Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State issuer's revenues for its most recent fiscal year. For the fiscal
year ended December 31, 2006, revenues were $131,357.
State the aggregate market value of the voting and nonvoting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. As of January 11, 2008,
the approximate aggregate market value of the voting and nonvoting common equity
held by non-affiliates of the issuer was $22,000,000.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. As of December 31, 2006,
issuer had 209,238,182 shares of issued and outstanding common stock, par value
$0.001.
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.
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.
The accompanying notes are an integral part of these consolidated financial
statements.
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.
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.
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 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.
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.
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:
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.
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.
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.
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.
Loans payable to officers are non-interest bearing advances made on behalf of
the Company that are unsecured and payable on demand.
Amounts owed to employees are non-interest bearing advances made on behalf of
the Company that are unsecured and payable on demand.
At December 31, 2006, secured convertible notes payable of $ 237,000 (2005: $
2,991,316) bear interest at a rate of 12% annually and are secured by 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. The issue was resolved on November 30, 2006 when the number of
authorized shares was increased.
The Company has the option to repay the notes and interest in cash or convert
them into common stock based on a conversion price of $.05 per share or the
holder can elect to convert the notes to common stock based on the above stated
conversion price. The holder can convert their notes anytime. If the Company
should force a conversion of these notes into common stock, then the holder will
receive an additional amount equal in value to 25% of the principal amount in
stock options priced at $0.05 per share that can be exercised within a 5 year
period in accordance with the terms and conditions of the note.
At December 31, 2006, these notes are convertible into 4,740,000 shares of
common stock (2005: 59,826,325).
On April 6, 2006, Noteholders holding notes valued at $2,811,316 plus accrued
interest of $1,275,257 elected to assign their notes to Phoenix Technology
Holdings Inc., a related company (see Note 16). This assigned debt is
convertible into 81,731,460 shares of common stock of the Company.
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.
In July 2002, various consultants, who were owed fees and/or other compensation,
signed deferred payment/compensation stock option agreements. The deferred
compensation agreements allow the holders to defer payment of their owed
compensation by electing to receive cash, common stock or stock options in
accordance with the terms of their agreements.
At December 31, 2006, deferred compensation, if the holders so elect, is
convertible into stock options totaling 42,316,648 shares (2005: 22,212,917
shares) of common stock which are potentially dilutive to earnings per share.
At December 31, 2006, the Company has available unused net operating loss
carryovers of approximately $71,500,000 that may be applied against future
taxable income and expire at various dates through 2026. The Company has a
deferred tax asset arising from such net operating loss deductions and has
recorded a valuation allowance for the full amount of such deferred tax asset
since the likelihood of realization of the tax benefits cannot be determined.
These losses may be subject to substantial limitations as a result of IRC
Section 382 rules governing changes in control.
Further, the Company has not filed any federal, state or local income or
franchise tax returns for the years ended December 31, 2006, 2005, 2004, 2003,
2002 and 2001. Such failure may have a material adverse effect on the amount of
any net operating loss carry forwards and may subject the Company to fines.
Reconciliation between the statutory federal income tax rate and the effective
income rate of income tax expense for the year ended December 31, 2006 is as
follows:
For the year ended December 31, 2006, the valuation allowance increased
approximately $1,560,000.
On February 13, 2006, the Company issued 2,000,000 common shares in exchange for
past services valued at $100,000. The shares were issued at $0.05.
On July 14, 2006, the Company issued 200,000 common shares in exchange for past
services valued at $10,000. The shares were issued at $0.05.
On August 18, 2006, the Company issued 1,000,000 common shares in exchange for
past services valued at $70,000. The shares were issued at $0.07.
On December 15, 2006, the Company issued 3,000,000 common shares in exchange for
services valued at $150,000. The shares were issued at $0.05.
On December 15, 2006, the Company issued 709,687 common shares in exchange for
past services valued at $49,679. The shares were issued at $0.07.
On December 16, 2006, the Company issued 1,153,333 common shares in exchange for
past services valued at $55,418. The shares were issued at $0.048.
On December 20, 2006, the Company issued 540,000, 1,307,080, 4,000,000 and
2,054,079 common shares in exchange for past services valued at $54,000,
$59,584, $280,000 and $102,704, respectively. The shares were issued at $0.10,
$0.046, $0.07 and $0.05, respectively.
On February 2, 2005 the Company issued 250,000 common shares in exchange for
services valued at $12,500. The shares were issued at $0.05.
On March 29, 2005 the Company issued 70,355 common shares in exchange for cash.
The shares were issued at $0.07.
On March 29, 2005 the Company issued 369,550 common shares in exchange for cash.
The shares were issued at $0.068.
On April 8, 2005, the Company issued 100,000 common shares in exchange for cash.
The shares were issued at $0.07
On April 28, 2005 the Company issued 100,000 common shares in exchange for cash.
The shares were issued at $0.09.
On May 4, 2005 the Company issued 248,000, 23,571, 142,857, 125,000, 47,968,
150,000 and 1,000,000 common shares in exchange for cash. The shares were issued
at $0.05, $0.056, $0.07, $0.08, $0.09, $0.123 and $0.30 respectively.
On May 4, 2005 the Company issued 1,050 common shares in exchange for past
services valued at $53. The shares were issued at $0.05.
On May 4, 2005, the Company issued 22,934,690 common shares for interest
payments of $1,884,829. The shares were issued at $0.082.
On May 4, 2005, the Company issued 13,450 common shares in exchange for cash.
The shares were issued at $0.068.
On June 2, 2005, the Company issued 62,500 common shares in exchange for cash.
The shares were issued at $0.08.
On June 6, 2005, the Company issued 800,000 common shares in exchange for cash.
The shares were issued at $0.05.
On June 15, 2005, the Company issued 100,000 and 50,000 common shares in
exchange for cash. The shares were issued at $0.05 and $0.09, respectively.
On June 15, 2005, the Company issued 100,000 common shares in exchange for
services valued at $4,750. The shares were issued at $0.048.
On July 9, 2005, the Company issued 200,000 common shares in exchange for cash.
The shares were issued at $0.05.
On July 21, 2005, the Company issued 200,000 common shares in exchange for cash.
The shares were valued at $0.05.
On September 14, 2005, the Company issued 58,413 common shares in exchange for
cash. The shares were valued at $ $0.06.
On October 31, 2005, the Company issued 323,494 common shares in exchange for
cash. The shares were valued at $ $0.05
On December 1, 2005, the Company issued 88,669 common shares in exchange for
services valued at $5,320. The shares were valued at $0.06.
Effective November 29, 2006, the Board of Directors of the Company approved
amendments to the Articles of Incorporation to adopt an increase in the
Company's common stock from 200,000,000 to 500,000,000 shares. Furthermore,
during a special meeting of the Board of Directors on July 20, 2007, the Board
voted to approve a resolution to increase the number of authorized shares to
600,000,000. (Refer subsequent events).
On December 8, 1999, the Company adopted an Employee Stock Option Plan (the
"Plan"). The Board of Directors administers the Plan. Under the Plan, the
Company may grant stock options, which may be incentive stock options ("ISO's")
as defined in the Internal Revenue Code, and stock awards or options which do
not qualify as ISO's to employees and officers. All employees of the Company are
eligible to participate in the Plan.
The Company did not issue any stock options during the year 2006. The fair value
of options is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for stock options granted
during the year 2005: annual dividends of $0; expected volatility range of
51.78% to 58.02%, risk-free interest rate of 3.0%; and expected life of five to
ten years. The estimated weighted - average fair values of stock options granted
to employees, officers and directors during the year 2005 was approximately
$.03. The market price of shares during the time of grants ranged from $0.05 to
$0.07.
On March 3, 2006, the Company cancelled 1,937,333 options that had been issued
to a past employee. On April 3, 2006, the Company cancelled 1,301,667 options
that had been issued to a past employee. On December 15, 2006 and December 16,
2006, the Company cancelled 527,296 and 1,000,000 options, respectively, that
had been issued to consulting companies for services rendered.
The following table summarizes the Company's stock options outstanding and
exercisable at December 31, 2006:
The Company retained a third-party vendor in 1997 to perform certain research
and development services relating to the Company's database technology. As of
December 31, 1999, cumulative costs incurred approximated $2,170,000, for which
the Company made cash payments of $200,000 in 1999 for such services rendered.
In 1999, the Company also issued to this vendor 2,100,000 shares of common stock
as collateral of the unpaid balance.
In June 2001, the Company reached a settlement and agreed to reduce the balance
of accounts payable to them by $770,000, to $1,200,000. The agreement resulted
in an extraordinary gain from settlement of $770,000. The agreement also calls
for the return to the Company of 2,100,000 shares of common stock placed in
escrow as collateral for the obligation. The agreement permits the Company to
repay the remaining amount over a period of time as long as fifteen months,
starting no later than September 30, 2001. The amounts expected to be repaid
will increase from $70,000 per month in September 2001 to $90,000 per month
through December 2002. During 2001, the Company made two of the four payments
due in 2001 which totaled to $140,000. The unpaid balance is $2,218,200,
including accrued interest charges of $1,158,200 as of December 31, 2006. In
December 2003, the Company received certificates for the return of all of the
2,100,000 shares of common stock which were then cancelled.
These short term loans and advances are non-interest bearing and were converted
to stock in 2007.
The Company is currently a defendant or co-defendant in various legal actions
arising in the ordinary course of business. There can be no assurance, the
Company will be successful in defending these actions.
Quint Star Management , Inc. vs. IC One, Inc., Arthur D. Bennet, and
Peter Bennee
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. 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 Company, and is secured by the
equipment, inventory, accounts and chattel paper of both the parent and IC One.
The Company is in default in its 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 at December 31, 2003) was entered to
reflect the additional unpaid rent, interest and attorney's 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 and Jami Biorge
The Company is reviewing, with the advice of legal counsel, whether the Company
has 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, the Company 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. The
Company believes 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. On the basis of
our previous assertion that the Company may make such a claim against Mr. Biorge
and perhaps other reasons not known to the Company, Mr. Biorge has refused to
accept certificates for 11,503,138 shares of Company's common stock to which he
would have been entitled to receive in exchange for his stock in IC One.
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 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.
As of July 31, 2002, Messrs. Hauge and Hipsley ceased their employment with us
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.
From time to time, the Company is threatened by creditors to initiate litigation
to collect amounts owed by the Company and reported on its financial statements.
In cases in which litigation is threatened or initiated, the Company seeks to
negotiate a settlement or forbearance agreement.
Joseph E. Diamond
On February 19, 2004, Joseph E. Diamond was appointed Senior Vice-President of
Administration and Finance. In addition to these duties, on November 12, 2004
Mr. Diamond was elected CEO of the Company. Mr. Diamond was relieved as CEO of
the Company and resigned his previous position on December 16, 2004. On January
26, 2005, Therese Diamond (Mr. Diamond's spouse) filed a complaint against the
Company in the Superior Court of California, County of Los Angeles bearing case
number LC-070391 and on February 4, 2005 Joseph Diamond filed a complaint
against the Company in the Superior Court of California, County of Los Angeles
bearing case number LC-070495. On February 3, 2006, the parties entered into a
Settlement and Release Agreement under which the Company agreed to issue
7,250,000 shares of common stock (see Note 9 - Stockholder's Deficiency and Note
22 - Subsequent Events) which resolved the matters and they were subsequently
dismissed by the Courts. The amount was recorded as a Deferred Compensation
liability in the amount of $462,500.
On July 25, 2004, the Company entered into a Licensing Agreement with Retention
Management Group, Inc.(RMG), a Barbados company, in which RMG was granted a
license to market, distribute and sublicense SCTN applications and products. On
March 10, 2006, the Company asserted claims against RMG in case no. A518577
filed in the Eighth Judicial District Court of Nevada, Clark County. On May 31,
2006, the Company and RMG entered into a Settlement Agreement and Release. Under
the terms of this agreement, the Company agreed to pay RMG $ 90,000, and the
Licensing Agreement between the Company and RMG was terminated. Accordingly,
case no. A518577 was dismissed by the Court on June 23, 2006. The settlement was
paid by Phoenix Technologies and is recorded as a liability to Phoenix.
Donald W. Mayer
On June 1, 2005, Donald W. Mayer, an investor in the Company, initiated an
action in The Superior Court of the State of Washington, In and For the County
of King, case no. 05-2-18115-0-SEA in which the Company was named one of several
defendants. On May 13, 2006, the Parties entered into a Settlement Agreement and
Release. Accordingly, the Company was dismissed as a defendant in the case.
On November 30, 2005, Verlo Howell initiated an action against the Company in
the Third Judicial District Court for Salt Lake County, Utah, civil no.
05-092-1235 for unpaid wages, interest and attorney costs. Mr. Howell was hired
as the Company's Executive Vice-President of Sales and Marketing pursuant to an
Employment Agreement dated May 17, 2005. On September 8, 2005, Mr. Howell's
employment was terminated with cause by the Company. We intend to assert and
pursue offsetting defenses and believe that there is a reasonable possibility
that the outcome of any claim, if asserted, would not be unfavorable to us.
The Company's 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.
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.
The State of Utah has filed tax liens against the Company of approximately
$58,332 as of December 31, 2006, for unpaid employee withholding taxes and
related amounts.
The State of California has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately
$77,721as of December 31, 2006.
The State of Nebraska has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately $5,864
as of December 31, 2006. On June 26, 2007, the Company paid its tax obligation
to the State of Nebraska in full.
The Company has established strategic alliances to market its products and
services. (Refer Note 13 - Litigation for licensing agreement signed with
Retention Management Group, Inc. and Note 16 for licensing agreement signed with
Phoenix Technology Holdings, Inc.)
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. Further, the
agreement provides for Phoenix to loan monies to the Company, at Phoenix's
discretion at the rate of one percent (1%) per month, compounded monthly until
paid in full. Any such loan shall be deducted from any payments due by Phoenix
under the agreement. In order to maintain exclusivity, the Agreement calls for
certain performance targets to be met. As of April 18, 2007, these targets have
been met.
As of December 31, 2006, the Company was no longer obligated under any
employment Agreements.
As of December 31, 2005 the Company was liable to executive officers and
directors For secured convertible promissory notes for $1,220,462, with interest
at 12%. Interest on such notes accrued approximated $189,000 for 2005. These
notes were assigned to Phoenix Technology Holdings Inc. in April 2006 (see Note
16 - above). Also during 2006, a director maintained a current account with the
Company to assist the Company meet its operating expenses. As of December 31,
2006, there was a receivable of $5,100 (2005: payable of $27,000) approximately
from this director. The amount is recorded as an offset to Accounts Payable -
Other, and was paid in March 2007.
Further, as per Note 16 (above), Phoenix agrees to loan monies to the Company at
the rate of one percent (1%) per month, compounded monthly. As of December 31,
2006 there was a payable of $110,490 to Phoenix.
The Company leased office space under an operating lease, which expired in 2003.
The Company now rents its principal executive offices at Las Vegas, Nevada on a
month-to-month basis, for combined rent of $12,000 per year.
The Company did not file required reports with the SEC on a timely basis and was
delisted from the OTC Bulletin Board (the "OTC"). The Company currently trades
on the Pink Sheets.
The Company is also not current with its corporate income tax return filings.
The Company's financial statements do not reflect a reserve for any potential
fines or penalties that may result from such delisting or late filings.
During a special meeting of the Board of Directors on November 30, 2006, the
Board voted to approve a resolution to convert the Company from a Florida
corporation to a Nevada corporation.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
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 accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included. Operating results for
the three months ended March 31, 2006, are not indicative of the results that
may be expected for the year ended December 31, 2006. The unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2005.
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- GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company and has incurred a net
loss of $81,061,737 since inception. Additionally, the Company had a net working
capital deficiency of $20,736,959 and a total shareholders' deficiency of
$20,736,959 at March 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 March 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.
F-34
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE-3 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.
NOTE 4-STOCK BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
accounting and reporting standards for stock-based employee compensation plans.
This statement allows companies to choose between the fair value based method of
accounting as defined in this statement and the intrinsic value based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an Amendment of SFAS Statement No. 123". This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. We have adopted the increased disclosure
requirements of SFAS No. 148 for the three month period ended March 31, 2006.
F-35
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 4- STOCK BASED COMPENSATION (Continued)
The additional disclosures required by SFAS No. 148 are as follows:
For the Three Months For the Three Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
---- ---- ---- ----
Net loss attributable to common stockholders,
as reported ......................................... $(1,599,658) $ (1,315,852) $(1,599,658) $ (1,315,852)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effect ........................... - 10,733 - 10,733
Less: Total stock-based compensation
expense determined under the Black-Scholes fair value
based method of all awards* ......................... - (10,733) - (10,733)
Pro forma net loss attributable to
common stockholders ................................. $(1,599,658) $ (1,315,852) $(1,599,658) $ (1,315,852)
=========== ============ =========== =============
Basic and diluted net loss attributable to
common stockholders
As reported ........................................... $ (0.01) $ (0.01) $ (0.01) $ (0.01)
=========== ============ =========== =============
Pro forma .............................................. $ (0.01) $ (0.01) $ (0.01) $ (0.01)
|
No stock options were granted by the Company for the three month period ended
March 31, 2006.
Loss Per 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 163,000,000 at
March 31, 2006.
F-36
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 5 - 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 6 - AMOUNTS OWED TO EMPLOYEES
Amounts owed to employees are non-interest bearing advances made on behalf of
the Company that are unsecured and payable on demand.
NOTE 7 - SHAREHOLDERS' DEFICIENCY
Equity Transactions
Three months ended March 31, 2006
On February 13, 2006, the Company issued 2,000,000 common shares in exchange for
past services valued at $100,000. The shares were issued at $0.05.
Three months ended March 31, 2005
On February 2, 2005 the Company issued 250,000 common shares in exchange for
services valued at $12,500. The shares were issued at $0.05.
On March 29, 2005 the Company issued 70,355 common shares in exchange for cash.
The shares were issued at $0.07.
On March 29, 2005 the Company issued 369,550 common shares in exchange for cash.
The shares were issued at $0.068.
NOTE 8- AUTHORIZED SHARES
As at March 31, 2006, the Company is authorized to issue 200,000,000 shares of
common stock. At March 31, 2006, the Company had common stock shares outstanding
of 195,274,003 and an additional 163,043,144 shares issuable upon the conversion
of stock options, convertible debt and deferred compensation. As a result, the
Company would exceed the authorized amount by 158,317,147. The Company would be
required to seek shareholder approval to increase the shares authorized limits
in order to satisfy its potential conversion of dilutive securities.
As an alternative, the Company may purchase shares of common stock in the open
market, or seek to repay the indebtedness in lieu of conversion.
Effective November 29, 2006, the Board of Directors of the Company approved
amendments to the Articles of Incorporation to adopt an increase in the capital
stock of the Company's common stock from 200,000,000 to 500,000,000 shares.
Furthermore, during a special meeting of the Board of Directors on July 20,
2007, the Board voted to approve a resolution to increase the number of
authorized shares to 600,000,000. (Refer Note 16 - Subsequent Events).
NOTE 9 - STOCK OPTION PLAN
On December 8, 1999, the Company adopted an Employee Stock Option Plan (the
"Plan"). The Board of Directors administers the Plan. Under the Plan, the
Company may grant stock options, which may be incentive stock options ("ISO's")
as defined in the Internal Revenue Code, and stock awards or options which do
not qualify as ISO's to employees and officers. All employees of the Company are
eligible to participate in the Plan.
F-37
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 9 - STOCK OPTION PLAN (Continued)
No stock options were granted by the Company for the three month period ended
March 31, 2006.
Stock Options
------------------------
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at December 31, 2004 48,425,299 $0.11
Granted 400,000 $0.06
Exercised - -
Cancelled (7,142,470) $0.17
Outstanding at December 31, 2005 41,682,829 $0.10
Granted - -
Exercised - -
Cancelled (1,937,333) $0.18
Outstanding at March 31, 2006 39,745,496 $0.11
|
The following table summarizes the Company's stock options outstanding and
exercisable at March 31, 2006:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
(In Thousands) (In Years) (In Thousands)
$0.00 - $0.23 37,365 2.95 $0.08 37,365 $0.08
$0.48 - $0.49 2,380 4.37 $0.48 2,380 $0.48
$0.64 - $0.80 - - - - -
------ ------
39,745 39,745
====== ======
|
F-38
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS
The Company is currently a defendant or co-defendant in various legal actions
arising in the ordinary course of business. There can be no assurance, the
Company will be successful in defending these actions.
Quint Star Management , Inc. vs. IC One, Inc., Arthur D. Bennet, and
Peter Bennee
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. 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 Company, and is secured by the
equipment, inventory, accounts and chattel paper of both the parent and IC One.
The Company is in default in its 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 at December 31, 2003) was entered to
reflect the additional unpaid rent, interest and attorney's fees.
Grish vs. Schimatic Cash Transactions Network.com a/b/a Smart Chip Technologies,
Inc. f/k/a IC One, Inc.
On September 18, 2001, we were served with a summons and complaint for an action
filed by Marilyn Grish in the Third Judicial District Court, Salt Lake County,
Utah, for breach of an independent contractor's contract and seeking unspecified
damages. On October 12, 2001, the Company filed an answer and a counterclaim
against Ms. Grish and intended to defend this matter vigorously. Ms. Grish had
taken no further action in this case and the court indicated that, unless Ms.
Grish certified she was ready for trial by August 4, 2004, the case would be
dismissed. Accordingly, the case was dismissed on August 4, 2004.
Eximsoft International, LLC and Eximsoft Technologies Pvt. Ltd.
In October 2001, IC One, Inc. entered into a settlement agreement with Eximsoft
International, LLC and Eximsoft Technologies Pvt. Ltd. to resolve claims by the
Eximsoft entities that IC One had contracted and received computer software
development and programming services and had failed to pay as agreed. IC One
agreed to pay $30,000 and provided Eximsoft with a confession of judgment that
could be filed in the Third District Court in Salt Lake City, Utah, in the event
that IC One failed to make the agreed payments. IC One paid the agreed $30,000
during 2002 and the original confession of judgment was returned by Eximsoft to
us in November 2003.
Sandra Lueck vs. Schimatic Cash Transactions Network.com, Inc. d/b/a Smart Chip
Technologies, Smart Chip Technologies L.L.C., and IC One, Inc.
On August 16, 2002, Sandra Lueck initiated an action against the Company for
unpaid wages, interest, costs and attorney's fees. On October 31, 2002, judgment
was entered against the Company in the amounts of $11,400 for unpaid wages,
$3,300 as a continuation of wages, court costs and attorney's fees of $1,753,
and interest from the date of judgment until paid in full. On or about June 30,
2003, the Company entered into a release and settlement agreement compromising,
resolving, and settling all matters and issues between the parties. The Company
paid a total of $18,750 and a satisfaction of judgment was filed with the Third
Judicial District Court on October 14, 2003.
F-39
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS (Continued)
Greg Morrison vs. Smart Chip Technologies, L.L.C.
On April 4, 2003, Greg Morrison initiated an action against the Company in the
Third Judicial District Court for Salt Lake County, Utah for unpaid wages in the
amount of $7,948, unpaid reimbursement expenses totaling $11,868, interest on
those amounts from the date of termination, court costs and attorney's fees. The
Company agreed to pay Mr. Morrison a total of $7,500 to resolve this matter. The
Company's final payment under this agreement was made prior to July 31, 2004,
and this matter has be dismissed.
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 and Jami Biorge
The Company is reviewing, with the advice of legal counsel, whether the Company
has 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, the Company 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. The
Company believes 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. On the basis of
our previous assertion that the Company may make such a claim against Mr. Biorge
and perhaps other reasons not known to the Company, Mr. Biorge has refused to
accept certificates for 11,503,138 shares of Company's common stock to which he
would have been entitled to receive in exchange for his stock in IC One.
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 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.
F-40
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS (Continued)
Richard Hauge and John Hipsley
As of July 31, 2002, Messrs. Hauge and Hipsley ceased their employment with us
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.
Verlo Howell
On November 30, 2005, Verlo Howell initiated an action against the Company in
the Third Judicial District Court for Salt Lake County, Utah, civil no.
05-092-1235 for unpaid wages, interest and attorney costs. Mr. Howell was hired
as the Company's Executive Vice-President of Sales and Marketing pursuant to an
Employment Agreement dated May 17, 2005. On September 8, 2005, Mr. Howell's
employment was terminated with cause by the Company. We intend to assert and
pursue offsetting defenses and believe that there is a reasonable possibility
that the outcome of any claim, if asserted, would not be unfavorable to us.
Other Creditors
From time to time, the Company is threatened by creditors to initiate litigation
to collect amounts owed by the Company and reported on its financial statements.
In cases in which litigation is threatened or initiated, the Company seeks to
negotiate a settlement or forbearance agreement.
NOTE 11 - PAYROLL TAXES
Internal Revenue Service
The Company's 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 March 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 $1,350,000. 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 $1,350,000 (including interest and penalties of approximately
$398,000). 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.
Other Creditors
From time to time, the Company is threatened by creditors to initiate litigation
to collect amounts owed by the Company and reported on its financial statements.
In cases in which litigation is threatened or initiated, the Company seeks to
negotiate a settlement or forbearance agreement.
F-41
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 11 - PAYROLL TAXES (Continued)
Internal Revenue Service
The Company's 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 March 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 $1,350,000. 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 $1,350,000 (including interest and penalties of approximately
$398,000). 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 against the Company of approximately
$57,000 as of March 31, 2006, for unpaid employee withholding taxes and related
amounts.
California Employment Development Corporation
The State of California has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately $75,500
as of March 31, 2006.
Nebraska Department of Revenue
The State of Nebraska has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately $5,700
as of March 31, 2006. On June 26, 2007, the Company paid its tax obligation to
the State of Nebraska in full.
NOTE 12- SELLING GENERAL AND ADMINISTRATIVE EXPENSES
For the three month period ended March 31, 2006, selling, general and
administrative expenses totaled $182,306.
NOTE 13 - STRATEGIC ALLIANCES
The Company has established strategic alliances to market its products and
services. (Refer Note 16 - Subsequent Events for licensing agreements signed
with Retention Management Group, Inc. and Phoenix Technology Holdings, Inc.)
NOTE 14 - EMPLOYMENT AGREEMENTS
As of March 31, 2006, the Company was no longer obligated under two employment
agreements with certain officers.
F-42
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 15 - DELISTING AND LATE FILINGS
The Company did not file required reports with the SEC on a timely basis and was
delisted from the OTC Bulletin Board (the "OTC"). The Company currently trades
on the Pink Sheets.
The Company is also not current with its corporate income tax return filings.
The Company's financial statements do not reflect a reserve for any potential
fines or penalties that may result from such delisting or late filings.
NOTE 16- SUBSEQUENT EVENTS
A) Subsequent issue of common shares:
On July 14, 2006, the Company issued 200,000 common shares in exchange for past
services valued at $10,000. The shares were issued at $0.05.
On August 18, 2006, the Company issued 1,000,000 common shares in exchange for
past services valued at $70,000. The shares were issued at $0.07.
On December 15, 2006, the Company issued 3,000,000 common shares in exchange for
services valued at $150,000. The shares were issued at $0.05.
On December 15, 2006, the Company issued 709,687 common shares in exchange for
past services valued at $49,678. The shares were issued at $0.07.
On December 16, 2006, the Company issued 1,153,333 common shares in exchange for
past services valued at $55,418. The shares were issued at $0.05.
On December 20, 2006, the Company issued 540,000, 1,307,080, 4,000,000 and
2,054,079 common shares in exchange for past services valued at $54,000,
$59,584, $280,000 and $102,704, respectively. The shares were issued at $0.10,
$0.05, $0.07 and $0.05, respectively.
On January 30, 2007, the Company issued 5,850,000 common shares for past
services valued at $292,500. The shares were issued at $0.05.
On February 5, 2007, the Company issued 2,123,208 common shares to convert
secured notes valued at $107,333. The shares were issued at $0.05.
On February 8, 2007, the Company issued 615,091 common shares to convert secured
notes valued at $30,793.75. The shares were issued at $0.05.
On February 21, 2007, the Company issued 6,400,000 common shares in exchange for
past services valued at $448,000. The shares were issued at $0.07.
On March 21, 2007, the Company issued 21,000,000 and 800,000 common shares in
exchange for past services valued at $1,260,000 and $56,000, respectively. The
shares were issued at $0.06 and $0.07, respectively.
On March 26, 2007, the Company issued 5,565,000 and 540,000 common shares for
past services valued at $ 278,250.00 and $54,000, respectively. The shares were
issued at $0.05 and $0.10, respectively.
On May 17, 2007, the Company issued 1,500,000 and 2,578,125 common shares for
cash and past services, respectively valued at $75,000.00 and $135,000,
respectively. The shares were issued at $0.05.
F-43
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
A) Subsequent issue of common shares (Continued):
On May 30, 2007, the Company issued 500,000 and 48,521 common shares for cash
and past services, respectively valued at $25,000.00 and $2,426, respectively.
The shares were issued at $0.05.
On June 1, 2007, the Company issued 1,000,000 common shares in exchange for cash
valued at $50,000.00. The shares were issued at $0.05.
On June 11, 2007, the Company issued 400,000 common shares in exchange for cash
valued at $20,000.00. The shares were issued at $0.05.
On June 12, 2007, the Company issued 100,324,827 common shares to convert
secured notes valued at $5,016,241. The shares were issued at $0.05.
On June 13, 2007, the Company issued 1,129,874 common shares for past services
valued at $56,494. The shares were issued at $0.05.
On June 17, 2007, the Company issued 516,048 common shares to convert secured
notes valued at $25,802. The shares were issued at $0.05.
On June 28, 2007, the Company issued 400,300 common shares for past services
valued at $ 20,015. The shares were issued at $0.05.
On July 1, 2007, the Company issued 6,000,000 common shares for past services
valued at $300,000. The shares were issued at $0.05.
On July 9, 2007, the Company issued 306,908 common shares in exchange for cash
valued at $58,000.00. The shares were issued at $0.19.
On July 11, 2007, the Company issued 6,500,000 common shares for past services
valued at $400,646. The shares were issued at $0.06.
On July 20, 2007, the Company issued 8,661,648 common shares for past services
valued at $432,542. The shares were issued at $0.05.
On August 2, 2007, the Company issued 63,742,180 common shares to convert
secured notes valued at 3,187,164. The shares were valued at $0.05.
On September 26, 2007, the Company issued 200,000 common shares in exchange for
cash valued at $25,000. The shares were issued at $0.125.
On September 26, 2007, the Company issued 160,000 common shares in exchange for
cash valued at $25,000. The shares were issued at $0.156.
On October 30, 2007, the Company issued 400,000 common shares in exchange for
cash valued at $40,000. The shares were issued at $0.10.
B) Options:
On April 3, 2006, the Company cancelled 1,301,667 options that had been issued
to a past employee. On December 15, 2006 and December 16, 2006, the Company
cancelled 527,296 and 1,000,000 options, respectively, that had been issued to
consulting companies for services rendered.
On March 9, 2007, the Company cancelled 19,161,876 options that had been issued
to past employees.
On March 26, 2007 and March 28, 2007, the Company cancelled 2,861,958 and
1,038,615 options, respectively, that had been issued to past employees.
On July 16, 2007 the Company cancelled 4,098,333 options that had been issued to
past employees.
F-44
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events
Joseph E. Diamond
On February 19, 2004, Joseph E. Diamond was appointed Senior Vice-President of
Administration and Finance. In addition to these duties, on November 12, 2004
Mr. Diamond was elected CEO of the Company. Mr. Diamond was relieved as CEO of
the Company and resigned his previous position on December 16, 2004. On January
26, 2005, Therese Diamond (Mr. Diamond's spouse) filed a complaint against the
Company in the Superior Court of California, County of Los Angeles bearing case
number LC-070391 and on February 4, 2005 Joseph Diamond filed a complaint
against the Company in the Superior Court of California, County of Los Angeles
bearing case number LC-070495. On February 3, 2006, the parties entered into a
Settlement and Release Agreement which resolved the matters and they were
subsequently dismissed by the Courts.
Canadian Patent
On April 20, 2004, the Canadian Intellectual Property Office granted the Company
patent number 2,182,596.
Retention Management Group, Inc.
On July 25, 2004, the Company entered into a Licensing Agreement with Retention
Management Group, Inc.(RMG), a Barbados company, in which RMG was granted a
license to market, distribute and sublicense SCTN applications and products. On
March 10, 2006, the Company asserted claims against RMG in case no. A518577
filed in the Eighth Judicial District Court of Nevada, Clark County. On May 31,
2006, the Company and RMG entered into a Settlement Agreement and Release. Under
the terms of this agreement, the Company agreed to pay RMG $ 90,000, and the
Licensing Agreement between the Company and RMG was terminated. Accordingly,
case no. A518577 was dismissed by the Court on June 23, 2006.
Marilyn Grish
On September 18, 2001, we were served with a summons and complaint for an action
filed by Marilyn Grish in the Third Judicial District Court, Salt Lake County,
Utah, for breach of an independent contractor's contract and seeking unspecified
damages. On October 12, 2001, the Company filed an answer and a counterclaim
against Ms. Grish and intended to defend this matter vigorously. Ms. Grish had
taken no further action in this case and the court indicated that, unless Ms.
Grish certified she was ready for trial by August 4, 2004, the case would be
dismissed. The case was dismissed on August 4, 2004.
David Simon
Concurrent with Mr. Diamond being relieved as CEO of the Company on December 16,
2004, David Simon assumed the role of CEO.
Donald W. Mayer
On June 1, 2005, Donald W. Mayer, an investor in the Company, initiated an
action in The Superior Court of the State of Washington, In and For the County
of King, case no. 05-2-18115-0-SEA in which the Company was named one of several
defendants. On May 13, 2006, the Parties entered into a Settlement Agreement and
Release. Accordingly, the Company was dismissed as a defendant in the case.
F-45
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events (Continued)
Miki Radivojsa
On August 8, 2005, Miki Radivojsa, CEO of Airos Group, the Company's development
partner, was elected to the Board of Directors. On August 17, 2005, Mr.
Radivojsa was elected Chairman and CEO of the Company, replacing David Simon.
Statute-Barred Accounts Payable
As of December 31, 2005, certain accounts payable of the Company are
Statute-Barred under Utah law from being collected by creditors. However, under
US GAAP, the Company still records them as a liability. As of December 31, 2005,
the amount is approximately 41,000.
Phoenix Technology Holdings, Inc.
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. 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. Further, the
agreement provides for Phoenix to loan monies to the Company, at Phoenix's
discretion, at the rate of one percent (1%) per month, compounded monthly until
paid in full. Any such loan shall be deducted from any payments due by Phoenix
under the agreement. In order to maintain exclusivity, the Agreement calls for
certain performance targets to be met. As of April 18, 2007, these targets have
been met.
Nevada Corporation
During a special meeting of the Board of Directors on November 30, 2006, the
Board voted to approve a resolution to convert the Company from a Florida
corporation to a Nevada corporation.
Increase in Authorized Shares
During a special meeting of the Board of Directors on November 30, 2006, the
Board voted to approve a resolution to increase the number of authorized shares
to 500,000,000.
Change in Auditors
During a meeting of the Board of Directors on May 18, 2007, the Board voted to
approve a resolution which dismissed Marcum & Kliegman, LLP as the Company's
independent registered public accounting firm and engaged Schwartz Levitsky
Feldman LLP as the Company's independent registered public accounting firm. The
change in independent registered public accounting firms is not the result of
any disagreement with Marcum & Kliegman, LLP.
F-46
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
March 31, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events (Continued)
Elimination of Senior Secured Debt
In Janaury of 2007, Noteholders which did not elect to assign their debt to
Phoenix Technology Holding, Inc. were given the option to receive their
principal investment plus accrued interest either in the form of cash or shares
in the Company. By June 2007, the last of these repayments were made, and all
Senior Secured Notes have been retired.
Increase in Authorized Shares
During a special meeting of the Board of Directors on July 20, 2007, the Board
voted to approve a resolution to increase the number of authorized shares to
600,000,000.
Menalco, FZE and The International Investor, K.S.C.S.
On August 30, 2007, The International Investor, K.S.C.C., a Kuwait-based
company, initiated an action in the United States District Court for the
District of Nevada, case # 07-CV-1178, in which the Company was named as a
co-defendant, seeking damages in the amount of $100,000,000. The allegations,
which have not been proven in a court of law, include conspiracy in violation of
statues prohibiting racketeering, misappropriation of trade secrets, fraud,
civil conspiracy to defraud, unjust enrichment, breach of contract, breach of
fiduciary trust and unfair competition. The company filed its counter-claim on
September 25, 2007 and plans to vigorously defend and counter sue TII for breach
of contract, fraud, interference with contractual relations, misappropriation of
trade secrets, conversion, unjust enrichment and to seek both compensatory and
punitive damages well in excess of $100 million.
Statute-Barred Accounts Payable
As of December 31, 2007, certain accounts payable of the Company are
Statute-Barred under Utah law from being collected by creditors. However, under
US GAAP, the Company still records them as a liability. As of December 31, 2007,
the amount is approximately $2,530,000. This amount includes the $41,000
previously Statute-Barred as of December 31, 2006.
F-47
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Consolidated Balance Sheets
As of June 30, 2006 and December 31, 2005
(Amounts expressed in US Dollars)
(Unaudited) (Audited)
June 30, December 31,
2006 2005
$ $
ASSETS
------
CURRENT ASSETS:
Cash 5,668 11,542
Prepaid Expenses and other 49,811 42,499
----------- -----------
TOTAL CURRENT ASSETS 55,479 54,041
----------- -----------
TOTAL ASSETS 55,479 54,041
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable - Vendor 2,091,000 1,963,800
Accounts payable - other 2,014,489 7,166,788
Accounts payable - Phoenix 8,387,164
Accrued wages and payroll taxes (note 11) 1,531,668 1,499,196
Deferred compensation 6,248,558 4,205,411
Loans - CEO America 150,000 150,000
Loans - Phoenix 12,250
Amounts owed to employees and officers (notes 5 and 6) 1,314,331 1,314,331
Short term loans 500 500
Convertible notes payable (including amounts owed to officers
$1,220,462 prior year $1,220,462) 237,000 2,991,316
----------- -----------
TOTAL CURRENT LIABILITIES 21,986,960 19,291,342
----------- -----------
SHAREHOLDERS' DEFICIENCY (note 7):
Common stock - $.001 par value; 200,000,000 shares
authorized; 195,274,003 shares issued and outstanding 195,274 193,274
(2005: 193,274,003)
Additional paid-in capital 60,104,504 60,006,504
Common stock subscription receivable - (175,000)
Common stock subscribed - 200,000
Deficit accumulated (82,231,259) (79,462,079)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIENCY (21,931,481) (19,237,301)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 55,479 54,041
=========== ===========
See condensed notes to interim unaudited consolidated financial statements.
|
F-48
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Consolidated Statements of Operations and Comprehensive Loss
For the six month period Ended June 30, 2006 and 2005
(Amounts expressed in US Dollars)
(Unaudited)
For the Quarter For the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2006 2005 2006 2005
---- ---- ---- ----
$ $ $ $
EXPENSES:
Selling, general and administrative (note 12) 218,596 663,417 400,902 1,376,367
Depreciation and amortization - - - -
Write-off of common stock subscription
receivable - - - -
Loss on impairment of intangible assets - - - -
Interest expense 950,926 1,381,891 2,368,278 1,984,794
------------- ------------- ------------- -------------
TOTAL EXPENSES 1,169,522 2,045,308 2,769,180 3,361,161
------------- ------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM (1,169,522) (2,045,308) (2,769,180) (3,361,161)
EXTRAORDINARY ITEM - LOSS ON
EXTINGUISHMENT OF DEBT - - - -
------------- ------------- ------------- -------------
NET LOSS $ (1,169,522) $ (2,045,308) $ (2,769,180) $ (3,361,161)
============= ============= ============= =============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01) $ (0.01) $ (0.01) $ (0.02)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 195,274,003 175,043,600 194,629,559 170,473,902
============= ============= ============= =============
COMPREHENSIVE LOSS
The components of comprehensive loss are as follows:
Net loss $ (1,169,522) $ (2,045,308)
Other comprehensive income (loss) foreign currency
Translation - -
Comprehensive Loss $ (1,169,522) $ (2,045,308)
See condensed notes to interim unaudited consolidated financial statements.
|
F-49
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Consolidated Statements of Changes in Stockholders' Deficiency
For the Periods Ended December 31, 2005 and June 30, 2006
(Amounts expressed in US dollars)
Common Common
Common Stock Additional Stock Stock Deferred
Number of Paid-in Subscription to be Compen- Deficit
Shares Amount Capital Receivable Issued sation Accumulated Total
BALANCE, December 31, 2004 165,714,436 165,714 57,616,113 (250,000) 500,000 - (71,820,010) (13,788,183)
(Audited)
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 4,469 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 75,000 75,000
received
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)
(Audited)
Issuance of stock for services
rendered:
($0.05 per share, February) 2,000,000 2,000 98,000 100,000
Adjustment of stock to be issued (200,000) (200,000)
with payables to Phoenix
Common stock subscription 175,000 175,000
received
Net Loss (2,769,180) (2,769,180)
BALANCE, June 30, 2006 195,274,003 195,274 60,104,504 - - - (82,231,259) (21,931,481)
(Unaudited)
See condensed notes to interim unaudited consolidated financial statements.
|
F-50
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Statement of Cash Flows
Six months Ended June 30, 2006 and 2005
(Amounts expressed in US Dollars)
(Unaudited)
Six Months Ended
June 30,
--------------------------------------
2006 2005
--------------------------------------
$ $
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,769,180) (3,361,160)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization - -
Stock option compensation - 13,114
Adjustment for variable accounting of options
Amortization of deferred option compensation - -
Common stock issued for services
and compensation 100,000 17,303
Common stock issued for interest expense - 1,884,829
Common stock issued to settle CardOne
Claims
Common stock issued for directors' fees
Write-off of common stock subscription
receivable - -
(Gain) loss on extinguishment of debt - -
Loss on impairment of assets - -
Changes in current assets and liabilities:
Prepaid Expenses and other (7,312) (88,022)
Accounts payable and accrued expenses 2,400,928 1,149,212
--------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (275,564) (384,724)
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment - -
Acquisition of patents - -
Investment in real estate joint venture - -
--------------------------------------
NET CASH USED IN INVESTING ACTIVITIES - -
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) loans payable - shareholders - (157,705)
Loans - Phoenix 12,250 -
Proceeds from notes payable 82,440 200,000
Proceeds from common stock subscription
received 175,000 75,000
Sales of common stock - 157,705
Amounts owed to employees and officers - 108,459
--------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 269,690 383,459
--------------------------------------
NET INCREASE (DECREASE) IN CASH (5,874) (1,266)
CASH AT BEGINNING OF PERIOD 11,542 14,086
--------------------------------------
CASH AT END OF PERIOD 5,668 12,820
--------------------------------------
See condensed notes to interim unaudited consolidated financial statements.
|
F-51
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
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 accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included. Operating results for
the six months ended June 30, 2006, are not indicative of the results that may
be expected for the year Ended December 31, 2006. The unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2005.
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- GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company and has incurred a net
loss of $82,231,259 since inception.
Additionally, the Company had a net working capital deficiency of $21,931,481
and a total shareholders' deficiency of $21,931,481 at June 30, 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 June 30, 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.
F-52
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE-3 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.
NOTE 4-STOCK BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
accounting and reporting standards for stock-based employee compensation plans.
This statement allows companies to choose between the fair value based method of
accounting as defined in this statement and the intrinsic value based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an Amendment of SFAS Statement No. 123". This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. We have adopted the increased disclosure
requirements of SFAS No. 148 for the six month period ended June 30, 2006.
F-53
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 4- STOCK BASED COMPENSATION-CONT'D
The additional disclosures required by SFAS No. 148 are as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2006 2005 2006 2005
---- ---- ---- ----
Net loss attributable to common stockholders,
as reported .................................... $ (1,169,522) $(2,045,308) $ (2,769,180) $(3,361,161)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effect ...................... - 2,381 - 13,114
Less: Total stock-based compensation
expense determined under the Black-Scholes fair value
based method of all awards* .................... - (2,381) - (13,114)
Pro forma net loss attributable to
common stockholders ............................ $ (1,169,522) $(2,045,308) $ (2,769,180) $(3,361,161)
============= =========== ============= ===========
Basic and diluted net loss attributable to
common stockholders
As reported ...................................... $ (0.01) $ (0.01) $ (0.01) $ (0.02)
============= =========== ============= ===========
Pro forma ........................................ $ (0.01) $ (0.01) $ (0.01) $ (0.02)
No stock options were granted by the Company for the six month period ended June 30, 2006.
|
Loss Per 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 248,700,000 at
June 30, 2006.
F-54
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 5 - 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 6 - AMOUNTS OWED TO EMPLOYEES
Amounts owed to employees are non-interest bearing advances made on behalf of
the Company that are unsecured and payable on demand.
NOTE 7 - SHAREHOLDERS' DEFICIENCY
Equity Transactions
Six months ended June 30, 2006
On February 13, 2006, the Company issued 2,000,000 common shares in exchange for
past services valued at $100,000. The shares were issued at $0.05.
Six months ended June 30, 2005
On February 2, 2005 the Company issued 250,000 common shares in exchange for
services valued at $12,500. The shares were issued at $0.05.
On March 29, 2005 the Company issued 70,355 common shares in exchange for cash.
The shares were issued at $0.07.
On March 29, 2005 the Company issued 369,550 common shares in exchange for cash.
The shares were issued at $0.068.
On April 8, 2005, the Company issued 100,000 common shares in exchange for cash.
The shares were issued at $0.07
On April 28, 2005 the Company issued 100,000 common shares in exchange for cash.
The shares were issued at $0.09.
On May 4, 2005 the Company issued 248,000, 23,571, 142,857, 125,000, 47,968,
150,000 and 1,000,000 common shares in exchange for cash. The shares were issued
at $0.05, $0.056, $0.07, $0.08, $0.09, $0.123 and $0.30 respectively.
On May 4, 2005 the Company issued 1,050 common shares in exchange for past
services valued at $53. The shares were issued at $0.05.
On May 4, 2005, the Company issued 22,934,690 common shares for interest
payments of $1,884,829. The shares were issued at $0.082.
On May 4, 2005, the Company issued 13,450 common shares in exchange for cash.
The shares were issued at $0.068.
On June 2, 2005, the Company issued 62,500 common shares in exchange for cash.
The shares were issued at $0.08.
On June 6, 2005, the Company issued 800,000 common shares in exchange for cash.
The shares were issued at $0.05.
On June 15, 2005, the Company issued 100,000 and 50,000 common shares in
exchange for cash. The shares were issued at $0.05 and $0.09, respectively.
On June 15, 2005, the Company issued 100,000 common shares in exchange for
services valued at $4,750. The shares were issued at $0.048.
F-55
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 8- AUTHORIZED SHARES
As at June 30, 2006, the Company is authorized to issue 200,000,000 shares of
common stock. At June 30, 2006, the Company had common stock shares outstanding
of 195,274,003 and an additional 248,703,575 shares issuable upon the conversion
of stock options, convertible debt and deferred compensation. As a result, the
Company would exceed the authorized amount by 243,977,578. The Company would be
required to seek shareholder approval to increase the shares authorized limits
in order to satisfy its potential conversion of dilutive securities.
As an alternative, the Company may purchase shares of common stock in the open
market, or seek to repay the indebtedness in lieu of conversion.
Effective November 29, 2006, the Board of Directors of the Company approved
amendments to the Articles of Incorporation to adopt an increase in the capital
stock of the Company's common stock from 200,000,000 to 500,000,000 shares.
Furthermore, during a special meeting of the Board of Directors on July 20,
2007, the Board voted to approve a resolution to increase the number of
authorized shares to 600,000,000. (Refer Note 16 - Subsequent Events).
NOTE 9 - STOCK OPTION PLAN
On December 8, 1999, the Company adopted an Employee Stock Option Plan (the
"Plan"). The Board of Directors administers the Plan. Under the Plan, the
Company may grant stock options, which may be incentive stock options ("ISO's")
as defined in the Internal Revenue Code, and stock awards or options which do
not qualify as ISO's to employees and officers. All employees of the Company are
eligible to participate in the Plan.
No stock options were granted by the Company for the six month period ended June
30, 2006.
Stock Options
-----------------------
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at December 31, 2004 48,425,299 $0.11
Granted 400,000 $0.06
Exercised - -
Cancelled (7,142,470) $0.17
Outstanding at December 31, 2005 41,682,829 $0.11
Granted - -
Exercised - -
Cancelled (3,239,000) $0.16
Outstanding at June 31, 2006 38,443,829 $0.10
|
F-56
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
The following table summarizes the Company's stock options outstanding and
exercisable at June 30, 2006:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
(In Thousands) (In Years) (In Thousands)
$0.00 - $0.23 36,130 2.64 $0.08 36,130 $0.08
$0.48 - $0.49 2,314 4.13 $0.48 2,314 $0.48
$0.64 - $0.80 - - - - -
------ ------
38,444 38,444
====== ======
|
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS
The Company is currently a defendant or co-defendant in various legal actions
arising in the ordinary course of business. There can be no assurance, the
Company will be successful in defending these actions.
Quint Star Management , Inc. vs. IC One, Inc., Arthur D. Bennet, and
Peter Bennee
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. 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 Company, and is secured by the
equipment, inventory, accounts and chattel paper of both the parent and IC One.
The Company is in default in its 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 at December 31, 2003) was entered to
reflect the additional unpaid rent, interest and attorney's fees.
F-57
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS (Continued)
Grish vs. Schimatic Cash Transactions Network.com a/b/a Smart Chip Technologies,
Inc. f/k/a IC One, Inc.
On September 18, 2001, we were served with a summons and complaint for an action
filed by Marilyn Grish in the Third Judicial District Court, Salt Lake County,
Utah, for breach of an independent contractor's contract and seeking unspecified
damages. On October 12, 2001, the Company filed an answer and a counterclaim
against Ms. Grish and intended to defend this matter vigorously. Ms. Grish had
taken no further action in this case and the court indicated that, unless Ms.
Grish certified she was ready for trial by August 4, 2004, the case would be
dismissed. Accordingly, the case was dismissed on August 4, 2004.
Eximsoft International, LLC and Eximsoft Technologies Pvt. Ltd.
In October 2001, IC One, Inc. entered into a settlement agreement with Eximsoft
International, LLC and Eximsoft Technologies Pvt. Ltd. to resolve claims by the
Eximsoft entities that IC One had contracted and received computer software
development and programming services and had failed to pay as agreed. IC One
agreed to pay $30,000 and provided Eximsoft with a confession of judgment that
could be filed in the Third District Court in Salt Lake City, Utah, in the event
that IC One failed to make the agreed payments. IC One paid the agreed $30,000
during 2002 and the original confession of judgment was returned by Eximsoft to
us in November 2003.
Sandra Lueck vs. Schimatic Cash Transactions Network.com, Inc. d/b/a Smart Chip
Technologies, Smart Chip Technologies L.L.C., and IC One, Inc.
On August 16, 2002, Sandra Lueck initiated an action against the Company for
unpaid wages, interest, costs and attorney's fees. On October 31, 2002, judgment
was entered against the Company in the amounts of $11,400 for unpaid wages,
$3,300 as a continuation of wages, court costs and attorney's fees of $1,753,
and interest from the date of judgment until paid in full. On or about June 30,
2003, the Company entered into a release and settlement agreement compromising,
resolving, and settling all matters and issues between the parties. The Company
paid a total of $18,750 and a satisfaction of judgment was filed with the Third
Judicial District Court on October 14, 2003.
Greg Morrison vs. Smart Chip Technologies, L.L.C.
On April 4, 2003, Greg Morrison initiated an action against the Company in the
Third Judicial District Court for Salt Lake County, Utah for unpaid wages in the
amount of $7,948, unpaid reimbursement expenses totaling $11,868, interest on
those amounts from the date of termination, court costs and attorney's fees. The
Company agreed to pay Mr. Morrison a total of $7,500 to resolve this matter. The
Company's final payment under this agreement was made prior to July 31, 2004,
and this matter has be dismissed.
F-58
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS (Continued)
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 and Jami Biorge
The Company is reviewing, with the advice of legal counsel, whether the Company
has 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, the Company 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. The
Company believes 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. On the basis of
our previous assertion that the Company may make such a claim against Mr. Biorge
and perhaps other reasons not known to the Company, Mr. Biorge has refused to
accept certificates for 11,503,138 shares of Company's common stock to which he
would have been entitled to receive in exchange for his stock in IC One.
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 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.
Richard Hauge and John Hipsley
As of July 31, 2002, Messrs. Hauge and Hipsley ceased their employment with us
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.
Verlo Howell
On November 30, 2005, Verlo Howell initiated an action against the Company in
the Third Judicial District Court for Salt Lake County, Utah, civil no.
05-092-1235 for unpaid wages, interest and attorney costs. Mr. Howell was hired
as the Company's Executive Vice-President of Sales and Marketing pursuant to an
Employment Agreement dated May 17, 2005. On September 8, 2005, Mr. Howell's
employment was terminated with cause by the Company. We intend to assert and
pursue offsetting defenses and believe that there is a reasonable possibility
that the outcome of any claim, if asserted, would not be unfavorable to us.
F-59
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS (Continued)
Other Creditors
From time to time, the Company is threatened by creditors to initiate litigation
to collect amounts owed by the Company and reported on its financial statements.
In cases in which litigation is threatened or initiated, the Company seeks to
negotiate a settlement or forbearance agreement.
NOTE 11 - PAYROLL TAXES
Internal Revenue Service
The Company's 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 June 30, 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 $1,367,000. 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 $1,367,000 (including interest and penalties of approximately
$414,000). 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 against the Company of approximately
$57,500 as of June 30, 2006, for unpaid employee withholding taxes and related
amounts.
California Employment Development Corporation
The State of California has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately $75,500
as of June 30, 2006.
Nebraska Department of Revenue
The State of Nebraska has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately $5,800
as of June 30, 2006. On June 26, 2007, the Company paid its tax obligation to
the State of Nebraska in full.
NOTE 12- SELLING GENERAL AND ADMINISTRATIVE EXPENSES
For the six month period ended June 30, 2006, selling, general and
administrative expenses totaled $400,902.
NOTE 13 - STRATEGIC ALLIANCES
The Company has established strategic alliances to market its products and
services. (Refer Note 16 - Subsequent Events for licensing agreements
signed with Retention Management Group, Inc. and Phoenix Technology
Holdings, Inc.)
F-60
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 14 - EMPLOYMENT AGREEMENTS
As of June 30, 2006, the Company was no longer obligated under two employment
agreements with certain officers.
NOTE 15 - DELISTING AND LATE FILINGS
The Company did not file required reports with the SEC on a timely basis and was
delisted from the OTC Bulletin Board (the "OTC"). The Company currently trades
on the Pink Sheets.
The Company is also not current with its corporate income tax return filings.
The Company's financial statements do not reflect a reserve for any potential
fines or penalties that may result from such delisting or late filings.
NOTE 16- SUBSEQUENT EVENTS
A) Subsequent issue of common shares:
On July 14, 2006, the Company issued 200,000 common shares in exchange for past
services valued at $10,000. The shares were issued at $0.05.
On August 18, 2006, the Company issued 1,000,000 common shares in exchange for
past services valued at $70,000. The shares were issued at $0.07.
On December 15, 2006, the Company issued 3,000,000 common shares in exchange for
services valued at $150,000. The shares were issued at $0.05.
On December 15, 2006, the Company issued 709,687 common shares in exchange for
past services valued at $49,678. The shares were issued at $0.07.
On December 16, 2006, the Company issued 1,153,333 common shares in exchange for
past services valued at $55,418. The shares were issued at $0.05.
On December 20, 2006, the Company issued 540,000, 1,307,080, 4,000,000 and
2,054,079 common shares in exchange for past services valued at $54,000,
$59,584, $280,000 and $102,704, respectively. The shares were issued at $0.10,
$0.05, $0.07 and $0.05, respectively.
On January 30, 2007, the Company issued 5,850,000 common shares for past
services valued at $292,500. The shares were issued at $0.05.
On February 5, 2007, the Company issued 2,123,208 common shares to convert
secured notes valued at $107,333. The shares were issued at $0.05.
On February 8, 2007, the Company issued 615,091 common shares to convert secured
notes valued at $30,793.75. The shares were issued at $0.05.
On February 21, 2007, the Company issued 6,400,000 common shares in exchange for
past services valued at $448,000. The shares were issued at $0.07.
On March 21, 2007, the Company issued 21,000,000 and 800,000 common shares in
exchange for past services valued at $1,260,000 and $56,000, respectively. The
shares were issued at $0.06 and $0.07, respectively.
On March 26, 2007, the Company issued 5,565,000 and 540,000 common shares for
past services valued at $ 278,250.00 and $54,000, respectively. The shares were
issued at $0.05 and $0.10, respectively.
On May 17, 2007, the Company issued 1,500,000 and 2,578,125 common shares for
cash and past services, respectively valued at $75,000.00 and $135,000,
respectively. The shares were issued at $0.05.
F-61
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
A) Subsequent issue of common shares (Continued):
On May 30, 2007, the Company issued 500,000 and 48,521 common shares for cash
and past services, respectively valued at $25,000.00 and $2,426, respectively.
The shares were issued at $0.05.
On June 1, 2007, the Company issued 1,000,000 common shares in exchange for cash
valued at $50,000.00. The shares were issued at $0.05.
On June 11, 2007, the Company issued 400,000 common shares in exchange for cash
valued at $20,000.00. The shares were issued at $0.05.
On June 12, 2007, the Company issued 100,324,827 common shares to convert
secured notes valued at $5,016,241. The shares were issued at $0.05.
On June 13, 2007, the Company issued 1,129,874 common shares for past services
valued at $56,494. The shares were issued at $0.05.
On June 17, 2007, the Company issued 516,048 common shares to convert secured
notes valued at $25,802. The shares were issued at $0.05.
On June 28, 2007, the Company issued 400,300 common shares for past services
valued at $ 20,015. The shares were issued at $0.05.
On July 1, 2007, the Company issued 6,000,000 common shares for past services
valued at $300,000. The shares were issued at $0.05.
On July 9, 2007, the Company issued 306,908 common shares in exchange for cash
valued at $58,000.00. The shares were issued at $0.19.
On July 11, 2007, the Company issued 6,500,000 common shares for past services
valued at $400,646. The shares were issued at $0.06.
On July 20, 2007, the Company issued 8,661,648 common shares for past services
valued at $432,542. The shares were issued at $0.05.
On August 2, 2007, the Company issued 63,742,180 common shares to convert
secured notes valued at 3,187,164. The shares were valued at $0.05.
On September 26, 2007, the Company issued 200,000 common shares in exchange for
cash valued at $25,000. The shares were issued at $0.125.
On September 26, 2007, the Company issued 160,000 common shares in exchange for
cash valued at $25,000. The shares were issued at $0.156.
On October 30, 2007, the Company issued 400,000 common shares in exchange for
cash valued at $40,000. The shares were issued at $0.10.
B) Options:
On December 15, 2006 and December 16, 2006, the Company cancelled 527,296 and
1,000,000 options, respectively, that had been issued to consulting companies
for services rendered.
On March 9, 2007, the Company cancelled 19,161,876 options that had been issued
to past employees.
On March 26, 2007 and March 28, 2007, the Company cancelled 2,861,958 and
1,038,615 options, respectively, that had been issued to past employees.
On July 16, 2007 the Company cancelled 4,098,333 options that had been issued to
past employees.
F-62
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events
Joseph E. Diamond
On February 19, 2004, Joseph E. Diamond was appointed Senior Vice-President of
Administration and Finance. In addition to these duties, on November 12, 2004
Mr. Diamond was elected CEO of the Company. Mr. Diamond was relieved as CEO of
the Company and resigned his previous position on December 16, 2004. On January
26, 2005, Therese Diamond (Mr. Diamond's spouse) filed a complaint against the
Company in the Superior Court of California, County of Los Angeles bearing case
number LC-070391 and on February 4, 2005 Joseph Diamond filed a complaint
against the Company in the Superior Court of California, County of Los Angeles
bearing case number LC-070495. On February 3, 2006, the parties entered into a
Settlement and Release Agreement which resolved the matters and they were
subsequently dismissed by the Courts.
Canadian Patent
On April 20, 2004, the Canadian Intellectual Property Office granted the Company
patent number 2,182,596.
Retention Management Group, Inc.
On July 25, 2004, the Company entered into a Licensing Agreement with Retention
Management Group, Inc.(RMG), a Barbados company, in which RMG was granted a
license to market, distribute and sublicense SCTN applications and products. On
March 10, 2006, the Company asserted claims against RMG in case no. A518577
filed in the Eighth Judicial District Court of Nevada, Clark County. On May 31,
2006, the Company and RMG entered into a Settlement Agreement and Release. Under
the terms of this agreement, the Company agreed to pay RMG $ 90,000, and the
Licensing Agreement between the Company and RMG was terminated. Accordingly,
case no. A518577 was dismissed by the Court on June 23, 2006.
Marilyn Grish
On September 18, 2001, we were served with a summons and complaint for an action
filed by Marilyn Grish in the Third Judicial District Court, Salt Lake County,
Utah, for breach of an independent contractor's contract and seeking unspecified
damages. On October 12, 2001, the Company filed an answer and a counterclaim
against Ms. Grish and intended to defend this matter vigorously. Ms. Grish had
taken no further action in this case and the court indicated that, unless Ms.
Grish certified she was ready for trial by August 4, 2004, the case would be
dismissed. The case was dismissed on August 4, 2004.
David Simon
Concurrent with Mr. Diamond being relieved as CEO of the Company on December 16,
2004, David Simon assumed the role of CEO.
F-63
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events
Donald W. Mayer
On June 1, 2005, Donald W. Mayer, an investor in the Company, initiated an
action in The Superior Court of the State of Washington, In and For the County
of King, case no. 05-2-18115-0-SEA in which the Company was named one of several
defendants. On May 13, 2006, the Parties entered into a Settlement Agreement and
Release. Accordingly, the Company was dismissed as a defendant in the case.
Miki Radivojsa
On August 8, 2005, Miki Radivojsa, CEO of Airos Group, the Company's development
partner, was elected to the Board of Directors. On August 17, 2005, Mr.
Radivojsa was elected Chairman and CEO of the Company, replacing David Simon.
Statute-Barred Accounts Payable
As of December 31, 2005, certain accounts payable of the Company are
Statute-Barred under Utah law from being collected by creditors. However, under
US GAAP, the Company still records them as a liability. As of December 31, 2005,
the amount is approximately 41,000.
Phoenix Technology Holdings, Inc.
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. 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. Further, the
agreement provides for Phoenix to loan monies to the Company, at Phoenix's
discretion, at the rate of one percent (1%) per month, compounded monthly until
paid in full. Any such loan shall be deducted from any payments due by Phoenix
under the agreement. In order to maintain exclusivity, the Agreement calls for
certain performance targets to be met. As of April 18, 2007, these targets have
been met.
Nevada Corporation
During a special meeting of the Board of Directors on November 30, 2006, the
Board voted to approve a resolution to convert the Company from a Florida
corporation to a Nevada corporation.
Increase in Authorized Shares
During a special meeting of the Board of Directors on November 30, 2006, the
Board voted to approve a resolution to increase the number of authorized shares
to 500,000,000.
F-64
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
June 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events
Change in Auditors
During a meeting of the Board of Directors on May 18, 2007, the Board voted to
approve a resolution which dismissed Marcum & Kliegman, LLP as the Company's
independent registered public accounting firm and engaged Schwartz Levitsky
Feldman LLP as the Company's independent registered public accounting firm. The
change in independent registered public accounting firms is not the result of
any disagreement with Marcum & Kliegman, LLP.
Elimination of Senior Secured Debt
In Janaury of 2007, Noteholders which did not elect to assign their debt to
Phoenix Technology Holding, Inc. were given the option to receive their
principal investment plus accrued interest either in the form of cash or shares
in the Company. By June 2007, the last of these repayments were made, and all
Senior Secured Notes have been retired.
Increase in Authorized Shares
During a special meeting of the Board of Directors on July 20, 2007, the Board
voted to approve a resolution to increase the number of authorized shares to
600,000,000.
Menalco, FZE and The International Investor, K.S.C.C.
On August 30, 2007, The International Investor, K.S.C.C., a Kuwait-based
company, initiated an action in the United States District Court for the
District of Nevada, case # 07-CV-1178, in which the Company was named as a
co-defendant, seeking damages in the amount of $100,000,000. The allegations,
which have not been proven in a court of law, include conspiracy in violation of
statues prohibiting racketeering, misappropriation of trade secrets, fraud,
civil conspiracy to defraud, unjust enrichment, breach of contract, breach of
fiduciary trust and unfair competition. The company filed its counter-claim on
September 25, 2007 and plans to vigorously defend and counter sue TII for breach
of contract, fraud, interference with contractual relations, misappropriation of
trade secrets, conversion, unjust enrichment and to seek both compensatory and
punitive damages well in excess of $100 million.
Statute-Barred Accounts Payable
As of December 31, 2007, certain accounts payable of the Company are
Statute-Barred under Utah law from being collected by creditors. However, under
US GAAP, the Company still records them as a liability. As of December 31, 2007,
the amount is approximately $2,530,000. This amount includes the $41,000
previously Statute-Barred as of December 31, 2006.
F-65
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Consolidated Balance Sheets
As of September 30, 2006 and December 31, 2005
(Amounts expressed in US Dollars)
(Unaudited) (Audited)
Sept 30, December 31,
2006 2005
$ $
ASSETS
------
CURRENT ASSETS:
Cash 3,178 11,542
Prepaid Expenses and other 49,811 42,499
----------- -----------
TOTAL CURRENT ASSETS 52,989 54,041
----------- -----------
TOTAL ASSETS 52,989 54,041
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable - Vendor 2,159,320 1,963,800
Accounts payable - other 1,943,172 7,166,788
Accounts payable - Phoenix 8,387,164
Accrued wages and payroll taxes (note 11) 1,545,649 1,499,196
Deferred compensation 6,248,558 4,205,411
Loans - CEO America 150,000 150,000
Loans - Phoenix 89,303
Amounts owed to employees and officers (notes 5 and 6) 1,314,331 1,314,331
Short term loans 500 500
Convertible notes payable (including amounts owed to officers
$1,220,462 prior year $1,220,462) 237,000 2,991,316
----------- -----------
TOTAL CURRENT LIABILITIES 22,074,997 19,291,342
----------- -----------
SHAREHOLDERS' DEFICIENCY (note 7):
Common stock - $.001 par value; 200,000,000 shares
authorized; 196,474,003 shares issued and outstanding 196,474 193,274
(2005: 193,274,003)
Additional paid-in capital 60,183,304 60,006,504
Common stock subscription receivable - (175,000)
Common stock subscribed - 200,000
Deficit accumulated (82,401,786) (79,462,079)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIENCY (22,022,008) (19,237,301)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 48,269 54,041
=========== ===========
See condensed notes to interim unaudited consolidated financial statements.
|
F-66
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Consolidated Statements of Operations and Comprehensive Loss
For the nine month period Ended September 30, 2006 and 2005
(Amounts expressed in US Dollars)
(Unaudited)
For the Quarter For the Nine Months
Ended Sept 30, Ended Sept 30,
------------------------------- -------------------------------
2006 2005 2006 2005
---- ---- ---- ----
$ $ $ $
REVENUE: 14,620 - 14,620 -
------------- ------------- ------------- -------------
EXPENSES:
Selling, general and administrative (note 12) 98,222 585,048 499,124 1,961,414
Depreciation and amortization - - - -
Write-off of common stock subscription
receivable - - - -
Loss on impairment of intangible assets - - - -
Interest expense 86,925 1,274,829 2,455,202 3,259,623
------------- ------------- ------------- -------------
TOTAL EXPENSES 185,147 1,859,877 2,954,326 5,221,037
------------- ------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM (170,527) (1,859,877) (2,939,707) (5,221,037)
EXTRAORDINARY ITEM - LOSS ON
EXTINGUISHMENT OF DEBT - - - -
------------- ------------- ------------- -------------
NET LOSS $ (170,527) $ (1,859,877) $ (2,939,707) $ (5,221,037)
============= ============= ============= =============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.00) $ (0.01) $ (0.02) $ (0.03)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 195,732,699 192,707,375 195,002,679 177,826,014
============= ============= ============= =============
COMPREHENSIVE LOSS
The components of comprehensive loss are as follows:
Net loss $ (170,527) $ (1,859,877)
Other comprehensive income (loss) foreign currency
Translation - -
Comprehensive Loss $ (170,527) $ (1,859,877)
See condensed notes to interim unaudited consolidated financial statements.
|
F-67
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Consolidated Statements of Changes in Stockholders' Deficiency
For the Periods Ended December 31, 2005 and September 30, 2006
(Amounts expressed in US dollars)
Common Common
Common Stock Additional Stock Stock Deferred
Number of Paid-in Subscription to be Compen- Deficit
Shares Amount Capital Receivable Issued sation Accumulated Total
BALANCE, December 31, 2004 165,714,436 165,714 57,616,113 (250,000) 500,000 - (71,820,010) (13,788,183)
(Audited)
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 4,469 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 75,000 75,000
received
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)
(Audited)
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
Adjustment of stock to be issued (200,000) (200,000)
with payables to Phoenix
Common stock subscription 175,000 175,000
received
Net Loss (2,939,707) (2,939,707)
BALANCE, September 30, 2006 196,474,003 196,474 60,183,304 - - - (82,401,786) (22,022,008)
(Unaudited)
See condensed notes to interim unaudited consolidated financial statements.
|
F-68
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Interim Statement of Cash Flows
Nine months Ended September 30, 2006 and 2005
(Amounts expressed in US Dollars)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------------
2006 2005
--------------------------------------
$ $
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (2,939,707) (5,221,037)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization - -
Stock option compensation - 13,114
Adjustment for variable accounting of options
Amortization of deferred option compensation - -
Common stock issued for services
and compensation 180,000 17,303
Common stock issued for interest expense - 1,884,829
Common stock issued to settle CardOne
Claims
Common stock issued for directors' fees
Write-off of common stock subscription
receivable - -
(Gain) loss on extinguishment of debt - -
Loss on impairment of assets - -
Changes in current assets and liabilities:
Prepaid Expenses and other (7,312) (9,674)
Accounts payable and accrued expenses 2,407,192 2,891,902
--------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (359,827) (423,563)
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment - -
Acquisition of patents - -
Investment in real estate joint venture - -
--------------------------------------
NET CASH USED IN INVESTING ACTIVITIES - -
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) loans payable - shareholders - (181,210)
Loans - Phoenix 89,303 -
Proceeds from notes payable 82,440 200,000
Proceeds from common stock subscription
received 175,000 75,000
Sales of common stock - 181,210
Amounts owed to employees and officers - 158,559
--------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 346,743 433,559
--------------------------------------
NET INCREASE (DECREASE) IN CASH (13,084) 9,996
CASH AT BEGINNING OF PERIOD 11,542 14,086
--------------------------------------
CASH AT END OF PERIOD (1,542) 24,082
--------------------------------------
See condensed notes to interim unaudited consolidated financial statements.
|
F-69
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
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 accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included. Operating results for
the nine months ended September 30, 2006, are not indicative of the results that
may be expected for the year ended December 31, 2006. The unaudited condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2005.
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- GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company and has incurred a net
loss of $82,401,786 since inception. Additionally, the Company had a net working
capital deficiency Of $22,022,008 and a total shareholders' deficiency of
$22,022,008 at September 30, 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 September 30, 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.
NOTE-3 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.
F-70
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 4-STOCK BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
accounting and reporting standards for stock-based employee compensation plans.
This statement allows companies to choose between the fair value based method of
accounting as defined in this statement and the intrinsic value based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -
an Amendment of SFAS Statement No. 123". This statement amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. We have adopted the increased disclosure
requirements of SFAS No. 148 for the nine month period ended September 30, 2006.
F-71
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 4- STOCK BASED COMPENSATION (Continued)
The additional disclosures required by SFAS No. 148 are as follows:
For the Three Months For the Nine Months
Ended Sept 30, Ended Sept 30,
2006 2005 2006 2005
---- ---- ---- ----
Net loss attributable to common stockholders,
as reported .................................... $ (170,527) $ (1,859,877) $ (2,939,707) $(5,221,037)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effect ...................... - - - 13,114
Less: Total stock-based compensation
expense determined under the Black-Scholes fair value
based method of all awards* .................... - - - (13,114)
Pro forma net loss attributable to
common stockholders ............................ $ (170,527) $ (1,859,877) $ (2,939,707) $(5,221,037)
=========== ============= ============= ===========
Basic and diluted net loss attributable to
common stockholders
As reported ...................................... $ (0.00) $ (0.01) $ (0.02) $ (0.03)
=========== ============= ============= ===========
Pro forma ........................................ $ (0.00) $ (0.01) $ (0.02) $ (0.03)
No stock options were granted by the Company for the nine month period ended September 30, 2006.
|
Loss Per 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 248,900,000 at
September 30, 2006.
F-72
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 5 - 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 6 - AMOUNTS OWED TO EMPLOYEES
Amounts owed to employees are non-interest bearing advances made on behalf of
the Company that are unsecured and payable on demand.
NOTE 7 - SHAREHOLDERS' DEFICIENCY
Equity Transactions
Nine months ended September 30, 2006
On February 13, 2006, the Company issued 2,000,000 common shares in exchange for
past services valued at $100,000. The shares were issued at $0.05.
On July 14, 2006, the Company issued 200,000 common shares in exchange for past
services valued at $10,000. The shares were issued at $0.05.
On August 18, 2006, the Company issued 1,000,000 common shares in exchange for
past services valued at $70,000. The shares were issued at $0.07.
Nine months ended September 30, 2005
On February 2, 2005 the Company issued 250,000 common shares in exchange for
services valued at $12,500. The shares were issued at $0.05.
On March 29, 2005 the Company issued 70,355 common shares in exchange for cash.
The shares were issued at $0.07.
On March 29, 2005 the Company issued 369,550 common shares in exchange for cash.
The shares were issued at $0.068.
On April 8, 2005, the Company issued 100,000 common shares in exchange for cash.
The shares were issued at $0.07
On April 28, 2005 the Company issued 100,000 common shares in exchange for cash.
The shares were issued at $0.09.
On May 4, 2005 the Company issued 248,000, 23,571, 142,857, 125,000, 47,968,
150,000 and 1,000,000 common shares in exchange for cash. The shares were issued
at $0.05, $0.056, $0.07, $0.08, $0.09, $0.123 and $0.30 respectively.
On May 4, 2005 the Company issued 1,050 common shares in exchange for past
services valued at $53. The shares were issued at $0.05.
On May 4, 2005, the Company issued 22,934,690 common shares for interest
payments of $1,884,829. The shares were issued at $0.082.
On May 4, 2005, the Company issued 13,450 common shares in exchange for cash.
The shares were issued at $0.068.
On June 2, 2005, the Company issued 62,500 common shares in exchange for cash.
The shares were issued at $0.08.
On June 6, 2005, the Company issued 800,000 common shares in exchange for cash.
The shares were issued at $0.05.
F-73
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 7 - SHAREHOLDERS' DEFICIENCY (Continued)
Equity Transactions (Continued)
On June 15, 2005, the Company issued 100,000 and 50,000 common shares in
exchange for cash. The shares were issued at $0.05 and $0.09, respectively.
On June 15, 2005, the Company issued 100,000 common shares in exchange for
services valued at $4,750. The shares were issued at $0.048.
On July 9, 2005, the Company issued 200,000 common shares in exchange for cash.
The shares were issued at $0.05.
On July 21, 2005, the Company issued 200,000 common shares in exchange for cash.
The shares were valued at $0.05.
On September 14, 2005, the Company issued 58,413 common shares in exchange for
cash. The shares were valued at $ $0.06.
NOTE 8- AUTHORIZED SHARES
As at September 30, 2006, the Company is authorized to issue 200,000,000 shares
of common stock. At September 30, 2006, the Company had common stock shares
outstanding of 196,474,003 and an additional 248,889,339 shares issuable upon
the conversion of stock options, convertible debt and deferred compensation. As
a result, the Company would exceed the authorized amount by 245,363,342. The
Company would be required to seek shareholder approval to increase the shares
authorized limits in order to satisfy its potential conversion of dilutive
securities.
As an alternative, the Company may purchase shares of common stock in the open
market, or seek to repay the indebtedness in lieu of conversion.
Effective November 29, 2006, the Board of Directors of the Company approved
amendments to the Articles of Incorporation to adopt an increase in the capital
stock of the Company's common stock from 200,000,000 to 500,000,000 shares.
Furthermore, during a special meeting of the Board of Directors on July 20,
2007, the Board voted to approve a resolution to increase the number of
authorized shares to 600,000,000. (Refer Note 16 - Subsequent Events).
NOTE 9 - STOCK OPTION PLAN
On December 8, 1999, the Company adopted an Employee Stock Option Plan (the
"Plan"). The Board of Directors administers the Plan. Under the Plan, the
Company may grant stock options, which may be incentive stock options ("ISO's")
as defined in the Internal Revenue Code, and stock awards or options which do
not qualify as ISO's to employees and officers. All employees of the Company are
eligible to participate in the Plan.
No stock options were granted by the Company for the nine month period ended
September 30, 2006.
F-74
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
Stock Options
---------------------------
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at December 31, 2004 48,425,299 $0.11
Granted 400,000 $0.06
Exercised - -
Cancelled (7,142,470) $0.17
Outstanding at December 31, 2005 41,682,829 $0.11
Granted - -
Exercised - -
Cancelled (3,239,000) $0.16
Outstanding at September 30, 2006 38,443,829 $0.10
|
The following table summarizes the Company's stock options outstanding and
exercisable at September 30, 2006:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
(In Thousands) (In Years) (In Thousands)
$0.00 - $0.23 36,130 2.39 $0.08 36,130 $0.08
$0.48 - $0.49 2,314 3.88 $0.48 2,314 $0.48
$0.64 - $0.80 - - - - -
------ ------
38,444 38,444
====== ======
|
F-75
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS
The Company is currently a defendant or co-defendant in various legal actions
arising in the ordinary course of business. There can be no assurance, the
Company will be successful in defending these actions.
Quint Star Management , Inc. vs. IC One, Inc., Arthur D. Bennet, and
Peter Bennee
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. 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 Company, and is secured by the
equipment, inventory, accounts and chattel paper of both the parent and IC One.
The Company is in default in its 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 at December 31, 2003) was entered to
reflect the additional unpaid rent, interest and attorney's fees.
Grish vs. Schimatic Cash Transactions Network.com a/b/a Smart Chip Technologies,
Inc. f/k/a IC One, Inc.
On September 18, 2001, we were served with a summons and complaint for an action
filed by Marilyn Grish in the Third Judicial District Court, Salt Lake County,
Utah, for breach of an independent contractor's contract and seeking unspecified
damages. On October 12, 2001, the Company filed an answer and a counterclaim
against Ms. Grish and intended to defend this matter vigorously. Ms. Grish had
taken no further action in this case and the court indicated that, unless Ms.
Grish certified she was ready for trial by August 4, 2004, the case would be
dismissed. Accordingly, the case was dismissed on August 4, 2004.
Eximsoft International, LLC and Eximsoft Technologies Pvt. Ltd.
In October 2001, IC One, Inc. entered into a settlement agreement with Eximsoft
International, LLC and Eximsoft Technologies Pvt. Ltd. to resolve claims by the
Eximsoft entities that IC One had contracted and received computer software
development and programming services and had failed to pay as agreed. IC One
agreed to pay $30,000 and provided Eximsoft with a confession of judgment that
could be filed in the Third District Court in Salt Lake City, Utah, in the event
that IC One failed to make the agreed payments. IC One paid the agreed $30,000
during 2002 and the original confession of judgment was returned by Eximsoft to
us in November 2003.
Sandra Lueck vs. Schimatic Cash Transactions Network.com, Inc. d/b/a Smart Chip
Technologies, Smart Chip Technologies L.L.C., and IC One, Inc.
On August 16, 2002, Sandra Lueck initiated an action against the Company for
unpaid wages, interest, costs and attorney's fees. On October 31, 2002, judgment
was entered against the Company in the amounts of $11,400 for unpaid wages,
$3,300 as a continuation of wages, court costs and attorney's fees of $1,753,
and interest from the date of judgment until paid in full. On or about June 30,
2003, the Company entered into a release and settlement agreement compromising,
resolving, and settling all matters and issues between the parties. The Company
paid a total of $18,750 and a satisfaction of judgment was filed with the Third
Judicial District Court on October 14, 2003.
F-76
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS (Continued)
Greg Morrison vs. Smart Chip Technologies, L.L.C.
On April 4, 2003, Greg Morrison initiated an action against the Company in the
Third Judicial District Court for Salt Lake County, Utah for unpaid wages in the
amount of $7,948, unpaid reimbursement expenses totaling $11,868, interest on
those amounts from the date of termination, court costs and attorney's fees. The
Company agreed to pay Mr. Morrison a total of $7,500 to resolve this matter. The
Company's final payment under this agreement was made prior to July 31, 2004,
and this matter has be dismissed.
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
The Company is reviewing, with the advice of legal counsel, whether the Company
has 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, the Company 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. The
Company believes 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. On the basis of
our previous assertion that the Company may make such a claim against Mr. Biorge
and perhaps other reasons not known to the Company, Mr. Biorge has refused to
accept certificates for 11,503,138 shares of Company's common stock to which he
would have been entitled to receive in exchange for his stock in IC One.
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 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.
CardOne Development Company and CardOne Corporation
As of July 31, 2002, Messrs. Hauge and Hipsley ceased their employment with us
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.
F-77
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 10 - LITIGATION AND SETTLEMENT OF CLAIMS (Continued)
Verlo Howell
On November 30, 2005, Verlo Howell initiated an action against the Company in
the Third Judicial District Court for Salt Lake County, Utah, civil no.
05-092-1235 for unpaid wages, interest and attorney costs. Mr. Howell was hired
as the Company's Executive Vice-President of Sales and Marketing pursuant to an
Employment Agreement dated May 17, 2005. On September 8, 2005, Mr. Howell's
employment was terminated with cause by the Company. We intend to assert and
pursue offsetting defenses and believe that there is a reasonable possibility
that the outcome of any claim, if asserted, would not be unfavorable to us.
Other Creditors
From time to time, the Company is threatened by creditors to initiate litigation
to collect amounts owed by the Company and reported on its financial statements.
In cases in which litigation is threatened or initiated, the Company seeks to
negotiate a settlement or forbearance agreement.
NOTE 11 - PAYROLL TAXES
Internal Revenue Service
The Company's 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 September 30, 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 $1,380,000.
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 $1,380,000 (including
interest and penalties of approximately $431,000). 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 against the Company of approximately
$58,000 as of September 30, 2006, for unpaid employee withholding taxes and
related amounts.
California Employment Development Corporation
The State of California has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately $77,000
as of September 30, 2006.
Nebraska Department of Revenue
The State of Nebraska has filed tax liens against the Company for unpaid
employee withholding taxes and related amounts aggregating approximately $5,800
as of September 30, 2006. On June 26, 2007, the Company paid its tax obligation
to the State of Nebraska in full.
F-78
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 12- SELLING GENERAL AND ADMINISTRATIVE EXPENSES
For the nine month period ended September 30, 2006, selling, general and
administrative expenses totaled $585,048.
NOTE 13 - STRATEGIC ALLIANCES
The Company has established strategic alliances to market its products and
services. (Refer Note 16 - Subsequent Events for licensing agreements
signed with Retention Management Group, Inc. and Phoenix Technology
Holdings, Inc.)
NOTE 14 - EMPLOYMENT AGREEMENTS
As of June 30, 2006, the Company was no longer obligated under two employment
agreements with certain officers.
NOTE 15 - DELISTING AND LATE FILINGS
The Company did not file required reports with the SEC on a timely basis and was
delisted from the OTC Bulletin Board (the "OTC"). The Company currently trades
on the Pink Sheets.
The Company is also not current with its corporate income tax return filings.
The Company's financial statements do not reflect a reserve for any potential
fines or penalties that may result from such delisting or late filings.
NOTE 16- SUBSEQUENT EVENTS
A) Subsequent issue of common shares:
On December 15, 2006, the Company issued 3,000,000 common shares in exchange for
services valued at $150,000. The shares were issued at $0.05.
On December 15, 2006, the Company issued 709,687 common shares in exchange for
past services valued at $49,678. The shares were issued at $0.07.
On December 16, 2006, the Company issued 1,153,333 common shares in exchange for
past services valued at $55,418. The shares were issued at $0.05.
On December 20, 2006, the Company issued 540,000, 1,307,080, 4,000,000 and
2,054,079 common shares in exchange for past services valued at $54,000,
$59,584, $280,000 and $102,704, respectively. The shares were issued at $0.10,
$0.05, $0.07 and $0.05, respectively.
On January 30, 2007, the Company issued 5,850,000 common shares for past
services valued at $292,500. The shares were issued at $0.05.
On February 5, 2007, the Company issued 2,123,208 common shares to convert
secured notes valued at $107,333. The shares were issued at $0.05.
On February 8, 2007, the Company issued 615,091 common shares to convert secured
notes valued at $30,793.75. The shares were issued at $0.05.
On February 21, 2007, the Company issued 6,400,000 common shares in exchange for
past services valued at $448,000. The shares were issued at $0.07.
On March 21, 2007, the Company issued 21,000,000 and 800,000 common shares in
exchange for past services valued at $1,260,000 and $56,000, respectively. The
shares were issued at $0.06 and $0.07, respectively.
F-79
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
A) Subsequent issue of common shares (Continued):
On March 26, 2007, the Company issued 5,565,000 and 540,000 common shares for
past services valued at $ 278,250.00 and $54,000, respectively. The shares were
issued at $0.05 and $0.10, respectively.
On May 17, 2007, the Company issued 1,500,000 and 2,578,125 common shares for
cash and past services, respectively valued at $75,000.00 and $135,000,
respectively. The shares were issued at $0.05.
On May 30, 2007, the Company issued 500,000 and 48,521 common shares for cash
and past services, respectively valued at $25,000.00 and $2,426, respectively.
The shares were issued at $0.05.
On June 1, 2007, the Company issued 1,000,000 common shares in exchange for cash
valued at $50,000.00. The shares were issued at $0.05.
On June 11, 2007, the Company issued 400,000 common shares in exchange for cash
valued at $20,000.00. The shares were issued at $0.05.
On June 12, 2007, the Company issued 100,324,827 common shares to convert
secured notes valued at $5,016,241. The shares were issued at $0.05.
On June 13, 2007, the Company issued 1,129,874 common shares for past services
valued at $56,494. The shares were issued at $0.05.
On June 17, 2007, the Company issued 516,048 common shares to convert secured
notes valued at $25,802. The shares were issued at $0.05.
On June 28, 2007, the Company issued 400,300 common shares for past services
valued at $ 20,015. The shares were issued at $0.05.
On July 1, 2007, the Company issued 6,000,000 common shares for past services
valued at $300,000. The shares were issued at $0.05.
On July 9, 2007, the Company issued 306,908 common shares in exchange for cash
valued at $58,000.00. The shares were issued at $0.19.
On July 11, 2007, the Company issued 6,500,000 common shares for past services
valued at $400,646. The shares were issued at $0.06.
On July 20, 2007, the Company issued 8,661,648 common shares for past services
valued at $432,542. The shares were issued at $0.05.
On August 2, 2007, the Company issued 63,742,180 common shares to convert
secured notes valued at 3,187,164. The shares were valued at $0.05.
On September 26, 2007, the Company issued 200,000 common shares in exchange for
cash valued at $25,000. The shares were issued at $0.125.
On September 26, 2007, the Company issued 160,000 common shares in exchange for
cash valued at $25,000. The shares were issued at $0.156.
On October 30, 2007, the Company issued 400,000 common shares in exchange for
cash valued at $40,000. The shares were issued at $0.10.
F-80
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
B) Options:
On December 15, 2006 and December 16, 2006, the Company cancelled 527,296 and
1,000,000 options, respectively, that had been issued to consulting companies
for services rendered.
On March 9, 2007, the Company cancelled 19,161,876 options that had been issued
to past employees.
On March 26, 2007 and March 28, 2007, the Company cancelled 2,861,958 and
1,038,615 options, respectively, that had been issued to past employees.
On July 16, 2007 the Company cancelled 4,098,333 options that had been issued to
past employees.
C) Events
Joseph E. Diamond
On February 19, 2004, Joseph E. Diamond was appointed Senior Vice-President of
Administration and Finance. In addition to these duties, on November 12, 2004
Mr. Diamond was elected CEO of the Company. Mr. Diamond was relieved as CEO of
the Company and resigned his previous position on December 16, 2004. On January
26, 2005, Therese Diamond (Mr. Diamond's spouse) filed a complaint against the
Company in the Superior Court of California, County of Los Angeles bearing case
number LC-070391 and on February 4, 2005 Joseph Diamond filed a complaint
against the Company in the Superior Court of California, County of Los Angeles
bearing case number LC-070495. On February 3, 2006, the parties entered into a
Settlement and Release Agreement which resolved the matters and they were
subsequently dismissed by the Courts.
Canadian Patent
On April 20, 2004, the Canadian Intellectual Property Office granted the Company
patent number 2,182,596.
Retention Management Group, Inc.
On July 25, 2004, the Company entered into a Licensing Agreement with Retention
Management Group, Inc.(RMG), a Barbados company, in which RMG was granted a
license to market, distribute and sublicense SCTN applications and products. On
March 10, 2006, the Company asserted claims against RMG in case no. A518577
filed in the Eighth Judicial District Court of Nevada, Clark County. On May 31,
2006, the Company and RMG entered into a Settlement Agreement and Release. Under
the terms of this agreement, the Company agreed to pay RMG $ 90,000, and the
Licensing Agreement between the Company and RMG was terminated. Accordingly,
case no. A518577 was dismissed by the Court on June 23, 2006.
F-81
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events (Continued)
Marilyn Grish
On September 18, 2001, we were served with a summons and complaint for an action
filed by Marilyn Grish in the Third Judicial District Court, Salt Lake County,
Utah, for breach of an independent contractor's contract and seeking unspecified
damages. On October 12, 2001, the Company filed an answer and a counterclaim
against Ms. Grish and intended to defend this matter vigorously. Ms. Grish had
taken no further action in this case and the court indicated that, unless Ms.
Grish certified she was ready for trial by August 4, 2004, the case would be
dismissed. The case was dismissed on August 4, 2004.
David Simon
Concurrent with Mr. Diamond being relieved as CEO of the Company on December 16,
2004, David Simon assumed the role of CEO.
Donald W. Mayer
On June 1, 2005, Donald W. Mayer, an investor in the Company, initiated an
action in The Superior Court of the State of Washington, In and For the County
of King, case no. 05-2-18115-0-SEA in which the Company was named one of several
defendants. On May 13, 2006, the Parties entered into a Settlement Agreement and
Release. Accordingly, the Company was dismissed as a defendant in the case.
Miki Radivojsa
On August 8, 2005, Miki Radivojsa, CEO of Airos Group, the Company's development
partner, was elected to the Board of Directors. On August 17, 2005, Mr.
Radivojsa was elected Chairman and CEO of the Company, replacing David Simon.
Statute-Barred Accounts Payable
As of December 31, 2005, certain accounts payable of the Company are
Statute-Barred under Utah law from being collected by creditors. However, under
US GAAP, the Company still records them as a liability. As of December 31, 2005,
the amount is approximately 41,000.
F-82
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events (Continued) Phoenix Technology Holdings, Inc.
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. 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. Further, the
agreement provides for Phoenix to loan monies to the Company, at Phoenix's
discretion, at the rate of one percent (1%) per month, compounded monthly until
paid in full. Any such loan shall be deducted from any payments due by Phoenix
under the agreement. In order to maintain exclusivity, the Agreement calls for
certain performance targets to be met. As of April 18, 2007, these targets have
been met.
Nevada Corporation
During a special meeting of the Board of Directors on November 30, 2006, the
Board voted to approve a resolution to convert the Company from a Florida
corporation to a Nevada corporation.
Increase in Authorized Shares
During a special meeting of the Board of Directors on November 30, 2006, the
Board voted to approve a resolution to increase the number of authorized shares
to 500,000,000.
Change in Auditors
During a meeting of the Board of Directors on May 18, 2007, the Board voted to
approve a resolution which dismissed Marcum & Kliegman, LLP as the Company's
independent registered public accounting firm and engaged Schwartz Levitsky
Feldman LLP as the Company's independent registered public accounting firm. The
change in independent registered public accounting firms is not the result of
any disagreement with Marcum & Kliegman, LLP.
Elimination of Senior Secured Debt
In Janaury of 2007, note holders which did not elect to assign their debt to
Phoenix Technology Holding, Inc. were given the option to receive their
principal investment plus accrued interest either in the form of cash or shares
in the Company. By June 2007, the last of these repayments were made, and all
Senior Secured Notes have been retired.
Increase in Authorized Shares
During a special meeting of the Board of Directors on July 20, 2007, the Board
voted to approve a resolution to increase the number of authorized shares to
600,000,000.
F-83
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
Condensed Notes to Interim Consolidated Financial Statements
September 30, 2006
(Amounts expressed in US Dollars)
(Unaudited)
NOTE 16- SUBSEQUENT EVENTS (Continued)
C) Events (Continued)
The International Investor
On August 30, 2007, The International Investor, K.S.C.C., a Kuwait-based
company, initiated an action in the United States District Court for the
District of Nevada, case # 07-CV-1178, in which the Company was named as a
co-defendant, seeking damages in the amount of $100,000,000. The allegations,
which have not been proven in a court of law, include conspiracy in violation of
statues prohibiting racketeering, misappropriation of trade secrets, fraud,
civil conspiracy to defraud, unjust enrichment, breach of contract, breach of
fiduciary trust and unfair competition. The company filed its counter-claim on
September 25, 2007 and plans to vigorously defend and counter sue TII for breach
of contract, fraud, interference with contractual relations, misappropriation of
trade secrets, conversion, unjust enrichment and to seek both compensatory and
punitive damages well in excess of $100 million.
Statute-Barred Accounts Payable
As of December 31, 2007, certain accounts payable of the Company are
Statute-Barred under Utah law from being collected by creditors. However, under
US GAAP, the Company still records them as a liability. As of December 31, 2007,
the amount is approximately $2,530,000. This amount includes the $41,000
previously Statute-Barred as of December 31, 2006.
F-84