FORM 10QSB | Edgar Filings | Freestar Technology Corporation

The following discussion and analysis of financial condition and results ofoperations of the FreeStar Technology Corporation, a Nevada corporation("Registrant"), is based upon, and should be read in conjunction with, itsunaudited condensed consolidated financial statements and related notes includedelsewhere in this Form 10-QSB, which have been prepared in accordance withaccounting principles generally accepted in the United States

Overview.

The e-payments and e-commerce market is composed of debit and creditcard issuers, switch interchanges, transaction acquirers and transactiongenerators, including Automated Teller Machine ("ATM") networks, retail merchantlocations and the Internet. The routing, control and settlement of e-payments isa complex activity due to the large number of locations and variety of sourcesfrom which transactions can be generated, the large number of issuers in themarket, high transaction volumes, geographically dispersed networks, differingtypes of authorization and varied reporting requirements. These activities aretypically performed online and must be conducted 24 hours a day, seven days aweek.

The Registrant's products and services are primarily focused onfacilitating electronic payments ("e-payments") and electronic commerce("e-commerce"). These products and services are used principally by financialinstitutions, retailers, and e-payment processors, both in domestic andinternational markets.

The Registrant intends to have four main revenue sources: (1) sales ofits PaySafe devices "ePayPad"; (2) processing fees related to the transactionsthrough the use of ePayPad and merchant services (the Registrant intends tocharge a fee for these transactions ranging from 0.3% to 1.3% of the value ofthe transaction); (3) revenue from the Registrant's transaction fees stemmingfrom its Internet Payment Gateway (estimated to be about 0.5% to 3.5% of thevalue of the transaction); and (4) revenue stemming from Rahaxi Processing Oy.,which derives income from the transaction fees it receives from processingonline point of sale terminal transactions in Finland. For the nine months endedMarch 31, 2004, the Registrant's revenue was primarily generated from thetransaction fees through its Finland operations.

For the Registrant to derive revenue outside of its Finnish operations,the Registrant first had to perform a major hardware and software upgrade atRahaxi, as Rahaxi is the core operating system of the Registrant's products.This upgrade was completed in December 2003, and evolved the Registrant'sbusiness critical systems to the latest Hewlett-Packard ("HP") NonStop serversand BASE24 e-payment processing software. HP NonStop servers are estimated torun approximately 95% of the world's secure transactions, making the NonStopplatform the backbone for the world's most demanding and critical environmentsand offering the Registrant a secure, continuously available processingplatform. A vastly scalable platform, HP NonStop provides the Registrant withthe ability to achieve an adaptive enterprise by enabling it to respond quicklyand easily to changing business needs, such as managing the expected growingnumber of transactions and the need for increased capacity.

BASE24 software from ACI Worldwide provides the Registrant with a fast,powerful authorization system. BASE24 software offers high data integrity formission-critical environments. ACI and HP have a strong and long-standingrelationship in e-payment implementations worldwide.

The new system will enable the Registrant to meet the latest Visa andMasterCard standards and to pave the way for EMV Europay/MasterCard/Visa ("EMV")compliance. The Registrant will also be capable of supporting the latest Visa 3DSecure payment technology. EMV is an agreed-upon protocol for the introductionof smart cards. Chip-based bank and payment cards provide a substantial increasein the security of consumer payment transactions, and the Registrant expects itwill be the standard throughout Europe by 2005. EMV is also gaining momentum inAsia and America, and promises complete global interoperability of bankcards forconsumers. All payment processors will have to be able to accept paymentsmediated by smart cards in order to remain competitive, and meeting EMVcompliance has major implications for all aspects of the payment handlingprocesses. Management believes that with the company's investment in theupgraded NonStop systems running the newest ACI software, it can meet itsprojected increasing capacity needs and ensure future volume growth.

The Registrant is a small company in a very competitive market. It hasa limited number of staff and is currently headquartered in the DominicanRepublic; however the company announced in February 2004 its intention torelocate its corporate offices to Miami, Florida. Management believes that themove to Miami will enhance the company's ability to coordinate its operationsand also provide for greater transparency in its relationship with shareholders.The company has identified the location for its offices in Miami and is in thelatter stages of negotiating the lease for these premises. The Registrant hasits European headquarters in Geneva, Switzerland, as well as offices in Ireland,Sweden and Finland.

The Registrant, under the current management, began generating morerevenue since its acquisition of Rahaxi Processing Oy. in January 2003. Itsbusiness is rapidly changing, and it expects the coming twelve months to bequite different from the previous twelve months as the company makes ready andfurther rolls-out its products and services. This process will require theRegistrant to react quickly to problems and opportunities as they arise, and mayinvolve costs that it does not currently anticipate. The Registrant also expectsthat further acquisitions may help it to quickly move forward in achieving itsgoals.

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE

MONTHS ENDED MARCH 31, 2003.

(a) Revenue.

The Registrant generated revenue of $329,659 for the three months endedMarch 31, 2004, an increase of $17,028, or approximately 5%, compared to revenueof $312,631 for the three months ended March 31, 2003. The net change was due toan increase of $114,155 in processing fees generated by the Registrant'ssubsidiary Rahaxi Processing Oy., combined with a decrease of $97,157 in salesin the Dominican Republic. This change in sales mix reflects the change in the company's strategy to focus its resources on the United States andEuropean markets.

(b) Cost of Revenue.

Cost of revenue was $334,555 for the three months ended March 31, 2004,an increase of $123,906, or approximately 59%, compared to $210,649 for thethree months ended March 31, 2003. During the three months ended March 31, 2004,Rahaxi upgraded both the hardware and software of its processing platform andbegan to recognize these costs. The change in the Registrant's business mix fromthe comparable quarter of 2003 also added to the increased cost of revenue forthe quarter ending March 31, 2004.

During the three months ended March 31, 2004, the Registrant recorded$814,051 in non-cash compensation, which is a decrease of $1,964,353, orapproximately 71%, compared to $2,778,404 in non-cash compensation recordedduring the three months ended March 31, 2003. During the three months endedMarch 31, 2003, the Company issued warrants valued at approximately $1,500,000to its investment banker and other financial consultants for services withregard to development and implementation of a plan for the Company's financialstructure. There were no warrants issued during the three months ended March 31,2004. Also during the three months ended March 31, 2003, the Company issuedstock valued at approximately $1,200,000 for legal services and otherconsultants, compared to approximately $400,000 for the three months ended March31, 2004. The primary reason for the decrease is a reduction in the level oflitigation the Company experienced during the three months ended March 31, 2004.During the three months ended March 31, 2004, the Company also amortizedapproximately $418,000 of the cost of stock issued to consultants in priorperiods.

(d) Selling, General and Administrative Expenses.

Selling, general, and administrative expenses ("SG&A") were $610,560for the three months ended March 31, 2004, an increase of $279,126, orapproximately 84%, compared to such expenses of $331,434 for the three monthsended March 31, 2003. The Registrant continued to add to its productcapabilities, with higher values for capitalized software and software licensesgenerating higher amortization expense. Depreciation expense also increased forsimilar reasons.

During the three months ended March 31, 2004, the primary components ofSG&A were: depreciation and amortization expense of approximately $155,000; cashpaid for consulting fees of approximately $124,000; legal and accounting fees ofapproximately $83,000 due to ongoing litigation (see "Legal Proceedings"), andas a result of legal and accounting work involved with the acquisitions ofRahaxi Processing Oy. and TransAxis, Inc.; payroll costs of approximately$100,000 as the company continued to build out its infrastructure; facilitycosts (rent, telephone, utilities, building maintenance) of approximately$44,000; and travel costs of approximately $44,000, which rose due to thecoordination of the Registrant's product rollout with Rahaxi.

(e) Loss On Investment

During the three months ended March 31, 2004, the Company advanced cashin the amount of $25,000 to Unipay, Inc., a potential acquisition target. InJune 2004, the Company made the decision not to pursue Unipay, Inc. as anacquisition candidate and wrote-off the $25,000 advance to loss on investment inthe consolidated statement of operations for the three months ended March 31,2004.

In June 2004, the Registrant terminated the TransAxis Acquisitionagreement and wrote-off the Note Receivable from TransAxis, Inc. in the amountof $75,000 during the three months ended March 31, 2004.

(f) Interest Expense.

The Registrant recognized net interest expense of $926 during the threemonths ended March 31, 2004, a decrease of $1,158, or approximately 56%,compared to interest expense of $2,084 for the three months ended March 31,2003. Lower interest expense was due to lower levels of debt during the mostrecent quarter. Pursuant to the vFinance settlement agreement, the Registrantreversed the liability it had recorded to its president in the amount of$679,869, which had been accruing interest on this amount at the rate of 7% perannum. During the three months ended March 31, 2004, the Registrant also madeprincipal payments on the amount due to related parties in the amount of$246,105.

(g) Miscellaneous.

The Registrant recorded no miscellaneous income or expense during thethree months ended March 31, 2004 compared to miscellaneous expense of $3,608during the three months ended March 31, 2003.

(h) Gain On Legal Settlement

The Registrant recognized a gain on the settlement of the vFinancelawsuit of $727,459 during the three months ended March 31, 2004, and had nosuch gain during the comparable period of the prior year.

(i) Net Loss.

For the reasons stated above, the Registrant recorded a net loss of$802,974 for the three months ended March 31, 2004, an improvement of$2,210,574, or approximately 74%, compared to the net loss of $3,013,548realized during the three months ended March 31, 2003.

RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO NINE MONTHS

ENDED MARCH 31, 2003.

(a) Revenue.

The Registrant had revenue of $991,033 for the nine months ended March31, 2004 compared to revenue of $321,331 during the nine months ended March 31,2003, an increase of $669,702, or approximately 208%. The increased revenue ismainly due to the revenue derived as a result of the acquisition of RahaxiProcessing Oy. The Registrant did not own Rahaxi Processing Oy. during theentire comparable period in the prior year.

The Registrant expects revenue levels to increase throughout the nexttwelve months as the company continues to roll out its service offerings;however, there can be no guarantee that our product will be accepted in themarketplace or that our sales effort will be successful. Please see "FactorsThat May Affect Operating Results."

(b) Cost of Revenue.

Cost of revenue was $769,990 for the nine months ended March 31, 2004compared to $211,451 for the nine months ended March 31, 2003, an increase of$558,539, or approximately 264%. Cost of revenue increased in the current periodcompared to the comparable period of the prior year because the Registrantgenerated revenue and incurred the costs of revenue during only three of thenine months ended March 31, 2003 compared to the entire nine month period endedMarch 31, 2004. The Registrant's Rahaxi subsidiary also upgraded its processingplatform during the nine months ended March 31, 2004, and this resulted inincreased costs.

Cost of revenue can be expected to increase in the coming twelve monthsif the company continues its current trend of increasing sales. The Registrantalso intends to expand its service offering and its business mix willnecessarily change, so that gross margin as a percent of sales may not remainconstant.

During the nine months ended March 31, 2004, the Registrant recorded$3,366,459 in non-cash compensation, which was a decrease of $4,030,450, orapproximately 54%, compared to $7,396,909 in non-cash compensation recordedduring the nine months ended March 31, 2003. The primary components of thedecrease were fewer shares and options issued as compensation to consultants, aswell as a decrease in the number of shares issued as compensation to officersand directors.

The Registrant expects non-cash compensation to increase during thecoming twelve months. The Registrant's expected continued expansion in itsvarious geographic markets will create a growing need for local consultants andadvisors that will be satisfied in large part via non-cash compensation.Management intends to continue to utilize non-cash compensation in order toconserve cash.

(d) Selling, General and Administrative Expenses.

SG&A was $1,926,516 for the nine months ended March 31, 2004, anincrease of $875,316, or approximately 83%, compared to $1,051,200 for the ninemonths ended March 31,

2003. During the nine months ended March 31, 2004, the primary components ofSG&A were: depreciation and amortization of approximately $417,000 as theRegistrant upgraded its processing platform and continue to build out itsproduct line; payroll expenses of approximately $324,000; legal and accountingfees of approximately $310,000, primarily due to ongoing litigation, as well asthe TransAxis and Rahaxi acquisitions; cash paid for consulting fees ofapproximately $238,000; travel costs of approximately $127,000 due to the focuson its Finland subsidiary and the Finnish market; investor relations expenses ofapproximately $110,000; merchant services of approximately $105,000 as theCompany continued to roll out its services in the European market; andfacilities expense (rent, telephone, utilities, and building maintenance) ofapproximately $69,000.

The rate of future SG&A will largely depend on the pace of theRegistrant's growth in the market for payment processing products and upon thecost of outside services and professional fees, including legal fees relating tolitigation. The company fully expects these costs to increase as it continuesits expected rollout of product offerings. In addition, selling expenses willcontinue to increase due to increased focus on obtaining new customers. TheRegistrant intends to focus additional resources in the areas of sales personnelsalaries, trade show participation, and other promotional expenses. In addition,the Registrant may pursue further acquisitions in order to facilitate its growthand exploit market opportunities, which would further drive up legal andaccounting fees, payroll, and travel costs.

(e) Loss On Investment

On June 17, 2004, the Registrant terminated the TransAxis acquisitionagreement and wrote-off the Note Receivable from TransAxis, Inc. in the amountof $75,000 as loss on investment in the consolidated statement of operations forthe three months ended March 31, 2004.

(f) Interest Expense.

The Registrant recognized net interest expense of $33,387 during thenine months ended March 31, 2004, a decrease of $346,559, or approximately 91%,compared to interest expense of $379,946 for the nine months ended March 31,2003. The reason for this decrease is lower borrowings during the quarter endedMarch 31, 2004. The Registrant had outstanding convertible debentures ofapproximately $600,000 during the quarter ended March 31, 2003 that were settledin December 2002 with common stock personally owned by the president of thecompany. The Registrant recorded a liability to its president in the amount of$679,869 and accrued interest on this amount at the rate of 7% per annum in2003. This liability was eliminated during the nine months ended March 31, 2004,pursuant to the vFinance settlement agreement. Also, during the nine monthsended March 31, 2003, the company reduced the amount payable to related parties by approximately $191,000. During the comparable nine-month period of 2003,interest expense included substantially higher interest charges for theconvertible debentures, including amortization of an amount attributable to thebeneficial conversion feature of these notes.

Currently, the Registrant is utilizing equity financing partly in orderto avoid the interest charges associated with debt financing. Accordingly, theRegistrant does not expect interest expense to materially increase in the comingtwelve months. There can be no guarantee that this will be the case; however, asthe market for the Registrant's stock could change, forcing the company topursue alternative methods of financing the company's cash needs; in addition,the Registrant could receive an offer of attractive debt financing or couldundertake additional financing with regard to an acquisition, in which casesinterest expense would significantly increase.

(g) Miscellaneous.

The Registrant recorded no miscellaneous income and expense during thenine months ended March 31, 2004 compared to miscellaneous income of $39,048during the comparable period of 2003. The Registrant received a non-refundabledeposit of $50,000 during the nine months ended March 31, 2003, and had no suchtransaction during the comparable period of 2004.

The Registrant does not anticipate material increases in miscellaneousincome or expense in the coming twelve months.

(h) Gain On Legal Settlement.

In December 2002, a lender group exercised their rights against the14,400,000 shares pledged by the president of the Registrant in fullsatisfaction of the outstanding notes payable of $637,000, interest payable of$18,569, and accrued penalties of $24,300 totaling $679,869.

In March 2004, this lender group entered into a settlement agreementwith the Registrant (see "Legal Proceedings"). As part of the settlement, thislender group is required to return the 14,400,000 pledged shares to thepresident of the company and the company is relieved from any other indebtednessto this lender group. Prior to this settlement, the Registrant considered thenotes payable of $679,869 and related interest of $47,590 totaling $727,459payable to the president related to the his 14,400,000 shares given to thislender group.

In addition, this lender group agreed to return 999,000 shares to theRegistrant Company that was issued to this lender group as collateral forborrowings in June 2002. The Company has not yet received the shares as of March31, 2004. Upon the receipts of the shares, the Company will record a gain onlegal settlement at cost based on the date of the issuance.

Thus, the Registrant recognized a gain on the settlement of thevFinance lawsuit of $727,759 during the three and nine months ended March 31,2004, and had no such gain during the comparable periods of the prior year.

(i) Net Loss.

For the reasons stated above, the Registrant recorded a net loss of$4,477,860 for the nine months ended March 31, 2004, an improvement of$4,201,267, or approximately 48%, compared to the net loss of $8,679,127realized during the nine months ended March 31, 2003.

A significant percentage of the Registrant's revenue for the thirdquarter of fiscal 2004, and for the first nine months of fiscal 2004, has beenderived from a limited number of the Registrant's customers, primarily Finnishcustomers for the Registrant's transaction processing products. Approximately40% of the Registrant's total revenue was attributable to the Registrant's tenlargest customers. The future loss of any major customer could have a materialadverse effect on the Registrant's business, financial condition and results ofoperations. The Registrant believes that this customer concentration willcontinue for the remainder of fiscal 2004. The Registrant believes that thiscustomer concentration will be diluted in the first half of fiscal 2005 as itpursues operations outside of Finland.

The majority of Registrant's revenues for the third quarter of fiscal2004 and for the first nine months of fiscal 2004 has been generated by itsoperations outside of the United States, and the Registrant's future growthrates and success are in part dependent on continued growth and success ininternational markets. The Registrant expects this trend to continue through thefiscal year 2004.

The Registrant may continue to incur losses on both a quarterly andannual basis. In addition, the Registrant expects to continue to incursignificant costs of services and substantial operating expenses. Therefore, theRegistrant will need to significantly increase revenues to achieve profitabilityand a positive cash flow. The Registrant may not be able to generate sufficientrevenues to achieve profitability. The Registrant expects losses to continue forat least the next twelve months.

The Registrant will attempt to continue to fund its operations throughdebt and equity financing until it achieves profitability, of which there is noguarantee. The Registrant expects these concerns regarding its perceivedviability to continue throughout the fiscal year 2004.

Factors That May Affect Operating Results.

The operating results of the Registrant can vary significantlydepending upon a number of factors, many of which are outside the company'scontrol. General factors that may affect the Registrant's operating resultsinclude:

- market acceptance of and changes in demand for products and services;
- a small number of customers account for, and may in future periods account for, substantial portions of the Registrant's revenue, and revenue could decline because of delays of customer orders or the failure to retain customers;
- gain or loss of clients or strategic relationships;
- announcement or introduction of new services and products by the Registrant or by its competitors;
- price competition:
- the ability to upgrade and develop systems and infrastructure to accommodate growth;
- the ability to introduce and market products and services in accordance with market demand;
- changes in governmental regulation; and
- reduction in or delay of capital spending by clients due to the effects of terrorism, war and political instability.

The Registrant believes that its planned growth and profitability willdepend in large part on the ability to promote its services, gain clients andexpand its relationship with current clients. Accordingly, the Registrantintends to invest in marketing, strategic partnerships, and development of itsclient base. If the Registrant is not successful in promoting its services andexpanding its client base, this may have a material adverse effect on itsfinancial condition and the ability to continue to operate the business.

The Registrant is also subject to the following specific factors thatmay affect the company's operating results:

(a) Competition.

The market for electronic payment systems and electronic POS systems isintensely competitive and we expect competition to continue to increase. TheRegistrant's competitors for POS systems include VeriFone, Ingenico and Hypercomamongst others, and companies such as NetGiro, TradeSafe & ProPay, and SafeDebitfor the Registrant's electronic payment software. In addition, the companieswith whom we have strategic relationships could develop products or services,which compete with the Registrant's products or services. In addition somecompetitors in the Registrant's market have longer operating histories,significantly greater financial, technical, marketing and other resources, andgreater brand recognition than the company does. The Registrant also expects toface additional competition as other established and emerging companies enterthe market for electronic payment solutions. To be competitive, the Registrantbelieves that it must, among other things, invest significant resources indeveloping new products, improve its current products and maintain customersatisfaction. Such investment will increase the Registrant's expenses and affectits profitability. In addition, if it fails to make this investment, theRegistrant may not be able to compete successfully with its competitors, whichcould have a material adverse effect on its revenue and future profitability

(b) Technological and Market Changes.

The markets in which the Registrant competes are characterized by rapidtechnological change, frequent new product introductions, evolving industrystandards and changing needs of customers. There can be no assurance that theRegistrant's existing products will continue to be properly positioned in themarket or that the company will be able to introduce new or enhanced productsinto the market on a timely basis, or at all. Currently, the Registrant isfocusing on upgrading and introducing new products. There can be no assurancethat enhancements to existing products or new products will receive customeracceptance. As competition in the electronic payments industry increases, it maybecome increasingly difficult for us to be competitive.

Risks associated with the development and introduction of new productsinclude delays in development and changes in payment processing, and operatingsystem technologies that could require the Registrant to modify existingproducts. There is also the risk to the Registrant that there may be delays ininitial shipments of new products. Further risks inherent in new productintroductions include the uncertainty of price-performance relative to productsof competitors, competitors' responses to the introductions and the desire bycustomers to evaluate new products for longer periods of time.

The Registrant's electronic payment software products and point of saledevices are complex and, accordingly, may contain undetected errors or failureswhen first introduced or as new versions are released. This may result in theloss of, or delay in, market acceptance of the Registrant's products. TheRegistrant has in the past discovered software errors in its new releases andnew products after their introduction. The Registrant has experienced delays inrelease, lost revenues and customer frustration during the period required tocorrect these errors. The Registrant may in the future discover errors andadditional scalability limitations in new releases or new products after thecommencement of commercial shipments or be required to compensate customers forsuch limitations or errors, as a result of which the Registrant's business, cashflow, financial condition and results of operations could be materiallyadversely affected.

(d) No Assurance of Successful and Timely Product Development.

The Registrant's products and proposed enhancements are at variousstages of development and additional development and testing will be required inorder to determine the technical feasibility and commercial viability of theproducts.

There can be no assurance that the Registrant's product developmentefforts will be successfully completed. The Registrant's proposed developmentschedule may be affected by a variety of factors, many of which will not bewithin the control of the Registrant, including technological difficulties,access to proprietary technology of others, delays in regulatory approvals,international operating licenses, and the availability of necessary funding. Inlight of the foregoing factors, there can be no assurance that the Registrantwill be able to complete or successfully commercialize its products. Theinability of the Registrant to successfully complete the development of newproducts or to do so in a timely manner, could force the Registrant to scaleback operations, or cease operations entirely.

(e) Market Acceptance.

The Registrant's success is dependent on the market acceptance of itsproducts. Despite the increasing demand for security devices, the Registrant'sproducts represents an advanced approach to the industry, and market acceptanceof the company's products will be dependent, among other things, upon itsquality, ease of use, speed, reliability, and cost effectiveness. Even if theadvantages of the Registrant's products are established, the company is unableto predict how quickly, if at all, the products will be accepted by themarketplace.

(f) Protection of Proprietary Rights.

The Registrant's success and ability to compete will be dependent inpart on the protection of its potential patents, trademarks, trade names,service marks and other proprietary rights. The Registrant intends to rely ontrade secret and copyright laws to protect the intellectual property that itplans to develop, but there can be no assurance that such laws will providesufficient protection to the Registrant, that others will not develop a servicethat are similar or superior to the Registrant's, or that third parties will notcopy or otherwise obtain and use the Registrant's proprietary informationwithout authorization. In addition, certain of the Registrant's know-how andproprietary technology may not be patentable.

The Registrant may rely on certain intellectual property licensed fromthird parties, and may be required to license additional products or services inthe future, for use in the general operations of its business plan. TheRegistrant currently has no licenses for the use of any specific products. Therecan be no assurance that these third party licenses will be available or willcontinue to be available to the Registrant on acceptable terms or at all. Theinability to enter into and maintain any of these licenses could have a materialadverse effect on the Registrant's business, financial condition or operatingresults.

There is a risk that some of the Registrant's products may infringe theproprietary rights of third parties. In addition, whether or not theRegistrant's products infringe on proprietary rights of third parties,infringement or invalidity claims may be asserted or prosecuted against it andit could incur significant expense in defending them. If any claims or actionsare asserted against the Registrant, it may be required to modify its productsor seek licenses for these intellectual property rights. The Registrant may notbe able to modify its products or obtain licenses on commercially reasonableterms, in a timely manner or at all. The Registrant's failure to do so couldhave a negative affect on its business and revenues.

(g) Dependence On Suppliers.

The Registrant depends upon a number of suppliers for components of itsproducts. There is an inherent risk that certain components of the company'sproducts will be unavailable for prompt delivery or, in some cases,discontinued. The Registrant only has limited control over any third-partymanufacturer as to quality controls, timeliness of production, deliveries andvarious other factors. Should the availability of certain components becompromised, it could force the company to develop alternative designs usingother components, which could add to the cost of goods sold and compromisedelivery commitments. If the Registrant is unable to obtain components in atimely manner, at an acceptable cost, or at all, the company may need to selectnew suppliers, redesign or reconstruct processes used to build its securitydevices. In such an instance, the Registrant would not be able to manufactureany security devices for a period of time, which could materially adverselyaffect its business, results from operations, and financial condition.

(h) Economic Slowdown.

The world economy in general, and the United States economy inparticular have experienced a prolonged downturn for electronic payment productswhich the Registrant believes has adversely affected demand for its products andhas made it increasingly difficult to accurately forecast future revenues. Whileit is seeing indications that the economic outlook is no longer deteriorating,the Registrant cannot predict the extent, timing or duration of any improvementin the economies where it sells its products. Further, the Registrant expectsthat its revenue during fiscal 2004 will be significantly affected by the timingand success of the introduction of new products and services during the fiscalyear.

(i) Key Personnel.

The Registrant's success is largely dependent on the personal effortsand abilities of its senior management. The loss of certain members of theRegistrant's senior management, including the company's chief executive officer,chief financial officer and chief technical officer, could have a materialadverse effect on the company's business and prospects.

The Registrant intends to recruit in fiscal year 2004 employees who areskilled in e-commerce, payment, funds management, payment reconciliation,Internet and other technologies. The failure to recruit these key personnelcould have a material adverse effect on the Registrant's business. As a result,the Registrant may experience increased compensation costs that may not beoffset through either improved productivity or higher revenue. There can be noassurances that we will be successful in retaining existing personnel or inattracting and recruiting experienced qualified personnel.

(j) Litigation.

As stated under Legal Proceedings, the Registrant is subject to alawsuit and a regulatory investigation. It is possible that one or more of thesematters could be resolved in a manner that ultimately would have a materialadverse impact on the Registrant's business, and could negatively impact itsrevenues, operating margins, and net income.

Liquidity and Capital Resources.

The Registrant had a working capital deficit of $416,975 as of March31, 2004, which is a decrease of $991,743, or approximately 70%, from a workingcapital deficit of $1,408,718 as of March 31, 2003, and a decrease of $823,417,or approximately 66%, compared to a working capital deficit of $1,240,392 atJune 30, 2003. The Registrant has needed to continually raise capital throughprivate offerings to fund its operations.

During the nine months ended March 31, 2004, the Registrant sold atotal of 180,400,000 shares of common stock for consideration of $1,804,000($0.01 per share). The Registrant received cash proceeds of $1,554,616 (net ofdirect financing costs and commissions). The unpaid portion is included insubscription receivable in the accompanying condensed consolidated balance sheetas of March 31, 2004.

The Registrant recognizes the need for the infusion of cash duringfiscal 2004. The Registrant is pursuing various financing options. The companyrelies heavily upon the market liquidity of its stock as traded on the Over theCounter Bulletin Board for its ability to raise funds, for its ability toconsummate acquisitions, and for the use of non-cash compensation for many ofthe company's consultants. Should the Registrant experience a weakening in themarket for its common stock, both its short-term liquidity and its ability toachieve its long-term strategy could be adversely affected.

Thus, the Registrant's continued operations, as well as theimplementation of its business plan, will depend upon its ability to raiseadditional funds through bank borrowings, equity or debt financing. TheRegistrant estimates that it will need to raise approximately $5,000,000 overthe next twelve months for such purposes. However, adequate funds may not beavailable when needed or may not be available on favorable terms to theRegistrant. The ability of the Registrant to continue as a going concern isdependent on additional sources of capital and the success of the company'sbusiness plan. The notes to the condensed consolidated financial statementscontained in this Form 10-QSB, as well as the audited consolidated financialstatements contained in the Registrant's Form 10-KSB for the year ended June 30,2003, include substantial doubt paragraphs regarding the company's ability tocontinue as a going concern. The Registrant believes it currently has adequatecash to fund anticipated cash needs for at least the next three months.

If funding is insufficient at any time in the future, the Registrantmay not be able to take advantage of business opportunities or respond tocompetitive pressures, or may be required to reduce the scope of its plannedproduct development and marketing efforts, any of which could have a negativeimpact on its business and operating results. In addition, insufficient fundingmay have a material adverse effect on the company's financial condition, whichcould require the company to:

- curtail operations significantly;
- sell significant assets;
- seek arrangements with strategic partners or other parties that may require the company to relinquish significant rights to products, technologies or markets; or
- explore other strategic alternatives including a merger or sale of the company.

To the extent that the Registrant raises additional capital through thesale of equity or convertible debt securities, the issuance of such securitieswill result in dilution to existing stockholders. If additional funds are raisedthrough the issuance of debt securities, these securities may have rights,preferences and privileges senior to holders of common stock and the terms ofsuch debt could impose restrictions on the Registrant's operations. Regardlessof whether the Registrant's cash assets prove to be inadequate to meet thecompany's operational needs, the Registrant may seek to compensate providers ofservices by issuance of stock in lieu of cash, which will also result indilution to existing shareholders.

The Company's independent certified public accountants have stated intheir report included in the Company's June 30, 2003 Form 10-KSB, that theCompany has incurred operating losses in the past years, and that the Company isdependent upon management's ability to develop profitable operations. Thesefactors among others may raise substantial doubt about the Company's ability tocontinue as a going concern.

Certain Indebtedness.

(a) The Registrant's president and shareholder, Paul Egan, has advancedfunds to the company for its operations. During the three months ended March 31,2004, the Registrant repaid the net amount of $191,642 to Mr. Egan. At March 31,2004, the Company owes Mr. Egan the net amount of $7,855, which is shown as DueTo Related Party For Advances on the balance sheet as of March 31, 2004.Interest on the unpaid balances is accrued at the rate of 7% per annum.

(b) In anticipation of the TransAxis Acquisition Agreement and while inthe negotiation stage, in July 2003, the Registrant loaned to TransAxis theamount of $75,000 via two senior secured convertible note agreements in theamount of $50,000 and $25,000, respectively ("Bridge Notes"). The Bridge Notescarry interest at the rate of (i)12.5 % per year from September 1, 2003,provided that the Company does not hold less than 70% interest of theoutstanding capital stock of TransAxis at August 31, 2003, and (ii) 15% perannum commencing January 1, 2004, provided that the Company has not completedthe acquisition of TransAxis by this date. The Bridge Notes are a seniorobligation of TransAxis, Inc. and payment is secured by a security agreementbetween the two parties.

The Bridge Notes matured on September 29, 2003 without being paid.Since the Bridge Notes were not paid in full by December 31, 2003, the Companyhas the option for a one-year period to convert the Bridge Notes without paymentof any other consideration into common stock of TransAxis according to thefollowing: at least the number of shares which will provide 5% ownership of theoutstanding shares of TransAxis, and shall be increased by 1% for eachadditional $15,000 of loans or accrued interest thereon that the Companymaintains with TransAxis.

After extensive discussions and following the unanimous determinationof the Registrant's Board of Directors, the Registrant has terminated theAgreement as of June 17, 2004. This decision was based on both TransAxis' andthe Sellers' failure to disclose material liabilities and contingencies inconnection with that company, as well as their failure to comply with theirobligations under the Agreement. The Company charged the $75,000 Bridge Notes toLoss on investments during the three months ended March 31, 2004.

Exchange Rates.

The Registrant's operations are principally in the Dominican Republicunder the name ePayLatina S.A., which are operated in its local currency, theDominican Republic Peso; and in Helsinki Finland under the Rahaxi subsidiary,operated in its local currency, the Euro. All assets and liabilities aretranslated at exchange rates in effect at the end of the period. Incomestatement accounts are translated at average rates for the period. Gains andlosses from translation of foreign currency financial statements into U.S.dollars are included in comprehensive income (loss). The accumulated foreigncurrency translation adjustment was $445,689 at March 31, 2004.

A significant portion of the Registrant's revenues and expenses isdenominated in currencies other than U.S. dollars; Rahaxi Processing Oy.generates its revenue in EUROS. Any significant change in exchange rates mayhave a favorable or negative effect on both the revenues and operational costsof the Registrant In particular, the value of the U.S. Dollar to the Euroimpacts the Registrant's operating results. The Registrant's expenses are notnecessarily incurred in the currency in which revenue is generated, and, as aresult, we are required from time to time to convert currencies to meet theRegistrant's obligations. In addition, a significant portion of the Registrant'sfinancial statements are prepared in Euro and translated to U.S. Dollars forconsolidation.

Inflation.

The impact of inflation on the costs of the Registrant, and the abilityto pass on cost increases to its customers over time is dependent upon marketconditions. The Registrant is not aware of any inflationary pressures that havehad any significant impact on the Registrant's operations over the past quarter,and the company does not anticipate that inflationary factors will have asignificant impact on future operations.

Other.

The Registrant does not provide post-retirement or post-employmentbenefits requiring charges under Statements of Financial Accounting StandardsNo. 106 and No. 112.

Critical Accounting Policies.

The Securities and Exchange Commission ("SEC") has issued FinancialReporting Release No. 60, "Cautionary Advice Regarding Disclosure About CriticalAccounting Policies" ("FRR 60"), suggesting companies provide additionaldisclosure and commentary on their most critical accounting policies. In FRR 60,the Commission has defined the most critical accounting policies as the onesthat are most important to the portrayal of a company's financial condition andoperating results, and require management to make its most difficult andsubjective judgments, often as a result of the need to make estimates of mattersthat are inherently uncertain. Based on this definition, the Registrant's mostcritical accounting policies include: (a) use of estimates in the preparation offinancial statements; (b) stock-based compensation arrangements; (c) revenuerecognition; and (d) long-lived assets. The methods, estimates and judgments theRegistrant uses in applying these most critical accounting policies have asignificant impact on the results the company reports in its financialstatements.

(a) Use of Estimates in the Preparation of Financial Statements.

The preparation of these financial statements requires the Registrantto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, the Registrant evaluates these estimates,including those related to revenue recognition and concentration of credit risk.The Registrant bases its estimates on historical experience and on various otherassumptions that is believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

(b) Stock-based Compensation Arrangements.

The Registrant intends to issue shares of common stock to variousindividuals and entities for management, legal, consulting and marketingservices. These issuances will be valued at the fair market value of the serviceprovided and the number of shares issued is determined, based upon the openmarket closing price of common stock as of the date of each respectivetransaction. These transactions will be reflected as a component of selling,general and administrative expenses in the accompanying statement of operations.

The Registrant recognizes revenue when products are shipped or servicesprovided to its customers. Provisions for discounts and other adjustments areprovided for in the same period the related sales are recorded.

Processing fee revenue is earned based upon the actual number oftransactions processed through its processing system. Transaction processingfees are recognized in the period that the service is performed. These fees arecharged on a per transaction basis, depending on the arrangement with thecustomer. Prebilling for estimated number of transactions processed in thefuture periods was classified as deferred revenue.

(d) Long-lived Assets.

Long-lived assets to be held and used are analyzed for impairmentwhenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. The Registrant evaluates at each balance sheetdate whether events and circumstances have occurred that indicate possibleimpairment. If there are indications of impairment, the Registrant uses futureundiscounted cash flows of the related asset or asset grouping over theremaining life in measuring whether the assets are recoverable. In the eventsuch cash flows are not expected to be sufficient to recover the recorded assetvalues, the assets are written down to their estimated fair value. Long-livedassets to be disposed of are reported at the lower of carrying amount or fairvalue of asset less the cost to sell.