| THE STEWART REPORT HOTLINE |
Special Update: International
Card Establishment, Inc.
___________________________________________________ Summary of Audio Message from Monday, August 28, 2006
(Next HotLine
Planned for Sunday, September 10, 2006)
OVERVIEW: As was highly emphasized
in the prior HotLine message, August has proved to be the overture to a whole
new era. More than ever, I believe that International Card Establishment,
Inc., Emergency Filtration Products, Inc. and Amarillo Biosciences, Inc. have
simultaneously entered into an unusual climate of great opportunity and change.
Soon, the opportunities will be fully realized. The change will continue to
be evidenced by a rapid cadence of frequent news releases. Last week alone, we saw the
issuance of two highly significant announcements - one from Emergency Filtration
Products, Inc and the other from International Card Establishment, Inc. But
it's the announcement disseminated by ICRD that I wish to focus on because
it's the one I'm most appreciative of, and because ICRD is your best very
near-term opportunity. INTERNATIONAL CARD ESTABLISHMENT, INC. Nasdaq/BB: -- $0.21, at time of HotLine recording. Now:
$0.25 Strong BUY This stock will prove to
be extremely satisfying if put away for three to five months. By then the
Q-3 numbers will be printed. The Company will be cash-flow positive at that
time, providing investors with black and white evidence that the red ink is
disappearing. On or before the fifth month, the trading pace will quicken
even more as it becomes more apparent that the Company will print its first-ever
profits sometime during Q-4. I therefore view ICRD stock as a strong buy and
an easy double to be priced at 50 cents before year's end. The basis for my reasoning
was the hour-long teleconference that I participated in with CEO William Lopshire,
Esq. As mentioned last time, Bill's background is in corporate law, so I knew
it was pointless to attempt any contact until after the Q-2 numbers were made
public. As expected, the second quarter
numbers were absolutely lurid. For the three months ended June 30, 2006, International
Card Establishment lost nearly $2.3 million, or 8 cents per-share. Clearly,
that's a hellacious loss for a 25-cent stock - but worth every penny! Why?
Because it was the final expression of one of the most comprehensive corporate
overhauls I have ever witnessed. Much of the credit for its successful re-tooling
is due to the appointment of a new General Manager, Dana E. Marlin. Dana has
the credential of a CPA and the MO of a surgeon who wields a long-handled
ax with the same precision as a scalpel. Division by division, the
cuts Dana Marlin effected went like this: I.
Global Leasing:
This division was sold outright to net the Company $2.3 million and enable
it to retire all long-term debt. Better yet, the division was sold
for a profit. That aside, Marlin correctly
identified leasing as a long-term, capital intensive operation. One where
you can make a bundle the last two years of a four year contract, but only
if you can afford to lose a bundle the first two. ICRD simply didn't have
that ability. At least not without diluting the stock with private placement
funding which, as we all know, is the thing that murdered the share price
twice in as many years. (Conversely, as of June 30, 2006, the Company has
issued just 80,000 shares since the close of 2005. In terms dilution, for
a company with 29.4 million outstanding, that's almost nothing.) II.
Credit Card Processing: Without a doubt, transforming the Company from being
just another Independent Service Organization (ISO) to become a direct bankcard
processor was the highlight of 2005. This was a long, delicate and demanding
process, but the attainment of Merchant Account status (by teaming with industry
giant First Data Corp) proved to be a real door-opener for ICRD. I mention this, in part,
because if this Special Update had a theme, it would be, "If At First You
Don't Succeed . Restructure." I like that. It's snappy and cute. Unfortunately,
such a statement is patently unfair because it implies failure. In truth,
International Card Establishment's merchant account revenues grew from zero
in all of CY 2004, to $1.3 million for the 2nd quarter of 2005
- and then nearly doubled to $2.5 million in the same period 2006. But along the way, the industry
grew as fast as the ultra-premium prices that majors like iPayment were willing
to pay for acquisitions. Competition was truculent. And not only were acquisitions
getting too expensive, frequently, the quality of the portfolios being bought
were entirely suspect. Poor "quality" equates to large groups of credit card
transactions where the card holder defaults, sticking the merchant provider
with the loss. Worse still, to sweeten deals, the majors were (and still are)
offering initial ISO payout deals upwards of 90-percent. At that level, the
merchant entity loses money from the outset, with the idea of recouping the
loss by renegotiating the payout at a later date, or by eventually selling
the portfolios to a third party. Similar to the hurdles posed by the leasing
industry, the proposition became too taxing for a company our size. Recognizing
the shift, and basically admitting that internal growth via outside acquisitions
was no longer attractive, Dana Marlin made a tactical decision to cease those
activities, and instead, grow the Company organically. To explain this right, I need to back-up for a moment to
discuss the enormity of the cost-cutting measures he put into place. Prior
to the restructuring, the company was being grown fast. Now it's being grown
smart. First, they had to tear it apart. Which they did .. and in a big way.
But before they put it back together, fantastic attention
was given to the smallest details - right down to postage stamps. From there they went on
to cut overhead and slash executive salaries. Today, no one in management
is paid more than $3,000 monthly. As a corporate attorney, Lopshire alone
was use to making that in a day. It closed a number of offices and reduced
headcount by 50-percent. Accounting was streamlined to do away with a preponderance
of interoffice accounting which had become a back and forth, division-to-division
nightmare - one that had nothing to do with making money, just keeping unnecessary
track of it. All told, Bill Lopshire said the cost savings come to $200,000
per-month! gement is paid more
than $3,000 monthly. place. losed a number of offices and reduced headcount
by 50-per
Returning now, to explain
further the strategies to grow the Company organically . Thorough identification of
all expenses (as well as all of the consequent cost-cutting steps) had to
be finalized before the new paradigm for the Merchant Account division could
be instigated. That's because, implicit to the paradigm is the firm directive
to turn cash flow positive in Q-3 and achieve profitability in Q-4. Both
goals have been stated publicly, in print. Both goals will almost certainly
be achieved if for no other reason than they are virtually guaranteed due
to contractual consent. Here's how it works: Every
single ISO is now a true independent - even those who work out of ICRD sales
offices. Also, every one of their contracts has been re-written. Now they
earn a 50-percent payout after
a full allowance for costs incurred by ICRD. As such, the only way ICRD's
ISO's can cost us money is if they make us money. Which is good, but it begs
the question, "Why should they accept 50% when the big players in bankcard
offer as much as 90%?" Lopshire's answer was a good
one: "Because we're giving them great stock incentives. They, like us, believe
the bigger payday is likely to be in the shares. I'm not going to tell you
that we didn't lose a few people in the rewrite, but you know that those who
did sign the new contract are very loyal soldiers." He also reminded me that
the Company recently raised $1 million cash to grow the new effort and to
alleviate any concerns about ICRD's stability - or its staying power. Importantly,
the million came from an unsecured note, so there was no dilution .
just interest. And the rate was great: Prime, plus 3. That's less than what
Ford Motors pays for money.
III.
Gift and Rewards: The Neos Merchant Solutions division - as headed by former
Navy Seal Wain Swapp - was found to be a tight ship. Marlin left Neos largely
untouched. Indeed, the only recognizable change occurred on Aug. 22 - just
two days after the last HotLine. That's when the stock was just $0.18 and
ICRD was able to announce that Neos had signed the nation's largest retail
candy store chain for credit card processing, and the Gift and Rewards program.
The latter will employ Neos' proprietary smart card to offer "Sweet Factory"
and its customers a number of distinct advantages. Those include: 1.) Faster
check-out lines: Customer data is contained in the card itself, so there's
no need to verify customer credit with a dial-up service. 2.) Brand
loyalty: The customer earns points towards future purchases with each use.
Also, they see the card - and therefore the Sweet Factory name and logo -
just about every time they open their wallet or purse. 3.) Improved
cash flow: Smart cards are pre-paid in cash against future purchases. When we got to this point,
the phone conference turned towards revenue goals and comparative analysis.
Bill Lopshire was good in providing the numbers, pointing me to some interesting
research and in offering some good and proper guidance as to valuing the shares:
FT Ventures and First Annapolis
are the respected management and consulting firms known to specialize in bankcard
industry analysis. If you look at their research, merchant providers are valued
somewhere between 25-to-40 times monthly net processing revenues, with 36
being the mean. Currently, ICRD's
net processing revenues are $175,000. Using the 36X multiple, the Merchant
Account division is worth $6.3 million. Applying the same formula to Neos'
Gift and Rewards operation division adds another $3.6 million for an aggregate
corporate valuation of $9.9 million. Relative to today's market cap of 7.5
million (based on stock priced @ 25 cents per share). So the company is ostensibly
cheap - especially since $9.9 million gives no allowance for its value as
ongoing concern . One that's freshly re-structured;
one that's poised to grow fast and profitably against a huge tax loss carry
forward that will exempt most of its future windfalls from the hands of the
IRS. As for comparative analysis,
we were only able to look at Heartland Payment Systems, Inc. (NYSE: HPY --
$26.97) and Pipeline Data, Inc. (Nasdaq: PPDA -- $1.31). Note: iPayment can no longer be used for comparison.
Its founders took the company private in a $903 million transaction in May,
2006. Ostensibly, PPDA and HPY
are quite expensive when compared to International Card Establishment. Especially,
PPDA. Be that as it may, their true value (to us) might simply be that they're
really the only two other publicly traded merchant account providers that
offer stock analysts a reasonable comparison. Somehow I ended up discussing
some of this with my dad, who is no more interested in stocks than he is in
political correctness or technical verbiage. Even so, he made a wonderful
point by reminding me that with so few stocks to chose from, now that the
industry is heating up and investors are looking for bankcard plays, "Your
I-Card thing sticks out like a diamond in a goat's ass." Well put, dad. As per Lopshire: The revenue
target for 2006 is $10 million. Since Q-2 came in at $2.5 million, the annualized
run rate makes the number easy to accept. As for 2007, the official goal is
$15 million but he said, "If the Company doesn't do $20 million - I'll quit.
I can't live forever on $3,000 month. None of us can. Each of us is betting
on our respective skills. We're also betting that in the log haul, ICRD stock
will increase five-to-ten fold. That will be the real payday and it's paramount
that we be right. Our current mantra is, 'We Kill What We Eat,' meaning, the days
we miss our goals are the days we don't eat. We are on the same side of the
fence as every one of our stockholders. The same exact thing can be said of
our ISOs . everybody involved has a vested interest in making all the right
moves so that the stock does too." Selfishly, that's when I
realized the same thing is true for me. I purchased 100,000 144 shares that
are tied up for another year. As such, the $20 million goal is an all-or-nothing
target for me as well. Bottom Line: I think I made a smart long-term bet.
I'm also pleased to have 100,000 shares of unrestricted common to capitalize
on the short-term moves, too. Hopefully, you have found the logic and forecasts
in this Report cogent, because the real
Bottom Line is for The Stewart Report
to make its Subscriber/Members money. International Card Establishment will
do just that. Cumulatively, I believe ICRD has a very workable game plan for
the future; a plan that's as intelligent in it's design as it was intrepid
in its creation. It signals a very real and profound shift in ICRD's future
and our fortunes. Buy ICRD - at least up to $0.30. As always, thank you for subscribing,
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