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 services and Gift &
Loyalty products. We find these merchants primarily through our independent
outside agent channel of distribution.
OVERVIEW
We are a provider of credit and debit card-based payment processing services and
Gift & Loyalty products to small merchants. As of September 30, 2007, we
provided our services to 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. Our Gift & Loyalty products enable
our merchants to offer customized merchant branded gift and loyalty cards and
programs.
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, 2006.
DEVELOPMENT OF OUR BUSINESS
International Card Establishment, Inc. (the "Company") (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 and could be defined as a "shell" company, 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 18, 2003, 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.
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.
International Card Establishment, Inc. (the "Company"), a Nevada corporation, is
a provider of diversified products and services to the electronic transaction
processing industry, offering merchant accounts for the acceptance and
processing of credit and debit cards, as well as a proprietary "smart card"
based gift and loyalty program. The Company's Merchant Card Services division
establishes "merchant accounts" for businesses that enable those businesses to
accept credit cards, debit cards, and other forms of electronic payments from
their customers; supplies the necessary card readers and other point-of-sale
transaction systems; and facilitates payment processing for the accounts.
Through its NEOS Subsidiary the Company also markets a proprietary "Smart
Card"-based system that enables merchants to economically offer store-branded
gift and loyalty cards - one of the fastest growing product categories in the
industry.
As used in these Notes to the Consolidated Financial Statements, the terms the
"Company", "we", "us", "our" and similar terms refer to International Card
Establishment, Inc. and, unless the context indicates otherwise its consolidated
subsidiaries. The 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 was dormant in 2006 and 2005.
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
2006, the Company changed its processing of credit card transactions to a manner
that allowed the recognition of gross processing revenues, and we restructured
ourselves to be more cost effective and efficient. In 2007, the Company
continues to look for additional cost savings and better revenue streams. We
have significantly tightened our underwriting criteria for the purpose of
lowering our exposure to bad debt for bank card processing. The initial impact
of this new credit criterion caused the elimination of several large processing
accounts and related revenue streams, which resulted in a decline of net
revenues and gross profit for the period ended September 30, 2007 as compared to
the period ended September 30, 2006. We anticipate that this trend will continue
until such time as we are able to increase our overall gross sales under the new
criteria. We are attempting to increase our sales agent base and identify
strategic relations for resale of our services. There is no assurance that we
will be successful in growing our agent base given the extremely competitive
environment for recruiting sales agents or that attrition of our bank and gift &
loyalty card portfolios will not continue to exceed new activations.
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 our allowance for doubtful accounts.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
REVENUES
The Company provides merchant services and customer support for merchants and
other Merchant Services providers. Revenues are recognized as customer services
are provided.
The Company provides merchant services to customers for acceptance and
processing of electronic payments. Credit card processing fees are recognized as
incurred. Sales and cost of sales of equipment are recognized when the equipment
is provided and the customer accepts responsibility for the payment of the
equipment.
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 SEPTEMBER 30, 2007 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2006
Results of operations consist of the following:
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006 $ CHANGE % CHANGE
Net Revenues $ 2,162,336 $ 2,827,008 $ (664,672) (24%)
Cost of Revenues 1,416,596 1,636,215 (219,619) (13%)
___________________________________________________________________________
Gross Profit 745,740 1,190,793 (445,053) (37%)
Operating, General and
Administrative Costs 1,343,918 1,134,356 209,562 18%
___________________________________________________________________________
Net Operating Loss $ (598,178) $ 56,437 $ (654,615) (1160%)
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Net revenues decreased by $664,672 from $2,827,008 for the three months ended
September 30, 2006 to $2,162,336 for the three months ended September 30, 2007
because of reduced sales due to tighter controls on new accounts, elimination of
high risk accounts, and the reduction in residuals due to attrition to both the
Merchant portfolios.
The costs associated with the merchant account services decreased by
approximately 13% or $219,619 primarily due to a $430,665 decrease in commission
expense, resulting from the consolidation of operations from our Neos subsidiary
to ICE Nevada in the third quarter of 2006.
General and administrative costs increased by approximately $209,562 from
$1,134,356 for the three months ended September 30, 2006 to $1,343,918 for the
three months ended September 30, 2007 because of changes instituted in April of
2007 to the methodology used to measure the allowance for doubtful accounts and
the corresponding bad debt expense. While theses changes have lowered net
revenues and increased general and administrative expenses, their net effect is
to increase the quality of reported earnings.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2006
Results of operations consist of the following:
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006 $ CHANGE % CHANGE
Net Revenues $ 6,929,718 $ 7,683,082 $ (753,364) (10%)
Cost of Revenues 4,515,171 5,243,888 (728,717) (14%)
________________________________________________________________________
Gross Profit 2,414,547 2,439,194 (24,647) (1)%
Operating, General and
Administrative Costs 3,431,815 5,406,793 (1,974,978) (37%)
________________________________________________________________________
Net Operating Loss $(1,017,268) $(2,967,599) $1,950,331 (66%)
|
Net revenues fell by 10% from $7,683,082 for the nine months ended September 30,
2006 to $6,929,718 compared to the nine months ended September 30, 2007
primarily because of reduced sales due to tighter controls on new accounts,
elimination of high risk accounts, and the reduction in residuals due to
attrition of the Merchant portfolio. Furthermore, these policies caused a
corresponding $728,717 decrease in the cost of revenues from $5,243,888 for the
nine months ended September 30, 2006 to $4,515,171 for the nine months ended
September 30, 2007.
Operating, general, and administrative costs decreased by $1,974,978 from
$5,406,793 for the nine months ended September 30, 2006 to $3,431,815 during the
nine months ended September 30, 2007 primarily because of cost reductions of
$500,778 in payroll expenses, $800,816 in compensation expense for stock option
awards, $368,277 in bad debts expense, $118,830 in consulting fees, and $218,632
in office expenses relating to the consolidation of operations from the Irvine,
CA office to our headquarters in Camarillo, CA. We do not expect dramatic
fluctuations in expenses in future periods barring corresponding fluctuations in
revenues.
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, 2007 SEPTEMBER 30, 2006 $ CHANGE % CHANGE
Cash $ 131,380 $ 157,528 $ (26,148) (17%)
Accounts Payable and
Accrued Expenses $ 594,831 $ 865,336 $ (270,505) (31%)
Accounts Receivable, net $ 36,904 $ 87,705 $ (50,801) (58%)
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We have financed our operations during the year primarily through sales and use
of cash on hand. As of September 30, 2007, we had total current liabilities of
$1,727,216 compared to $1,980,213 as of December 31, 2006. The decrease in
current liabilities is primarily due to a decrease in Accrued Expenses and
paying down Accounts Payable.
Cash decreased 17% as of September 30, 2007 due to the above and the issuance of
a $50,000 Note Receivable in the second quarter.
As of September 30, 2007, our accounts receivable, net decreased to $36,904
compared to $87,705 at December 31, 2006. The relating allowance for doubtful
accounts decreased from $280,595 at December 31, 2006 to $243,871 as of
September 30, 2007 because of a wholesale restructuring of credit policies, the
tightening of requirements for the extension of credit, the scrubbing of our
accounts receivable portfolio of all risky accounts, and the implementation of
an aggressive collections policy.
As of September 30, 2007, 4,500 shares of preferred stock were converted into
1,200,000 shares of common stock, resulting in a $555 decrease to additional
paid-in capital. We had $131,380 cash on hand as of September 30, 2007 compared
to $157,528 as of December 31, 2006. 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.
