financial condition or results of operation.
In December 2007, the FASB issued SFAS No. 141 (R), "BUSINESS COMBINATIONS
(REVISED 2007)" ("SFAS No. 141 (R)"). SFAS 141 (R) applies the acquisition
method of accounting for business combinations established in SFAS 141 to all
acquisitions where the acquirer gains a controlling interest, regardless of
whether consideration was exchanged. Consistent with SFAS 141, SFAS 141 (R)
requires the acquirer to fair value the assets and liabilities of the acquiree
and record goodwill on bargain purchases, with main difference the application
to all acquisitions where control is achieved. SFAS 141 (R) is effective for
financial statements issued for fiscal years beginning after December 15, 2008
and will be adopted by the Company in the first quarter of fiscal year 2009. We
do not expect that the adoption of SFAS 141 (R) will have a material impact on
our financial condition or results of operation.
NOTE 2. NOTE RECEIVABLE
In April 2007, we issued a note receivable for $50,000 to an independent third
party. This receivable bears no interest and is convertible to a maximum of 10%
of the third party's outstanding common stock in the event of default. Repayment
was expected to begin in October of 2007; however, in September, we have fully
allowed for the entire balance of this note. As of December 31, 2007, we do not
expect to collect any cash from this loan or to convert the debt to common stock
because of the dissolution of all business arrangements with the holder of the
note.
34
NOTE 3. DISCONTINUED OPERATIONS
On May 10, 2006, the Company entered in an Agreement and Plan of Merger to sell
its subsidiary GlobalTech Leasing, Inc. ("GTL") to an independent third party
for $2,500,000 consisting of $808,943 in cash and $1,691,057 of debt assumption.
The assets sold consisted primarily of cash, property and equipment. Subsequent
to the disposition of GTL, management determined that approximately $158,000 of
the $2,500,000 was not recoverable from the acquirer, resulting in a total
$701,443 received in cash and $1,640,625 in debt assumption. We have increased
our loss from discontinued operations by this amount in 2006.
GTL comprised the Company's entire Leasing Services segment of the Company.
Leasing income subsequent to the sale totaled $256,384 through December 31,
2006.
The Loss on Discontinued Operations includes $26,076 of earnings in 2006 through
the date of disposal. GTL's sales through May 9, 2006. Loss on the disposal
totaled $543,069.
The resulting income from operations of this discontinued segment, adjusted for
the total loss on the disposal, are pre-tax as the Company has reoccurring net
losses and determined that there would not be a tax effect.
NOTE 4. FIXED ASSETS
Fixed assets and accumulated depreciation consists of the following:
Years ended
December 31, December 31,
2007 2006
____________ _____________
Furniture and fixtures $ 14,750 $ 14,750
Equipment and machinery 138,257 231,257
Software 2,836,320 2,836,320
____________ _____________
Subtotal 2,989,327 3,082,327
Accumulated Depreciation (2,983,007) (2,222,776)
____________ _____________
$ 6,320 $ 859,551
============ =============
|
In the second quarter of 2006, the Company entered into a lease agreement for a
new accounting system for $93,000. The lease commenced February 2006 and was
terminated March 31, 2007. We had successfully negotiated a settlement to cancel
this lease. The settlement agreement calls for payments of $10,000 over 7 months
beginning May 31, 2007; all scheduled payments have been made as of December 31,
2007. We have recorded the event as of March 31, 2007 including the resulting
loss of $51,699, representing the carrying value of the asset.
35
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
Goodwill and Intangible assets were purchased with the acquisition NEOS Merchant
Solutions, Inc. The purchase price allocation at fair market values included
values assigned to intangible assets and a portion allocated to goodwill. The
Company has determined that the intangibles purchased have an indefinite useful
life except as noted below. The provisions of SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS", require the completion of an annual impairment test with any
impairment recognized in current earnings.
The Company commissioned an outside appraisal to determine if any impairment in
intangibles or goodwill for both 2007 and 2006 exists. We have determined that
at present the NEOS tradename has an indefinite life, which has been included in
the Company's annual impairment analysis. In 2007 and 2006, the Company
completed an impairment analysis that resulted in no impairment of goodwill. We
have recognized an impairment of $3,649,711 in our merchant and gift card
portfolios by writing them down to their appraised value.
The Company's intangible assets consisted of the following:
December 31,
_____________________________
2007 2006
___________ ___________
Merchant portfolios $ 1,385,300 $ 4,809,421
Tradename 435,000 435,000
Gift card portfolios - 25,720
___________ ___________
$ 1,820,300 $ 5,270,141
=========== ===========
Goodwill $ 87,978 $ 87,978
=========== ===========
|
Acquisitions, net of attrition, were $199,870 and $483,089, respectively.
36
NOTE 6. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
2007 2006
____________ ____________
Accrued payroll $ 298,528 $ 249,688
Customer deposits 40,589 43,215
Accrued expenses, other 125,189 51,823
Accrued interest 7,977 18,328
Sales taxes payable 2,110 23,454
Reserve for chargebacks 38,588 221,920
_________ _________
$ 512,981 $ 608,428
========= =========
|
NOTE 7. NOTES AND LEASES PAYABLE
Notes and leases payable consist of the following:
December 31, December 31,
2007 2006
____________ ____________
Notes payable, capital lease obligation
to acquire computer equipment $ - $ 2,202
Notes payable, at 6% interest, due May 2008 42,613 102,271
Lease payable, capital lease obligation
to acquire accounting system - 19,775
____________ ____________
Current portion of notes and leases payable $ 42,613 $ 124,248
============ ============
Notes payable, at 6% interest, due May 2008 $ - $ 42,613
Lease payable, capital lease obligation
to acquire accounting system 63,849
____________ ____________
Noncurrent portion of notes and leases payable $ - $ 106,462
============ ============
|
As previously disclosed, in the second quarter of 2006, the Company entered into
a lease agreement for a new accounting system for $93,000. The lease commenced
February 2006 and was terminated March 31, 2007. We had successfully negotiated
a settlement to cancel this lease. The settlement agreement calls for payments
of $10,000 over 7 months beginning May 31, 2007; all scheduled payments have
been made as of December 31, 2007. We have recorded the event as of March 31,
2007 including the resulting loss of $51,699, representing the carrying value of
the asset.
The Company is required to make the following principal payments on its total
debt (including related party debt see Note 12):
Year Ended December 31, Principal Payments
__________________
2008 1,047,890
2009 -
2010 -
2011 -
Thereafter -
____________
Total $ 1,047,890
============
|
37
NOTE 8. RESTRUCTURING CHARGES
Due to the Company's continued losses, we critically reviewed all locations and
closed non-profitable locations where appropriate in 2006. Due to this we have
reported a Restructuring Charge in our in Statement of Operations of $207,335
for the year ending December 31, 2006.
The Company consolidated locations and moved the majority of operations to its
Camarillo location, which was completed in the third quarter of 2006.
All items identifiable for this restructuring at December 31, 2006 have been
expensed and consist of:
Payroll and benefits $ 80,031
Office closure and early lease termination 85,156
Transitional staff housing and other 42,148
_________
Total $ 207,335
=========
|
NOTE 9. STOCKHOLDERS' EQUITY
The authorized common stock of the Company consists of 100,000,000 shares of
common shares with par value of $0.0005 and 10,000,000 shares of preferred stock
with a par value of $0.01.
In 2006, the Company has the following common stock transactions:
o Issued $100,064 of common stock subscriptions, $43,064 were for
accrued salaries.
o Issued 1,450,973 of common stock for preferred share dividends
amounting to $234,072.
o Issued 80,000 of common stock relating to a legal settlement amounting
to $21,600.
o Issued 2,150,000 of common stock for a cash offering; shares sold at
$0.10 a share for a total of $215,000.
We did not issue or authorize for issuance any shares in the first quarter of
2007. The only activity in our equity section relates to the expensing of stock
options granted as of December 31, 2006, amounting to $240,124.
In 2007, the Company has the following common stock transactions:
o Issued 1,200,000 shares for the conversion of 4,500 preferred shares.
o Issued 134,751 shares per a 2003 agreement's antidilution clause for a
value of $23,042.
As of December 31, 2007, we have instructed our SEC counsel to finalize all
necessary paperwork for the issuance of shares comprising the remaining $100,064
in our common stock subscription.
PREFERRED STOCK
Collectively, the Series A Convertible Preferred Stock contain the following
features:
o Dividends: Each share of Series A Preferred Stock pays a mandatory monthly
dividend, at an annual rate equal to the product of multiplying (i) $100.00
per share, by (ii) six and one-half percent (6.5%). Dividends are payable
monthly in arrears on the last day of each month, in cash, and prorated for
any partial month periods. From and after the Effective Date of the
Registration Statement, no further MANDATORY DIVIDENDS shall be payable on
the Series A Preferred Stock. There have been no preferred stock dividends
declared or paid since that date.
o Liquidation Preferences: Series A Preferred Stock is entitled to be paid
first out of the assets of the Corporation available for distribution to
shareholders, whether such assets are capital, surplus or earnings, an
amount equal to the Series A Purchase Price per share of Series A Preferred
Stock held (as adjusted for any stock splits, stock dividends or
recapitalizations of the Series A Preferred Stock) and any declared but
unpaid dividends on such share, before any payment is made to the holders
of the common stock, or any other stock of the Corporation ranking junior
to the Series A Preferred Stock with regard to any distribution of assets
upon liquidation, dissolution or winding up of the Corporation.
38
o Voting Rights: None
o Conversion Rights: Series A Preferred Stock may, at the option of the
holder, be converted at any time or from time to time into fully paid and
non-assessable shares of common stock at the conversion rate in effect at
the time of conversion, provided, that a holder of Series A Preferred Stock
at any given time convert only up to that number of shares of Series A
Preferred Stock so that, upon conversion, the aggregate beneficial
ownership of the Corporation's common stock is not more than 9.99% of the
Corporation's common stock then outstanding. The "Conversion Price" per
share for the Series A Preferred Stock shall be equal to Eighty-Five
percent (85%) of the Market Price, rounded to the nearest penny; in no
event shall the Conversion Price be less than $0.375 per share (the "Floor
Price") or exceed $0.47 (the "Ceiling Price").
o Reservation of Stock Issuable Upon Conversion: The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares
of common stock, solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock 15,000,000 shares of common stock.
As disclosed above in Note 6, the Company accrued for Preferred Stock Dividends
$ 0 as of December 31, 2007 and 2006, respectively. In the second quarter of
2006, the Company amended the preferred share agreements above with the
shareholders to remove the dividend reference. Consideration for all dividends
accrued as of June 22, 2006 were paid via issued of 1,450,973 in the Company's
common stock. Total dividends accrued and paid (cash and stock issuance),
inclusive of the beneficial conversion accounted for as preferred dividends,
totaled $0 and $199,844 as of December 31, 2007 and 2006, respectively.
The Company has converted 4,500 and 3,500 shares of preferred stock to 1,200,000
and 933,333 shares of common stock in 2007 and 2006, respectively.
NET LOSS PER COMMON SHARE
Net loss per share is calculated in accordance with SFAS No. 128, "EARNINGS PER
SHARE". The weighted-average number of common shares outstanding during each
period is used to compute basic loss per share. Diluted loss per share is
computed using the weighted averaged number of shares and dilutive potential
common shares outstanding. Potentially dilutive common shares consist of
employee stock options, warrants, and restricted stock, and are excluded from
the diluted earnings per share computation in periods where the Company has
incurred a net loss.
NOTE 10. SHARE OPTION PLAN
The Company's 2003 Stock Option Plan (as amended) for Directors, Executive
Officers, and Employees of and Key Consultants to the Company (the "Plan"),
which is shareholder approved, permits the grant of share options and shares to
its employees for up to 5,000,000 shares of common stock. In addition, in 2007
Company has issued 3,074,000 options under a non-statutory stock option plan.
The Company believes that such awards better align the interests of its
employees and key consultants with those of its shareholders. All option awards
are generally granted with an exercise price equal to market price of the
Company stock at the date of grant, unless otherwise defined in the option
agreement with the grantee.
The fair value of all option awards is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table. Expected volatilities are based on volatilities from the
Company's traded common stock since the acquisition of INetEvents, Inc. in July
2003. The expected term of options granted is estimated at half of the
contractual term as noted in the individual option agreements and represents the
period of time that options granted are expected to be outstanding. The
risk-free rate for the periods within the contractual life of the option is
based on the U.S. Treasury bond rate in effect at the time of grant for bonds
with maturity dates at the estimated term of the options.
2007 2006
Expected volatility 212.88% 183.39%-189.44%
Weighted-average volatility 70.96% 45.92%
Expected dividends 0 0
Expected term (in years) 4 2-4.5
Risk-free rate 4.013% 4.625%-4.875%
|
39
A summary of option activity as of December 31, 2007 and 2006, respectively, and
changes during the periods then ended is presented below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term Value
___________________________________________________________________________________________
Outstanding at December 31, 2005 - $ -
Granted 4,370,000 $0.22
Exercised - $ -
Forfeited or expired (125,000) $0.20)
______________________________________________________
Outstanding at December 31, 2006 4,245,000 $0.22 2.2 $ 835,684
______________________________________________________
Granted 3,185,000 $0.15
Exercised - -
Forfeited or expired - -
______________________________________________________
Outstanding at December 31, 2007 7,430,000 $0.19 3.5 $1,079,811
=======================================================
Exercisable at December 31, 2007 7,245,000 $0.19 3.5 $1,065,631
=======================================================
|
A summary of the status of the Company's nonvested shares as of December 31,
2007 and 2006, and changes during the periods ended December 31, 2007 and 2006,
is presented below:
Weighted-Average
Grant-Date
Nonvested Shares Shares Fair Value
___________________________________________________________________
Nonvested at December 31, 2005 - -
Granted 85,000 $ 11,448
Vested - -
Forfeited - -
Nonvested at December 31, 2006 85,000 11,448
Granted 3,100,000 244,127
Vested (3,085,000) (241,395)
Forfeited - -
Non-vested at December 31, 2007 185,000 $ 14,180
========== ========
|
40
NOTE 11. INCOME TAXES
The consolidated provision for federal and state income taxes for the years
ended December 31, 2007 and 2006 are as follows:
2007 2006
_________ __________
Current - State $ 1,000 $ 1,000
Current - Federal - -
Deferred - State (121,000) (171,000)
Deferred - Federal (539,000) (978,000)
Increase in valuation allowance 659,000 1,148,000
_________ __________
Income tax expense (benefit) $ - $ -
========= ==========
|
There were no amounts paid for federal income taxes during the years ended
December 31, 2007 and 2006.
The income tax provision differs from the expense that would result from
applying statutory tax rates to income before taxes because of certain expenses
that are not deductible for tax purposes and the effect of the valuation
allowance.
As of December 31, 2007, the Company had federal net operating loss
carryforwards of $11,763,000 that can be deducted against future taxable income.
These tax carryforward amounts expire as follows:
December 31, 2022 $ 16,000
December 31, 2023 631,000
December 31, 2024 3,400,000
December 31, 2025 3,926,000
December 31, 2026 2,962,000
December 31, 2027 828,000
___________
Total $11,763,000
===========
|
However, such carryforwards are not available to offset federal alternative
taxable income. Internal Revenue Code Section 382 imposes limitations on our
ability to utilize net operating losses if we experience an ownership change and
for the NOL's acquired in the acquisitions of subsidiaries. An ownership change
may result from transactions increasing the ownership of 5% or greater
stockholders in the stock of the corporation by more than 50 percentage points
over a three-year period. The value of the stock at the time of an ownership
change is multiplied by the applicable long-term tax exempt interest rate to
calculate the annual limitation. Any unused annual limitation may be carried
over to later years.
The state operating losses will expire between 2012 and 2017 if not utilized.
The Company accounts for income taxes in accordance with Statement of SFAS No.
109 - Accounting for Income Tax and FASB Interpretation No. 48 - Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No.109, whereby
deferred taxes are provided on temporary differences arising from assets and
liabilities whose bases are different for financial reporting and income tax
purposes. Deferred taxes are attributable to the effects of the following items:
o Differences in calculating depreciation on property, plant and
equipment
o Differences in calculating amortization and/or impairments on
intangible assets
o Allowance for bad debt
o Tax loss carryforwards
41
The Company's total deferred tax assets and deferred tax liabilities at December
31, 2007 and 2006 are as follows:
2007 2006
___________ ___________
Deferred tax asset - current $ - $ -
Deferred tax asset - non current 5,156,000 4,618,000
___________ ___________
Total deferred tax asset 5,156,000 4,618,000
___________ ___________
Deferred tax liability - current - -
Deferred tax liability - non current (262,000) (384,000)
___________ ___________
Total deferred tax liability (262,000) (384,000)
___________ ___________
Current deferred tax asset (liability) - -
Non current deferred tax asset (liability) 4,894,000 4,234,000
___________ ___________
Net deferred tax asset (liability) $ 4,894,000 $ 4,234,000
___________ ___________
Valuation allowance (4,894,000) (4,234,000)
___________ ___________
Net deferred tax asset (liability) $ - $ -
=========== ===========
|
SFAS No. 109 - Accounting for Income Tax and FASB Interpretation No. 48 -
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement
No.109, specify that deferred tax assets are to be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized. The valuation allowance increased $660,000 and
$1,148,000 during the years ended December 31, 2007 and 2006, respectively,
based upon management's expectation of future taxable income. The Company will
continue to assess the valuation allowance and to the extent it is determined
that such allowance is no longer required, the tax benefit of the net deferred
tax asset will be recognized in the future.
Upon adoption of FIN 48 as of January 1, 2007, the Company had no gross
unrecognized tax benefits that, if recognized, would favorably affect the
effective income tax rate in future periods. The Company files income tax
returns in the United States federal jurisdiction and California state
jurisdiction. As of December 31, 2007 the Company has not filed federal or state
of California tax returns, and is working with their tax accountant to rectify
that situation as fast as practical. These U. S. federal and state income tax
returns are considered open tax years as of the date of these consolidated
financial statements. The Company has filed an extension for its 2007 corporate
tax return.
NOTE 12. RELATED PARTY TRANSACTIONS
On September 30, 2006, the Company entered into an agreement for a revolving
line of credit worth $1,000,000 with Worldwide Business Services Group to be
used primarily for working capital. The balance due on the line was $606,582 and
$510,629 as of December 31, 2007 and 2006, respectively. In the third quarter of
2006, the CEO of Worldwide Business Services Group became the Company's General
Manager. Due to this, we have reflected the outstanding line of credit as
related party.
Our Line of Credit with Worldwide Business Services Group matured on July 30,
2007. The Line of Credit was renewed for one year during the third quarter of
2007 and now matures on July 30, 2008.
Related party bonuses paid during the years ended December 31, 2007 and 2006
totaled $6,800 and $179,275, respectively, and are included in general and
administrative expenses.
During the year ended December 31, 2006, the Company also purchased merchant
portfolios from a related party for $1,040,000. Payments of $40,000 are required
for 26 months. This note contains interest of 6% per annum. This is our Notes
Payable, Related Party on our accompanying balance sheet and was $400,000 and
$480,000 as of December 31, 2007 and 2006, respectively. No portfolios from this
source were purchased in 2007.
42
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company's existing $500,000 line of credit, entered into in December 2005,
was extinguished in July 2006. In July 2006, the Company entered into another
line of credit agreement with the same vendor for $2,000,000. At the time of
extinguishment the Company had not drawn down on the line of credit and no
balance was outstanding. As of December 31, 2007 the Company has not drawn on
the line of credit.
The Company is engaged in various non-cancelable operating leases for office
facilities and equipment. Under the related lease agreements, the Company is
obligated to make monthly payments ranging from $159 to $3,725 with expiration
dates through January 2011.
Minimum future lease obligations for the five years immediately following the
balance sheet date are as follows:
2008 $ 71,242
2009 57,746
2010 11,239
2011 7,210
Thereafter -
________
Total future minimum lease commitments $147,438
========
|
In 2005, the Company was engaged in a operating lease for a sales office. Under
the term of the lease agreement, the Company is obligated to make minimum
monthly payments of $2,579 with an expiration date through August 2009. This
lease was terminated in 2006.
The company leases its facilities for a total of $5,877 per month. Our current
offices are located in Camarillo and Mission Viejo, California. Total lease
costs for the years ended December 31, 2007 and 2006 were $86,494 and $70,524,
respectively.
In 2007, ICE was served a subpoena by the receiver for a company seized by the
FTC. The receiver's counsel felt that ICE was not acting quickly enough on the
subpoena so they filed a motion to hold ICE in contempt. A payment of $8,451 was
made in 2007 in full settlement of the claims. This amount represents attorneys'
fees that the receiver incurred in filing that motion. There are no other fees
or costs the receiver is alleging is owed. There are no material legal
proceedings pending or, to our knowledge, threatened against us or any of our
subsidiaries.
43
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Pursuant to Rule 13a-15(b) under the Securities Exchange Act ("Exchange Act") of
1934, the Company carried out an evaluation with the participation of the
Company's management, including William Lopshire, the Company's Chief Executive
Officer ("CEO") and Candace Mills, the Company's Chief Financial Officer
("CFO"), of the effectiveness of the Company's disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the
year ended December 31, 2007. Based upon that evaluation, the Company's CEO and
CFO concluded that the Company's disclosure controls and procedures are not
effective to ensure that information required to be disclosed by the Company in
the reports that the Company files or submits under the Exchange Act, is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including the Company's CEO and CFO,
as appropriate, to allow timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We conducted an evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of December 31, 2007, to ensure that information
required to be disclosed by us in the reports filed or submitted by us under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities Exchange Commission's rules and forms,
including to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that as
of December 31, 2007, our disclosure controls and procedures were not effective
at the reasonable assurance level due to the material weaknesses described
below.
In light of the material weaknesses described below, we performed additional
analysis and other post-closing procedures to ensure our financial statements
were prepared in accordance with generally accepted accounting principles.
Accordingly, we believe that the consolidated financial statements included in
this report fairly present, in all material respects, our financial condition,
results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. Management has identified the following three
material weaknesses that have caused management to conclude that, as of December
31, 2007, our disclosure controls and procedures were not effective at the
reasonable assurance level:
1. Our financial reporting process did not entail detail enough for us to
separate out the major components of our related party line of credit.
To address these material weaknesses, management performed additional analyses
and other procedures to ensure that the financial statements included herein
fairly present, in all material respects, our financial position, results of
operations and cash flows for the periods presented.
REMEDIATION OF MATERIAL WEAKNESSES
To remediate the material weaknesses in our disclosure controls and procedures
identified above, we have adjusted our internal financial reporting processes to
ensure that detail is robust enough to identify the major components of our
related party line of credit for proper disclosure in our statement of cash
flows.
44
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in the Company's internal control over financial reporting have come
to management's attention during the Company's last fiscal quarter that have
materially affected, or are likely to materially affect, the Company's internal
control over financial reporting.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 20, 2009
INTERNATIONAL CARD ESTABLISHMENT, INC.
BY: /s/ WILLIAM LOPSHIRE
__________________________________
WILLIAM LOPSHIRE
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER),
SECRETARY AND DIRECTOR
BY: /s/ CANDACE MILLS
__________________________________
CANDACE MILLS
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
|
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ WILLAIM LOPSHIRE CHIEF EXECUTIVE OFFICER, May 20, 2009
_____________________ SECRETARY AND DIRECTOR
WILLAIM LOPSHIRE
/s/ CANDACE MILLS CHIEF FINANCIAL OFFICER May 20, 2009
_____________________
CANDACE MILLS
|
45
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