UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended September 30, 2010





or





oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from ____________ to ____________





Commission file number:0-52556





Card Activation Technologies Inc.


(Exact name of registrant as specified in its charter)




Delaware
20-5769015(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)53 West Jackson Blvd., Suite 1618

Chicago, Illinois
60604-3749(Address of principal executive offices)
(Zip Code)





Registrant's telephone number, including area code: (312) 972-1662





Securities registered pursuant to Section 12(b) of the Act:





Title of each class
Name of each exchange on which registeredNone
None





Securities registered pursuant to Section 12(g) of the Act:





Common Stock, $0.0001 Par Value





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes o                      No x





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.


Yes o                      No x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes o                      No x










Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes o                      No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. x





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer   ̈
Accelerated filer   ̈Non–accelerated filer   ̈(Do not check if a smaller reporting company)
Smaller reporting company  x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).


Yes o                      No x





The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on March 31, 2010 was $9,028,378, computed by reference to the $0.10 closing price of such common stock equity on March 31, 2010.





As of January 10, 2011, there were 176,610,616 shares of common stock outstanding.





DOCUMENTS INCORPORATED BY REFERENCE





None.





TABLEOF CONTENTS





PART IITEM 1.
BUSINESS
1ITEM 1A.
RISK FACTORS
4ITEM 2.
PROPERTIES
4ITEM 3.
LEGAL PROCEEDINGS
4ITEM 4.
[REMOVED AND RESERVED]
4PART IIITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
5ITEM 6.
SELECTED FINANCIAL DATA
6ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
6ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
9ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
10ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
24ITEM 9A.
CONTROLS AND PROCEDURES
24ITEM 9B.
OTHER INFORMATION
25PART IIIITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
25ITEM 11.
EXECUTIVE COMPENSATION
27ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
29ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
29ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
30PART IVITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
31SIGNATURES
32




i
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PARTI





Forward Looking Statements





Certain statements made or incorporated by reference in this Annual Report on Form 10-K,  in our other filings with the Securities and Exchange Commission (SEC), in our press releases and in statements made by or with the approval of authorized personnel constitute “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended ( the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended ( the Exchange Act), with respect to, among other things, future events and financial trends affecting us.  Forward looking statements are typically identified by words such as believes, estimates, expects, anticipates, plans, should, would and similar expressions.





Although we believe the expectations reflected in any forward looking statements are reasonable, readers are cautioned that forward looking statements involve known and unknown risks and uncertainties, are not guarantees of future performance and that actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied by such forward looking statements.





Forward looking statements in this Annual Report on Form 10-K speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents.  Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward looking statements, whether as a result of new information, future events or otherwise.  In light of these risks and uncertainties, we cannot ensure that the forward looking statements contained in this Annual Report on Form 10-K will, in fact, transpire.





ITEM 1.  BUSINESS.





General





Card Activation Technologies Inc. (“we,” “us,” “our” or the “Company”) was incorporated as a Delaware corporation on August 29, 2006.  Our principal executive office is located at 53 West Jackson Boulevard, Suite 1618, Chicago, Illinois 60604, and our telephone number is (312) 972-1662.





The Company was formed to own and commercially develop our patented point-of-sale technology for the activation and processing of transactions related to debit styled cards, which include gift cards, phone cards and other stored value cards.  Currently, our business strategy consists exclusively of attempting to enter into license agreements with third parties to license our rights under our patent and in pursuing patent litigation in an effort to protect our intellectual property and obtain recourse against alleged infringement of our patent.  During the fiscal year ended September 30, 2010, our sole revenues from operations were generated from settlements of patent litigation with third parties pursuant to which such third parties paid us royalties for use of our patent.





We were formerly a wholly owned subsidiary of MedCom USA Incorporated (“MedCom”).  In October 2006, MedCom announced its intention to spin-off its card technology business from its other businesses.  In connection with our formation, MedCom transferred a patent relating to its card technology business to us in exchange for 146,770,504 shares of our common stock.  On October 31, 2006, MedCom's board of directors declared a stock dividend to its shareholders of record at the end of business on December 15, 2006 of one share of our common stock for every one share of common stock of MedCom owned by its shareholders.  On March 1, 2007, MedCom distributed 86,770,504 shares of our common stock to its shareholders pursuant to the stock dividend and retained the balance of 60,000,000 shares of our common stock.  MedCom remains our largest shareholder.





1
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Description of Our Patent





Our principal asset is our patented payment technology that we acquired from MedCom in connection with our spin-off.  The payment technology is covered by one patent which was assigned to us by MedCom upon our formation (U.S. Patent No. 6,032,859).  The patent covers the method for processing debit purchase transactions.  This method can be used for gift cards, phone cards and other stored value cards.





Patents generally have a life span of 20 years from the date of application.  An application for the patent was filed in September 1997 and subsequently granted on March 7, 2000.  Based on the September 1997 application date, the patent has a remaining term of approximately seven years and will expire in 2017.





Business Strategy





Our business strategy consists exclusively of attempting to enter into license agreements with third parties to license our rights under our patent and in pursuing patent litigation in an effort to protect our intellectual property and obtain recourse against alleged infringement of our patent.  We are presently engaged in an aggressive program to identify potential third-party infringers of our patent, notify such third-parties of their infringement and seek licensing fees for the use of our patent.  We may obtain such licensing fees pursuant to license agreements entered into by the Company and the third-parties, or we may pursue patent litigation to obtain remedies for infringement.  We intend to aggressively enforce our rights during the entire life of the patent, and to seek royalty payments from all infringing parties until the patent expires in 2017.





Licensing the use of our patented technology





We have identified hundreds of retail chains who the Company believes are utilizing our patented technology with the use of debit cards, gift cards, phone cards, affinity cards and stored value cards.  We have, through our attorneys, sent letters to these retailers notifying them of their potential infringement on our patent and requesting that the retailers enter into negotiations with the Company regarding a license agreement for the patent.  The letters also notify the retailers of the Company's intent to pursue legal action to enforce its rights with respect to the patent should the retailers choose not to negotiate a licensing agreement.  The Company has and continues to negotiate licenses with several retailers that responded to the correspondence.  We intend to generate revenues by charging licensing fees to the retailers who are utilizing our patented technology and voluntarily entering into licensing agreements.





Patent infringement settlements





We also generate revenue through settlements with retailers who are infringing on our patent.  Since our acquisition of the patent from MedCom, we have, through our attorneys, initiated lawsuits against 38major retailers, and we have entered into settlement and license agreements with 12 major retailers.  The terms of these settlement and license agreements are typically confidential and grant a non-exclusive license to the retailers in exchange for royalty fees.  During the fiscal year ended September 30, 2010, our sole revenues from operations were generated from settlements of patent litigation with third parties pursuant to which such third parties paid us royalties for use of our patent.  In addition, we recently announced our intent to file additional lawsuits against major retailers in the near future.





2
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In the ordinary course of our patent litigation, we are the subject of, or party to, various pending or threatened legal actions regarding the validity of the patent.  As a part of these actions, we have been involved in "Markman Hearings," which are proceedings under U.S. patent law in which plaintiffs and defendants present their arguments to the court as to how they believe the patent claims – which define the scope of the patent holder's rights under the patent – should be interpreted for purposes of determining at trial whether the patent is valid and/or has been infringed.  Other parties may take actions to challenge our patent.  We can make no assurances that we will not lose all or some of the claims covered by our patent as the result of such challenges or other litigation, including actions initiated by us, regarding our patent.





Marketing





We market our technology to retailers and other companies who utilize point of sale technology.  Our primary market is the hundreds of retailers who we believe are utilizing our patented technology.  Since inception the Company has negotiated with and actively pursued infringers of our patent.  Once the company is successful in the pursuit of the patent infringers and in its licensing program, we anticipate receiving the appropriate royalties from the use of our technology by third parties by allowing licensing arrangements to our technology and anticipated royalties for the use of our patent.





Description of the Industry





The use of debit-styled cards by consumers has been expanding rapidly throughout the United States. Significant uses include phone cards populated with value by retailers, the expansion of gift cards at major department and big box stores, the creation of affinity cards by retailers building customer loyalty, and the sale of these cards in supermarkets, convenience stores, coffee shops and other outlets. Retailers continue to add this product offering to augment their sales efforts.





The retailer benefits significantly because it receives revenue from the customer and does not incur the cost of providing goods and services until the customer actually utilizes the card at time of purchase.  Other benefits to retailers for the use of debit-styled cards include the fact that not all cards are fully utilized or used at all thereby providing a 100% profit to the retailer for the amount not used, merchandise returns are reduced, potential new customers are created and the amount of purchase is potentially increased.





Competition





Competition in the technology industry is intense.  As technologies advance there is always a risk of new technology and more competition.  The overall market of the gift and affinity cards is significant and continues to grow.





We are actively seeking to license our technology and believe that many retailers, gas stations, phone companies and others that utilize stored value cards, such as gift and debit, are infringing on our patent.





Employees





At September 30, 2010, the Company was managed by its sole officer and director, Robert Kite.  We have no other full or part-time employees. Our business operations are focused on the patent infringement activity and the protection of our patent through our legal counsel and are conducted through the use of consultants and our administrative services agreement with MedCom which we entered into in connection with our spin-off.





3
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Available Information





We file annual and quarterly reports and other information with the Securities and Exchange Commission.  You may read and copy any document that we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C., 20549.  Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room.  Reports and other information regarding issuers, including us, that file electronically with the Securities and Exchange Commission are also available to the public from the Securities and Exchange Commission’s Web site at http://www.sec.gov.





ITEM1A.  RISK FACTORS.





The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.





ITEM2.  PROPERTIES.





The Company does not maintain any properties.





ITEM3.  LEGAL PROCEEDINGS.





In the ordinary course of business, we are the subject of, or party to, various pending or threatened legal actions, including various counterclaims in connection with our intellectual property enforcement activities.  Card Activation, through its attorneys, has sent letters to over 600 potential infringers of the patent, placing the infringers on notice of the patent and seeking a license agreement under the patent. While we believe that any liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flows, we can make no assurances that we will not lose all or some of the claims covered by our patent as the result of such actions.





On February 26, 2010, the Company and MedCom entered into a Settlement Agreement (the "Agreement") and Mutual Release with William Williams (a former executive of the Company and MedCom), Eva Williams, Wilcom Inc., W.P.W. Aircraft, LLC, Williams Family Trust, and American Nortel Communications, Inc. (collectively, the "Williams Group").  The Agreement settled and provided a mutual release of each member of the Williams Group, on the one hand, and the Company and MedCom, on the other hand, from any and all claims that any member of the Williams Group and the Company or MedCom has against the other relating to certain litigation that was filed or corporate governance claims that may arise from the Company or MedCom.  As a condition to the Agreement, the Williams Group will return an aggregate of 24,150,264 shares of common stock of the company and 20,415,651 shares of MedCom common stock.





Information regarding the Company's legal proceedings outside the ordinary course of business is disclosed under Notes 5 and 6 to the Company's Financial Statements of Item 8 of Part II of this Annual Report on Form 10-K, which is incorporated herein by reference.





ITEM4.  [REMOVED AND RESERVED].





4
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PARTII





ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.





Our common stock is traded in the over-the-counter market, and quoted in the National Association of Securities Dealers Inter-dealer Quotation System (“Electronic Bulletin Board”) and can be accessed on the Internet at www.otcbb.com under the symbol “CDVT”.  The following table sets forth for the periods indicated the high and low bid quotations for Card’s common stock.  These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown or commission and may not represent actual transactions.





High


LowFiscal Year 2010First Quarter (October – December 2009)

$
.18



.06Second Quarter (January – March 2010)

$
.15



.08Third Quarter (April – June 2010)

$
.14



.05Fourth Quarter (July – September 2010)

$
.10



.05Fiscal Year 2009First Quarter (October – December 2008)

$
.12



.05Second Quarter (January – March 2009)

$
.11



.04Third Quarter (April – June 2009)

$
.08



.02Fourth Quarter (July – September 2009)

$
.20



.07





As of January 10, 2011 there were 1,049 holders of record of our common stock and the closing price on the Electronic Bulletin Board was $0.10.





Dividend Policy





We have never declared or paid cash dividends on our common stock.  We intend to follow a policy of retaining earnings to finance the growth of our business and do not anticipate paying any cash dividends in the foreseeable future.  The declaration and payment of future dividends on our common stock will be at the sole discretion of our Board of Directors and will depend on our profitability, our financial condition, capital requirements, future prospects and other factors the Board of Directors deem relevant.





Issuer Repurchases of Equity Securities





On August 1, 2009, our Board of Directors approved a share repurchase plan under which, subject to price and market conditions, we may purchase shares of our common stock from time to time in the open market or in privately negotiated transactions using available cash.  There has been no time limit set for completion of the repurchase plan.  There is no maximum number of shares that may be purchased pursuant to the plan.  There have been no share repurchases pursuant to this plan.





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Equity Compensation Plan





We have a 2006 Stock Option Plan (the “Plan”) for employees, directors and consultants and reserved 1,000,000 shares for issuance under the Plan.  No shares have been issued under this Plan.





ITEM6.  SELECTED FINANCIAL DATA.





The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.





ITEM7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.





The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.





Overview





We own and commercially develop our patented method of processing debit purchase transactions, which include gift cards, phone cards and other stored value cards.  Currently, our business strategy consists exclusively of attempting to enter into license agreements with third parties to license our rights under our patent and in pursuing patent litigation in an effort to protect our intellectual property and obtain recourse against alleged infringement of our patent.





Results of Operations





Fiscal Year Ended September 30, 2010, Compared to Fiscal Year Ended September 30, 2009





Revenues decreased 30.8% to $687,500 for the year ended September 30, 2010 from $993,000 for the year ended September 30, 2009.  The decrease in revenues was due to four settlements in 2010 compared to ten settlements during 2009.





Operating expenses consist of cost of revenue, general and administrative expenses and sales and marketing costs.





Cost of revenue consists of contingency fees paid to legal counsel of 35% of settlement revenue in certain cases.  Cost of revenue decreased 50.9% to $170,625 for the year ended September 30, 2010 from $347,550 for the year ended September 30, 2009 as a result of decreased revenue and the fact that all of our settlements are not subject to contingency fees.





6
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General and administrative expenses consist of salaries and benefits, legal, professional and consulting fees, corporate costs, facilities cost, insurance, travel and entertainment.  General and administrative costs increased 226.2% to $1,858,060 for the year ended September 30, 2010 from $569,606 for the year ended September 30, 2009.  This increase was primarily due to a reserve for affiliate receivable and increased legal fees offset by decreased salaries, benefits and rent expenses.





Sales and marketing costs decreased 100.0% to zero for the year ended September 30, 2010 from $5,434 for the year ended September 30, 2009 due to no marketing efforts.





Liquidity and Capital Resources





The Company's operating requirements have historically been funded from the sale of our common stock and litigation settlement revenue.  We expect our future operations will be funded from the litigation revenue settlements as well as revenues from licensing our technology.  In addition, the Company is researching potential business combinations that would utilize our technology or enhance our strategy, although no such target acquisition has been identified.





In order to develop our business plan, we will require funds for working capital. We are attempting to raise additional working capital through the sale of equity, debt or a combination of equity and debt. We do not presently have any firm commitments for additional working capital and there are no assurances that such capital will be available to us when needed or upon terms and conditions which are acceptable to us. If we are able to secure additional working capital through the sale of equity securities, the ownership interests of our current stockholders will be diluted. If we raise additional working capital through the issuance of debt or additional dividend paying securities our future interest and dividend expenses will increase. If we are unable to secure additional working capital as needed, our ability to grow our sales, meet our operating and financing obligations as they become due and continue our business and operations could be in jeopardy.





Off-Balance Sheet Arrangements





The Company does not have any off-balance sheet arrangements.





Critical Accounting Policies and Estimates





Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such, we are required to make estimates and assumptions about the effects of matters that are inherently uncertain.  Those estimates and assumptions are derived and continually evaluated based on historical experience, current facts and circumstances, and changes in the business environment.  However, actual results may sometimes differ materially from estimates under different conditions.  We have summarized our significant accounting policies in Note 1 to our financial statements.  Of the accounting policies, we believe the following may involve a higher degree of judgment and complexity.





Revenue Recognition





Revenue is recognized from litigation settlements received from companies that have violated our patented technology and is recorded upon receipt.  Revenue is recognized from the receipt of royalties or licensing fees from the use of our patent technology and is recorded when sales are generated from third parties that have generated sales from the use of our technology.  We have no licensing agreements executed that generate royalty payments at this time.





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Recent Accounting Guidance





Updates issued and adopted





On September 30, 2009, the Company adopted updates issued by the Financial Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards CodificationTM (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Financial Statements.





In June 2009, the FASB issued guidance now codified as ASC Topic 105, “Generally Accepted Accounting Principles” (“ASC 105”), which establishes the FASB Accounting Standards Codification as the source of GAAP to be applied to nongovernmental agencies.  ASC 105 explicitly recognizes rules and interpretive releases of the SEC under authority of federal securities laws as authoritative GAAP for SEC registrants.  ASC 105 became effective for interim or annual periods ending after September 15, 2009.  ASC 105 does not have a material impact on the Company’s financial statements presented hereby.





In May 2009, the FASB issued guidance now codified as ASC Topic 855, “Subsequent Events” (“ASC 855”).  The pronouncement modifies the definition of what qualifies as a subsequent event – those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued – and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date.  The Company adopted the provisions of ASC 855 in September 30, 2009, in accordance with the effective date.





On June 30, 2009, the Company adopted updates issued by the FASB to fair value disclosures of financial instruments.  These changes require a publicly traded company to include disclosures about the fair value of its financial instruments.  Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the method(s) and significant assumptions used to estimate the fair value.  Other than the required disclosures, the adoption of these changes had no impact on the Financial Statements.





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Other Considerations


There are numerous factors that affect the business and the results of its operations.  Sources of these factors include general economic and business conditions, federal and state regulation of business activities, the level of demand for our product, and the ability to develop new products based on new or evolving technology and the market's acceptance of those products.





ITEM7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.





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ITEM8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





CARD ACTIVATION TECHNOLOGIES, INC.Index to Financial Statements
PageINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
11Tarvaran, Askelson & Company, LLPFINANCIAL STATEMENTS
12Balance Sheets at September 30, 2010 and 2009
12Statements of Operations for the years ended September 30, 2010 and 2009
13Statements of Stockholders' Equity for the years ended September 30, 2010 and 2009
14Statements of Cash Flows for the years ended September 30, 2010 and 2009
15NOTES TO FINANCIAL STATEMENTS
16





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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM





To the Board of Directors and Stockholders


of Card Activation Technologies, Inc.





We have audited the accompanying balance sheets of Card Activation Technologies, Inc. as of September 30, 2010 and 2009, and the related statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Card Activation Technologies, Inc. as of September 30, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.





The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed further in Note 2, the Company has incurred significant losses.  The Company's viability is dependent upon its ability to obtain future financing and the success of its future operations.  These factors raise substantial doubt about the Company's ability to continue as a going concern.  Management's plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ Tarvaran Askelson & Company, LLP





Laguna Niguel, California


December 30, 2010





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CARD ACTIVATION TECHNOLOGIES INC.


BALANCE SHEET





September 30,2010


2009CURRENT ASSETSCash

$
-


$
6,909Investments


-



25,000Settlement receivable


-



237,500Advances to affiliate


695,777



1,072,050Total current assets


695,777



1,341,459TOTAL ASSETS

$
695,777


$
1,341,459LIABILITIES AND STOCKHOLDERS' EQUITY:CURRENT LIABILITIES:Accounts payable


828,808



51,522Accrued expenses


14,272



222,857Disputed liabilities


20,000



20,000Total current liabilities


863,080



294,379TOTAL LIABILITIES


863,080



294,379STOCKHOLDERS' EQUITY:Preferred stock, $.001 par value, 1,000,000 shares authorized; none issued and outstanding as of September 30, 2010 and 2009, respectively


-



-Common stock, $.0001 par value, 300,000,000 shares authorized; 174,782,045 and 174,782,045 shares issued and outstanding as of September 30, 2010 and 2009, respectively


17,478



17,478Additional paid-in capital


1,509,953



1,509,953Common stock, subscribed, 728,571 shares


35,250



-Accumulated deficit


(1,729,984
)


(480,351
)Total stockholders' equity


(167,303
)


1,047,080TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
695,777


$
1,341,459




The accompanying notes are an integral part of these financial statements.




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CARD ACTIVATION TECHNOLOGIES INC.


STATEMENTS OF OPERATIONS





Year EndedSeptember 30,2010


2009REVENUELitigation revenue

$
687,500


$
993,000Total


687,500



993,000COSTS AND EXPENSESCost of Revenue


170,625



347,550General and administrative


1,858,060



569,606Sales and marketing expenses


-



5,434Total operating expenses


2,028,685



922,590OPERATING INCOME (LOSS)


(1,341,185
)


70,410OTHER (INCOME) AND EXPENSESInterest income


(92,948
)


(67,297
)Interest expense


1,396



582Total other (income) expense


(91,552
)


(66,715
)INCOME (LOSS) BEFORE INCOME TAXES


(1,249,633
)


137,125INCOME TAX (BENEFIT) PROVISION


-



-NET INCOME (LOSS)

$
(1,249,633
)

$
137,125Weighted Average Common Share Outstanding:Basic and diluted:


174,782,045



174,048,418Net Income (Loss) Per ShareBasic and diluted:

$
(0.01
)

$
0.00





The accompanying notes are an integral part of these financial statements.





13
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CARD ACTIVATION TECHNOLOGIES INC.


STATEMENTS OF STOCKHOLDERS’ EQUITY





Common Stock


Preferred Stock


Additional Paid in


Common Stock Subscribed, not


AccumulatedShares


Amount


Shares


Amount


Capital


issued


Deficit


TotalBalance as of September 30, 2008


169,968,289


$
16,997



-


$
-


$
1,055,845


$
-


$
(617,476
)

$
455,366Common stock issued under subscription agreements


1,381,756



138



-



-



119,362











119,500Shares issued in connection with PayMed acquisition


3,000,000



300



-



-



293,700











294,000Common stock issued for compensation


432,000



43



-



-



41,046











41,089Net income


























137,125



137,125Balance as of September 30, 2009


174,782,045


$
17,478



-


$
-


$
1,509,953






$
(480,351
)

$
1,047,080Shares subscribed, not issued to investor at $0.05 per share, 200,000 shares






-



-



-



-



10,000



-



10,000Shares subscribed, not issued to investor at $0.07 per share, 142,857 shares






-



-



-



-



10,000



-



10,000Shares subscribed, not issued to investor at $0.035 per share, 285,714 shares






-



-



-



-



10,000



-



10,000Shares subscribed, not issued to investor at $0.0525 per share, 100,000 shares






-



-



-



-



5,250



-



5,250Net loss


























(1,249,633
)


(1,249,633
)Balance as of September 30, 2010


174,782,045


$
17,478



-


$
-


$
1,509,953


$
35,250


$
(1,729,984
)

$
(167,303
)





The accompanying notes are an integral part of these financial statements.





14
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CARD ACTIVATION TECHNOLOGIES INC.


STATEMENT OF CASH FLOWS





September 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
(1,249,633
)


137,125Adjustments to reconcile net income to net cash provided by (used in) operating activities:Investment distributed for services


25,000Common stock issued for services


-



41,089Reserve for bad debts


782,749Changes in assets and liabilities:Other assets


237,500



(237,500
)Accounts payables


777,286



30,662Accrued expenses and disputed liabilities


(208,585
)


213,897Net cash provided by (used in) operating activities


364,317



185,273CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of short term investments






(25,000
)Net cash provided by (used in) investing activities


-



(25,000
)CASH FLOWS FROM FINANCING ACTIVITIES:Advances to affiliates


(413,183
)


(396,694
)Repayment of advances from affiliates


6,707



-Cash received from subscription of common stock


35,250



125,793Proceeds from the sale of common stock


-



119,500Bank overdraft






(1,963
)Net cash provided by (used in) financing activities


(371,226
)


(153,364
)INCREASE IN CASH


(6,909
)


6,909CASH, BEGINNING OF YEAR


6,909



-CASH, END OF YEAR

$
-



6,909Supplemental Cash Flow Information:Issuance of stock for affiliate acquisition

$
-



294,000





The accompanying notes are an integral part of these financial statements.





15
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CARD ACTIVATION TECHNOLOGIES INC.





NOTES TO FINANCIAL STATEMENTS


FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009





NOTE 1 – BACKGROUND





Card Activation Technologies, Inc. (“we,” “us,” “our” or the “Company”) was incorporated in the state of Delaware on August 29, 2006. The Company was incorporated in order to own and commercially develop our patented point-of-sale technology for the activation and processing of transactions related to debit styled cards, which include gift cards, phone cards and other stored value cards.  We also vigorously defend our patent and actively litigate infringements related to the unauthorized use of our technology.  The patent was transferred to us by MedCom USA, Incorporated (“MedCom”) upon our formation in exchange for 146,770,504 shares of our common stock.  The patent covers the technology and process for taking a card with a magnetic strip or other data capture mechanism and activating the card by down loading a determined monetary value onto the card for use at a later date for different types of transactions.





NOTE 2 – BASIS OF PRESENTATION





The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplate continuation of the Company as a going concern.   During the year ended September 30, 2010 the Company recognized a net loss of $1,249.633.  However, the Company incurred an accumulated net loss from period August 29, 2006 (Inception) through September 30, 2010 of $1,729,984.  Further, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from private investors and the support of certain stockholders.





These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.  In this regard, Management is proposing to raise any necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.





NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America.  Significant accounting policies are as follows:





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  These estimates and assumptions also affect the reported amounts of revenues, costs and expenses during the reporting period.  Management evaluates these estimates and assumptions on a regular basis.  Actual results could differ from those estimates.





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Revenue Recognition





Revenue is recognized from litigation settlements received from companies that have violated our patented technology and is recorded upon receipt.  Revenue is recognized from the receipt of royalties or licensing fees from the use of our patent technology and is recorded when sales are generated from third parties that have generated sales from the use of our technology.  We have no licensing agreements executed that generate royalty payments at this time.





Cash and Cash Equivalents





The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  At September 30, 2010, cash and cash equivalents include cash on hand and cash in the bank.





Income Taxes





Deferred income taxes are provided based on the provisions of ASC Topic 740, "Accounting for Income Taxes", to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.





The Company adopted the provisions of ASC Topic 740; “Accountig for Uncertainty in Income Taxes-An Interpretation of ASC Topic 740 (“Topic 740”).  Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement.  The Company considers many factors when evaluating and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments.  At September 30, 2010, the Company did not record any liabilities for uncertain tax positions.





Earnings per Share





Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.  As of September 30, 2010, there were no potential dilutive instruments that could result in share dilution.





Fair Value of Financial Instruments





The company financial instruments consist primarily of cash, affiliate receivable, settlement receivable, accounts payable and accrued expenses and debt.  The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.  The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.





17
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The Company adopted ASC Topic 820, Fair Value Measurements (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements.  The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The standard also prioritizes, within the measurement of fair value, the use of market-based measurements.





The three-level hierarchy for fair value measurements is defined as follows:





·
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;





·
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable of the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active;





·
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.





Share-Based Compensation





The Company applies Topic 718 “Share-Based Payments” (Topic 718”) to share-based compensation, which requires the measurement of the cost of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award.  Compensation cost is recognized when the event occurs.  The Black-Scholes option pricing model is used to estimate the fair value of options granted.





Concentration of Credit Risk





Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents.  Cash equivalents consist of interest-bearing deposits, money market funds and debt instruments in financial institutions.  Cash and cash equivalents are not in excess of Federal Deposit Insurance Corporation insurance limits.  The Company has not experienced any losses in such accounts.





Impairment of Long-Lived Assets





In accordance with ASC Topic 360, long-lived assets, such as property, plant, and equipment, and purchased intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Goodwill and other intangible assets are tested for impairment.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an  impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.  There were no events or changes in circumstances that necessitated an impairment of long-lived assets.





18
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Recent Accounting Updates





Updates issued and adopted





On September 30, 2009, the Company adopted updates issued by the Financial Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP.  These changes establish the FASB Accounting Standards CodificationTM (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates.  Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification.  These changes and the Codification itself do not change GAAP.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Financial Statements.





In June 2009, the FASB issued guidance now codified as ASC Topic 105, “Generally Accepted Accounting Principles” (“ASC 105”), which establishes the FASB Accounting Standards Codification as the source of GAAP to be applied to nongovernmental agencies.  ASC 105 explicitly recognizes rules and interpretive releases of the SEC under authority of federal securities laws as authoritative GAAP for SEC registrants.  ASC 105 became effective for interim or annual periods ending after September 15, 2009.  ASC 105 does not have a material impact on the Company’s financial statements presented hereby.





In May 2009, the FASB issued guidance now codified as ASC Topic 855, “Subsequent Events” (“ASC 855”).  The pronouncement modifies the definition of what qualifies as a subsequent event – those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued – and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date.  The Company adopted the provisions of ASC 855 in September 30, 2009, in accordance with the effective date.





On June 30, 2009, the Company adopted updates issued by the FASB to fair value disclosures of financial instruments.  These changes require a publicly traded company to include disclosures about the fair value of its financial instruments.  Such disclosures include the fair value of all financial instruments, for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position; the related carrying amount of these financial instruments; and the method(s) and significant assumptions used to estimate the fair value.  Other than the required disclosures, the adoption of these changes had no impact on the Financial Statements.





NOTE 4 - INCOME TAXES





The Company adopted ASC Topic 740 which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.





For income tax reporting purposes, the Company’s aggregate unused net operating losses approximate $1,728,506 which expire in various years through 2029, subject to limitations of Section 382 of the Internal Revenue Code, as amended.  The Company has provided a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management based upon the earning history of the Company, it is more likely than not that the benefits will not be realized.





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Under the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited on certain circumstances.  Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership changes of more than 50% over a three-year period.  The impact of any limitations that may be imposed for future issuances of equity securities, including issuances with respect to acquisitions have not been determined.





The provision (benefit) for income taxes from continued operations for the years ended September 30, 2010 and 2009 consist of the following:





September 30,2010


2009Current:Federal

$
–


$
–State


–



–Deferred:Federal

$
–


$
–State

$
–


$
––



–Change in valuation allowance


–



–(Benefit) provision for income taxes

$
–


$
–





The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:





September 30,2010


2009Statutory federal income tax rate


34.0
%


34.0
%State income taxes and other


4.8
%


4.8
%Utilization of net operating loss carryforward


(38.8
%)


(38.8
%)Effective tax rate


0.0
%


0.0
%





20
 Table of Contents





Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:





September 30,2010


2009Net operating loss carry forward


670,971



185,889Valuation allowance


(670,971
)


(185,889
)Deferred income tax asset

$
–


$
–





NOTE 5 – COMMITMENTS AND CONTINGENCIES





The Company also has a contingency agreement with its attorneys that represent the Company in the patent litigation.   The attorneys are paid thirty five percent of any settlement entered into by the Company, other cases are handled on an hourly fee basis.





The Company was a party to litigation in federal court involving certain related parties, which was recently dismissed.  The Company was a plaintiff, along with MedCom, in a lawsuit against prior management, Michael Malet and Annette Malet, and William P. Williams, Eva S. Williams and certain of their affiliated entities, Wilcom, Inc., a Texas Corporation, WPW Aircraft LLC, an Arizona Limited Liability Corporation and American Nortel Communications, Inc., a Nevada Corporation, which was filed in February 2009 in the United States District Court in the District of Arizona (Case No. 2:09-cv-00298).  The Company alleged nine causes of action including, among other things, securities fraud, racketeering, and other state law causes of actions, which related to alleged acts arising out of certain of the defendants’ prior service as management of the Company and MedCom.  The Company and MedCom were seeking certain compensatory damages, punitive damages, treble damages, injunctive relief and disgorgement of personal profits and compensation realized by the defendants and reasonable attorneys’ fees, costs and expenses associated with the lawsuit.  In August 2009, the parties filed a stipulation for dismissal without prejudice, which was approved by the court pursuant to an order issued on August 25, 2009.  The parties intend to seek to resolve the claims outside the context of a court proceeding to mitigate expenses.  To this end, the parties have entered in tolling agreements preserving claims against statutes of limitations and other applicable time-based defenses.  If the parties can’t reach a resolution, the Company and MedCom may seek to reinstate the litigation.  The Company is uncertain of the legal costs associated with this suit or its ultimate outcome.





21
 Table of Contents





NOTE 6 – RELATED PARTY





As of September 30, 2009, the Company was managed by its sole officer and director, Robert H. Kite.  Michael De La Garza previously served as a director of the Company and as the Company’s President and Chief Executive Officer.  On April 27, 2009, holders of more than a majority of the outstanding shares of the Company’s common stock, acting by written consent, effected the removal of Mr. De La Garza from the Company’s Board of Directors.  Following Mr. De La Garza’s removal as a director by stockholders, Mr. Kite, the Company’s sole director, acted to remove Mr. De La Garza from his position as President and Chief Executive Officer.  Mr. Kite now serves as sole director and Chairman of the Company’s Board of Directors and acts as the Company’s principal executive and principal financial officer.  Mr. Kite also serves as chairman of the board of directors, president and chief executive officer of MedCom, a related party, and owns shares of common stock of both MedCom and the Company.  MedCom is also a significant shareholder of the Company. He also serves in the same capacity of MedCom, a related party and significant shareholder. Additionally Mr. Kite is a significant shareholder of both entities.





On June 4, 2009, the Company entered into a settlement agreement with Mr. De La Garza, MedCom, certain shareholders of MedCom, Robin De La Garza, Mr. De La Garza’s spouse, PayMed USA, LLC, and Absolute Medical Software Systems, LLC (the “Settlement Agreement”).  The Settlement Agreement resolved pending Arizona state court litigation against Mr. De La Garza, in which the Company’s largest shareholder, MedCom, sought, among other things, injunctive and declaratory relief that Mr. De La Garza was not authorized to act on behalf of MedCom as an officer or director.  The Settlement Agreement became final and effective on August 11, 2009.





Under the terms of the Settlement Agreement, Mr. De La Garza affirmed in writing that he holds no position with the Company, whether as an officer, a director or otherwise, and he resigned from any such position to the extent he could be said to hold any such position, which resolved any potential disputes relating to his removal from such offices in April 2009, as discussed above.





On October 1, 2008 the Company issued 96,000 shares of common stock to a related party, American Nortel Communications Inc. The issuances were valued at $.088 per share and the Company recognized compensation expenses to William P. Williams of $8,448.





On October 21, 2008, the Company issued 3,000,000 shares of common stock in benefit of its related party, MedCom, for that company's acquisition of PayMed LLC.  The value of the shares was $.088 per share, its trading value at the date of issue. The Company recorded a receivable from MedCom in the amount of $294,000.  In connection with the Settlement Agreement discussed above, this transaction will be unraveled whereby the ownership of PayMed LLC will revert back to the previous owner and the shares of our common stock will be returned to us.





On December 4, 2008 the Company issued 96,000 shares of common stock to a related party, American Nortel Communications Inc. The issuances were valued at $.089 per share and the Company recognized compensation expenses to William P. Williams of $8,630.





On January 15, 2009, we issued 240,000 shares to a related party, Wilcom, Inc., valued at $0.09 per share which was its trading value on the date of issue.  We recognized compensation expense in the amount of $21,600.





22
 Table of Contents





On September 30, 2010, we distributed our investment account to our CEO.  The distribution was recorded at cost and the Company recognized compensation expense of $25,000.





On September 30, 2010, the Company entered into an agreement with MedCom to repay the amount due from advances made in the amount of $1,478,526.  The Company agreed to accept shares of its common stock valued at the closing price on the date received.  On October 1, 2010, the Company received 8,697,210 shares of its common stock valued at $0.08 per share or $695,777.  The Company recorded a reserve for bad debt on the remaining balance of $782,749 for the year ended September 30, 2010.





As of September 30, 2010 and 2009 the company had a receivable from affiliate advances in the amount of $695,777 and $1,072,050, respectively.





NOTE 7 - NET LOSS PER SHARE





The net loss per common share is calculated by dividing the loss by the weighted average number of shares outstanding during the periods.





NOTE 8 – STOCK BASED COMPENSATION





The Company can grant options under their stock option plan.  The Company's Incentive Stock Option Plan (the "Plan") has allocated and reserved 1,000,000 common shares for the Plan, of which 500,000 shares are designated for Officers and Directors of the Company and 500,000 shares are designated for consultants of the Company.   Each option represents the right to purchase one share of the Company's Common Stock.





No options have been awarded under the Plan.





NOTE 9 – EQUITY





On October 1, 2008 the Company issued 96,000 shares of common stock to a related party, American Nortel Communications Inc. The issuances were valued at $.088 per share and the Company recognized compensation expenses to William P. Williams of $8,448.





On October 21, 2008, the Company issued 3,000,000 shares of common stock in benefit of its related party, MedCom, for that company's acquisition of PayMed LLC.  The value of the shares was $.088 per share, its trading value at the date of issue. The Company recorded a receivable from MedCom in the amount of $294,000.  In connection with the Settlement Agreement discussed above, this transaction will be unraveled whereby the ownership of PayMed LLC will revert back to the previous owner and the shares of our common stock will be returned to us.





On December 4, 2008 the Company issued 96,000 shares of common stock to a related party, American Nortel Communications Inc. The issuances were valued at $.089 per share and the Company recognized compensation expenses to William P. Williams of $8,630.





During the three months ended December 31, 2008 the Company entered into subscription agreements for 1,381,756 shares of common stock to third parties.  The shares were valued at their trading value on the date of issue for a total amount of $119,500.





23
 Table of Contents





On January 15, 2009, we issued 240,000 shares to a related party, Wilcom, Inc., valued at $0.09 per share which was its trading value on the date of issue.  We recognized compensation expense in the amount of $21,600.





During the year ended September 30, 2010 the company entered into subscription agreements whereby it sold 728,571 shares of common stock to third parties. The shares were valued at their closing prices on the date of the agreements for a total value of $35,250.  The shares were not issued as of September 30, 2010.





NOTE 10 – SUBSEQUENT EVENTS





From the period October 1, 2010 through December 31, 2010, the Company settled litigation with three additional parties in the total amount of $164,000.





During the three months ended December 31, 2010, the Company issued 728,571 shares of common stock to third parties under subscription agreements entered into during the year ended September 30, 2010.  The shares were valued at their trading value on the date of issue for a total amount of $35,250.





*  *  *  *  *  *





ITEM9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.





None.





ITEM9A.  CONTROLS AND PROCEDURES.





Evaluation of Disclosure Controls and Procedures





Our principal executive officer, who also serves as our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report.  Based on that evaluation, our principal executive officer has concluded that our disclosure controls and procedures were not effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.  We are in the process of evaluating our disclosure controls and procedures in an effort to develop remedial measures to correct the deficiencies.





Management’s Report on Internal Control over Financial Reporting





Our principal executive officer, who also serves as our principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.





It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.





24
 Table of Contents





Our principal executive officer conducted an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2010. This assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework.  Based on this assessment, our principal executive officer has concluded that our internal control over financial reporting as of September 30, 2010 was not effective at the reasonable assurance level due to the possible material weakness described below, and other factors related to the Company’s financial reporting processes.





The Company and its independent registered public accounting firm identified certain significant internal control deficiencies that we considered to be, in the aggregate, a material weakness. The primary concern was the preparation of the stock subscription agreements and the proper depositing of cash received. During the year ended September 30, 2009 the Company issued and sold stock to third parties through a subscription agreement, however, the Company requested the investors to write the checks in the name of MedCom, a related party. These payments were deposited in Medcom, a related party. The company accounted for these deposits as affiliate receivables and accrues interest at a rate of seven percent annually.  Due to the size of our Company and the costs associated to remediate these issues, we still consider these concerns to be relevant.





The Company is in the process of evaluating its internal control over financial reporting in an effort to develop remedial measures to correct the deficiencies.





This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.





Changes in Internal Control over Financial Reporting





During the year September 30, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





ITEM9B.  OTHER INFORMATION.





None.





PARTIII





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.





Director and Executive Officer





Set forth below is information regarding the Company’s current directors and executive officers. There are no family relationships between any of our directors or executive officers. The directors are elected annually by stockholders. The executive officers serve at the pleasure of the Board of Directors.





25
 Table of Contents




Name

Age

TitleRobert H. Kite

56

Sole Director (Chairman), President and Chief Executive Officer





Robert H. Kite joined the Company’s Board of Directors in September 2008.  He has been Chairman of the Board of Directors since April 2009, and President and Chief Executive Officer of the Company since April 2009.  Since 1981, Mr. Kite has been President and COO of Kite Family Co., Inc. and the Managing General Partner of KFT LLLP, a family owned company whose assets and operations include but are not limited to, commercial and industrial buildings, land holdings, stock, bonds, commodities, MRI clinics,  and hotel and retail development.  Mr. Kite is a director with five publicly traded companies, two privately held companies, and two charitable organizations.  Public companies include: MedCom USA Incorporated (MedCom), a medical software provider and Company affiliate, Ants Software Inc. (Ants), a software company based in Burlingame, California, National Energy Group (NEG), an oil and gas company based in Dallas Texas, Petrol Oil & Gas (POIG), an oil and gas exploration and development company based in Overland Park, Kansas, and Jardinier, developer of highly efficient irrigation systems, based in Santa Ana, California.  He also serves on the boards of E2020, an internet education company, and Financialz, an accounting software company.  Mr. Kite’s public service work includes board membership with Child Help USA and the FBI Citizen’s Academy.





Mr. Kite previously worked in the construction industry in Saudi Arabia with Beck-Arabia, and in Central America in gold mining and manufacturing operations.  He is a graduate of Southern Methodist University with a Bachelor of Science, Political Science and Psychology with a Minor in Business.





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16 (a) of the Exchange Act requires the Company's officers and directors and persons who own more than 10% of the registered class of the Company's equity securities to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the "SEC"). Such officers, directors, and 10% stockholders are also required by the SEC rules to furnish the Company with copies of all Section 16(a) forms they file.





To our knowledge, based solely on a review of Forms 3, 4, 5 and amendments thereto furnished to us and written representations that no other reports were required, during and for the fiscal year ended December September 30, 2010, all Section 16(a) filing requirements applicable to our directors, executive officers and greater than 10% beneficial owners were complied with, in a timely manner.





Code of Ethics





Given our limited operations and resources, and the limited size of our management team, our Company has not adopted a code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.





Audit Committee Financial Expert





Given our limited operations and resources, and the limited size of our management team, our Company's board of directors does not have an audit committee. In addition, our Company’s board of directors has determined that the Company does not have an audit committee financial expert serving on the board. When the Company develops its operations, it will create an audit committee and will seek an audit committee financial expert for its board and audit committee.





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ITEM11.  EXECUTIVE COMPENSATION.





It is anticipated that once the Company begins to generate revenues, the Company’s officers, will begin receiving compensation from the Company, but the amount has yet to be determined. In addition, it is anticipated that the Company will provide the officers with normal and customary benefits, including health, vacation, expense reimbursement, and retirement plan contributions.





There is currently no arrangement with any officer to provide compensation for their executive services to the Company.





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Summary Compensation Table





The following table sets forth the cash compensation paid by the Company to its Chief Executive Officer and to all other executive officers for services rendered for the last two completed fiscal years.





Name and Principal Position (1)

Year

Salary


Bonus


All Other Compensation


TotalRobert H. Kite

2010

$
–


$
–


$
25,000


$
25,000Chairman, President and Chief Executive Officer

2009


–



–



–



–William P. Williams

2010


–



–



–



–Former Chairman, Former President and Former Chief Executive Officer

2009


–



–



113,750
(2)


113,750Michael Malet

2010


–



15,000



–



15,000Former Executive Vice President

2009


–



11,000



–



11,000





(1) Pursuant to applicable regulations, certain columns of the Summary Compensation Table and each of the remaining tables required by applicable SEC regulations have been omitted, if there was no compensation awarded to, or earned by or paid to the named executive officers by us.





(2) Represents amounts paid for management fees and value of stock issued in lieu of cash compensation.





Non-Employee Director Compensation





The Company has no formal plan for director compensation, but anticipates that it will reimburse the reasonable and customary expenses of any future non-employee directors associated with their service on the board, including travel expenses and standard fees for attending board meetings. In addition, the Company has established the 2006 Stock Option Plan (the “Plan”) for employees, directors and consultants and reserved 1,000,000 shares for issuance under the Plan. At the date hereof, no options have been issued under this Plan.





Compensation of Directors





Mr. Kite is the sole director of the Company and is not being compensated for those services.





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ITEM12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.





The following table lists stock ownership of our Common Stock as of January 10, 2011. The information includes beneficial ownership by (i) holders of more than 5% of our Common Stock, (ii) each director and executive officer and (iii) all of our directors and executive officers as a group. Except as noted below, to our knowledge, each person named in the table has sole voting and investment power with respect to all shares of our Common Stock beneficially owned by them.  As of January 10, 2011, there were 176,610,616 shares of our Common Stock outstanding.





Title of Class
Name and Address of Beneficial Owner

Amount and Nature of Beneficial Ownership (1)


Percent of ClassCommon Stock
Robert H. Kite

7038 E Fifth Avenue

Scottsdale, AZ 85251


1,832,910



1.0
%Common Stock
All Officers and Directors

As a Group


1,832,910



1.0
%Common Stock
American Nortel Communications, Inc. (2)

7975 N. Hayden Rd., Suite D333

Scottsdale, AZ 85258


19,976,210



11.3
%Common Stock
MedCom USA, Incorporated

7038 E Fifth Avenue

Scottsdale, AZ 85251


39,865,171



22.6
%





* Constitutes less than 1% of the Company's outstanding common stock.





(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.





(2) American Nortel Communications, Inc. is controlled by William P. Williams, our former Chief Executive Officer.





Securities Authorized for Issuance under Equity Compensation Plans





The Company has adopted an employee stock option plan, which acts as an incentive stock option plan, under which the Company’s officers, directors, consultants, and employees will be eligible to receive, in relevant part, either securities or stock options exercisable for the Company’s securities at exercise prices that may be equal to or lower than the offering price. The Company has reserved 1,000,000 shares of Common Stock for issuance under this plan. No options have been issued under this plan.





Changes in Control





We are not aware of any arrangements that may result in a change in control of the Company.





ITEM13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.





On October 1, 2008 the Company issued 96,000 shares of common stock to a related party, American Nortel Communications Inc. The issuances were valued at $.088 per share; which was the trading value of the stock at the date of issuance, and the Company recognized compensation expenses to William P. Williams of $8,448.





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On October 21, 2008, the Company issued 3,000,000 shares of common stock in benefit of its related party, MedCom, for that company's acquisition of PayMed LLC.  The value of the shares was $.088 per share, which was the trading value of the stock at the date of issuance. The Company recorded a receivable from MedCom in the amount of $294,000.  In connection with the Settlement Agreement discussed above, this transaction will be unraveled whereby the ownership of PayMed LLC will revert back to the previous owner and the shares of our common stock will be returned to us.





On December 4, 2008 the Company issued 96,000 shares of common stock to a related party, American Nortel Communications Inc. The issuances were valued at $.089 per share; which was the trading value of the stock at the date of issuance, and the Company recognized compensation expenses to William P. Williams of $8,630.





On January 15, 2009, we issued 240,000 shares to a related party, Wilcom, Inc., valued at $0.10 per share which was its trading value on the date of issue.  We recognized compensation expense in the amount of $24,000.





On September 30, 2010, we distributed our investment account to our CEO.  The distribution was recorded at cost and the Company recognized compensation expense of $25,000.





On September 30, 2010, the Company entered into an agreement with MedCom to repay the amount due from advances made in the amount of $1,478,526.  The Company agreed to accept shares of its common stock valued at the closing price on the date received.  On October 1, 2010, the Company received 8,697,210 shares of its common stock valued at $0.08 per share or $695,777.  The Company recorded a reserve for bad debt on the remaining balance of $782,749 for the year ended September 30, 2010.





As of September 30, 2010 and 2009 the company had a receivable from affiliate advances in the amount of $695,777 and $1,072,050, respectively.





ITEM14.  PRINCIPAL ACCOUNTING FEES AND SERVICES.





The following table sets forth the approximate aggregate fees incurred by our principal accountants for 2010 and 2009 services:




2009


2008Audit fees

$
30,520


$
31,550Audit-related fees


-



-All Other fees


-



-Tax


-



5,000Total Fees

$
30,520


$
36,550





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Tarvaran, Askelson and Company, LLP, did not provide any services related to financial information systems design and implementation during 2010 or 2009.





It is the policy of the Company's Board of Directors to pre-approve all engagements and fees of the independent public accountant and during 2010 and 2009 all such engagements and fees were pre-approved.





PARTIV





ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





(a)  Financial Statements, Financial Statement Schedules, and Exhibits





(1)  Financial Statements





The financial statements filed as part of this filing are listed on the Index to Financial Statements under Item 8.





(2)  Financial Statement Schedules





Not Applicable.





(3)  Exhibits





Refer to Item 15(b) below.





(b)  Exhibits





The exhibits filed in response to Item 601 of Regulation S-K are listed in the Index to Exhibits.





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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





CARD ACTIVATION TECHNOLOGIES INC.Dated: January 12, 2011
By
/s/ Robert KiteRobert KiteChairman, President and Chief Executive Officer(Principal Executive Officer and Principal Financial Officer)





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Dated: January 12, 2011
By
/s/ Robert KiteRobert KiteChairman, President and Chief Executive Officer(Principal Executive Officer and Principal Financial Officer)




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Index to Exhibits




Exhibit
Description3.1
Certificate of Incorporation of the Company, which is attached as Exhibit 3.1 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 3.1.3.2
Bylaws of the Company, which is attached as Exhibit 3.2 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 3.2.10.1*
Card Activation Technologies Inc. Stock Option Plan, which is attached as Exhibit 10.1 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 10.1.10.2
Separation Agreement, dated October 31, 2006, by and between the Company and MedCom USA, Incorporated, which is attached as Exhibit 10.2 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 10.2.10.3
Tax Sharing Agreement, dated October 31, 2006, by and between the Company and MedCom USA, Incorporated, which is attached as Exhibit 10.3 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 10.3.10.4
Administrative Services Agreement, dated October 31, 2006, by and between the Company and MedCom USA, Incorporated, which is attached as Exhibit 10.4 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 10.4.10.5
Settlement Agreement, dated February 27, 2007, by and between the Company and McDonald's Corporation, which is attached as Exhibit 10.6 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 10.5.10.6
Patent License and Covenant Not to Sue Agreement, dated February 27, 2007, by and between the Company and McDonald's Corporation, which is attached as Exhibit 10.7 to the Company's Registration Statement on Form SB-2, as amended (Registration No. 333-139677), filed on October 31, 2006, is hereby incorporated by reference as Exhibit 10.6.10.7
Settlement Agreement and Mutual Release, dated May 21, 2009, by and among the Company, MedCom USA, Incorporation and additional parties thereto, which is attached as Exhibit 10.1 to the Company's Current Report on Form 8-K (Commission File No. 000-52556), filed on June 12, 2009, is hereby incorporated by reference as Exhibit 10.7.31.1
Certification of Principal Executive and Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act is attached hereto as Exhibit 31.1.31.2
Certification of Principal Executive and Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act is attached hereto as Exhibit 31.2.* Management contracts or compensatory plan or arrangement







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