UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION FROM _______ TO ________.
COMMISSION FILE NUMBER 000-33129
INTERNATIONAL CARD ESTABLISHMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4581903
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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555 Airport Space Way, Suite A
Camarillo, CA 93010
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (866) 423-2491
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X[ No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 16, 2009, there were
35,873,703 outstanding shares of the Registrant's Common Stock, $.0005 par
value.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................4
Item 2. Management's Discussion and Analysis.................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........15
Item 4. Controls and Procedures..............................................15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................17
Item 1A. Risk Factors.........................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........17
Item 3. Defaults Upon Senior Securities......................................17
Item 4. Submission of Matters to a Vote of Security Holders..................17
Item 5. Other Information....................................................17
Item 6. Exhibits.............................................................17
SIGNATURES....................................................................18
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL CARD ESTABLISHMENT, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2009
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2009 2008
(UNAUDITED) (AUDITED)
____________ ____________
ASSETS
CURRENT ASSETS
Cash $ 109,863 $ 91,404
Accounts receivable, net of allowance of $28,009
and $50,178 at September 30, 2009 and December 31,
2008, respectively 15,891 22,572
Note receivable, net of allowance of $50,000 at
September 30, 2009 and December 31, 2008, respectively 88 88
Inventory 73,027 76,394
Other receivables 93,915 255,631
Prepaid assets 37,500 25,003
____________ ____________
Total current assets 330,284 471,092
____________ ____________
FIXED ASSETS, net of accumulated depreciation of $2,992,251
and $2,983,007 at September 30, 2009 and December 31, 2008,
respectively 27,215 -
INTANGIBLE ASSETS 1,419,971 1,579,378
GOODWILL 87,979 87,979
OTHER NON-CURRENT ASSETS 117,576 116,685
____________ ____________
Total assets $ 1,983,025 $ 2,255,134
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,427 $ 22,915
Accrued expenses 494,540 593,312
Due to FTS - Underpayment 83,545 -
Line of credit, related party 684,399 658,536
____________ ____________
Total current liabilities 1,288,911 1,274,763
COMMITMENTS & CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock; $0.01 par value; 10,000,000 shares
authorized, 54,000 shares issued and outstanding at
September 30, 2009, and December 31, 2008, respectively 540 540
Common stock; $0.0005 par value; 100,000,000 shares
authorized, 35,873,703 and 35,873,703 shares issued and
outstanding at September 30, 2009, and December 31, 2008,
respectively 17,937 17,937
Common stock subscribed 30,000 30,000
Additional paid-in capital 19,628,400 19,628,401
Accumulated deficit (18,982,763) (18,696,507)
____________ ____________
Total stockholders' equity 694,114 980,371
____________ ____________
Total liabilities and stockholders' equity $ 1,983,025 $ 2,255,134
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements.
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4
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
_______________________________ _______________________________
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2009 2008 2009 2008
_______________________________ _______________________________
Revenue:
Merchant services revenues $ 1,268,424 $ 1,688,444 $ 3,986,257 $ 5,266,420
Equipment sales 132,241 173,889 355,827 503,889
Less: sales returns and allowances (6,504) (7,052) (21,634) (28,114)
_______________________________ _______________________________
Net revenue 1,394,161 1,855,281 4,320,450 5,742,195
Cost of revenue:
Commissions 157,251 208,873 476,786 560,349
Cost of sales 677,962 947,154 2,155,290 3,002,590
Cost of sales - equipment 13,279 34,224 68,946 115,189
_______________________________ _______________________________
Cost of revenue 848,492 1,190,251 2,701,022 3,678,128
_______________________________ _______________________________
Gross profit 545,669 665,030 1,619,428 2,064,067
Operating, general and administrative expenses:
General, administrative and selling expenses 490,562 581,450 1,604,466 1,732,532
Depreciation 5,950 - 9,244 -
Merchant portfolio attrition expense 60,550 84,700 222,250 242,550
_______________________________ _______________________________
Total operating, general and administrative
expenses 557,062 666,150 1,835,960 1,975,082
Net operating gain (loss) (11,393) (1,120) (216,532) 88,985
_______________________________ _______________________________
Non-operating income (expense):
Interest income - 14 1 94
Interest (expense) (11,183) (16,331) (31,088) (56,800)
Other Expense - FTS - - (38,636) -
_______________________________ _______________________________
Total non-operating income (expense) (11,183) (16,317) (69,723) (56,706)
_______________________________ _______________________________
Net (loss) before provision for income taxes (22,576) (17,437) (286,255) 32,279
_______________________________ _______________________________
Provision for income taxes - - - -
Net income (loss) $ (22,576) $ (17,437) $ (286,255) $ 32,279
=============================== ===============================
Earnings per share - basic $ (0.00) $ 0.00 $ (0.01) $ 0.00
Earnings per share - dilutive $ (0.00) $ 0.00 $ (0.01) $ 0.00
Weighted average shares outstanding - basic 35,873,703 35,548,160 35,873,703 35,374,323
Weighted average shares outstanding - dilutive 35,873,703 35,548,160 35,873,703 36,077,572
See Accompanying Notes to Condensed Consolidated Financial Statements.
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INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
_________________________________
SEPTEMBER 30, SEPTEMBER 30,
2009 2008
_____________ _____________
Cash Flows from Operating Activities:
Net (loss) income $ (286,255) $ 32,279
Depreciation 9,244 -
Write off of cancelled merchant accounts 222,250 242,550
Allowance for doubtful accounts, other receivables and accrued interest
income, net of bad debt recoveries (22,168) (30,388)
Compensation for stock awards - 14,027
Write off of software consulting originally capitalized as fixed asset - 6,320
Adjustments to reconcile net (loss) income to cash provided by operating
activities:
Changes in assets and liabilities
Decrease in accounts receivable 28,849 35,523
Decrease in inventories 301,842 266,919
Decrease in other receivables 161,716 136,103
(Increase) in prepaid expenses (12,497) (37,501)
(Increase) decrease in other non-current assets (891) -
Increase in accounts payable 3,513 1,012
(Decrease) in accrued expenses (98,774) (83,496)
Increase in Due to FTS - Underpayment 83,543 8,776
_____________ _____________
Net cash provided by operating activities 390,372 592,124
_____________ _____________
Cash Flows from Investing Activities:
Acquisitions of merchant accounts, net of attrition (62,842) (72,487)
Purchase of property and equipment (36,459) -
Payments received toward notes receivable - 6,340
_____________ _____________
Net cash (used in) investing activities (99,301) (66,147)
_____________ _____________
Cash Flows from Financing Activities:
Payment on notes payable - (42,613)
Noncash advances from line of credit, related party 53,137 120,246
Payment on line of credit, related party (945,749) (858,264)
Proceeds from line of credit, related party 620,000 620,000
Payment on notes payable, related party - (400,000)
Proceeds from common stock subscribed - 250
_____________ _____________
Net cash (used in) financing activities (272,612) (560,381)
_____________ _____________
Net increase in cash 18,459 (34,404)
_____________ _____________
Cash, beginning of period 91,404 126,149
_____________ _____________
Cash, end of period $ 109,863 $ 91,745
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements.
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INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED
_________________________________
SEPTEMBER 30, SEPTEMBER 30,
2009 2008
_____________ _____________
SUPPLEMENT DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest $ 23,809 $ 51,338
Cash paid for income taxes $ - $ -
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Inventory purchased from line of credit, related party $ 298,475 $ 253,406
See Accompanying Notes to Condensed Consolidated Financial Statements.
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INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION AND SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION AND ORGANIZATION
The accompanying Condensed Consolidated Financial Statements of International
Card Establishment, Inc. (the "Company") should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2008.
Significant accounting policies disclosed therein have not changed except as
noted below.
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 Companies subsidiaries include NEOS Merchant
Solutions ("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 condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in accordance with such
rules and regulations. The information furnished in the interim condensed
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments, which, in the opinion of management, are necessary for
a fair presentation of such financial statements. Although management believes
the disclosures and information presented are adequate to make the information
not misleading, these interim condensed consolidated financial statements should
be read in conjunction with the Company's most recent audited financial
statements and notes thereto included in its December 31, 2008 Annual Report on
Form 10-K. Operating results for the period ended September 30, 2009 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009.
ACCOUNTING POLICIES
FAIR VALUE ACCOUNTING
As required by the Fair Value Measurements and Disclosures Topic of the FASB
ASC, fair value is measured based on a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows: (Level 1)
observable inputs such as quoted prices in active markets; (Level 2) inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and (Level 3) unobservable inputs in which there is
little or no market data, which require the reporting entity to develop its own
assumptions.
The three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the
full term of the asset or liability;
Level 3 Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
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RECLASSIFICATION
Certain reclassifications, which have no effect on net income (loss), have been
made in the prior period financial statements to conform to the current
presentation.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING GUIDANCE
ADOPTED
On September 30, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board ("FASB") to the authoritative hierarchy of GAAP.
These changes establish the FASB Accounting Standards CodificationTM
("Codification") as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the Securities and Exchange Commission ("SEC") under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
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FASB will no longer issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue
Accounting Standards Updates. Accounting Standards Updates will not be
authoritative in their own right as they will only serve to update the
Codification. These changes and the Codification itself do not change GAAP.
Other than the manner in which new accounting guidance is referenced, the
adoption of these changes had no impact on the Financial Statements.
In April 2009, the FASB issued authoritative guidance for "Interim Disclosures
about Fair Value of Financial Instruments," which requires disclosures about
fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This guidance also
requires those disclosures to be in summarized financial information at interim
reporting periods. This guidance is effective for interim reporting periods
ending after June 15, 2009. The Company adopted this guidance in the second
quarter of 2009 and it did not have a material impact on the financial
statements.
In April 2009, the FASB issued authoritative guidance for the "Recognition and
Presentation of Other-Than-Temporary Impairments" in order to make existing
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. The Company adopted this guidance in the second quarter of 2009 and
it did not have a material impact on the financial statements.
In April 2009, the FASB issued authoritative guidance for "Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly." This
guidance provides additional direction for estimating fair value in accordance
with established guidance for "Fair Value Measurements," when the volume and
level of activity for the asset or liability have significantly decreased. This
guidance also includes direction on identifying circumstances that indicate a
transaction is not orderly. This guidance is effective for interim and annual
reporting periods ending after June 15, 2009. The Company adopted this guidance
in the second quarter of 2009 and it did not have a material impact on the
financial statements.
In June 2009, the FASB issued authoritative guidance which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. This guidance applies to both interim financial statements and
annual financial statements and is effective for interim or annual financial
periods ending after June 15, 2009. This guidance does not have a material
impact on our financial statements.
ISSUED
In June 2009, the FASB issued authoritative guidance for "Accounting for
Transfers of Financial Assets," which eliminates the concept of a "qualifying
special-purpose entity," changes the requirements for derecognizing financial
assets, and requires additional disclosures in order to enhance information
reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and
an entity's continuing involvement in and exposure to the risks related to
transferred financial assets. This guidance is effective for fiscal years
beginning after November 15, 2009. The Company will adopt this guidance in
fiscal 2010 and does not expect that the adoption will have a material impact on
the consolidated financial statements.
In June 2009, the FASB issued authoritative guidance amending existing guidance.
The amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is necessary
to reassess who should consolidate a variable-interest entity. This guidance is
effective for the first annual reporting period beginning after November 15,
2009 and for interim periods within that first annual reporting period. The
Company will adopt this guidance in fiscal 2010. The Company does not expect
that the adoption will have a material impact on the consolidated financial
statements.
NOTE 2. OTHER RECEIVABLES
At September 30, 2009, and December 31, 2008, other receivables consisted of the
following:
SEPTEMBER 30, DECEMBER 31,
2009 2008
_____________ ____________
Merchant residuals receivable $ 76,180 $ 226,717
Other receivables 17,735 28,914
_____________ ____________
Total $ 93,915 $ 255,631
============= ============
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Other receivables are split between residuals due from commissions earned from
merchant account transactions and employee advances with a $15,000 advance
having been made to our top sales rep. The commission receivables decreased
approximately $150,537 due to reduced sales by merchants caused by the
recession. Our merchants experienced approximately a 16% decrease in sales
between July 1 and September 30, 2009. Tighter credit policies have reduced the
number of new accounts that we acquire, thereby increasing the quality of
earnings by taking the most conservative forecast of the collectability of
residuals.
NOTE 3. DUE TO FTS - UNDERPAYMENT
In June 2009, one of our residual sources notified us that between November 2008
and April 2009 they had undercharged us by $111,393. An agreement was reached
whereby the vendor would deduct an additional $9,283 per month in fees over the
next 12 months. The $111,393 was split with $72,757 being offset against the
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second quarter residual income and $38,636 (representing the November and
December 2008 portion) was treated as Other Expense. At September 30, 2009 the
outstanding balance payable was $83,545.
NOTE 4. SUBSCRIPTIONS
As of September 30, 2009, we have instructed our SEC counsel to finalize all
necessary paperwork for the issuance of shares comprising the remaining $30,000
in our common stock subscription.
NOTE 5. FAIR VALUE ACCOUNTING
In accordance with authoritative guidance, the table below sets forth the
Company's 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.
FAIR VALUE AT SEPTEMBER 30, 2009
_______________________________________________
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
_______________________________________________
Assets:
Intangibles -
Merchant Portfolios $ 984,971 $ - $ 984,971 $ -
_______________________________________________
$ 984,971 $ - $ 984,971 $ -
===============================================
Liabilities:
Line of Credit,
related party $ 684,399 $ - $ 684,399 $ -
_______________________________________________
$ 684,399 $ - $ 684,399 $ -
===============================================
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NOTE 6. RELATED PARTY LINE OF CREDIT
The related party line of credit was renewed for an additional year at June 30,
2009, at a fee of $50,000.
NOTE 7. SUBSEQUENT EVENTS
Management evaluated all activity of the Company through November 16, 2009 (the
issue date of the Financial Statements) and concluded that no subsequent events
have occurred that would require recognition in the Financial Statements or
disclosure in the Notes to the Financial Statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. References in
this section to "International Card Establishment, Inc.," the "Company," "we,"
"us," and "our" refer to International Card Establishment, Inc. and our direct
and indirect subsidiaries on a consolidated basis unless the context indicates
otherwise.
This interim report contains forward looking statements relating to our
Company's future economic performance, plans and objectives of management for
future operations, projections of revenue mix and other financial items that are
based on the beliefs of, as well as assumptions made by and information
currently known to, our management. The words "expects, intends, believes,
anticipates, may, could, should" and similar expressions and variations thereof
are intended to identify forward-looking statements. The cautionary statements
set forth in this section are intended to emphasize that actual results may
differ materially from those contained in any forward looking statement.
Our Management, Discussion and Analysis ("MD&A") is provided as a supplement to
our financial statements to help provide an understanding of our financial
condition, changes in financial condition and results of operations. The MD&A
section is organized as follows:
o EXECUTIVE SUMMARY, OVERVIEW AND DEVELOPMENT OF OUR BUSINESS. These sections
provide a general description of the Company's business, as well as recent
developments that we believe are important in understanding our results of
operations as well as anticipating future trends in our operations.
o CRITICAL ACCOUNTING POLICIES. This section provides an analysis of the
significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses, and the related disclosure of
contingent assets and liabilities.
o RESULTS OF OPERATIONS. This section provides an analysis of our results of
operations for the three months ended September 30, 2009 compared to the
three months ended September 30, 2008 and the nine months ended September
30, 2009 compared to the nine months ended September 30, 2008. A brief
description of certain aspects, transactions and events is provided,
including related-party transactions that impact the comparability of the
results being analyzed.
o LIQUIDITY AND CAPITAL RESOURCES. This section provides an analysis of our
financial condition and cash flows as of September 30, 2009, and December
31, 2008.
EXECUTIVE SUMMARY
Our strategy is to grow profitably by increasing our penetration of the
expanding small merchant marketplace for payment and Gift & Loyalty card based
products. We find these merchants through our Independent Sales Organization
("ISO") and agent channels of distribution and intend to make additional
acquisitions on an opportunistic basis in this fragmented segment of the
industry.
OVERVIEW
We are a rapidly growing provider of credit and debit card-based payment
processing services and Gift & Loyalty products to small merchants. As of
September 30, 2009, we provided our services to numerous ISOs and thousands of
merchants located across the United States. Our payment processing services
enable our merchants to process traditional card-present, or swipe transactions,
as well as card-not-present transactions. A traditional card-present transaction
occurs whenever a cardholder physically presents a credit or debit card to a
merchant at the point-of-sale. Card-not-present transactions occur whenever the
customer does not physically present a payment card at the point-of-sale and may
occur over the Internet or by mail, fax or telephone.
DEVELOPMENT OF OUR BUSINESS
International Card Establishment, Inc. (formerly Summit World Ventures, Inc.)
was incorporated on December 18, 1986, under the laws of the State of Delaware
to engage in any lawful corporate activity, including, but not limited to,
selected mergers and acquisitions. Prior to July 28, 2000, we were in the
developmental stage, whose sole purpose was to locate and consummate a merger or
acquisition with a private entity, and we did not have any operations. On July
28, 2000, we acquired iNetEvents, Inc., a Nevada corporation and commenced
operations. iNetEvents, Inc., a Nevada corporation, was incorporated on February
3, 1999, and provided Internet support and supply software for real time
event/convention information management.
On January 16, 2003, we entered into a Plan and Agreement of Reorganization with
International Card Establishment, Inc., a Nevada corporation, and its
shareholders. International Card Establishment, Inc., a Nevada corporation, was
incorporated on July 26, 2002. As part of the acquisition, reorganization in the
form of a reverse merger, International Card Establishment, Inc. became our
wholly-owned subsidiary, and there was a change of our control. Following the
International Card Establishment, Inc. acquisition we changed our corporate name
from iNetEvents, Inc. to International Card Establishment, Inc. and reverse
split our outstanding shares of common stock on a one for two share basis.
On December 15, 2003, we entered into a Plan and Agreement of Reorganization
with GlobalTech Leasing, Inc., a California corporation, and its shareholders.
On December 29, 2003, GlobalTech Leasing, Inc. became our wholly owned
subsidiary. In May of 2006 we sold our GlobalTech Leasing, Inc. subsidiary which
comprised our entire equipment leasing segment.
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Effective September 8, 2004, we entered into a Plan and Agreement of
Reorganization with Neos Merchant Solutions, Inc., a Nevada corporation, and its
shareholders. Effective September 8, 2004, Neos Merchant Solutions, Inc. became
our wholly owned subsidiary.
In May 2008 we started LIFT Network, a new sales division focused on marketing
for small to medium sized businesses. LIFT Network is based in our corporate
offices in Camarillo, California with a small office in Tampa, Florida.
In January 2009 we began a new month-to-month "rental" ("LiftMySales") program.
The first sales under this program were booked in February 2009. Under this
program, there is no long-term contract and the merchant pays an all inclusive
fee for the loan of a terminal and monthly fees for all services. These services
have been expanded to include assistance to the merchant in marketing their
company including on-line "coupon" and sales tools. This program is being
marketed under the LIFT name. A video detailing the program is available at
WWW.LIFTMYSALES.COM. Under this program, the merchant is provided a "loaner"
terminal.
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 Companies 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 Nevada corporation, which has been dormant since 2005.
CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying our accounting policies
have a significant impact on the results we report in our financial statements,
which we discuss under the heading "Results of Operations" following this
section of our MD&A. Some of our accounting policies require us to make
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Our most critical accounting
estimates include the assessment of recoverability of long-lived assets and
intangible assets, which impacts operating expenses when we impair assets or
accelerate their amortization or depreciation.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
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 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.
REVENUE AND COST RECOGNITION
Substantially all of our revenues are generated from fees charged to merchants
for card-based payment processing services. We typically charge these merchants
a bundled rate, primarily based upon the merchant's monthly charge volume and
risk profile. Our fees principally consist of discount fees, which are a
percentage of the dollar amount of each credit or debit transaction. We charge
all merchants higher discount rates for card-not-present transactions than for
card-present transactions in order to compensate ourselves for the higher risk
of underwriting these transactions. We derive the balance of our revenues from a
variety of fixed transaction or service fees, including fees for monthly minimum
charge volume requirements, statement fees, annual fees and fees for other
miscellaneous services, such as handling charge backs. We recognize discounts
and other fees related to payment transactions at the time the merchants'
transactions are processed. We recognize revenues derived from service fees at
the time the service is performed. Related interchange and assessment costs are
also recognized at that time.
In determining our revenue reporting we analyze the sales transaction for gross
versus net revenue recognition as required by the Revenue Recognition Topic of
the FASB ASC. Generally, where we have merchant portability, credit risk and
ultimate responsibility for the merchant, revenues are reported at the time of
sale on a gross basis equal to the full amount of the discount charged to the
merchant. This amount includes interchange fees 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. Interchange fees are set by Visa and MasterCard and are based on
transaction processing volume and are recognized at the time transactions are
processed.
12
GOODWILL AND INTANGIBLES
Since 2005, we capitalize 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) and, at
least quarterly, amortize accounts at the time of attrition. Additionally, as
required by the Intangibles - Goodwill and Other Topic of the FASB ASC on the
valuation of Goodwill and Intangibles, we also hire an outside firm to complete
an annual valuation to determine any impairment recognized in current earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE ACCOUNTING
As required by the Fair Value Measurements and Disclosures Topic of the FASB
ASC, Fair value is measured based on a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value as follows: (Level 1)
observable inputs such as quoted prices in active markets; (Level 2) inputs,
other than the quoted prices in active markets, that are observable either
directly or indirectly; and (Level 3) unobservable inputs in which there is
little or no market data, which require the reporting entity to develop its own
assumptions.
The three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or
liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the
full term of the asset or liability;
Level 3 Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
In accordance with authoritative guidance, the table below sets forth the
Company's 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.
FAIR VALUE AT SEPTEMBER 30, 2009
_______________________________________________
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
_______________________________________________
Assets:
Intangibles -
Merchant Portfolios $ 984,971 $ - $ 984,971 $ -
_______________________________________________
$ 984,971 $ - $ 984,971 $ -
===============================================
Liabilities:
Line of Credit,
related party $ 684,399 $ - $ 684,399 $ -
_______________________________________________
$ 684,399 $ - $ 684,399 $ -
===============================================
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13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2008
Results of operations consist of the following:
September 30, September 30, Difference Difference
2009 2008 $ %
________________________________________________________
Net Revenues $ 1,394,161 $ 1,855,281 $(461,120) (25)
Cost of Revenues 848,492 1,190,251 (341,759) (29)
________________________________________________________
Gross Profit 545,669 665,030 (119,361) (18)
Operating, General,
and Administrative
Costs 557,062 666,150 (109,088) (16)
________________________________________________________
Net Operating Gain/
(Loss) $ (11,393) $ (1,120) $ (10,273) (916)
=======================================================
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Net revenues decreased by $461 from $1,855,281for the three months ended
September 30, 2008, to $1,394,161 for the three months ended September 30, 2009,
due mainly to the poor economy as well as continued attrition of merchant
accounts and tighter credit policies. Residuals decreased by approximately
$419,000. This decrease was due in part to the attrition of merchant accounts
but the primary factor was the faltering economy which affected us in two ways.
First, reduced merchant sales led directly to reduced residuals. Secondly, many
small businesses closed shop last year due to the lagging economy. A number of
merchants simply closed their doors and bank accounts, precluding us from even
collecting their early termination fees. Equipment sales dropped by $95,500 but
were offset by $53,400 in monthly fees collected through our new marketing
model, introduced in January 2009, wherein merchants receive a "loaner" terminal
as part of a total package for which they pay a flat monthly fee. Merchant
attrition, caused by better offers from competitors as well as closing
businesses, is a common aspect of our industry. However, we believe our new
marketing models will help stop attrition to some extent. In the third quarter
we saw a significant decline in attrition of merchant accounts, roughly 22% less
than we had seen over the previous year.
The costs associated with the merchant account services decreased by
approximately 29% or $341,759 primarily due to decreased costs associated with
residual income as well as decreased commissions and equipment costs due to
lower sales. Again, both residuals and sales were lower than in prior periods
due to the sluggish economy.
General and administrative costs decreased by approximately 16% or $109,088 from
$666,150 for the three months ended September 30, 2008, to $557,062 for the
three months ended September 30, 2009. While there was cumulative decrease of
approximately $133,450 for amortization, interest, office, payroll and bonus
expenses, these were offset by a $22,900 combined increase in advertising,
depreciation, insurance, interest and office expenses. An increase of $10,400 in
advertising reflects expenses associated with the startup of the new LiftMySales
program.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Results of operations consist of the following:
September 30, September 30, Difference Difference
2009 2008 $ %
________________________________________________________
Net Revenues $ 4,320,450 $ 5,742,195 $(1,421,745) (25)
Cost of Revenues 2,701,022 3,678,128 (977,106) (27)
________________________________________________________
Gross Profit 1,619,428 2,064,067 (444,639) (22)
Operating, General,
and Administrative
Costs 1,835,960 1,975,082 (139,122) (7)
________________________________________________________
Net Operating Gain/
(Loss) $ (216,532) $ 88,985 $ (305,517) (343)
========================================================
|
Net revenues decreased by $1,421,745 from $5,742,195 for the nine months ended
September 30, 2008 to $4,320,450 for the nine months ended September 30, 2009,
due mainly to the poor economy as well as continued attrition of merchant
accounts and tighter credit policies. Residuals decreased by approximately
$1,281,500. This decrease was due primarily to the faltering economy, with
merchant sales dropping approximately $2.26 million since January 2009.
Equipment sales dropped by $222,900, due to the continued recession. This drop
was offset by an increase of $76,500 in fees collected under our new marketing
model, introduced in January 2009, wherein merchants receive a "loaner" terminal
14
as part of a total package for which they pay a flat monthly fee. Merchant
attrition, caused by better offers from competitors as well as closing
businesses, is a common aspect of our industry. However, we believe our new
marketing model has helped slow attrition to some extent. This is reflected by
the fact that we boarded more new accounts in both July and September than were
cancelled.
The costs associated with the merchant account services decreased by
approximately 27% or $977,106 due primarily to $897,700 in decreased costs
associated with residual income as well as $54,860 in decreased commissions and
$24,543 in equipment costs due to lower sales. Again, both residuals and sales
were lower than in prior periods due to the sluggish economy.
General and administrative costs decreased by approximately 7% or $139,122 from
$1,975,082 for the nine months ended September 30, 2008, to $1,835,960 for the
nine months ended September 30, 2009. While there was cumulative decrease of
approximately $222,034 for amortization, auto, consulting, interest, insurance,
legal & professional fees, office and payroll expenses, these were offset by a
$44,252 combined increase in advertising, depreciation, salaries, office rent
and state taxes and the additional $38,600 of undercharged residual fees for
November and December 2008. An increase of $53,324 in advertising reflects
expenses associated with the startup of the new LiftMySales program.
LIQUIDITY AND CAPITAL RESOURCES
We are currently seeking to expand our merchant services offerings in bankcard
and gift and loyalty. In addition, we are investigating additional business
opportunities and potential acquisitions; accordingly we will require additional
capital to complete the expansion and to undertake any additional business
opportunities.
September 30, September 30, Difference Difference
2009 2008 $ %
________________________________________________________
Cash $ 109,863 $ 91,404 $ 18,459 20
Accounts Payable and
Accrued Expenses $ 520,967 $ 616,229 $ (95,262) (15)
Accounts Receivable,
net $ 15,891 $ 22,572 $ (6,681) (30)
Proceeds from sale
of common stock $ - $ 250 $ (250) (100)%
|
We have financed our operations during the third quarter primarily through
sales, the collection of accounts receivable, the use of our line of credit, and
the use of cash on hand. As of September 30, 2009, we had total current
liabilities of $1,288,911compared to $1,274,765 as of December 31, 2008. The
increase in current liabilities is primarily due to the FTS fee underpayment.
Cash increased 20% from $91,404 at December 31, 2008, to $109,863 at September
30, 2009, due to decreased interest and salaries expenses.
As of September 30, 2009, our accounts receivable, net decreased to $15,891
compared to $22,572 at December 31, 2008. The relating allowance for doubtful
accounts decreased $22,169 from $50,178 at December 31, 2008, to $28,009 as of
September 30, 2009, because of continued strong controls on cash collections and
collection of several past due accounts.
We had no equity issuances in the first, second or third quarters of 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A.
ITEM 4T. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act) that is designed to ensure that information required to be
disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, 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 nine months ended September 30, 2009. Based upon that
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures are effective to ensure that information requiring
disclosure by the Company in the reports that the Company files or submits under
15
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.
CHANGES IN INTERNAL CONTROLS
Our management, with the participation our Chief Executive Officer and Chief
Financial Officer, performed an evaluation to determine whether any change in
our internal controls over financial reporting occurred during the nine month
period ended September 30, 2009. Based on that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that no change occurred in the
Company's internal controls over financial reporting during the nine months
ended September 30, 2009, that has materially affected, or is reasonably likely
to materially affect, the Company's internal controls over financial reporting.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
N/A.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
(1) Committees and financial reviews.
The board of directors has not established an audit committee. In addition, we
do not have any other compensation or executive or similar committees. We will
not, in all likelihood, establish an audit committee until such time as we
increase our revenues, of which there can be no assurance. We recognize that an
audit committee, when established, will play a critical role in our financial
reporting system by overseeing and monitoring management's and the independent
auditor's participation in the financial reporting process.
Until such time as an audit committee has been established, the board of
directors will undertake those tasks normally associated with an audit committee
to include, but not by way of limitation, the (i) review and discussion of the
audited financial statements with management, and (ii) discussions with the
independent auditors with respect to the matters required to be discussed by the
Statement On Auditing Standards No. 61, "Communications with Audit Committees",
as may be modified or supplemented.
ITEM 6. EXHIBITS.
(a) The following exhibits are filed with this report.
31.1 Certification by Chief Executive Officer pursuant to Sarbanes Oxley
Section 302.
31.2 Certification by Chief Financial Officer pursuant to Sarbanes Oxley
Section 302.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S. C.
Section 1350.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S. C.
Section 1350.
17
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.
Date: November 16, 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)
|
18
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