ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
EXECUTIVE SUMMARY
Our strategy is to grow profitably by increasing our penetration of the
expanding small merchant marketplace for payment processing and Gift & Loyalty
transactions. 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. We provide
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.
For additional detailed discussion regarding the Company's business and business
trends affecting the Company and certain risks inherent in the Company's
business, see "Item 6: Management's Discussion and Analysis or Plan of
Operations" in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2005.
DEVELOPMENT OF OUR BUSINESS
On January 16, 2003, International Card Establishment, Inc. 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.
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.
On May 10, 2006 we sold GlobalTech Leasing, Inc. to focus on our growing
bankcard and Gift and Loyalty business.
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.
Our business operations are now conducted primarily through two wholly-owned
subsidiaries: International Card Establishment, Inc., a Nevada corporation
("ICE"), and NEOS Merchant Solutions, Inc, a Nevada corporation ("NEOS"). ICE is
a provider of credit and debit card-based payment processing services for small
merchants, that enable those merchants to accept credit cards, debit cards, and
other forms of electronic payments from their customers; and supplies the
necessary card readers and other point-of-sale authorization systems. NEOS
offers merchants a "Smart Card" (a card that stores data digitally on an
embedded chip and not on an analog magnetic stripe) based system that enables
merchants to provide its proprietary gift cards and incentive-purchase cards
that are custom merchant branded.
ANALYSIS OF BUSINESS
Over the past year, management has critically reviewed the operations of the
Company to look for cost savings, efficiencies and better revenue streams. In
2005 the Company did not processes credit card transactions in a manner that
allowed the recognition gross processing revenues, had an in-house sales force
and numerous locations. Many of these items were changed in stages through out
2005. In 2006, the Company continues to look for additional cost savings and
better revenue streams.
CRITICAL ACCOUNTING POLICIES
All Critical Accounting Policies of the Company are disclosed in our Annual
Report for 2005 filed on Form 10-KSB.
We do not have any of the following:
* Off-balance sheet arrangements.
* Certain trading activities that include non-exchange traded contracts
accounted for at fair value.
* Relationships and transactions with persons or entities that derive benefits
from any non-independent relationships other than related party transactions
discussed herein.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 ("2006") COMPARED
TO THE THREE MONTHS ENDED JUNE 30, 2005 ("2005")
Results of operations consist of the following:
JUNE 30, 2006 JUNE 30, 2005 $ CHANGE % CHANGE
Net Revenues $ 2,536,638 $ 1,325,144 $ 1,211,494 91%
Cost of Revenues 1,919,165 654,450 1,264,715 193%
______________________________________________
Gross Profit 617,473 670,694 (53,221) -8%
Operating, General and 2,061,532 1,111,446 950,086 85%
Administrative Costs
Restructuring Costs 207,335 - 207,335 100%
______________________________________________
Net Operating Loss $(1,651,394) $ (440,752) $(1,210,642) 275%
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The 91% increase in net revenues between June 30, 2005 and June 30, 2006 is
mainly attributable to an increase of $1,323,948 in Merchant Services Revenue,
offset by a decrease in lease transactions.
The increase in cost of revenues is directly related to the increase in merchant
account services and the recording of interchange expense due to the increased
volume. Commissions and other cost of leases remained relatively constant
between the two periods.
General and administrative costs increased by approximately $1,157,000 largely
due to an adjustment to bad debt expense of $597,000, a one-time increase in
payroll cost of $150,000, an increase in consulting fees of $121,000 and
$119,000 write down of merchant accounts due to attrition which are all offset
by advertising cost reductions.
Due to the Company's continued losses, we are critically reviewing all locations
and closing non-profitable locations where appropriate. Due to this we have
reported Restructuring Charge in our in Statement of Operations of approximately
$207,000 for the quarter ended June 30, 2006.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 ("2006") COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 2005 ("2005")
JUNE 30, 2006 JUNE 30, 2005 $ CHANGE % CHANGE
Net Revenues $ 4,856,074 $ 2,111,777 $ 2,744,297 130%
Cost of Revenues 3,607,673 1,312,544 2,295,129 175%
______________________________________________
Gross Profit 1,248,401 799,233 449,168 56%
Operating, General and 3,264,285 2,623,089 641,196 24%
Administrative Costs
Restructuring Costs 207,335 - 207,335 100%
_________________________________________________________
Net Operating Loss $(2,223,219) $(1,823,856) $ (399,363) 22%
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Net revenues for the six months ended June 30, 2006 increased by 130% due to the
boarding of merchant contracts on the First Data system. Cost of revenues also
increased and includes interchange and other processing costs not present in
2005.
Operating, general and administrative costs increased 24% primarily attributable
to the increases in bad debt, bonuses and write offs of merchant accounts due to
attrition recorded in the second quarter. These costs are offset by reductions
in other expense categories, including approximately $70,000 in rent and
professional fees, $50,000 in contract labor, advertising, and office supplies,
and $20,000 in telephone, recruiting, and postage expenses.
Due to the Company's continued losses, we are critically reviewing all locations
and closing non-profitable locations where appropriate. Due to this we have
reported Restructuring Charge in our in Statement of Operations of approximately
$207,000 for the quarter ended June 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
We are currently seeking to expand our merchant services offerings in bankcard,
gift and loyalty and POS equipment leasing.
JUNE 30, 2006 JUNE 30, 2005 $ CHANGE % CHANGE
Cash $ 111,837 $ 635,775 $ (523,938) (82%)
Accounts Payable and $ 1,581,178 $ 1,100,363 $ 480,815 44%
Accrued Expenses
Accounts Receivable $ 274,330 $ 495,566 $ (221,236) (45%)
Proceeds from sale of $ 215,000 $ - $ 215,000 100%
Common Stock
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We have financed our operations during the quarter primarily through the receipt
of proceeds from the sale of GlobalTech Leasing, the draw of $250,000 on the
line of credit, sales common stock subscriptions and use of cash on hand. As of
June 30, 2006, we had total current liabilities of $2,443,487 compared to
$3,413,522 as of December 31, 2005. The increase in current liabilities is
primarily due to an increase in Accrued Expenses and Current Notes payable. We
had no long term liabilities during any of these periods.
Cash decreased 82% as of June 30, 2006 due to the acquisition costs incurred for
the purchase of merchant portfolios ($220,084, gross cash) and payments of
Accounts Payable.
As of June 30, 2006, our accounts receivable of $274,330 compared to $495,566 at
December 31, 2005 partially due to an allowance of $130,000 recorded in the
second quarter.
Due to the Company's continued losses, we are critically reviewing all locations
and closing non-profitable locations where appropriate. Due to this we have
reported a Restructuring Charge in our in Income statement of approximately
$207,000 for the quarter ended June 30, 2006. This amount has increased our
Accrued Expenses as well.
As of June 30, 2005, the Company did not have any common stock transactions
resulting in proceeds; transactions as of June 30, 2006 resulted in common stock
subscription proceeds of $215,000. The Company issued 929,242 common shares in
2005 compared to 80,000 common shares in 2006. Management believes that it will
be able to fund the Company through its present cash position and the
continuation of revenue producing activities by its subsidiaries ICE and NEOS.
We will need to seek further capital through the sale of our capital stock
and/or the issuance of debt in order to continue to grow the Company.
We had $111,837 cash on hand and $522,350 of cash held in escrow for the
GlobalTech Leasing sale as of June 30, 2006 compared to $748,040 as of December
31, 2005. We will continue to need additional cash during the following twelve
months and these needs will coincide with the cash demands resulting from our
general operations and planned expansion. There is no assurance that we will be
able to obtain additional capital as required, or obtain the capital on
acceptable terms and conditions.
