The following discussion and analysis of our financial condition and results of operations is based upon, and should be read in conjunction with, our audited consolidated financial statements and related notes included elsewhere in this Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States.
Overview
The electronic payment transaction industry is composed of debit and credit card issuers, switch interchanges, transaction acquirers and transaction generators, including Automated Teller Machine networks, retail merchant locations and the Internet. The routing, control and settlement of electronic payments is a complex activity due to the large number of locations and variety of sources from
which transactions can be generated, the large number of issuers in the market, high transaction volumes, geographically dispersed networks, differing types of authorization and varied reporting requirements. These activities must be conducted 24 hours a day, seven days a week.
Our products and services are primarily focused on facilitating electronic card transactions. These products and services are used principally by financial institutions, retailers, and payment processors, both in domestic and international markets.
We intend to increase revenue from our core payment processing products, which include: (1) Authorization: transaction fees derived from processing point of sale terminal transactions; (2) Dynamic Currency Conversion support services: we will provide support for transaction gateway services and settlement of credit card transactions utilizing dynamic currency conversion to merchants and participating banking institutions; (3) Consulting and Software Development Fees: consulting services and customized software development provided to financial institutions and merchants and fees earned by PLC; (4) Sale of Point of Sale solutions: sales of point of sale terminals; and (5) Private Label Cards: transaction management services provided for a private label card issuer. Our revenue for the year ended June 30, 2008 was primarily generated from transaction fees, sales of point of sale terminals through our Finland operations and consulting fees through PLC, as well as through customized software development fees.
Effective November 2006, the Company has acquired 50% of the outstanding capital stock of Project Life Cycle Partners, Ltd. ("PLC"), a technology consulting firm located in Dublin, Ireland. PLC is a niche project consulting firm specializing in the management and implementation of information systems projects. PLC has international experience within the financial services and telecommunication sectors.
Due to our systems upgrade in December 2003 to the latest Hewlett-Packard NonStop servers and BASE24 e-payment processing software, we do not anticipate the need for any similar significant systems upgrades within the next 12 months. However, we are continuously reviewing our product and service offering to ensure we maintain our competitive position in our target markets.
Our business is continually evolving. Market conditions may require us to react quickly to problems and opportunities as they arise, and we may incur costs that we do not currently anticipate. Our business strategy to maximize growth and shareholder value may include future strategic acquisitions where we believe such acquisitions will help us quickly move forward in achieving our goals.
Management believes that our primary short and medium-term growth opportunities will be derived form the European marketplace and a significant portion of our resources, both financial and personnel, will be directed towards developing those opportunities. We believe that our anticipated growth and ultimate profitability will depend in large part on the ability to promote our services, gain clients and expand our relationship with current clients. Accordingly, we intend to invest in marketing, strategic relationships, and development of our client base.
Results of Operations
Revenue
Transaction processing and related revenue
Transaction processing and related revenue was $2,076,309 for the year ended June 30, 2008, compared to $1,945,512 during the prior year, an increase of $130,797 or approximately 7%. The Company process a total of 19,019,055 transactions during the year ended June 30, 2008, a decrease of 414,944 compared to 19,443,999 transactions processed during the prior year. The primary reason for this was the loss of one customer but we expect to increase the number of transactions processed throughout fiscal 2009 as we continue to expand our customer base.
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Consulting services revenue
Consulting services revenue was $2,904,708 for the year ended June 30, 2008, compared to $1,349,963 during the prior year, an increase of $1,554,745 or approximately 115%. Consulting services revenue is primarily generated by the Company's subsidiary PLC. The Company consolidated the results of PLC effective November 21, 2006. We expect to report increased revenue from consulting services in the fiscal year ending June 30, 2009.
Hardware sales and related revenue
Hardware sales and related revenue was $1,278,690 during the year ended June 30, 2008, compared to $484,860 during the prior year, an increase of $793,830 or approximately 164%. The Company began selling processing terminals and related equipment in
December 2006. We expect to report increased hardware and related sales in the year ending June 30, 2008 as we not only increase actual hardware sales to our expanding customer base, but began to recognize revenue from annual maintenance fees and service initiation fees, which we began to recognize at June 30, 2007.
For the reasons above, total revenue for the year ended June 30, 2008 was $6,259,707 compared to $3,780,335 for the year ended June 30, 2007, an increase of $2,479,372 or approximately 66%.
We expect revenue levels to increase throughout the next twelve months as we continue to increase our client base and introduce service offerings, such as EMV transaction processing, dynamic currency conversion, sales of point of sale terminals and consulting fees. However, there can be no guarantee that our products will be accepted in the marketplace or that its sales efforts will be successful.
All of our revenue for the year ended June 30, 2008 has been derived from a limited number of its customers, primarily Finnish customers for its transaction processing products. Approximately 55% of our total revenue was attributable to our ten largest customers. The future loss of any major customer could have a material adverse effect on our business, financial condition and results of operations. We believe that this customer concentration will continue for much of fiscal 2008. We believe that this customer concentration will be diluted in the latter half of fiscal 2009 as we pursues operations outside of Finland. All of our revenues for the twelve months ended June 30, 2008 have been generated by our operations outside of the United States, and our future growth rate is, in part, dependent on continued growth in international markets. We expect this trend to continue through fiscal year 2009.
Cost of Revenue
Cost of transaction processing and related revenue
Cost of transaction processing and related revenue was $2,313,929 for the year ended June 30, 2008, compared to $2,330,561 for the prior year ended June 30, 2007, a decrease of $16,632 or approximately 1%. The reason for the decrease is the impairment charge for our software that we recorded during the year ended June 30, 2008. We no longer charge the amortization of software or software licenses to cost of goods sold. We expense all costs associated with maintaining, and many of the costs of improving, our processing and customer support capabilities. These costs do not always change in direct relation to sales, and in fact often increase in advance of any potential increase in sales which they may support.
Cost of consulting services
Cost of consulting services revenue was $2,146,766 for the year ended June 30, 2008, compared to $816,122 for the prior year ended June 30, 2007. an increase of $1,330,644 or approximately 163%. Consulting services revenue is primarily generated by our subsidiary company PLC Partners, Ltd. We began to consolidate the results of PLC Partners, Ltd. effective November 21, 2006.
Cost of hardware and related revenue
Cost of hardware and related revenue was $834,950 during the year ended June 30, 2008, compared to $589,472 during the prior year, an increase of $245,478 or approximately 42%. The Company began selling processing terminals and related equipment in December 2006. Included in cost of hardware revenue are terminals shipped to customers as test and demonstration units, as well as items replaced or returned.
For the reasons above, total cost of revenue was $5,295,645 for the year ended June 30, 2008, compared to $3,736,155 for the year ended June 30, 2007, an increase of $1,559,490 or approximately 42%.
We expect cost of revenue to increase in the coming year as we continue our current trend of increasing sales and expanding our product offering. As our service offerings and business mix changes, gross margin as a percent of sales may not remain constant.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were $19,737,217 for the year ended June 30, 2008 compared to $16,251,713 for the year ended June 30, 2007, an increase of $3,485,504 or approximately 21%. The primary components of selling, general, and administrative expenses for the year ended June 30, 2008 were:
consulting fees of $9,427,248 to service providers for financial consulting and other professional services; $9,063,697 of this amount consists of non-cash compensation in the form of stock, stock options, and warrants. Other components of selling, general, and administrative expenses for fiscal year 2008 included payroll and related costs of $7,509,789; $2,632,088 of this amount consists of non-cash compensation to management and employees in the form of stock and stock options; facilities expense (rent, telephone, utilities, and maintenance) of $1,160,657; travel and entertainment costs of $508,072; legal and accounting fees of $343,802; depreciation and amortization of $807,047; investor relations of $18,200; $44,526 for recruiting, $56,082 for freight and delivery, $120,872 for advertising and marketing, and $24,810 for repair and maintenance.
The amount of future selling, general, and administrative expenses will largely depend on the pace of our growth in the market for payment processing products and upon the cost of outside services and professional fees, including legal fees relating to litigation and acquisitions. We fully expect these costs to increase as we continues our expected rollout of product offerings. We also intend to continue to build out our infrastructure, which may include adding support staff and branch offices. Selling expenses may also continue to increase due to increased focus on obtaining new customers. We intends to focus additional resources in the areas of sales personnel salaries, trade show participation, and other promotional expenses. In addition, we may pursue further acquisitions in order to facilitate our growth and exploit market opportunities, which would further drive up legal and accounting fees, payroll, and travel costs.
Impairment of Software
Cost of impairment of software was $4,086,502 for the year ended June 30, 2008 representing the cost of capitalized software and software licenses. There was no such charge during the year ended June 30, 2007.
Additional Cost of Acquisition
During the year ended June 30, 2008, the Company issued an additional 1,111,110 shares of common stock with a fair value of $192,555 pursuant to the terms of the acquisition of PLC Partners, Ltd. There was no such charge during the year ended June 30, 2007.
Interest Expense
Interest income (expense) net was ($47,374) for the year ended June 30, 2008, compared to ($3,018) for the year ended June 30, 2007, an increase of ($44,356) or approximately 1470%. The increase is due primarily to interest cost associated with vendor financing.
Currently, we are utilizing equity financing partly in order to avoid the interest charges associated with debt financing. Accordingly, we do not expect interest expense to materially increase in the coming year. There can be no guarantee that this will be the case, however, as the market for our common stock could change, forcing us to pursue alternative methods of financing our cash needs. In addition, we could receive an offer of attractive debt financing or could undertake additional financing with regard to an acquisition, in which cases interest expense would significantly increase.
Minority Interest in Net Income of Subsidiary
The Company recorded the minority interest in the net income of its subsidiary PLC Partners, Ltd. of $39,855 during the year ended June 30, 2008, compared to $62,991 during the year ended June 30, 2007, a decrease of $23,136 or approximately 37%.
Net Loss
For the reasons stated above, we recorded a net loss of $23,150,901 for the year ended June 30, 2008 compared to $16,305,197 for the year ended June 30, 2007, an increase of $6,845,704 or approximately 42%.
We may continue to incur losses on both a quarterly and annual basis. In addition, we expect to continue to incur significant costs of services and substantial operating expenses. Therefore, we will need to significantly increase revenues to achieve profitability and a positive cash flow. We may not be able to generate sufficient revenues to achieve profitability. We expect losses to continue for at least the next twelve months.
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Commitments
Our total commitments under non-cancelable operating leases at June 30, 2008 are as follows:
| Years ending June 30, |
|
|
|
 |
|
| 2009 |
$ |
427,488 |
| 2010 |
$ |
407,907 |
| 2011 |
$ |
362,359 |
| 2012 |
$ |
138,909 |
| 2013 |
$ |
-- |
| Total |
$ |
1,336,663 |
|
|
|
Operating Activities
The net cash used in operating activities was $3,713,921 for the year ended June 30, 2008 compared to $5,686,036 for the year ended June 30, 2007, an decrease of $1,972,115 or approximately 35%. The primary reason for the decrease in cash used in operating activities was a change in the components of working capital, which had the effect of reducing cash outflow: current assets (other than cash) decreased by $326,587, and current liabilities increased by $1,899,986. The primary components of cash used in operating activities during the current period are the net loss of ($23,150,901), partially offset by the non-cash charges of non-cash compensation of $11,695,785; depreciation and amortization of $807,047; impairment of intangible assets of $4,086,502; and bad debt expense of $51,203.
Investing Activities
Net cash used in investing activities was $470,589 during the year ended June 30, 2008 compared to $1,289,457 for the year ended June 30, 2007, a decrease of $818,868 or approximately 64%. This decrease was primarily due to lower costs related to software enhancement of our transaction processing system, and lower acquisition-related costs of PLC Partners, LLC.
Financing Activities
Net cash provided by financing activities was $4,694,474 for the year ended June 30, 2008, compared to $4,353,061 for the year ended June 30, 2007, an increase of $341,413 or approximately 8%. The reason for the increase was due to increased costs associated with expanding our customer base .
Liquidity and Capital Resources
As of June 30, 2008, we had total current assets of $2,140,258 and total current liabilities of $4,665,496, resulting in a working capital deficiency of $(2,525,238). We had cash and cash equivalents of $692,802 at June 30, 2008, and an accumulated deficit of $97,569,812.
The independent auditors report on our June 30, 2008 financial statements included in this Form 10-K states that our difficulty in generating sufficient cash flow to meet our obligations and sustain operations raise substantial doubts about the our ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, our ability to continue as a going concern will be dependent upon our ability to generate sufficient cash flow from operations to meet our obligations on a timely basis, to obtain additional financing, and ultimately attain profitability.
Recent Financings
In the past, we have been successful in obtaining cash resources through private placements and the exercise of options. Financing activities provided cash of $4,694,474 during the year ended June 30, 2008 compared to $4,353,061 for the year ended June 30, 2007, an increase of $341,413 or approximately 8%.
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Prior Financing
On January 27, 2006, the Company signed subscription agreements with a group of offshore investors for the sale of an aggregate of $9.2 million in Company common stock, plus warrants (the "January Financing"). Due to the failure of the investment group to timely fund in full the first payment required for the purchase of shares and warrants, the Company terminated the January Financing; all shares and warrants issued thereunder were returned by the escrow holder to the Company for cancellation, and any funds received pursuant to the January Financing were returned by the escrow holder to the investors.
In March 2006, a group of European investors (collectively, the "March Investors"), lead by Olympia Holding AS, informed the Company that they were willing to invest on the same terms and conditions that were negotiated for the now-terminated January Financing, and the Company agreed to this financing transaction with the March Investors (the "March Financing").
Pursuant to the March Financing, the Company agreed to issue 46 million shares of restricted common stock under Regulation S at $0.20 per share, plus warrants to purchase 50 million shares of common stock with two-year exercise periods and strike prices ranging from $1.50 to $8.50, as set forth below. The shares which will be held in escrow by Carl Hessel ("Escrow Holder"), a director and major stockholder of the Company based in Geneva, Switzerland, along with the warrants. Pursuant to the terms of the March Financing, the first payment of $4.6 million is due immediately, with a second payment of $4.6 million due within three months thereafter.
As of June 30, 2008, the Company had received cash in the net amount $8,134,924 pursuant to the March Financing, and had issued 45,850,000 shares of common stock and warrants to purchase an additional 49,836,957 shares. Warrants to purchase 24,836,957 shares expired on March 31, 2008, and warrants to purchase 25,000,000 shares remain outstanding at June 30, 2008, as detailed in the table below.
The Company also issued to consultants 4,600,000 shares of unregistered common stock and warrants to purchase an additional 13,000,000 shares of common stock at a price of $0.20 per share as a commission for work performed on the March Financing. These warrants to purchase 13,000,000 shares expired on March 31, 2008.
The warrants to be issued pursuant to the investors in the March Financing are as follows:
|
Exercise Price
Per Share |
Total Number
Issued |
Expired |
Outstanding
at June 30, 2008 |
|
|
|
|
|
| $ |
1.50 |
13,954,348 |
(6,954,348) |
7,000,000 |
| $ |
2.50 |
10,964,130 |
(5,464,130) |
5,500,000 |
| $ |
4.50 |
6,977,174 |
(3,477,174) |
3,500,000 |
| $ |
5.50 |
6,977,174 |
(3,477,174) |
3,500,000 |
| $ |
6.50 |
6,977,174 |
(3,477,174) |
3,500,000 |
| $ |
8.50 |
3,986,957 |
(1,986,957) |
2,000,000 |
|
|
|
|
|
|
|
49,836,957 |
(24,836,957) |
25,000,000 |
All warrants have a two-year exercise period from the date of issuance of the warrants. No registration rights were granted to the Investors in connection with the March Financing and the shares and warrants issued in the March Financing will be restricted securities, subject to the applicable restrictions set forth in Regulation S promulgated under the Securities Act of 1933, as amended.
PLC Acquisition
Effective November 21, 2006, the Company has acquired 50% of the outstanding capital stock of Project Life Cycle Partners, Ltd. ("PLC"), a technology consulting firm located in Dublin, Ireland. Total consideration for the transaction was $1,000,000, consisting of $200,000 cash and 2,222,220 shares of the Company's common stock, valued at $0.36 per share based upon a 30-day average closing price per share. In accordance with the PLC purchase agreement, the Company issued an additional 1,111,110 shares since the 30-day average closing price per share of the Company's stock was less than $0.36 on the on-year anniversary of the PLC acquisition. No additional shares or earn-outs are required to be paid for the PLC acquisition.
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Additional Financing Required
Management plans to continue raising additional capital through a variety of fund raising methods during fiscal 2009 and to pursue all available financing alternatives in this regard. Management may also consider a variety of potential partnership or strategic alliances to strengthen its financial position. Although we have been successful in the past in raising capital, no assurance can be given that these sources of financing will continue to be available to us and/or that demand for our equity/debt instruments will be sufficient to meet our capital needs, or that financing will be available on terms favorable to us. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern.
If funding is insufficient at any time in the future, we may not be able to take advantage of business opportunities or respond to competitive pressures, or may be required to reduce the scope of our planned product development and marketing efforts, any of which could have a negative impact on our business and operating results. In addition, insufficient funding may have a material adverse effect on our financial condition, which could require us to:
-curtail operations significantly;
-sell significant assets;
-seek arrangements with strategic partners or other parties that may require us to relinquish significant rights to products, technologies or markets; or
-explore other strategic alternatives including a merger or sale;
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our cash assets prove to be inadequate to meet our operational needs, we may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to existing shareholders.
Certain Indebtedness
Paul Egan and Ciaran Egan have delayed payment of a portion of their salary in order to conserve our cash. At June 30, 2008, $317,385 and $147,123 of accrued salaries were owed to Paul Egan and Ciaran Egan, respectively. At June 30, 2007, $49,901 and $81,649 of accrued salaries were owed to Paul Egan and Ciaran Egan, respectively.
Paul Egan has also advanced the funds to the Company. These advances accrue interest at the rate of 7% per annum. At June 30, 2008, the Company owned the amount of $217,613 to Paul Egan for advances, plus $9,179 of accrued interest.
Pursuant to Paul Egan's and Ciaran Egan's employment agreements, the Company provides the officers a car allowance. These allowance have not been paid during the year ended June 30, 2008. At June 30, 2008, the Company has accrued the amount of $30,786 to Paul Egan and $30,786 to Ciaran Egan for car allowances.
Exchange Rates
Our operations are principally conducted in Finland through our subsidiary Rahaxi, which operates in its local currency, the Euro. We also have operations in the Dominican Republic under the name ePayLatina S.A., and Freestar Dominicana, Inc. operating in its local currency, the Dominican Republic Peso. All assets and liabilities are translated at exchange rates in effect at the end of the year. Accounts for consolidated statements of operations are translated at weighted average rates for the year. Gains and losses from translation of foreign currency into U.S. dollars are included in other comprehensive income (loss). The accumulated foreign currency translation adjustment was $108,352 for the year ended June 30, 2008.
A significant portion of our revenues and expenses is denominated in currencies other than U.S. dollars; Rahaxi generates its revenue in Euros. Any significant change in exchange rates may have a favorable or negative effect on both our revenues and operational costs. In particular, the value of the U.S. dollar to the Euro impacts our operating results. Our expenses are not necessarily incurred in the currency in which revenue is generated, and, as a result, we are required from time to time to convert currencies to meet our obligations. In addition, a significant portion of our financial statements are prepared in Euro and translated to U.S. dollars for consolidation.
Inflation
The impact of inflation on our costs, and the ability to pass on cost increases to our customers over time is dependent upon market conditions. We are not aware of any inflationary pressures that have had any significant impact on our operations over the past fiscal year, and we do not anticipate that inflationary factors will have a significant impact on future operations.
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Off-Balance Sheet Arrangements
We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.
Other
We do not provide post-retirement or post-employment benefits requiring charges under Statements of Financial Accounting Standards No. 106 and No. 112.
Critical Accounting Policies
The SEC has issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the Commission has defined the most critical . . .
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17/ 10 / 2008
