Schimatic Technlgs, Inc - Recent Material Event
<![CDATA[SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Description Pages
<S> <C>
Special Introductory Notes.......................................................................................1
Part I
Item 1 Description of Business................................................................................2
Item 2 Description of Property................................................................................4
Item 3 Legal Proceedings......................................................................................5
Item 4 Submission of Matters to a Vote of Security Holders....................................................6
Part II
Item 5 Market for Common Equity and Related Stockholder Matters...............................................7
Item 6 Management's Discussion and Analysis or Plan of Operation.............................................10
Item 7 Financial Statements..................................................................................12
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................13
Item 8A Controls and Procedures...............................................................................13
Item 8B Other Information.....................................................................................13
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act..........................................................................................14
Item 10 Executive Compensation................................................................................15
Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........16
Item 12 Certain Relationships and Related Transactions........................................................17
Item 13 Exhibits and Reports on Form 8-K......................................................................18
Item 14 Principal Accountant Fees and Services................................................................19
Signatures............................................................................................19
</TABLE>
ii
SPECIAL INTRODUCTORY NOTES
Forward-Looking Information
This Annual Report on Form 10-KSB includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are based on our beliefs and assumptions, and on
information currently available to us. The words "anticipated," "believe,"
"expect," "plan," "intended," "seek," "estimate," "project," "could," "may," and
similar expressions are intended to identify forward-looking statements. These
statements include, among others, information regarding future operations,
future capital expenditures, and future net cash flow. Such statements reflect
our current views with respect to future events and financial performance and
involves risks and uncertainties, including general economic and business
conditions, changes in foreign, political, social and economic conditions,
regulatory initiatives and compliance with governmental regulations, the ability
to achieve further market penetration and additional customers, and various
other matters, many of which are beyond our control. Our future results and
stockholder values may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Investors are
cautioned not to put undue reliance on any forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Securities Exchange Act.
Filing of Delinquent Reports
This delinquent report is filed for the year ended December 31, 2006,
and is one of several reports for subsequent periods that we are filing under
Section 13 of the Securities Exchange Act after their respective due dates. The
requirement to file the associated quarterly reports for this period has been
waived by the Securities and Exchange Commission. The unaudited quarterly data
that would normally be included in the required quarterly reports is contained
herein, at the end of Item 7 Financial Statements. This report contains
information for the period to which this report relates, but does not contain
all information covering periods subsequent to the report period. For
information covering other periods, please see the applicable reports for such
period.
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Schimatic Cash Transactions Network.com, Inc. (the "Company") was
originally incorporated in the State of Florida under the name of Apple Tree
Capital Corp. on October 4, 1996. Apple Tree Capital Corp. never had any assets
or commenced operations.
On November 12, 1998, Apple Tree simultaneously acquired Schimatic
Technologies, Inc. and R&D Technology Inc., two privately held Nevada
Corporations. On this date Apple Tree Capital Corp's name was changed to
Schimatic Technologies, Inc.
Schimatic Technologies, Inc. had been organized principally based on a
business model for the future development of a freestanding Internet kiosk
capable of economical domestic and international funds transfers. R&D
Technology, Inc. had been organized based on a business model for the future
development of technology for the three-dimensional, virtual reality
presentation of products in freestanding Internet kiosks for online shopping.
In January 1999, Schimatic Technologies, Inc. changed its name to
Schimatic Cash Transactions Network.com, Inc.
In September 1999, Schimatic Cash Transactions Network.com, Inc.
acquired the business and assets of IC One, Inc., a developer of smart-card
technologies. The acquisition of IC One was treated as a reverse acquisition
under the purchase method of accounting in which the combination was reported as
a recapitalization of IC One. IC One is treated as the continuing entity for
accounting purposes, and the historical financial statements presented,
including the statement of stockholders' equity, are those of IC One. IC One was
deemed the acquirer and successor company. The key assets acquired with IC One
were patents and pending patents in the United States and other countries.
Effective November 30, 2006, the Board of Directors of Schimatic Cash
Transactions Network.com, Inc. approved the Company's Articles of Conversion
changing the Company from a Florida to a Nevada corporation (the "Articles").
Under the Articles, the Company's shares will be converted on a 1-for-1 basis.
With the acquisition of IC One, we commenced efforts to complete
commercialization of smart-card-based loyalty programs and ancillary services
and products as described in this document.
Products and Services Development
Our products and services are designed to operate in conjunction with a
variety of business applications, the largest being the retail payments
industry. This industry is comprised of retail merchants and the infrastructure
of banks and other financial institutions, and card associations and technology
suppliers that enable them to process payment transactions.
We anticipate that our software will be used to support these major
business sectors:
o Technology suppliers provide the centralized systems and services
to process the electronic payment transactions. Large issuing
banks frequently process their own charge card and electronic
payments transactions, while smaller banks and other financial
institutions outsource processing. Large processors have
established market dominance through consolidation and subsequent
economies of scale. Merchants pay fees to the banks for the
privilege of accepting credit cards.
o Retail merchants and product manufacturers use discounts, points
programs and other incentives to differentiate themselves from
their competitors and to increase loyalty in the form of repeat
spending or to initiate the initial purchase of a specific
product or service. These programs are typically tied to the
amount or frequency of customer spending, with the most prominent
ones directly tied to a credit or debit card. Additionally, many
other segments of the payments industry, such as the hospitality
and travel industries, have programs designed to award points for
each dollar spent that can be redeemed for free or upgraded goods
or services.
o Loyalty consultants or advertising agencies would use the
technology to implement incentive programs. The incentive
programs are used to increase spend for existing consumers as
well as to capture new consumers.
2
We believe that the retail industry, as well as various other segments,
is in the initial stages of adopting smart cards and wireless devices to replace
the magnetic stripe cards that have existed in the marketplace for nearly 30
years. As this transition occurs, we believe there is an opportunity to market
our loyalty program software to the various organizations that comprise the
industry. We anticipate the majority of our revenue will come from marketing our
software to the organizations that provide the loyalty system infrastructure as
an adjunct to the electronic payments process. This includes banks and other
financial institutions, third-party payment processors, card associations,
coalition loyalty scheme operators, consultants and other software suppliers. In
some cases, we expect that our customers may also include retail merchants or
other businesses that wish to sponsor their own loyalty programs.
The electronic payment industry is very mature, and because our
software is compatible with existing magnetic stripe card technology as well as
smart cards, we believe our software and intellectual property provide a
potential solution for those wishing to migrate from magnetic-stripe cards to
smart cards or other smart devices in order to grant loyalty rewards and
incentives.
The ability of smart cards to store data or value makes them
particularly suited to loyalty programs that track and provide incentives to
repeat customers. Stored value is more convenient and safer than cash. When
combined with a software and hardware system for processing loyalty
transactions, the smart cards and other devices provide an opportunity to
develop loyalty programs that provide users with immediate, dynamically updated
incentives.
In addition to the payments industry, we anticipate significant and
increased demand for more powerful and effective smart-card-based loyalty
programs in other industries such as gaming, transit, identification, access and
health care. We are actively seeking to introduce our intellectual property in
these other markets.
We believe that we are able to offer services that fill these needs for
all of the aforementioned industry segments.
Strategic Alliances
We have developed and will continue to seek strategic relationships
with industry participants that may provide an alternate channel to deliver our
products and services by expanding our market reach and creating incentives
through revenue or technology sharing with strategic partners. We have
established the following strategic alliances.
Phoenix Technology Holdings
On April 6, 2006, the Company entered into a License Agreement with
Phoenix Technology Holdings ("Phoenix") a Turks and Caicos Islands company.
Under the terms of the agreement, the Company granted Phoenix an exclusive
license to use the Company's technology. Also, certain portions of the Company's
debt, including a significant portion of the Senior Secured Convertible Notes,
unpaid amounts owing to Airos Group for technology development services
rendered, and accrued interest were assumed by Phoenix and ceased accruing
additional interest. In order to maintain exclusivity, the Agreement calls for
certain performance targets to be met on an annual basis by Phoenix.
Airos Group
We entered into an agreement with Airos Group to complete the current
software development and integration services on the Ingenico terminal for
Scotiabank. Airos Group's primary focus is system integration, software
development, and quality assurance for the financial services industry with a
focus on smart card and payment terminals. Airos Group has provided integration
and development services to a variety of clients. In 2003, we replaced the above
agreement with a new agreement to complete the development of all product
components, including the card, terminal and host processing, plus integration
and customization services. This agreement was terminated effective April 30,
2006 when the Company entered into an agreement with Phoenix. Airos currently
provides management and administrative services to the Company.
Thomas Jackson Performance Management, Inc.
In September 2003, the Company granted Thomas Jackson Performance
Management, Inc., an unaffiliated company, the exclusive right to act as its
authorized sales agent in the United States, Canada, Mexico, Japan and
Australia. This agreement was terminated in May 2006.
3
Intellectual Property
Our intellectual property consists of software applications and a
system built around our process and methodology patents and includes application
software for loyalty programs that reside on cards or other portable electronic
devices and the terminals for the processing of loyalty and payments. We also
have a centralized processing system for loyalty program management and
accounting that can be used for our own loyalty customers and licensed to other
electronic payment processors that offer loyalty programs.
Patents
We have U.S. Patent No. 5806045, issued on September 8, 1998, with
prior patent filings dating back to February 1994. Since that time, the patent
has also been issued in Australia (Patent No. 703349, October 1999), Mexico
(Patent No. 96/03161, November 2000), Japan (Patent No. 3416141, April 2003),
and Canada (Patent No. 2182596, April 2004). We refer to these patents issued or
pending collectively as the "Patents."
The Patents are entitled: "Method and System for Allocating and
Redeeming Incentive Credits between a Portable Device and a Base Device," and
cover processes or methodologies associated with storing and redeeming loyalty
credits and incentives on a portable device and interacting with a base device
to calculate the amount of loyalty units to be credited or redeemed.
Trademarks, Copyrights and Trade Secrets
We also rely on the protections afforded our intellectual property
under copyright, trademark and trade secret laws. We market or may market
products or services under the following trademarks:
o E-LLEGIANCE(TM) for our smart-card-based loyalty
applications;
o LOYALTY CENTRAL(TM) for our loyalty program management,
transa ction processing and accounting centralized
processing services;
o LOYALTYCENTRAL.COM(TM) for our loyalty program management
user interface; and
o SMART BANK(R) for specialized products services for
marketing to the financial services and banking industries.
Research and Development Program
We incurred expenses of approximately $125,000 during 2006. The
payments for such services were satisfied primarily through the issuance of
either stock or stock options.
Competition
Many of our existing competitors, as well as a number of potential new
competitors have longer operating histories, greater name recognition, larger
customer bases, and significantly greater financial, technical and marketing
resources than we have. Such competitors may be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, and make more
attractive offers to potential employees and distribution partners. We believe
that we can compete effectively, because we will offer our clients certain
capabilities that are protected by our patents that our competition cannot offer
without infringing our patents. However, patents can be difficult to defend and
there can be no assurance that our competitors will not develop products and
services that are equal or superior to ours, or that we can achieve greater
market acceptance than our competitors.
Employees
On December 31, 2006 we had two employees including officers. One was
located in the Las Vegas, Nevada office and one in Oakville, Ontario, Canada.
ITEM 2. DESCRIPTION OF PROPERTY
We rent our principal executive office located at 330 East Warm Springs
Road, Las Vegas, Nevada, 89119 on a month-to-month basis, for rent of
approximately $12,000 per year. These facilities are adequate for our
foreseeable needs.
4
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, and to our
knowledge, no such legal proceedings have been threatened against us, except as
follows:
Quint Star Management
On August 30, 1999, Quint Star Management, Inc. initiated an action in
the Third Judicial District Court, Salt Lake City, Utah, against IC One, Inc.,
Arthur D. Bennett and Peter J. Bennee, for unpaid rent and related charges, plus
costs and attorney's fees, under the lease on our former principal executive
offices in Salt Lake City, Utah. Quint Star Management, Inc. vs. IC One, Inc.,
Arthur D. Bennett, and Peter Bennee (case no. 990908764EV). Following the entry
of judgment against IC One for $50,541 on December 7, 2000, IC One reached a
payment arrangement under which we are obligated to pay $5,000 per month, plus
ongoing obligations under the lease. The settlement obligation is guaranteed by
the parent, Schimatic Cash Transactions Network.com, Inc., and is secured by the
equipment, inventory, accounts and chattel paper of both the parent and IC One.
We are currently in default in our obligations under this agreement. Upon the
expiration of the lease, an amended judgment of $222,765 (a provision has been
provided for in the financial statements) was entered to reflect the additional
unpaid rent, interest and attorneys' fees.
PR Newswire Association, Inc. vs. Smart Chip Technologies, L.L.C.
On May 21, 2003, PR Newswire Association, Inc. initiated an action
against the Company in the Superior Court of New Jersey, Hudson County for
unpaid amounts owed for services provided in the amount of approximately $4,000.
On July 18, 2003, a judgment was entered against the Company (a provision of
$4,000 has been provided for in the financial statements at December 31, 2004).
The Company is currently in default of the judgment and would be liable to pay
interest from the date of judgment until paid in full.
James E. Biorge
We are reviewing, with the advice of legal counsel, whether we have
legal claims that may be asserted against James E. Biorge, a founder and officer
and director of IC One at the time it was acquired in September 1999. At the
time of such acquisition, we set aside in a special trust approximately 7.8
million shares of common stock to be used to resolve claims that may be asserted
against IC One by persons claiming an interest in or claim against IC One as a
successor-in-interest to the assets, operations and liabilities of CardOne,
which Mr. Biorge had also been instrumental in founding and which had been
involved in the initial development of the intellectual properties subsequently
acquired by IC One before IC One was acquired by us. We believe that all or a
portion of the 7.8 million shares then reserved to satisfy such claims, all of
which have subsequently been used for such purpose, should properly be the
responsibility of Mr. Biorge. In 1999 we advised Mr. Biorge that we intended to
assert a claim against him to hold him responsible for the 7.8 million shares to
satisfy CardOne related liabilities as well as other damages and that we would
offset our claims against shares to be issued to him, reserving the right to
seek such further damages. After we made such assertions in 1999, Mr. Biorge
refused to accept certificates for 11,503,138 shares of our common stock to
which he otherwise may have been entitled to receive in exchange for his stock
in IC One and those shares have been cancelled. We do not believe that it is
probable that Mr. Biorge will assert any claim against us for the shares
cancelled or other damages. If he does, we intend to assert and pursue
vigorously offsetting defenses and believe that there is a reasonable
possibility that the outcome of any claim, if asserted, would not be unfavorable
to us. We may pursue claims against Mr. Biorge and seek damages in addition to
cancellation of the shares.
On October 2, 2007, James Biorge and Jami Biorge (Mr. Biorge's
daughter) initiated an action against the company in the United States District
Court for the District of Utah (Case # 07cv00129), seeking issuance of the
above-noted shares which were previously cancelled by the Company, as well as
attorney's fees and punitive damages. The Company plans to vigorously defend
itself and believes that there is a reasonable possibility that the outcome of
any claim would not be unfavorable to the Company. Additionally, the Company may
pursue claims against Mr. Biorge and seek damages in addition to cancellation of
the shares.
5
Richard Hauge and John Hipsley
As of July 31, 2002, Messrs. Hauge and Hipsley ceased their employment
with the Company and signed agreements to accept their compensation on a
deferred basis. In December 2002, they signed additional agreements releasing
all rights to any claims based on the CardOne entities, terminating their
association with the Company, and agreed to accept options to purchase 725,000
shares of common stock each. In addition, the Company agreed to issue to Mr.
Hauge 700,000 shares of our stock for work performed through December 2002.
On March 18, 2005, Richard Hauge and John Hipsley initiated an action
against the Company in the Third Judicial District Court, Salt Lake County,
State of Utah (Case # 050905213) alleging the Company breached prior employment
and settlement agreements. On July 16, 2007, Richard Hauge and the Company
entered into a separate Settlement Agreement, and the Company continues to
vigorously defend itself in the matter against John Hipsley.
Internal Revenue Service and Withholding Taxes
Our wholly owned subsidiary, IC One, Inc., has received notification
from the Internal Revenue Service that IC One has an unpaid liability for
employment taxes and amounts withheld from employees' wages for the periods from
July 1, 1999, through September 30, 2001. IC One erroneously filed an employer
tax report for the quarter ended September 30, 2001, even though it did not have
any employees and paid no payroll after June 30, 2001. Accordingly, IC One was
not required to make federal tax deposits for the periods after June 30, 2001.
The Internal Revenue Service has filed tax liens against the Company with
respect to such amounts outstanding. As of December 31, 2006, the aggregate
amount owed by IC One, together with applicable penalties and interest, for the
period from July 1, 1999, through June 30, 2001, was approximately $1,347,524.
During 2006, total payments of $52,870.52 were made to the Internal Revenue
Service with respect to this balance outstanding. The Company is attempting to
negotiate with the Internal Revenue Service regarding payment of the amounts
owed by IC One.
The total amount of unpaid employment taxes owed by the Company was
approximately $1,347,524 (including interest and penalties of approximately
$447,910). The Company continues to work with the Internal Revenue Service via
the appeals process to resolve its outstanding liability. The Company does not
believe that the liability will hinder the progress of the Company.
Utah State Tax Commission
The State of Utah has filed tax liens of approximately $58,332 as of
December 31, 2006, for unpaid employee withholding taxes and related amounts.
California Employment Development Department
The State of California has filed tax liens against us for unpaid
employee withholding taxes and related amounts aggregating approximately $77,721
as of December 31, 2006.
Nebraska Department of Revenue
The State of Nebraska has filed tax liens against us for unpaid
employee withholding taxes and related amounts aggregating approximately $5,864
as of December 31, 2006.
Other Creditors
From time to time, we are threatened by creditors to initiate
litigation to collect amounts owed by us and reported in our financial
statements. In cases in which litigation is threatened or initiated, we seek to
negotiate a settlement or forbearance agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In November 2006, the security holders voted to increase the authorized
share limit from 200,000,000 to 500,000,000 shares of common stock, $.001 par
value. The amendment was approved by the directors and shareholders. The number
of votes for the amendment by the shareholders was sufficient for approval.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 1998, our common stock has been traded in the
over-the-counter market and was quoted on the Over-the-Counter Electronic
Bulletin Board until March 2000. Thereafter, it has been quoted in the Pink
Sheets published by Pink Sheets, LLC, under the symbol SCTN. The trading volume
of the common stock is limited. This limited trading volume creates the
potential for significant changes in the trading price of the common stock as a
result of relatively minor changes in the supply and demand. It is likely that
trading prices and volumes for the common stock will fluctuate in the future,
without regard to our business activities.
The following table sets forth the high and low closing bid quotations
for our common stock as reported on the Over-the-Counter Electronic Bulletin
Board or Pink Sheets, as appropriate, for the periods indicated, based on
interdealer bid quotations, without markup, markdown, commissions or
adjustments, which may not reflect actual transactions:
High Low
---- ---
2006
Quarter ended December 31 .............. $0.090 $0.060
Quarter ended September 30.............. 0.100 0.040
Quarter ended June 30................... 0.070 0.050
Quarter ended March 31.................. 0.060 0.040
2005
Quarter ended December 31 .............. $0.080 $0.040
Quarter ended September 30.............. 0.080 0.030
Quarter ended June 30................... 0.070 0.040
Quarter ended March 31.................. 0.090 0.050
2004
Quarter ended December 31............... $0.090 $0.060
Quarter ended September 30.............. 0.120 0.070
Quarter ended June 30................... 0.180 0.090
Quarter ended March 31.................. 0.190 0.120
As of December 31, 2006, we had approximately 1,000 stockholders of
record. We are unable to estimate the number of beneficial owners of our shares.
Penny Stock Regulations
The Securities and Exchange Commission, or SEC, has promulgated rules
governing over-the-counter trading in penny stocks, defined generally as
securities trading below $5 per share that are not quoted on a securities
exchange or NASDAQ or which do not meet other substantive criteria. Under these
rules, our common stock is currently classified as a penny stock. As a penny
stock, our common stock is currently subject to rules promulgated by the SEC
that impose additional sales practice requirements on broker-dealers that sell
such securities to persons other than established customers and institutional
accredited investors. For transactions covered by the rule, the broker-dealer
must make a special suitability determination for the purchaser and receive the
purchaser's written consent to the transaction prior to sale. Further, if the
price of the stock is below $5 per share and the issuer does not have $2.0
million or more net tangible assets or is not listed on a registered national
securities exchange or NASDAQ, sales of such stock in the secondary trading
market are subject to certain additional rules promulgated by the SEC. These
rules generally require, among other things, that brokers engaged in secondary
trading of penny stocks provide customers with written disclosure documents,
monthly statements of the market value of penny stocks, disclosure of the bid
and asked prices, and disclosure of the compensation to the broker-dealer and
the salesperson working for the broker-dealer in connection with the
transaction. These rules and regulations may affect the ability of
broker-dealers to sell our common stock, thereby effectively limiting the
liquidity of our common stock. These rules may also adversely affect the ability
of persons that acquire our common stock to resell their securities in any
trading market that may exist at the time of such intended sale.
7
Dividend Policy
We have never paid cash dividends on our common stock and do not
anticipate that we will pay dividends in the foreseeable future. We intend to
use any future earnings primarily for the expansion of our business.
Transfer Agent
Our registrar and transfer agent is Standard Registrar and Transfer
Agency, 673 Bluebird N.E., Albuquerque, New Mexico 87122-1805, telephone number
(505) 828-2839.
Equity Compensation Plan Information
As of December 31, 2006, we had issued options to purchase common
stock, but had no equity compensation plan that had been approved by our
stockholders. The following table shows the options issued and issuable under
our equity compensation plans:
<TABLE>
<CAPTION>
Number of securities
available for future
issuance under equity
Number of securities to be Weighted average exercise compensation plans
issued upon exercise of prices of outstanding (excluding securities
Plan Category outstanding options options reflected in column (a))
------------------------ ------------------------ ------------------------- ------------------------
(a) (b) (c)
------------------------ ------------------------- ------------------------
<S> <C> <C> <C>
Equity compensation plans
approved by stockholders -- -- --
Equity compensation plans not
approved by security holders 36,916,533 $0.10 --
----------
Total................. 36,916,533 $0.10 --
==========
</TABLE>
As of December 31, 2006, we had outstanding options granted to various
current and former employees, consultants and others, including executive
officers and directors, to purchase an aggregate of 36,916,533 shares. The
options were granted at various exercise prices that were at or below the market
price for our common stock as of the date of grant. Such options are fully
exercisable without meeting any future vesting requirements. Such options are
not incentive stock options under the criteria established by the Internal
Revenue Service.
We have granted to current and former officers, directors and employees
the option to convert an aggregate of $1,556,125 in accrued and past due
salaries and consulting fees as of December 31, 2006, into an aggregate of
22,212,917 shares of common stock at such time as they may deem appropriate.
Recent Sales of Unregistered Securities
During the year ended December 31, 2006, we issued securities without
registration under the Securities Act of 1933 on the terms and circumstances
described in the following paragraphs.
Unless otherwise indicated, all transactions were the result of
arm's-length negotiations. Transactions involving the issuances of securities to
persons that, at the time of such transactions, were either executive officers,
directors, principal stockholders, or other affiliates are noted and were not
the result of arm's length negotiations. In each case of the issuance of
securities to affiliates, unless otherwise noted, such affiliates purchased
securities on the same terms at which securities were sold to unrelated parties
in contemporaneous transactions, and such transactions were approved unanimously
by the disinterested directors.
Certificates for all securities issued in the following transactions
bore a restrictive legend conspicuously on their face and stop-transfer
instructions were noted respecting such certificates on our stock transfer
records. The recipients acknowledged in writing that they were receiving
restricted securities and consented to a legend on the certificates issued and
stop-transfer instructions with the transfer agent.
8
Common Stock
<TABLE>
<CAPTION>
Transaction Number
----------- ------
<S> <C>
Common Stock Outstanding at December 31, 2005 193,274,003
Financial, Development and Administrative Services.............................. 15,964,179
In February, July, August and December 2006, we issued an aggregate of
15,964,179 shares of restricted common stock to five parties, each of
whom was an accredited investor, as payment of $931,384 in financial,
development and administrative services, or an average of approximately
$0.06 per share. On the dates on which such transactions occurred
during the above period, the market price for the common stock ranged
between $0.05 and $0.07 per share.
Common Stock Outstanding at December 31, 2006 209,238,182
===========
</TABLE>
Issuance of Convertible Notes
At December 31, 2006, we had outstanding secured convertible notes
payable of $237,000 (2005: $2,991,316) bearing interest at a rate of 12%
annually and secured by the Company's intellectual property. The notes mature at
various dates extending through September 2004. In a letter to note holders on
December 30, 2004, the Company advised all note holders that there had been a
technical delay in conversion to Common Stock, and that notes would be extended
on a month-by-month basis until resolution. In April 2006 note holders were
given three options; Option 1 was to assign the secured note and accrued
interest outstanding to Phoenix. Option 2 was to continue to earn interest on
the note until the Company was in a position to convert the note into common
stock. This happened in November 2006 when the Company's authorized share limit
was increased from 200,000,000 to 500,000,000. Option 3 was to pay off the
principal and interest outstanding on the note.
Secured Convertible Promissory Notes Payable:
Balance - December 31, 2005 $ 2,991,316
Notes issued during 2006 57,000
Notes assigned to Phoenix (2,811,316)
Notes converted to SCTN shares --
Notes paid out in full --
------------
Ending Balance - December 31, 2006 $ 237,000
============
The subscribers of the above notes were one or more of the following: a
regular employee/consultant, an existing stockholder, or a family member or
personal or business associate of an affiliate, an employee, or a then-current
stockholder. Each was able to bear the financial risk of the investment. One or
more of our executive officers negotiated each transaction. No general
solicitation was used, no commission or other remuneration was paid in
connection with such transactions, and no underwriter participated. The
recipients acknowledged in writing that the notes constituted restricted
securities and that any stock received on conversion would constitute restricted
securities and consented to a legend on the certificates to be issued and
stop-transfer instructions with the transfer agent.
At December 31, 2006, convertible promissory notes were convertible
into an aggregate of 4,740,000 shares of common stock.
9
Uncompleted Securities Transaction with CEO America
On May 17, 2002, the Company signed an agreement with CEO America, a
wholly-owned subsidiary of Consumer Economic Opportunities, whereby CEO America
agreed to pay an initial $150,000 to the Company and a second payment of
$350,000 on June 20, 2002 for ownership of the SCTN Patents with exclusive
rights for use of the patents being retained by SCTN. The agreement was to
include a 20% equity swap of the two companies. On June 4, 2002, the Company
placed title to the patents in escrow. In connection with the agreement, the
Company placed in escrow a certificate for 30,116,134 shares of SCTN common
stock as collateral. On July 2, 2002, CEO had not delivered the balance of the
money, nor had they complied with any other conditions of the escrow agreement.
The patent title and stock certificate were to remain in escrow pending either
repayment of the original $150,000 to CEO, or until the matter is settled. The
shares of common stock deposited in escrow were not considered to have been
issued or outstanding, and on April 19, 2005 the share certificate for
30,116,134 shares was cancelled. The $150,000 received from CEO America is
recorded as a non-interest bearing liability.
Option Grants
During the year ended December 31, 2006, we granted no options to
persons who were then officers, directors or others.
Exemptions from Registration
Each of the above transactions was effected in reliance on the
exemption from registration provided in Section 4(2) of the Securities Act of
1933 as transactions not involving any public offering. In each case, the
offering was limited and without any general solicitation, there were a limited
number of investors, and the investors were sophisticated relative to an
investment in the Company and able to bear the economic risks of their
investment. Each transaction was negotiated with an officer of the Company to
answer questions from the investors and provide additional material information
requested, to the extent it could be provided without unreasonable effort or
expense. The investors had access to material information of the kind that
registration would provide. All certificates contained a restrictive legend and
stop-transfer instructions were placed against transfer of the certificates in
the absence of registration or an available exemption.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We caution readers that important facts and factors described in this
Management's Discussion and Analysis of Financial Condition or Plan of Operation
and elsewhere in this document sometimes have affected, and in the future could
affect, our actual results, and could cause our actual results during the
current year and beyond to differ materially from those expressed in any
forward-looking statements made by us or on our behalf.
As indicated in the Report of Independent Registered Public Accounting
Firm accompanying the financial statements in this report, we have suffered
recurring losses since inception, had significant negative cash flows from
operations, and have a net capital deficiency that raises substantial doubt
about our ability to continue as a going concern.
Management is actively seeking additional equity or a combination of
equity and debt financing from new stockholders and/or lenders. In the past, we
have relied on issuing stock for outside services and for compensation to fund
our operating shortfalls; however, there is no assurance that we can continue to
fund a significant portion of our operating needs in this manner. In addition, a
significant portion of the $22.2 million in current liabilities is more than a
year past due. We are attempting to negotiate settlements of some of these debts
and continue to seek forbearance on others; however, there is no guarantee that
we will be successful in continuing to do so. Should we fail to obtain financing
on terms acceptable to us or negotiate settlements on past due debts, or fail in
obtaining forbearance, we may be forced by creditors to take other actions
including seeking protection under bankruptcy proceedings. There can be no
assurance that funding will be available on acceptable terms, if at all, or that
such funds, if raised, would enable us to achieve and maintain profitable
operations.
Authorized Common Stock
As of December 31, 2006, we were authorized to issue 500.0 million
shares of common stock. At December 31, 2006, we had approximately 209.2 million
shares outstanding and an additional approximately 253.9 million shares issuable
upon the conversion of stock options, convertible debt and deferred
compensation.
10
Results of Operations
During 2006, we incurred total expenses of approximately $3.9 million
compared to approximately $7.6 million in 2005. The decrease in expenses in 2006
as compared to 2005 is principally reflected in substantial decreases in
research and development expenses to approximately $125,000 in 2006, as compared
to approximately $1.6 million in 2005, decreases in interest expense to $2.0
million in 2006, as compared to $4.7 million in 2005, as well as decreases in
general and administrative expenses.
Net Loss
The net loss for the year ended December 31, 2006, was approximately
$3.8 million as compared to $7.6 million in the same period in 2005. The change
in the net loss was due to decreases in research and development, interest
expenses, and general and administrative expenses.
Basic and diluted net loss per share for the fiscal year ended December
31, 2006, was $(0.02), compared to basic and diluted net loss per share of
$(0.04) for the fiscal year ended December 31, 2005.
Liquidity
Although we generated approximately $345,000 from financing activities,
our operating activities used net cash of approximately $348,000. These
activities contributed to a net working capital deficit as of December 31, 2006,
of approximately $22.1 million.
Net cash used in operating activities for the fiscal year ended
December 31, 2006, was approximately $348,000, a decrease of approximately
$172,000 over the approximately $520,000 cash used in operating activities for
the fiscal year ended December 31, 2006.
Capital Resources
Through December 31, 2006, we do not currently have any material
commitments for capital expenditures other than those expenditures incurred in
the ordinary course of business.
From inception to December 31, 2006, our operating and investing
activities have used substantially more cash than they have generated. Because
we will continue to need substantial amounts of working capital to fund the
growth of our business, we expect to continue to experience significant negative
operating and investing cash flows for the foreseeable future. This estimate is
a forward-looking statement that involves risks and uncertainties. We will need
to raise additional capital in the future to meet our ongoing operating and
investing cash requirements. We may not be able to find additional financing on
favorable terms or at all. If we raise additional funds through the issuance of
securities, these securities may have rights, preferences or privileges senior
to those of our common stock, and our stockholders may experience additional
dilution to their equity ownership. We have a history of losses, have never been
profitable, and may never achieve profitability.
We have just started to generate revenues and do not anticipate
generating significant revenues until some time in the future. We do not know
when we will achieve profitability. We expect to continue to incur losses for
the foreseeable future and we may never be profitable. If we do achieve
profitability in any period, we cannot be certain that we will sustain or
increase such profitability on a quarterly or annual basis. From inception
through December 31, 2006, we incurred total expenses of approximately $83.3
million. The independent auditors' report accompanying the financial statements
included in this report includes an explanatory paragraph stating that the
accumulated deficit and a working capital deficiency raise substantial doubt
about our ability to continue as a going concern. (See Note 2, Going Concern, of
the Notes to Consolidated Financial Statements). The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
11
We have funded our capital requirements and our business operations
primarily with funds provided from the issuance of common stock and stock
options and from borrowings, and the sale of common stock. For the year ended
December 31, 2006, we have received $175,000 from the subscription and sale of
common stock and $170,000 from notes and loans payable. We will require
additional financing to support our operations until we become profitable. Such
sources of financing could include capital infusions, additional equity
financing, or debt offerings. Management believed that as of December 31, 2006,
we would need approximately $5.0 million in equity or debt financing to achieve
revenues at a level to cover operating costs. Management is actively pursuing
obtaining additional funds. There can be no assurance that additional funding
will be available on acceptable terms, if at all, or that such funds if raised,
would enable us to achieve and maintain profitable operations. If we are not
able to obtain sufficient additional funds from investors, we may be unable to
sustain our operations.
Application of Critical Accounting Policies
Research and development expenses consist primarily of compensation,
benefits and related expenses for personnel engaged in research and development
activities, outside contract and consulting expenses, material and supplies and
personnel costs to maintain our technology.
General and administrative expenses consist of compensation, benefits
and related expenses for personnel engaged in general management, finance and
administrative positions. They also include expenses for financial advisory,
legal and accounting fees, advisory board expenses, insurance and other
expenses.
Sales and marketing expenses consist of compensation, benefits and
related expenses for personnel engaged in sales, marketing, and related business
development activities. These expenses also include consultants, printing of
promotional materials, travel and general corporate expenses.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS
No. 109 requires the recognition of deferred tax assets and liabilities for both
the expected impact of differences between the financial statements and tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived primarily from tax loss carryforwards. The Company has established a
valuation allowance related to the benefits of net operating losses for which
utilization in future periods is uncertain. The Company believes it is more
likely than not that the Company will not realize the benefits of these
deductible differences in the near future and therefore a full valuation
allowance of approximately $28,600,000 is provided.
As of December 31, 2006, the Company has approximately $71,500,000 of
federal net operating losses available to offset future taxable income, which if
not utilized will expire in 2026. No provision for income taxes has been
recorded in the financial statements as a result of continued losses. Any
benefit for income taxes as a result of utilization of net operating losses may
be limited as a result of change in control.
Off-balance sheet arrangements
None.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements, including the auditors' report, are included
beginning at page F-1 immediately following the signature page of this report.
12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On May 18, 2007, Schwartz Levitsky Feldman LLP ("SLF") were appointed
as our new independent auditors, commencing with the audit for the years ending
December 31, 2003, 2004, 2005 and 2006. Effective May 18, 2007, we dismissed
Marcum & Kliegman LLP ("MKLLP") as our independent auditors, which action was
approved by our board of directors.
During the four most recent fiscal years and the interim period
preceding the engagement of SLF, we have not consulted with SLF regarding
either: (i) the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on our financial statements, and either a written report or oral advice
was not provided to us by SLF that was an important factor considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue;
or (ii) any matter that was either the subject of a "disagreement" or event
identified in response to Paragraph (a)(1)(iv) of Item 304, as those terms are
used in Item 304(a)(1)(iv) of Regulations S-B and S-K and the related
instructions to Item 304 of Regulations S-B and S-K.
The report of SLF on our financial statements for the fiscal year ended
December 31, 2005 contained an expression of substantial doubt regarding our
ability to continue as a going concern.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the periods covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time period specified in Securities and Exchange
Commission's rules and forms.
Changes in Internal Controls Over Financial Reporting
None.
ITEM 8B. OTHER INFORMATION
None.
13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
Our bylaws provide for a board of from one to seven directors to be
elected at each annual meeting of stockholders, with each director to serve
until the next annual meeting and until such director's successor is elected and
qualified. Officers are elected and serve at the pleasure of the board of
directors.
The following table sets forth the name, age and position of each of
our directors and executive officers at December 31, 2006:
Name Age Title
----------------- --- -------------------------------------
Miki Radivojsa 39 President, CEO, Chairman of the Board of Directors
David J Simon 60 Director
Bernard F. McHale 71 Director and CFO
Executive officers are elected by the board of directors and serve
until their successors are duly elected and qualify, subject to earlier removal
by the board of directors. Directors are elected at the annual meeting of
stockholders to serve for their term and until their successors are duly elected
and qualify, or until their earlier resignation, removal from office, or death.
The remaining directors may fill any vacancy in the board of directors for an
unexpired term.
Business Experience of Executive Officers and Directors
Miki Radivojsa, CEO of Airos Group, the Company's development partner,
joined the Company as our Chairman and CEO on August 17, 2005. Miki Radivojsa
has built a profitable and growing software development company and brings more
than 17 years of business and technical leadership experience in banking,
payments, chip, telecommunications, and embedded development. He has led the
development and deployment of more than 100 successful software projects for a
broad range of banking and payment applications including EMV, VISACASH, Mondex,
Proton, other smart card and POS applications, in addition to the construction
of Smart Chip Technologies' end-to-end loyalty, pre-paid stored value, and gift
card product suite. Mr. Radivojsa and the Airos Group were developers of the EMV
pilot in Barrie, Canada, representing the world's first multi-application smart
card implementation.
David J. Simon has been a director since November 1998 and chairman of
the board from May 1999 until August 2005. He served as chief executive officer
from May 1999 until July 1999, from November 1999 until March 1, 2000, from May
15, 2002, until June 10, 2002, from August 2003 until August 2005. He served as
president and chief executive officer for R & D Technology, Inc., a Nevada
company that he helped found, from its inception August 31, 1998, until we
acquired it in November 1998. In all of Mr. Simon's employment in the past six
years, he was involved in the architecture, design, development, maintenance and
management of computer programs, software applications and systems. His career,
including as an employee and as a consultant, has been involved with computing
technology and spanned many diverse industries including banking, healthcare,
manufacturing, stock exchange and telecommunications.
Bernard (Mac) F. McHale is the chief financial officer, treasurer and a
director. Mr. McHale has been a director since May 2002. He began his financial
services professional career 30 years ago after concluding a 20-year career in
the U.S. Navy, during which he earned his B.A. in Business Management and
Finance. Mr. McHale has been actively involved in managing his own financial
services company, Mid-America CAPITAL Group, in Las Vegas, Nevada, from December
1995 through April of 2002, until he became actively involved in the Company as
our director, treasurer and interim chief executive officer, until assuming the
position of chief financial officer in August of 2003.
Dependence on Key Management
Our performance depends substantially on the continued services and
performance of our senior management. The loss of services of one or more of
these employees could have a material adverse effect on our business. There can
be no assurance that we will be successful in attracting and retaining such
personnel. Competition for such personnel is intense.
14
Compliance with Section 16(a) of the Exchange Act
We believe all forms required to be filed under Section 16 of the
Exchange Act have been timely filed.
Code of Ethics
Due to its limited operations, the Company has not yet adopted a Code
of Ethics.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table shows the compensation paid or accrued by us for
the last three fiscal years for each person serving as our chief executive
officer during 2006. No other executive officer or other person received annual
salary and bonus of $100,000 or more during 2006. Accordingly, the summary
compensation table does not include compensation of any other executive officer
or other person:
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------- --------------------------- ---------------------
Other Restricted Securities All Other
Year Annual Stock Underlying LTIP Compen-
Name and Ended Compen- Awards Options/ Payouts sation
Principal Position Dec 31 Salary($) Bonus($) sation($) (shares) SARs(#) ($) ($)
------------------ ------ --------- -------- --------- -------- ------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Miki Radijvosa 2006 $ -- $ -- $ -- -- -- $ -- $ --
(CEO)(1) 2005 $ -- $ -- $ -- -- -- $ -- $ --
2004 $ -- $ -- $ -- -- -- $ -- $ --
</TABLE>
-------------
(1) Served as chief executive officer commencing August 2005 without
compensation.
Employment and other Agreements
Mr. McHale was engaged under a three year agreement commencing July 7,
2004 to serve as director and treasurer at compensation of $2,500 per month as
the Company's cash flow permits.
Option Grants in 2006
No options were granted to any of the executive officers named in the
summary compensation table above.
Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth information with respect to the
exercise/exercisability of options and stock appreciation rights during the last
completed fiscal year by the executive officers named in the above summary
compensation table and the fiscal year-end values of unexercised options and
stock appreciation rights:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at FY
at FY End (#) End ($)
Shares Acquired Value Realized ($) Exercisable/ Exercisable/
Name on Exercise (#) Unexercisable Unexercisable
---- --------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
David J. Simon -- -- 17,062,813/-- --/--
President (CEO)
</TABLE>
15
Director Compensation
During 2006, members of our board of directors who were not employees
received no cash compensation for services as a director or for attendance at or
participation in meetings. In the year ended December 31, 2006, there were no
options issued to board members.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 31, 2006, the name,
stockholdings and address of each person who owns of record, or was known by us
to own beneficially, 5% or more of the 209,238,182 shares of common stock then
issued and outstanding. Unless otherwise indicated, all shares consist of common
stock and all such shares are owned beneficially and of record by the named
person or group.
<TABLE>
<CAPTION>
Amount and Nature
Title of Class Name and Address of Beneficial Owner of Beneficial Ownership Percent of Class (1)
<S> <C> <C> <C> <C> <C>
Common Stock David Simon 3,957,839 Direct
330 E. Warm Springs Road. 21,161,876 (2) Options
Las Vegas, Nevada 89119 14,881,667 Rights
40,001,382 Total 8.6%
Common Stock Bernard McHale 24,783,327 Direct
7757 Foredawn Dr. - Options
Las Vegas, NV 89123 5,870,000 Rights
30,653,327 Total 6.6%
Common Stock Miki Radivojsa - (3) Direct
482 South Service Road, Suite 103 - Options
Oakville, Ontario, Canada L6J 2X6 - Rights
- Total 0.0%
Common Stock Airos Group Inc. 34,896,638 (3) Direct
482 South Service Road, Suite 103 2,900,000 Options
Oakville, Ontario, Canada L6J 2X6 - Rights
37,796,638 Total 8.2%
Shares of all named executives and directors as a group 63,637,804 Direct
(3 persons) 24,061,876 Options
20,751,667 Rights
108,451,347 Total 23.4%
</TABLE>
(1) The percent of class is calculated on the basis of the amount of outstanding
securities, plus for each person or group, any securities that person or group
has the right to acquire within 60 days pursuant to options, conversion or other
rights.
(2) Consists of options to purchase 17,062,813 shares in Mr. Simon's name and
4,099,063 in the name of Elaine Beavon-Simon
(3) Mr. Radivojsa does not individually own any shares in the Company, however,
he is the controlling shareholder of Airos Group, Inc. and as such, he has the
power to direct the voting of those shares owned by Airos Group, Inc.
16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 2002 we issued David Simon, an executive officer and
director, a secured convertible promissory note for $310,462, with interest at
12%, as evidence of our obligation to repay him un-reimbursed expenses incurred
by him on our behalf and cash advances to us. As of December 31, 2006, the
outstanding principal balance of such notes, including accrued interest, was
assigned to Phoenix Technology Holdings Inc.
Prior to becoming a director in May 2002, Bernard F. McHale purchased
on the same terms as sold to unaffiliated parties an aggregate of $180,000 in
common stock in the year 2000, $145,000 in a convertible promissory note that
was converted into stock in the year 2001, and an additional $910,000 in
principal amount of Limited Recourse Convertible Promissory Notes in the years
2001-2002, which were converted into the same principal amount of Secured
Recourse Convertible Promissory Notes on September 30, 2002. As of December 31,
2006, the outstanding principal balance of such notes, including accrued
interest, was assigned to Phoenix Technology Holdings Inc.
In April 2003, we entered into a Development Agreement with Airos Group
Inc. to complete the development of all product components, including the card,
terminal and host processing, plus integration and customization services. The
fees are payable on a deferred basis until revenues begin. Airos Group Inc.
earned 6% per month in company stock, restricted by SEC Rule 144, for all fees
deferred until product revenues begin up to a maximum of $2,000,000 worth of
stock issued. In November 2003, we amended our agreement with Airos Group Inc.
to change the terms of our agreement to five years and adjust the rate of
reimbursement to various Airos personnel. We agreed to issue Airos 12,800,000
shares of restricted common stock, with 11,300,000 issuable immediately and the
balance issuable on the execution of the first qualified customer order through
Thomas Jackson Performance Management, Inc. Airos agreed to purchase 2,000,000
shares of restricted common stock at $0.30 per share, for a total of $600,000,
payable pursuant to the terms of promissory note in 24 consecutive monthly
installments of $25,000, commencing November 2003. Effective January 2005 the
deferred interest rate was increased to 8% and effective April 2005 it was
further increased to 10%. Interest stopped accruing in April 2006 when the total
outstanding payable plus interest was assigned to Phoenix Technology Holdings
Inc.
In April 2006, the Company entered into an agreement with Phoenix
Technology Holdings Inc. when it became readily apparent to the Company's
management that the Company could no longer continue to operate as a viable
entity. Company management facilitated this agreement since the Company simply
did not have the capital to continue with its technology development, or to
integrate and deploy its technology to potential clients. The Company's
financial instability would not have allowed it to pass a due diligence test
with prospects desiring to license the Company's technology. To move the company
forward as a viable entity, Company management eliminated all expenses and risks
associated with marketing, sales, development as well as operational support
activities by exclusively licensing the Company's technology to Phoenix. This
action facilitated and increased the potential profitability of the Company by
eliminating expenses for the services that would be provided by Phoenix and by
eliminating significant interest expense. The services that would be provided by
Phoenix are estimated to be 50 to 70% of the gross revenue that would be
received by Phoenix. The agreement provides that the Company would receive 20%
of all Phoenix gross transaction revenue without exposing the Company to any of
the expenses and risk factors that Phoenix faces on every project. Phoenix`s
profitability is based on its operational efficiency including the minimizing of
operational risks concerning integration and deployment of the Company's
patented technology. This agreement has effectively transformed the Company into
a patented licensing loyalty technology company while retaining patented
intellectual property ownership within the Company. Most of the Company's gross
revenue will be net revenue since the Company has only two employees and minimal
overhead. Phoenix is contracting approximately 25 employees that provide
services to the Company. Almost all funding and revenue received by Phoenix fund
operational activities that produce income for both companies without additional
risk to the Company. No accrued salaries were part of notes assigned into
Phoenix and interest accrual stopped on secured notes and the Airos debt once
the agreement was entered into.
17
ITEM 13. EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Title of Document Location
--------- --------------------------------------------------------------------------- -------------
Item 3. Articles of Incorporation and ByLaws
--------- --------------------------------------------------------------------------- -------------
<S> <C> <C>
3.01 Articles of Incorporation of Apple Tree Capital Corp., filed October 4, 1996 Incorporated by
Reference(2)
3.02 Articles of Amendment to Apple Tree Capital Corp. (name change to Schimatic Incorporated by
Technologies, Inc.) filed November 13, 1998 Reference(1)
3.03 Articles of Amendment to Schimatic Technologies, Inc. (name change to Incorporated by
SCHIMATIC Cash Transactions Network.com, Inc.) filed January 15, 1999 Reference(2)
3.04 Bylaws of SCHIMATIC Cash Transactions Network.com, Inc. dated Incorporated by
January 15, 1999 Reference(2)
3.05 Articles of Amendment to Articles of Incorporation of SCHIMATIC Cash Incorporated by
Transactions Network.com, Inc. dated June 30, 1999, filed June 26, 2000 Reference(3)
3.06 Amendment to Articles of Incorporation (increase authorized shares to Incorporated by
500,000,000), dated November 29, 2006 Reference(4)
3.07 Articles of Conversion Changing SCHIMATIC Cash Transactions Network.com, Incorporated by
Inc. from a Florida Corporation to a Nevada Corporation, dated December 22, 2006 Reference(5)
--------- --------------------------------------------------------------------------- -------------
Item 10. Material Contracts
--------- --------------------------------------------------------------------------- -------------
10.01 Agreement with Phoenix Technology Holdings Inc. dated April 6, 2006 This filing
--------- --------------------------------------------------------------------------- -------------
Item 31 Section 302 Certifications
--------- --------------------------------------------------------------------------- -------------
31.01 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 This filing
31.02 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
This filing
--------- --------------------------------------------------------------------------- -------------
Item 32 Section 1350 Certifications
--------- --------------------------------------------------------------------------- -------------
32.01 Certification of Chief Executive Officer Pursuant to Section 906 of the This filing
Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 This filing
</TABLE>
------------------------------
(1) Incorporated by reference from Amendment No. 3 to Form 10-SB/A filed on
September 10, 2001.
(2) Incorporated by reference from Amendment No. 2 to Form 10-SB/A filed on
April 13, 2000.
(3) Incorporated by reference from Amendment No. 5 to Form 10-SB/A filed on
February 14, 2002.
(4) Incorporated by reference from an exhibit to Form 8-K filed on January 9,
2007
(5) Incorporated by reference from an exhibit to Form 8-K filed on March 22,
2007
18
(b) Reports on Form 8-K:
(i) Form 8-K dated April 6, 2006 and filed January 8,
2007 and incorporated herein by reference, Entry into
Agreement with Phoenix Technology Holdings
Incorporated.
(ii) Form 8-K dated November 29, 2006 and filed January 9,
2007 and incorporated herein by reference, Amendment
to Articles of Incorporation to increase the
authorized shares to 500,000,000 at $.001.
(iii) Form 8-K dated December 22, 2006 and filed March 22,
2007 and incorporated herein by reference, Articles
of Conversion Changing SCHIMATIC Cash Transactions
Network.com, Inc. from a Florida Corporation to a
Nevada Corporation.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to the Company by its
principal accountants during the fiscal years ended December 31, 2006 and
December 31, 2005.
Fee Category 2006 2005
--------------------------------------------------------------------------------
Audit Fees $15,800 $15,800
Audit-Related Fees $0 $0
Tax Fees $0 $0
All Other Fees $0 $0
Audit Fees consists of fees for professional services provided by our
principal accountants for the audit of the Company's annual financial statement
and reviews of the quarterly financial statements included in the Company's
statutory and regulatory filings.
The Company does not have an Audit Committee, therefore, there is no
Audit Committee policy with respect to pre-approval of audit and non-audit
services of independent auditors. All services provided by our principal
accountant are performed in accordance with a written engagement letter between
us and the principal accountant. The Company approves all professional services
undertaken by the principal accountant prior to their execution.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, this report has been signed below on the registrant and in the
capacities and on the dates indicated.
SCHIMATIC Cash Transactions Network.com, Inc.
Dated: February 8, 2008 /s/ Miki Radivojsa
---------------------------------------
Miki Radivojsa, President and
Chief Executive Officer
Dated: February 8, 2008 /s/ Bernard F. McHale
---------------------------------------
Bernard F. McHale
Treasurer (Chief Financial Officer)
19
PART II
Item 7. FINANCIAL STATEMENTS
FORM 10-KSB
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2006 AND 2005
Together With Report of Independent Registered Public Accounting Firm
(Amounts expressed in US Dollars)
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm .....................F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005.................F-3
Consolidated Statements of Operations and Comprehensive Loss for
the years ended December 31, 2006 and 2005...................................F-4
Consolidated Statements of Changes in Stockholders' Deficiency
for the years ended December 31, 2006 and 2005...............................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2006 and 2005...................................................F-7
Notes to Consolidated Financial Statements...................................F-9
F-1
Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
LICENSED PUBLIC ACCOUNTANTS
TORONTO o MONTREAL
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Schimatic Cash Transactions
Network.Com, Inc.
We have audited the accompanying consolidated balance sheets of Schimatic Cash
Transactions Network.Com, Inc. (the "Company") as at December 31, 2006 and 2005
and the related consolidated statements of operations and comprehensive loss,
cash flows and stockholders' deficiency for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Schimatic Cash Transactions Network.Com, Inc. as of December 31,
2006 and 2005, and the results of its operations and comprehensive loss and its
cash flows for the years ended December 31, 2006 and 2005, in accordance with
generally accepted accounting principles in the United States of America.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred net losses since
inception. Additionally, the Company has a net working capital deficiency and
stockholders' deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
"SCHWARTZ LEVITSKY FELDMAN LLP"
Toronto, Ontario, Canada Chartered Accountants
January 14, 2008 Licensed Public Accountants
1167 Caledonia Road
Toronto, Ontario M6A 2X1
F-2
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Consolidated Balance Sheets
As of December 31, 2006 and 2005
(Amounts expressed in US Dollars)
<TABLE>
<CAPTION>
2006 2005
$ $
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash 9,006 11,542
Prepaid Expenses and other 10,720 42,499
----------- -----------
TOTAL CURRENT ASSETS 19,726 54,041
----------- -----------
TOTAL ASSETS 19,726 54,041
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable - Vendor (note 11) 2,218,200 1,963,800
Accounts payable - other 1,566,606 7,166,788
Accounts Payable-Phoenix (note 16) 8,387,164 -
Accrued wages and payroll taxes (note 14) 1,526,550 1,499,196
Deferred compensation (note 7) 5,959,206 4,182,715
Loans - CEO America (note 6) 150,000 150,000
Loans -Phoenix (note 16) 110,490 -
Amounts owed to employees and officers (notes 3 and 4) 2,003,500 1,337,027
Short term loans (note 12) 500 500
Convertible notes payable (including amounts owed to officers
$0 prior year $1,220,462 (note 5)) 237,000 2,991,316
----------- -----------
TOTAL CURRENT LIABILITIES 22,159,216 19,291,342
----------- -----------
GOING CONCERN (note 2)
COMMITMENTS AND CONTINGENCIES (notes 13, 14, 16, 17 and 19)
RELATED PARTY TRANSACTIONS (note 18)
SHAREHOLDERS' DEFICIENCY (note 9):
Common stock - $.001 par value; 500,000,000 shares
authorized; 209,238,182 shares issued and outstanding 209,238 193,274
(2005: 193,274,003)
Additional paid-in capital 60,921,925 60,006,504
Common stock subscription receivable - (175,000)
Common stock subscribed - 200,000
Deficit (83,270,653) (79,462,079)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIENCY (22,139,490) (19,237,301)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 19,726 54,041
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2006 and 2005
(Amounts expressed in US Dollars)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------------
2006 2005
---- ----
<S> <C> <C>
REVENUES : $ 131,357 $ -
------------- -------------
EXPENSES:
Selling, general and administrative 1,339,004 2,951,119
Interest expense 2,600,927 4,690,950
------------- -------------
TOTAL EXPENSES 3,939,931 7,642,069
------------- -------------
NET LOSS (3,808,574) (7,642,069)
============= =============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.02) $ (0.04)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 195,412,535 181,736,272
============= =============
COMPREHENSIVE LOSS
The components of comprehensive loss are as follows:
Net loss $ (3,808,574) $ (7,642,069)
Other comprehensive income (loss) foreign currency
Translation - -
Comprehensive Loss $ (3,808,574) $ (7,642,069)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Consolidated Statements of Changes in Stockholders' Deficiency
For the years ended December 31, 2006 and December 31, 2005
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
Common Common
Common Stock Additional Stock Stock
Number of Paid-in Subscription to be
Shares Amount Capital Receivable Issued Deficit Total
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
(1) BALANCE, December 31, 2004 165,714,436 165,714 57,616,113 (250,000) 500,000 (71,820,010) (13,788,183)
Issuance of stock for services
rendered:
($0.05 per share, February) 250,000 250 12,250 - 12,500
($0.05 per share, May) 1,050 1 52 53
($0.048 per share, June) 100,000 100 4,650 4,750
($0.06 per share, December) 88,669 89 5,231 5,320
Issue of stock in lieu of
interest payments:
($0.082 per share, May) 22,934,690 22,935 1,861,894 1,884,829
Issue of stock for cash:
($0.07 per share, March) 70,355 70 4,855 4,925
($0.068 per share, March) 369,550 370 24,590 24,960
($0.07 per share, April) 100,000 100 6,900 7,000
($0.09 per share, April) 100,000 100 8,900 9,000
($0.05 per share, May) 248,000 248 12,152 12,400
($0.056 per share, May) 23,571 23 1,297 1,320
($0.07 per share, May) 142,857 143 9,857 10,000
($0.08 per share, May) 125,000 125 9,875 10,000
($0.09 per share, May) 47,968 48 4,269 4,317
($0.123 per share, May) 150,000 150 18,225 18,375
($0.30 per share, May) 1,000,000 1,000 299,000 (300,000) -
($0.068 per share, May) 13,450 13 895 908
($0.08 per share, June) 62,500 63 4,937 5,000
($0.05 per share, June) 800,000 800 39,200 40,000
($0.05 per share, June) 100,000 100 4,900 5,000
($0.09 per share, June) 50,000 50 4,450 4,500
($0.05 per share, July) 200,000 200 9,800 10,000
($0.05 per share, July) 200,000 200 9,800 10,000
($0.06 per share, September) 58,413 58 3,447 3,505
($0.05 per share, October) 323,494 324 15,851 16,175
Common stock subscription
received - - - 75,000 75,000
Stock option compensation - - 13,114 - - 13,114
Net Loss - - - - - (7,642,069) (7,642,069)
BALANCE, December 31, 2005 193,274,003 193,274 60,006,504 (175,000) 200,000 (79,462,079) (19,237,301)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Consolidated Statements of Changes in Stockholders' Deficiency
For the years ended December 31, 2006 and December 31, 2005
(Amounts expressed in US dollars)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock for services
rendered:
($0.05 per share, February) 2,000,000 2,000 98,000 100,000
($0.05 per share, July) 200,000 200 9,800 10,000
($0.07 per share, August) 1,000,000 1,000 69,000 70,000
($0.05 per share, December) 3,000,000 3,000 147,000 150,000
($0.07 per share, December) 709,687 710 48,969 49,679
($0.048 per share, December) 1,153,333 1,153 54,265 55,418
($0.10 per share, December) 540,000 540 53,460 54,000
($0.046 per share, December) 1,307,080 1,307 58,277 59,584
($0.07 per share, December) 4,000,000 4,000 276,000 280,000
($0.05 per share, December) 2,054,079 2,054 100,650 102,704
Adjustment of stock to be issued
with payables to Phoenix (200,000) (200,000)
Common stock subscription
received 175,000 175,000
Net Loss (3,808,574) (3,808,574)
BALANCE, December 31, 2006 209,238,182 209,238 60,921,925 - - (83,270,653) (22,139,490)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Consolidated Statement of Cash Flows
Years Ended December 31, 2006 and 2005
(Amounts expressed in US Dollars)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------
2006 2005
-------------------------------------
$ $
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (3,808,574) (7,642,069)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock option compensation - 13,114
Common stock issued for services
and compensation 931,384 22,623
Common stock issued for interest expense - 1,884,829
Changes in current assets and liabilities:
Prepaid Expenses and other 31,778 16,073
Accounts payable and accrued expenses 2,497,435 5,185,827
-------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (347,976) (519,603)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) loans payable - shareholders - (197,385)
Proceeds from loans payable-Phoenix 88,000 -
Proceeds from notes payable 82,440 225,000
Proceeds from common stock subscription
Received 175,000 75,000
Sales of common stock - 197,385
Amounts owed to employees and officers - 217,059
-------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 345,440 517,059
-------------------------------------
NET DECREASE IN CASH (2,536) (2,544)
CASH AT BEGINNING OF PERIOD 11,542 14,086
-------------------------------------
CASH AT END OF PERIOD 9,006 11,542
-------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Consolidated Statement of Cash Flows
Years Ended December 31, 2006 and 2005
(Amounts expressed in US Dollars)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------
For the Years Ended
December 31,
------------
2006 2005
---- ----
Cash paid during the year for:
Interest $ 9,000 $ 9,000
Taxes 52,870 0
Total $ 61,870 $ 9,000
========== ==========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
--------------------------------------------
Issuance of common stock for interest $ - $1,884,829
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(Amounts expressed in US Dollars)
NOTE 1- THE COMPANY
Schimatic Cash Transactions Network.com, Inc. (the Company) is in the business
of research, development and integration of proprietary processes and software
technologies for the electronic payment industry, primarily involving consumer
loyalty programs. Schimatic Cash Transactions Network.com, Inc. operates
principally through its wholly-owned subsidiary, Smart Chip Technologies, LLC.
The Company licenses, markets and develops smart-card loyalty products through
its subsidiary, Smart Chip Technologies, LLC under the "Smart Chip" name.
The Company was previously in the development stage and commenced operations in
its planned line of business during the end of first quarter of 2006. On April
6, 2006, the Company entered into a License Agreement with Phoenix Technology
Holdings Incorporated, a Turks and Caicos Islands company. Under the terms of
the agreement, the Company granted Phoenix an exclusive license to use the
Company's technology.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
-------------
The accompanying financial statements have been prepared according to United
States Generally Accepted Accounting Principles. The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. The Company has incurred net losses of $83,270,653 since inception.
Additionally, the Company had a net working capital deficiency of $22,139,490
and a total shareholders' deficiency of $22,139,490 at December 31, 2006. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Management expects to incur additional losses for the foreseeable future and
recognizes the need to raise capital through the future issuance of stock and/or
debentures in order to develop a viable business. The Company continues to
implement cost-cutting measures. It may also rely increasingly on strategic
alliances with others who will assume responsibility for financing specific
required development tasks, thus, reducing the Company's financial requirements
for the exploitation of its intellectual properties.
As of December 31, 2006, current liabilities are substantially past due. In the
event demands are made upon the Company which cannot be met and the associated
creditors successfully pursue action against the Company, the Company could be
exposed to additional costs of legal fees, interest or penalties, and may be
forced to take other defensive actions, including filing for bankruptcy.
The Company has been able to finance its operations primarily by raising capital
through the private placement of common stock and the issuance of convertible
debt.
On April 6, 2006, the Company entered into a License Agreement with Phoenix
Technology Holdings Incorporated, a related Turks and Caicos Islands company.
Under the terms of the agreement, the Company granted Phoenix an exclusive
license to use the Company's technology. Also, certain portions of the Company's
debt, including a significant portion of the Senior Secured Convertible Notes,
unpaid amounts owing to Airos Group for services rendered, and accrued salaries
were assumed by Phoenix and ceased accruing additional interest. In order to
maintain exclusivity, the Agreement calls for certain performance targets to be
met on an annual basis by Phoenix. As of April 18, 2007, the targets for the
first year were met.
F-9
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(Amounts expressed in US Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, IC One and Smart Chip Technologies, LLC. All
significant inter-company balances and transactions have been eliminated in
consolidation.
Software Development Costs
--------------------------
Software development costs are expensed as incurred until technology feasibility
has been established. The Company defines the establishment of technological
feasibility as the completion of all planning, designing, coding and testing
activities that are necessary to establish products that meet design
specifications including functions, features and technical requirements. Costs
incurred by us between completion of the working model and the point at which
the product is ready for general release have not been significant. Accordingly,
no costs have been capitalized to date.
Revenue Recognition
-------------------
The Company has granted an exclusive license to Phoenix Technology Holding
Incorporated ("Phoenix"), to use, sub-license, reproduce, manufacture,
distribute, sell, and otherwise commercially exploit the technology at its own
costs, with no costs to be borne by the Company. Software revenue recognition
exists if an arrangement or contract to deliver software does not require
substantial customization, modification, or production of the software by the
Company. If and when the arrangement or contract will involve more than one
element, revenue recognition will be applied to each element separately. For
arrangements that do require substantial customization, modification, or
production of the software, paragraph 7 of SOP 97-2 mandates that the entire
arrangement be accounted for in conformity with Accounting Research Bulletin
(ARB) 45 and SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Similarly to SFAC 5, paragraphs 14 through 33
of SOP 97-2 detail four recognition criteria. These paragraphs detail the four
basic criteria needed for software revenue recognition: (1) persuasive evidence
that an arrangement exists, (2) delivery has occurred, (3) the vendor's fee is
fixed or determinable, and (4) collectability is probable. The Company
recognizes revenue based on the licensing contract with Phoenix where the
revenues are calculated at specified percentages of the revenues earned by
Phoenix through sub-licensing, professional services and transactions fees
earned from the sale and use of the technology.
Research and Development Costs
------------------------------
Research and development expenditures are charged to expense as incurred, unless
such costs are expected to be reimbursed. The Company capitalizes costs related
to acquired technologies that have achieved technological feasibility and have
alternative uses. Research and development expenses totaled approximately
$125,122 and $1,643,055 for the years ended December 31, 2006 and 2005,
respectively.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Expenditures for major additions
and betterments are capitalized. Maintenance and repairs are charged to
operations as incurred. Depreciation of property and equipment is computed by
straight-line method over the assets estimated lives. Leasehold improvements are
amortized over the lesser of the lease term or the assets' useful lives. Upon
sale or retirement of plant and equipment, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
operations. Prior to January 1, 2003, the assets were fully depreciated.
F-10
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(Amounts expressed in US Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangible Assets
-----------------
Intellectual Property is recorded at cost less impairment written down.
Impairment tests are performed at least once a year and when conditions
indicating possible impairment exist, intellectual property is written down if
the carrying amount exceeds the fair value or if significant doubt exists with
respect to recoverability. During the year ended December 31, 2003, Patents were
written down to nil value.
Stock-Based Compensation
------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based
Payment" (SFAS 123 (R)). SFAS 123 (R) requires companies to recognize
compensation cost for employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The Company
adopted the provisions of SFAS 123 (R) on January 1, 2006 using the "modified
prospective" application method of adoption which requires the Company to record
compensation cost related to unvested stock awards as of December 31, 2005 by
recognizing the unamortized grant date fair value of these awards over the
remaining service periods of those awards with no change in historical reported
earnings. As a result of using this method, the consolidated financial
statements for the year ended December 31, 2005 were not restated for the impact
of stock-based compensation expense. Awards granted after December 31, 2005 are
valued at fair value in accordance with the provisions of SFAS 123 (R) and
recognized on a straight line basis over the service periods of each award.
Had expense for the Company's stock- based compensation plans been determined
based on the grant-date fair value for 2005, consistent with the provisions of
SFAS 123 (R), the Company's reported and proforma net loss and net loss per
share for the year ended December 31, 2005 would be as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 2005
-----------------
<S> <C>
Net Loss-as reported $(7,642,069)
Add:Proforma stock-based compensation expense-as
If grant date fair value had been applied to all
Stock -based payment awards $ 13,114
Less: Stock based compensation as reported $ (13,114)
Net loss-proforma for stock based compensation
expense $(7,642,069)
Net loss per share-basic, as reported $ (0.04)
Net loss per share-basic, proforma for stock- based
Compensation expense $ (0.04)
</TABLE>
As of December 31, 2006 there was $Nil of unrecognized expense related to
non-vested stock-based compensation arrangements granted.
No options were granted during the year ended December 31, 2006 under the
Company's stock-option plan.
F-11
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(Amounts expressed in US Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No.
109,"Accounting for Income Taxes". Deferred tax assets and liabilities are
recorded for differences between the financial statement and tax basis of the
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is recorded for the amount of income tax payable or
refundable for the period increased or decreased by the change in deferred tax
assets and liabilities during the period.
Loss per Common Share
---------------------
Basic and diluted loss per share has been calculated based upon the weighted
average number of common shares outstanding and excludes any potentially
dilutive securities. Stock options and convertible notes have been excluded as
common stock equivalents in the computation of diluted loss per share since the
results would be anti-dilutive. Obligations to issue additional shares, which
could potentially dilute earnings per share, were approximately 253,900,000 at
December 31, 2006 and 147,800,000 at December 31, 2005.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The main areas of estimates include the calculation of stock based compensation,
accrued liabilities and valuation allowance
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist primarily of cash, notes payable and
Accounts payable and accrued expenses, which approximate fair value because of
their short maturities. The Company's notes payable approximate the fair value
of such instruments based upon management's best estimate of interest rates that
would be available to the Company for similar financial arrangements at December
31,2006.
Comprehensive Income (Loss)
---------------------------
The Company has adopted SFAS No. 130 Reporting Comprehensive Income (Loss). This
standard requires companies to disclose comprehensive income in their
consolidated financial statements. In addition to items included in net income,
comprehensive income includes items currently charged or credited directly to
stockholders' equity, such as foreign currency translation adjustments.
Impairment of Long - Lived Assets
---------------------------------
The Company reviews long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered.
F-12
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(Amounts expressed in US Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Pronouncements
---------------------
SFAS 153 - Exchanges of Non-monetary Assets -- an amendment of APB Opinion No.
29. The guidance in APB Opinion No. 29, Accounting for Non-monetary
Transactions, is based on the principle that exchanges of non-monetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in that Opinion, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
company believes that this standard would not have a material impact on its
financial position, results of operations or cash flows.
SFAS 123R - In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment" ("SFAS 123R"). SFAS 123R revises FASB Statement No. 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25 "Accounting for
Stock Issued to Employees". SFAS 123R requires all public and non-public
companies to measure and recognize compensation expense for all stock-based
payments for services received at the grant-date fair value, with the cost
recognized over the vesting period (or the requisite service period). SFAS 123R
is effective for non-small business issuers for all interim periods beginning
after June 15, 2005. SFAS 123R is effective for small business issuers for all
interim periods beginning after December 15, 2005. As such, the Company is
required to adopt these provisions commencing January 1, 2006. The Company
adopted the provisions of SFAS 123 (R) on January 1, 2006 using the "modified
prospective" application method of adoption which requires the Company to record
compensation cost related to unvested stock awards as of December 31, 2005 by
recognizing the unamortized grant date fair value of these awards over the
remaining service periods of those awards with no change in historical reported
earnings.
SFAS 154- In May 2005, the FASB issued Statement of Financial Accounting
Standard No 154, "Accounting Changes and Error Corrections," (SFAS 154)
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. SFAS 154 replaces APB Opinion 20 and SFAS 3.
Among other changes, SFAS 154 requires retrospective application to prior
periods financial statements of changes in accounting principle, unless it is
impractical to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. The adoption of SFAS 154 will only affect the Company's
financial condition or results of operations if it has such changes or
corrections of errors in the future.
SFAS 155 - In February 2006, the FASB issued SAFS No. 155, Accounting for
Certain Hybrid Financial Instruments. SFAS is an amendment to SFAS 133 and 140.
SFAS 155 improves financial reporting by eliminating the exception from applying
SFAS 133 to interest in securitized financial assets so similar instruments are
accounted for similarly regardless of the form of instruments. SFAS 155 is
effective for all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006. The
Company does not expect the adoption of SFAS 155 to have an impact on its
financial position or results of operation.
SFAS 156 - In March 2006, the FASB issued SFAS No. 156, "Accounting for
Servicing of Financial Assets", which amends SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
In a significant change to current guidance, SFAS No. 156 permits an entity to
choose either of the following subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities: (1)
Amortization Method or (2) Fair Value Measurement Method. SFAS No. 156 is
effective as of the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company is currently reviewing the effect, if any, the
proposed guidance will have on its financial position and operations.
F-13
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(Amounts expressed in US Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Pronouncements (Continued)
---------------------------------
FIN 48 - In July 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in enterprises financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a
recognition threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognizing, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently reviewing the effect, if any, FIN 48 will have on
its financial position and operations.
SFAS 157 -In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles ("GAAP"),
expands disclosures about fair value measurements, and applies under other
accounting pronouncements that require or permit fair value measurements. SFAS
No. 157 does not require any new fair value measurements, however the FASB
anticipates that for some entities, the application of SFAS No. 157 will change
current practice. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, which for the Company would be
its fiscal year beginning November 1, 2008. The Company is currently reviewing
the effect, if any, SFAS 157 will have on its financial position and operations.
SFAS 158 - In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R)". This statement requires employers to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization. This statement also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
provisions of SFAS No. 158 are effective for employers with publicly traded
equity securities as of the end of the fiscal year ending after December 15,
2006. The adoption of this statement is not expected to have a material effect
on the Company's future reported financial position or results of operations.
SAB 108 - In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108). SAB 108 requires companies to evaluate the materiality of
identified unadjusted errors on each financial statement and related financial
statement disclosure using both the "rollover" approach and the "iron curtain"
approach. The rollover approach quantifies misstatements based on the amount of
the error in the current-year financial statement whereas the iron curtain
approach quantifies misstatements based on the effects of correcting the
misstatement existing in the balance sheet at the end of the current year,
irrespective of the misstatement's year(s) of origin. Financial statements would
require adjustment when either approach results in quantifying a misstatement
that is material. SAB 108 is effective for interim periods of the first fiscal
year ending after November 15, 2006.
F-14
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
(Amounts expressed in US Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Pronouncements (Continued)
---------------------------------
SFAS 159 - In February 2007, the FASB issued SFAS No. 159 ("SFAS 159") - the
fair value option for financial assets and liabilities including in amendment of
SFAS 115. This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement objectives for accounting for financial instruments. This Statement
is effective as of the beginning of an entity's first fiscal year that begins
after November 15, 2007, and interim periods within those fiscal years. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of FASB Statement No. 157, Fair value measurements. The Company is
currently evaluating the impact of SFAS No. 159 on its consolidated financial
statements.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term highly liquid investments with a maturity
date of three months or less to be cash equivalents.
NOTE 3 - AMOUNTS OWED TO OFFICERS
Loans payable to officers are non-interest bearing advances made on behalf of
the Company that are unsecured and payable on demand.
NOTE 4 - AMOUNTS OWED TO EMPLOYEES
Amounts owed to employees are non-interest bearing advances made on behalf of
the Company that are unsecured an]]> |