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 JUNE 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.)
555 Airport Space Way, Suite A
Camarillo, CA 93010
________________________________________ __________
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (866) 423-2491
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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 August 13, 2009, there were
35,873,703 outstanding shares of the Registrant's Common Stock, $.0005 par
value.
2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis or Plan of Operation 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)
June 30, 2009
4
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2009 2008
(UNAUDITED) (AUDITED)
____________ ____________
ASSETS
CURRENT ASSETS
Cash $ 115,938 $ 91,404
Accounts receivable, net of allowance of $52,962 and $50,178 at June 30,
2009 and December 31, 2008, respectively 7,794 22,572
Note receivable, net of allowance of $50,000 at June 30, 2009 and
December 31, 2008, respectively 88 88
Inventory 77,236 76,394
Other receivables 100,974 255,631
Prepaid assets 60,328 25,003
____________ ____________
Total current assets 362,358 471,092
____________ ____________
FIXED ASSETS, net of accumulated depreciation of $2,986,301and $2,983,007 at
June 30, 2009 and December 31, 2008, respectively 19,752 -
INTANGIBLE ASSETS 1,457,729 1,579,378
GOODWILL 87,979 87,979
OTHER NON-CURRENT ASSETS 117,576 116,685
____________ ____________
Total assets $ 2,045,394 $ 2,255,134
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $21,891 $ 22,915
Accrued expenses 459,544 593,312
Due to FTS - Underpayment 111,393 -
Line of credit, related party 735,875 658,536
____________ ____________
Total current liabilities 1,328,703 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 June 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 June 30, 2009, and
December 31, 2008, Respectively 17,937 17,937
Common stock subscribed 30,000 30,000
Additional paid-in capital 19,628,401 19,628,401
Accumulated deficit (18,960,187) (18,696,507)
____________ ____________
Total stockholders' equity 716,691 980,371
____________ ____________
Total liabilities and stockholders' equity $ 2,045,394 $ 2,255,134
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements.
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5
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
___________________________ ___________________________
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2009 2008 2009 2008
___________________________________________________________
Revenue:
Merchant services revenues $ 1,290,452 $ 1,780,856 $ 2,717,833 $ 3,577,976
Equipment sales 124,521 167,806 223,586 330,000
Less: sales returns and allowances (6,399) (2,428) (15,131) (21,063)
___________________________________________________________
Net revenue 1,408,574 1,946,234 2,926,288 3,886,913
Cost of revenue:
Commissions 179,229 169,473 319,535 351,475
Cost of sales 742,917 1,040,274 1,477,328 2,055,436
Cost of sales - equipment 30,202 43,045 55,667 80,966
___________________________________________________________
Cost of revenue 952,348 1,252,792 1,852,530 2,487,877
___________________________________________________________
Gross profit 456,226 693,442 1,073,758 1,399,036
Operating, general and administrative expenses:
General, administrative and selling expenses 535,272 544,672 1,113,903 1,151,080
Depreciation 2,649 - 3,294 -
Merchant portfolio attrition expense 66,150 75,250 161,700 157,850
___________________________________________________________
Total operating, general and
administrative expenses 604,071 619,922 1,278,897 1,308,930
Net operating gain (loss) (147,845) 73,520 (205,139) 90,106
___________________________________________________________
Non-operating income (expense):
Interest income - 29 - 80
Interest (expense) (9,665) (18,287) (19,905) (40,469)
Other Expense - FTS (38,636) - (38,636) -
___________________________________________________________
Total non-operating income (expense) (48,301) (18,258) (58,541) (40,389)
___________________________________________________________
Net (loss) before provision for income taxes (196,146) 55,262 (263,680) 49,717
___________________________________________________________
Provision for income taxes - - - -
Net income (loss) $ (196,146) $ 55,262 $ (263,680) $ 49,717
===========================================================
Earnings per share - basic $ (0.01) $ 0.00 $ (0.01) $ 0.00
Earnings per share - dilutive $ (0.01) $ 0.00 $ (0.01) $ 0.00
Weighted average shares outstanding - basic 35,873,703 35,286,449 35,873,703 35,286,449
Weighted average shares outstanding - dilutive 35,873,703 36,111,507 35,873,703 35,548,246
See Accompanying Notes to Condensed Consolidated Financial Statements.
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6
INTERNATIONAL CARD ESTABLISHMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
_________________________________
JUNE 30, 2009 JUNE 30, 2008
_____________ _____________
Cash Flows from Operating Activities:
Net (loss) income $ (263,680) $ 49,717
Depreciation 3,294 -
Write off of cancelled merchant accounts 161,700 157,850
Allowance for doubtful accounts, other receivables and accrued interest income,
net of bad debt recoveries 2,784 (36,796)
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 11,994 21,393
Decrease in inventories 210,976 177,814
Decrease in other receivables 154,657 152,043
(Increase) in prepaid expenses (35,325) (54,167)
(Increase) decrease in other non-current assets (891) 1,311
(Decrease) in accounts payable (1,023) (76,518)
Increase (decrease) in accrued expenses (133,771) 135,295
Increase in Due to FTS - Underpayment 111,393 -
_____________ _____________
Net cash provided by operating activities 222,108 534,261
_____________ _____________
Cash Flows from Investing Activities:
Acquisitions of merchant accounts, net of attrition (40,050) (50,763)
Purchase of property and equipment (23,046) -
Payments received toward notes receivable - 3,518
_____________ _____________
Net cash provided by (used in) investing activities (63,096) (47,245)
_____________ _____________
Cash Flows from Financing Activities:
Payment on notes payable - (42,613)
Noncash advances from line of credit, related party 52,101 119,954
Payment on line of credit, related party (656,579) (569,867)
Proceeds from line of credit, related party 470,000 305,000
Payment on notes payable, related party - (280,000)
_____________ _____________
Net cash (used in) financing activities (134,478) (467,526)
_____________ _____________
Net increase in cash 24,534 19,490
_____________ _____________
Cash, beginning of period 91,404 126,149
_____________ _____________
Cash, end of period $ 115,938 $145,639
============= =============
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)
SIX MONTHS ENDED
_________________________________
JUNE 30, 2009 JUNE 30, 2008
_____________ _____________
SUPPLEMENT DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest $ 19,905 $ 35,398
Cash paid for income taxes $ - $ -
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Inventory purchased from line of credit, related party $ 211,817 $ 171,216
See Accompanying Notes to Condensed Consolidated Financial Statements.
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8
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 June 30, 2009 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009.
ACCOUNTING POLICIES
On January 1, 2008, the Company adopted SFAS No. 157 (SFAS 157), Fair Value
Measurements. SFAS 157 relates to financial assets and financial liabilities. In
February 2008, the FASB issued Staff Position (FSP) No. FAS 157-2 "Effective
Date of FASB Statement No. 157," which delayed the effective date of SFAS 157
for nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least an
annual basis, until January 1, 2009, for calendar year-end entities.
SFAS 157 defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (GAAP),
and expands disclosures about fair value measurements. The provisions of this
standard apply to other accounting pronouncements that require or permit fair
value measurements and are to be applied prospectively with limited exceptions.
SFAS 157 defines fair value as the price that would be receive to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. This standard is now the single source in
GAAP for the definition of fair value, except for the fair value of leased
property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from independent sources (observable inputs) and (2) an
entity's own assumptions about market participant assumptions that are based on
the best information available in the circumstances (unobservable inputs). The
fair value hierarchy consists of three broad levels, which give the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under FAS 157 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 - Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly, or indirectly,
including quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs
that are derived principally from or corroborated by observable market data
by correlation or other means;
Level 3 - Inputs that are both significant to the fair value measurement
and unobservable. These inputs rely on management's own assumptions about
the assumptions that market participants would use in pricing the asset or
liability.
(The unobservable inputs are developed based on the best information available
in the circumstances and may include the Company's own data.)
In April 2009, the FASB issued FSP FAS No 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments" ("FSP FAS No. 107-1 and
APB 28-1"). This FSP amends FASB Statement No. 107, "Disclosure about Fair
Values of Financial Instruments," to require disclosures about fair value of
financial instruments in interim financial statements as well as in annual
financial statements. APB 28-1 also amends APB Opinion No. 28, "Interim
Financial Reporting," to require those disclosures in all interim financial
statements. This standard is effective for interim periods ending after June 15,
2009, but early adoption is permitted for interim periods ending after March 15,
2009. The Company adopted FSP FAS No. 107-1 and APB 28-1 and provided the
additional disclosure requirements beginning in the second quarter 2009.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
165, "Subsequent Events," ("SFAS No. 165"). SFAS 165 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. SFAS 165 applies to both interim financial statements and annual
financial statements. SFAS 165 is effective for interim or annual financial
periods ending after June 15, 2009. SFAS 165 does not have a material impact on
our financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
166, "Accounting for Transfers of Financial Assets, an amendment to SFAS No.
140," ("SFAS 166"). SFAS 166 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. SFAS 166 is effective for fiscal years beginning
after November 15, 2009. The Company will adopt SFAS 166 in fiscal 2010. The
Company does not expect that the adoption of SFAS 166 will have a material
impact on the consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
167, "Amendments to FASB Interpretation No. 46(R)," ("SFAS 167"). The amendments
include: (1) the elimination of the exemption for qualifying special purpose
entities, (2) a new approach for determining who should consolidate a
9
variable-interest entity, and (3) changes to when it is necessary to reassess
who should consolidate a variable-interest entity. SFAS 167 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 SFAS
167 in fiscal 2010. The Company does not expect that the adoption of SFAS 166
will have a material impact on the consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards No.
168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles," ("SFAS 168"). SFAS 168 replaces FASB Statement
No. 162, "The Hierarchy of Generally Accepted Accounting Principles", and
establishes the FASB Accounting Standards Codification ("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 generally accepted accounting principles ("GAAP"). SFAS 168
is effective for interim and annual periods ending after September 15, 2009. The
Company will begin to use the new Codification when referring to GAAP in its
annual report on Form 10-K for the fiscal year ending January 3, 2010. This will
not have an impact on the consolidated results of the Company.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed
by management to, have a material impact on the Company's present or future
consolidated financial statements.
NOTE 2. OTHER RECEIVABLES
At June 30, 2009, and December 31, 2008, other receivables consisted of the
following:
JUNE 30, 2009 DECEMBER 31, 2008
_____________________________________
Merchant residuals receivable $ 72,673 $ 226,717
Other receivables 28,301 28,914
_________ _________
Total $ 100,974 $ 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 $37,944 due to reduced sales by merchants caused by the recession.
Our merchants experienced approximately a 12% decrease in sales between April 1
and June 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. Additionally,
merchants are charged an annual fee in December accounting for approximately
$116,100 of the December 2008 residuals receivable.
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
second quarter residual income and $38,636 (representing the November and
December 2008 portion) was treated as Other Expense.
NOTE 4. SUBSCRIPTIONS
As of June30, 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
The following table presents the Company's fair value hierarchy for those assets
and liabilities measured at fair value on a recurring basis as of June 30, 2009.
FAIR VALUE AT JUNE 30, 2009
___________________________
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
_____________________________________________________________________________
Assets:
Intangibles - Merchant Portfolios $ 1,022,729 $ - $ 1,022,729 $ -
_____________________________________________________________________________
$ 1,022,729 $ - $ 1,022,729 $ -
=============================================================================
Liabilities:
Line of Credit, related party $ 735,875 $ - $ 735,875 $ -
_____________________________________________________________________________
$ 735,875 $ - $ 735,875 $ -
=============================================================================
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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.
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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 June 30, 2009 compared to the three
months ended June 30, 2008 and the six months ended June 30, 2009 compared
to the three months ended June 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 June 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 June
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, a 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.
11
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 chargebacks. 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.
We follow the requirements of EITF 99-19, "Reporting Revenue Gross as a
Principal Versus Net as an Agent", in determining our revenue reporting.
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, in
keeping with the provisions of FASB No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), 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 MEASUREMENTS
On January 1, 2008, the Company adopted SFAS No. 157 (SFAS 157), Fair Value
Measurements. SFAS 157 relates to financial assets and financial liabilities. In
February 2008, the FASB issued Staff Position (FSP) No. FAS 157-2 "Effective
Date of FASB Statement No. 157," which delayed the effective date of SFAS 157
for nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least an
annual basis, until January 1, 2009, for calendar year-end entities.
SFAS 157 defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (GAAP),
and expands disclosures about fair value measurements. The provisions of this
standard apply to other accounting pronouncements that require or permit fair
value measurements and are to be applied prospectively with limited exceptions.
SFAS 157 defines fair value as the price that would be receive to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. This standard is now the single source in
GAAP for the definition of fair value, except for the fair value of leased
property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from independent sources (observable inputs) and (2) an
entity's own assumptions about market participant assumptions that are based on
the best information available in the circumstances (unobservable inputs). The
fair value hierarchy consists of three broad levels, which give the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under FAS 157 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 - Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly, or indirectly,
including quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs
that are derived principally from or corroborated by observable market data
by correlation or other means;
Level 3 - Inputs that are both significant to the fair value measurement
and unobservable. These inputs rely on management's own assumptions about
the assumptions that market participants would use in pricing the asset or
liability.
(The unobservable inputs are developed based on the best information available
in the circumstances and may include the Company's own data.)
The following table presents the Company's fair value hierarchy for those assets
and liabilities measured at fair vlue on a recurring basis as of June 30, 2009.
FAIR VALUE AT JUNE 30, 2009
_______________________________________________
TOTAL LEVEL 1 LEVEL 2 LEVEL 3
_______________________________________________
Assets:
Intangibles -
Merchant
Portfolios $ 1,022,729 $ - $ 1,022,729 $ -
_______________________________________________
$ 1,022,729 $ $ 1,022,729 $ -
===============================================
Liabilities:
Line of Credit,
related party $ 735,875 $ - $ 735,875 $ -
_______________________________________________
$ 735,875 $ - $ 735,875 $ -
===============================================
|
13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2008
Results of operations consist of the following:
June 30, 2009 June 30, 2008 Difference Difference
$ %
____________________________________________________________
Net Revenues $ 1,408,574 $ 1,946,234 $ (537,660) (28)
Cost of Revenues 952,348 1,252,792 (300,444) (24)
____________________________________________________________
Gross Profit 456,226 693,442 (237,216) (34)
Operating, General,
and Administrative Costs 604,071 619,922 (15,851) (3)
____________________________________________________________
Net Operating Gain/(Loss) $ (147,845) $ 73,520 $ (221,365) (301)
============================================================
|
Net revenues decreased by $537,660 from $1,946,234 for the three months ended
June 30, 2008 to $1,408,574 for the three months ended June 30, 2009, due mainly
to the poor economy as well as continued attrition of merchant accounts and
tighter credit policies. Residuals decreased by approximately $490,400. 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 $43,285, due
primarily to 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 second 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 24% or $300,444 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 3% or $15,851 from
$619,922 for the three months ended June 30, 2008 to $604,071 for the three
months ended June 30, 2009. While there was cumulative decrease of approximately
$97,500 for amortization, interest, office and bonus expenses, these were offset
by a $43,900 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 $27,051 increase in advertising
reflects expenses associated with the startup of the new LiftMySales program.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2008
Results of operations consist of the following:
June 30, 2009 June 30, 2008 Difference Difference
$ %
_____________________________________________________________
Net Revenues $ 2,926,288 $ 3,886,913 $ (960,625) (25)
Cost of Revenues 1,852,530 2,487,877 (635,347) (26)
_____________________________________________________________
Gross Profit 1,073,758 1,399,036 (325,278) (23)
Operating, General,
and Administrative Costs 1,278,897 1,308,930 (30,033) (2)
_____________________________________________________________
Net Operating Gain/(Loss) $ (205,139) $ 90,106 $ (295,245) (328)
=============================================================
|
Net revenues decreased by $960,625 from $3,886,913 for the six months ended June
30, 2008 to $2,926,288 for the six months ended June 30, 2009, due mainly to the
poor economy as well as continued attrition of merchant accounts and tighter
credit policies. Residuals decreased by approximately $860,100. This decrease
was due primarily to the faltering economy, with merchant sales dropping
approximately $1.2 million since January 2009. Equipment sales dropped by
$106,000, due to a combination of the poor economy and to 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.
14
The costs associated with the merchant account services decreased by
approximately 26% or $635,347 due primarily to $578,108 in decreased costs
associated with residual income as well as $31,940 in decreased commissions and
$25,299 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 2% or $30,033 from
$1,308,930 for the six months ended June 30, 2008, to $1,278,897 for the six
months ended June 30, 2009. While there was cumulative decrease of approximately
$163,000 for amortization, auto, consulting, interest, insurance, office and
bonus expenses, these were offset by a $133,000 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 $429,900 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.
June 30, 2009 December 31, 2008 Difference Difference
$ %
_________________________________________________________________
Cash $ 115,938 $ 91,404 $ 24,534 27
Accounts Payable and
Accrued Expenses $ 481,435 $ 616,227 $ (134,792) (22)
Accounts Receivable, net $ 7,794 $ 22,572 $ (14,778) (65)
|
We have financed our operations during the second 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 June 30, 2009, we had total current liabilities
of $1,328,703 compared to $1,274,763 as of December 31, 2008. The increase in
current liabilities is primarily due to the FTS fee underpayment.
Cash increased 27% from $91,404 at December 31, 2008, to $115,938 at June 30,
2009, due to decreased advertising and salaries expenses.
As of June 30, 2009, our accounts receivable, net decreased to $7,794 compared
to $22,572 at December 31, 2008. The relating allowance for doubtful accounts
increased only a $2,784 from $50,178 at December 31, 2008, to $52,962 as of June
30, 2009, because of continued strong controls on cash collections.
We had no equity issuances in the first or second 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 three months ended June 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
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.
15
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 six month
period ended June 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 six months ended
June 30, 2009, that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial reporting.
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.
16
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: August13, 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)
|
17
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