UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
Commission file number 0-28572. | |
| OPTIMAL GROUP INC. | |
| (Exact name of registrant as specified in its charter) | |
| Canada | 98-0160833 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 3500 de Maisonneuve Blvd. West, Suite 800, | (514) 738-8885 |
| Montreal, Quebec, Canada, H3Z 3C1 | |
| (Address of principal executive offices and postal code) | (Registrant telephone number, including area code) |
| 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 x No o |
| Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 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 (Check one): | |
Large Accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
| (Do not check if a smaller reporting company) | |||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). | Yes o No x |
| At May 17, 2010 the registrant had 5,148,735 common shares designated as Class “A” shares (without nominal or par value) outstanding. | |
OPTIMAL GROUP INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Financial Statements of
(Unaudited)
OPTIMAL GROUP INC.
Three months ended March 31, 2010 and 2009
(expressed in U.S. dollars)
2
OPTIMAL GROUP INC.
Condensed Consolidated Financial Statements
Three months ended March 31, 2010 and 2009
(expressed in U.S. dollars)
| Financial Statements | ||
| 4 | ||
| 5 | ||
| 6 | ||
| 7 | ||
| 8 |
OPTIMAL GROUP INC.
| Condensed Consolidated Balance Sheets | ||||||||
| March 31, 2010 and December 31, 2009 | ||||||||
| (expressed in thousands of U.S. dollars) | ||||||||
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 15,449 | $ | 19,915 | ||||
| Accounts and other receivables (net of allowance for doubtful accounts of $461; 2009 - $369) | 4,538 | 14,573 | ||||||
| Inventories | 9,505 | 12,813 | ||||||
| Prepaid expenses and deposits | 1,549 | 1,802 | ||||||
| Current assets related to discontinued operations | 987 | 1,156 | ||||||
| 32,028 | 50,259 | |||||||
| Balance of sale receivable | 3,392 | 3,500 | ||||||
| Property and equipment | 3,310 | 3,512 | ||||||
| Intangible assets | 17,713 | 18,821 | ||||||
| $ | 56,443 | $ | 76,092 | |||||
Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Bank indebtedness | $ | 6,788 | $ | 8,848 | ||||
| Accounts payable and accrued liabilities | 22,475 | 30,575 | ||||||
| Accounts payable and accrued liabilities related to discontinued operations | 4,013 | 4,263 | ||||||
| Income taxes payable | 1,625 | 1,063 | ||||||
| 34,901 | 44,749 | |||||||
| Deferred income taxes | 6,546 | 6,298 | ||||||
| Long-term debt | 3,081 | 3,319 | ||||||
| Shareholders' equity: | ||||||||
| Share capital | 252,488 | 252,488 | ||||||
| Warrants | 2,696 | 2,696 | ||||||
| Additional paid-in capital | 65,746 | 65,746 | ||||||
| Deficit | (305,998 | ) | (296,187 | ) | ||||
| Accumulated other comprehensive loss | (3,017 | ) | (3,017 | ) | ||||
| 11,915 | 21,726 | |||||||
| Contingencies and guarantees (note 9) | ||||||||
| Basis of presentation and going concern (note 1) | ||||||||
| $ | 56,443 | $ | 76,092 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
OPTIMAL GROUP INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
Three months ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except per share amounts)
| 2010 | 2009 | |||||||
| Revenues | $ | 7,187 | $ | 2,129 | ||||
| Other revenues (note 11 (d)) | 568 | 797 | ||||||
| Expenses: | ||||||||
| Cost of sales | 5,868 | 1,462 | ||||||
| Selling, general and administrative, excluding amortization and stock-based compensation | 9,017 | 8,503 | ||||||
| Stock-based compensation pertaining to selling, general and administrative | – | 1,457 | ||||||
| Research and development | 452 | 659 | ||||||
| Operating leases | 441 | 430 | ||||||
| Amortization (note 11 (f)) | 2,126 | 3,325 | ||||||
| Loss from continuing operations before undernoted item | (10,149 | ) | (12,910 | ) | ||||
| Investment income | 314 | 245 | ||||||
| Loss from continuing operations before income tax | (9,835 | ) | (12,665 | ) | ||||
| Income tax expense | – | 127 | ||||||
| Net loss from continuing operations | (9,835 | ) | (12,792 | ) | ||||
| Net earnings from discontinued operations, net of income taxes (note 3) | 24 | 357 | ||||||
| Net loss and comprehensive loss | $ | (9,811 | ) | $ | (12,435 | ) | ||
| Weighted average number of shares: | ||||||||
| Basic and diluted | 5,148,735 | 5,148,445 | ||||||
| (Loss) earnings per share: | ||||||||
| Continuing operations: | ||||||||
| Basic and diluted | (1.91 | ) | (2.48 | ) | ||||
| Discontinued operations: | ||||||||
| Basic and diluted | – | 0.07 | ||||||
| Net: | ||||||||
| Basic and diluted | (1.91 | ) | (2.41 | ) | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
OPTIMAL GROUP INC. |
| Condensed Consolidated Statements of Shareholders’ Equity |
| (Unaudited) |
| Three months ended March 31, 2010 and 2009 |
| (expressed in thousands of U.S. dollars) |
Class "A" shares | Addi- tional paid-in | Accu- mulated other compre- hensive | ||||||||||||||||||||||||||
| Number | Dollars | Warrants | capital | Deficit | loss | Total | ||||||||||||||||||||||
| Balance, December 31, 2009 | 5,148,735 | $ | 252,488 | $ | 2,696 | $ | 65,746 | $ | (296,187 | ) | $ | (3,017 | ) | $ | 21,726 | |||||||||||||
| Net loss | – | – | – | – | (9,811 | ) | – | (9,811 | ) | |||||||||||||||||||
| Balance, March 31, 2010 | 5,148,735 | $ | 252,488 | $ | 2,696 | $ | 65,746 | $ | (305,998 | ) | $ | (3,017 | ) | $ | 11,915 | |||||||||||||
| Balance, December 31, 2008 | 5,148,445 | $ | 252,488 | $ | 2,696 | $ | 64,173 | $ | (222,849 | ) | $ | (3,017 | ) | $ | 93,491 | |||||||||||||
| Stock-based compensation | – | – | – | 1,457 | – | – | 1,457 | |||||||||||||||||||||
| Net loss | – | – | – | – | (12,435 | ) | – | (12,435 | ) | |||||||||||||||||||
| Balance, March 31, 2009 | 5,148,445 | $ | 252,488 | $ | 2,696 | $ | 65,630 | $ | (235,284 | ) | $ | (3,017 | ) | $ | 82,513 | |||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
OPTIMAL GROUP INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars)
| 2010 | 2009 | |||||||
| Cash flows (used in) from operating activities: | ||||||||
| Net loss | $ | (9,811 | ) | $ | (12,435 | ) | ||
| Add earnings from discontinued operations | (24 | ) | (357 | ) | ||||
| Net loss from continuing operations | (9,835 | ) | (12,792 | ) | ||||
| Adjustments for items not affecting cash: | ||||||||
| Amortization | 2,126 | 3,325 | ||||||
| Deferred income taxes | 248 | (211 | ) | |||||
| Stock-based compensation | – | 1,457 | ||||||
| Foreign exchange | (507 | ) | (346 | ) | ||||
| Net change in operating assets and liabilities (note 11 (a)) | 5,462 | 4,913 | ||||||
| Operating cash flows used in discontinued operations | (55 | ) | (441 | ) | ||||
| (2,561 | ) | (4,095 | ) | |||||
| Cash flows (used in) from financing activities: | ||||||||
| Decrease in bank indebtedness | (1,709 | ) | (4,105 | ) | ||||
| Repayment of long-term debt | (42 | ) | (40 | ) | ||||
| (1,751 | ) | (4,145 | ) | |||||
| Cash flows (used in) from investing activities: | ||||||||
| Purchase of property, equipment and intangible assets | (219 | ) | (451 | ) | ||||
| Net proceeds from maturity of short-term investments | — | 6,296 | ||||||
| Proceeds from disposition of payment processing businesses | — | 1,035 | ||||||
| Proceeds from balance of sale receivable | 108 | 106 | ||||||
| Transaction costs related to business acquisitions and disposals | — | (58 | ) | |||||
| (111 | ) | 6,928 | ||||||
| Effect of exchange rate changes on cash and cash equivalents during the period | (43 | ) | (219 | ) | ||||
| Net decrease in cash and cash equivalents | (4,466 | ) | (1,531 | ) | ||||
| Cash and cash equivalents, beginning of period | 19,915 | 32,849 | ||||||
| Cash and cash equivalents, end of period | $ | 15,449 | $ | 31,318 | ||||
Supplemental cash flow information (note 11)
See accompanying notes to unaudited condensed consolidated financial statements.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 1. | Basis of presentation and going concern: |
These condensed consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary to present a fair statement of the results of the interim periods. With the exception of changes referred to in note 2, these interim condensed consolidated financial statements follow the same accounting policies and methods of their application as described in note 4 and note 25 to the annual audited consolidated financial statements for the year ended December 31, 2009. The interim condensed consolidated financial statements do not include all disclosures required for annual financial statements and should be read in conjunction with the most recent annual audited consolidated financial statements of Optimal Group Inc. (the "Company") as at and for the year ended December 31, 2009.
The accompanying condensed consolidated financial statements have been prepared on a going-concern basis in accordance with U.S. GAAP. The going-concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The Company incurred a net loss from continuing operations of $67,750 for the year ended December 31, 2009 and $9,835 for the quarter ended March 31, 2010 and a net cash outflows from operating activities excluding discontinued operations of $19,794 for the year ended December 31, 2009 and $2,506 for the quarter ended March 31, 2010. The recent banking and financial crisis and the global economic recession have created an extremely challenging retail and economic environment in the United States, Canada and Europe, which has negatively impacted the Company’s operating performance and potentially that of our customers and suppliers. The Company’s ability to continue as a going concern depends on the success of management’s plans to overcome these conditions, ultimately achieve positive cash flows from operations and b ecome profitable.
The Company currently funds the majority of its operations from its cash and cash equivalents and bank indebtedness. The majority of its bank indebtedness is based on qualifying accounts receivable and is otherwise not fully available to be drawn on during seasonal low sales periods due to the lack of accounts receivable available at the time. The Company has been unable to secure any new significant sources of financing not secured by accounts receivable which will be required during low seasonal sales periods of the year. The Company’s balance of cash and cash equivalents generally decreases during the second and third quarters of the year, as cash is used to fund product development and production, and increases in the fourth and first quarters in connection with the shipping and collection periods. During the first quarter o f 2010, the cash and cash equivalents decreased which is contrary to the usual trend for a first quarter.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 1. | Basis of presentation and going concern (continued): |
If operating performance continues its current trend, the Company will require financing in order to meet its cash flow requirements and fund its operations especially during the second and third quarters of 2010. However, additional financing may not be available in amounts or on terms that are acceptable to the Company. Without financing, the Company may be unable to fund product development and the production of inventory required for sales in the third and fourth quarters and therefore will not be able to capitalize on potential future sales. Refer to note 15, for the details of a take-over bid to purchase the Company's outstanding shares, which is being supported by the Company. If the Company is unable to obtain additional financing in the near term, it may be required to curtail operations in order to offset the lack of availab le funding, which could have a material adverse impact on the Company, and, consequently, there is a substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these condensed consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. The appropriateness of the going concern basis is dependent upon, among other things, future profitable operations, the ability to negotiate new sources of financing, and the ability to generate sufficient cash from operations and financing arrangements to meet its obligations.
The results of certain payment processing portfolios which were sold in 2009 are presented separately under discontinued operations in the condensed consolidated statements of operations and comprehensive loss for the current and prior periods. The balance sheet also presents the assets and liabilities related to the discontinued operations separately at the end of the current period and the prior year.
The effect of the takeover transaction as described in note 15 on the Company's financial position and future cash flows was not considered in the preparation of the condensed consolidated financial statements for the period ended March 31, 2010.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 2. | Changes in accounting policies: |
| (a) | New accounting policies: |
Effective January 1, 2010, the Company adopted the Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets, which was primarily codified into FASB ASC Topic 860, Transfers and Servicing. SFAS No. 166 amends SFAS No. 140, Accounting for the Transfers and Servicing of Financial Assets and the Extinguishments of Liabilities, and seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets; the effects of the transfer on its financial position, financial performance, and cash flows; and a transferor’ s continuing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
| 3. | Business disposals: |
Sale of Payment Processing Portfolios:
On February 2, 2009, the Company entered into an agreement with a buyer, giving the Company the right to cause the buyer to purchase, and giving the buyer the right to cause the Company to sell, a portfolio of residual payments from merchants processing credit card-present transactions. In substance, the transaction represented the sale of a portfolio of residual payments from merchants processing credit card-present transactions for proceeds of approximately $11,000.
The aggregate amount of monthly residuals earned on the portfolio, net of a service fee, will be set off against and will reduce the balance of sale receivable. The agreement established that the calculation be based on the results of this portfolio from November 2008 onwards. The adjustment of $1,077 for the amount earned between November 2008 to the transaction date is reflected as a reduction to the proceeds. The discounted balance of sale receivable is increased monthly by a rate of interest of 1 % per month. The interest income earned on the balance of sale receivable is included in other income on the condensed consolidated statement of operations and comprehensive loss. The Company's right to cause the buyer to purchase (to effectively settle the balance of sale) may be exercised any time on or after February 2, 2011. The buyer's right to cause the Company to sell the portfolio (to effectively settle the balance of sale) may be exercised at any time up to December 31, 2014. Under the terms of this agreement, the Company has also received a warrant, exercisable for a nominal consideration, giving the Company the right to acquire treasury shares, representing up to 3.5% of the outstanding shares of the purchaser, if the purchase price is not settled prior to specified dates.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 3. | Business disposals (continued): |
During fiscal 2009, the monthly residuals earned on the underlying portfolio, which are applied to the balance of sale receivable, decreased significantly compared to amounts initially forecasted. During the fourth quarter of 2009, the Company concluded that the asset was impaired and, based on the present value of estimated future cash flows, recorded a provision of $6,504 to write down the receivable to its estimated recoverable amount of $3,500. If the monthly residuals earned on the underlying portfolio decrease significantly compared to the revised forecast, this asset could become further impaired in the near term.
Effective February 4, 2009, the Company sold a portfolio of merchant processing contracts and associated sales channel contracts for a cash consideration of approximately $1,035.
On October 31, 2009, the Company entered into an agreement to dispose of the contractual rights relating to a U.S. “card-present” portfolio of merchants forming part of its remaining payment processing business. Proceeds on sale comprised a total cash consideration of up to $300 payable on an earn-out basis over the two-year period following closing of the transaction, and the assumption of certain liabilities.
At March 31, 2010, the Company continues to operate one merchant portfolio that previously formed part of the payment processing segment.
The results of operations for these disposed businesses are included in discontinued operations in the condensed consolidated statements of operations and comprehensive loss, and the remaining assets and liabilities of these segments are classified as discontinued in the consolidated balance sheets.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 3. | Business disposals (continued): |
Sale of Payment Processing Portfolios (continued):
The following table summarizes the book value of the assets and liabilities relating to the businesses sold during fiscal 2009:
March 31, 2009 | ||||
| Current assets: | ||||
| Accounts receivable | $ | 160 | ||
| Inventories | 74 | |||
| 234 | ||||
| Long-term assets: | ||||
| Property and equipment | 72 | |||
| Intangible assets | 11,286 | |||
| 11,358 | ||||
| Net assets sold | 11,592 | |||
| Proceeds from sale, net of transaction cost of $58 and adjustments of $1,019 | 10,958 | |||
| Net loss on sale of net assets | $ | (634 | ) | |
The summarized results of operations of the businesses disposed of are as follows:
March 31, 2010 | March 31, 2009 | |||||||
| Revenues | $ | – | $ | 1,507 | ||||
| Loss before income tax | $ | (78 | ) | $ | (451 | ) | ||
| Net earnings from discontinued operations | $ | 24 | $ | 991 | ||||
| Net loss on sale of net assets | – | (634 | ) | |||||
| Net earnings from discontinued operations | $ | 24 | $ | 357 | ||||
The results of operations include management assumptions and adjustments related to cost allocations, which are inherently subjective.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 4. | Inventories: |
March 31, 2010 | December 31, 2009 | |||||||
| Raw materials | $ | 2,763 | $ | 2,763 | ||||
| Finished goods | 6,742 | 10,050 | ||||||
| $ | 9,505 | $ | 12,813 | |||||
| 5. | Intangible assets: |
| March 31, 2010 | ||||||||||||
Gross carrying | Accumulated | Net book | ||||||||||
| amount | amortization | value | ||||||||||
| Customer relations | $ | 23,228 | $ | 11,471 | $ | 11,757 | ||||||
| ISO/ISA relations | 5,608 | 4,253 | 1,355 | |||||||||
| Tradename | 11,459 | 6,858 | 4,601 | |||||||||
| Other | 299 | 299 | – | |||||||||
| $ | 40,594 | $ | 22,881 | $ | 17,713 | |||||||
| December 31, 2009 | ||||||||||||
Gross carrying | Accumulated | Net book | ||||||||||
| amount | amortization | value | ||||||||||
| Customer relationships and service agreements | $ | 23,228 | $ | 10,944 | $ | 12,284 | ||||||
| ISO/ISA relations | 5,608 | 4,118 | 1,490 | |||||||||
| Tradename | 11,459 | 6,412 | 5,047 | |||||||||
| Other | 299 | 299 | – | |||||||||
| $ | 40,594 | $ | 21,773 | $ | 18,821 | |||||||
The banking and financial crisis and global recession has negatively impacted the Company’s operating performance (refer to Note 1). It is reasonably possible that the Company’s determination that these intangibles are not impaired could change in the near term should the Company’s operating performance deteriorate lower than forecasted.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 6. | Long-term debt: |
March 31, 2010 | December 31, 2009 | |||||||
| Loan payable to a selling shareholder, repayable in installments of $675 (EUR 500) per year beginning in 2011, maturing in 2014, bearing interest at 7% (EUR 2,000 (2009 - EUR 2,000)) | $ | 2,701 | $ | 2,863 | ||||
| Other loans, bearing interest at rates ranging from 5% to 7.55% (2009 - 5% to 7.9%) (EUR 406 (2009 - EUR 443)) | 549 | 635 | ||||||
| 3,250 | 3,498 | |||||||
| Less current portion (included in accounts payable and accrued liabilities) | 169 | 179 | ||||||
| Long-term debt | $ | 3,081 | $ | 3,319 | ||||
| 7. | Share capital: |
On August 7, 2009, the shareholders of the Company approved an amendment to the Articles of Continuance of the Company to consolidate all issued and outstanding Class "A" shares on the basis that each holder of a Class “A” share shall receive one (1) Class "A" share for every five (5) Class "A" shares so consolidated. The share consolidation became effective on August 26, 2009 upon filing of the Articles of Amendment and issuance of a Certificate of Amendment in respect thereof. As a result, the issued and outstanding Class "A" shares decreased from 25,742,223 Class "A" shares to 5,148,735 Class "A" shares, which include 290 shares required to satisfy the fractional share requirements. All share, stock option, EPS and warrant amounts have been retroactively adjusted for all periods presented.
On November 5, 2008, the Board of Directors renewed its stock buyback program authorizing the Company to purchase up to 5% of its outstanding Class "A" shares on the open market through the facilities of the Nasdaq Stock Market. The 2008 program expired on November 20, 2009 and has not been renewed. There were no shares repurchased during the three months ended March 31, 2009.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 8. | Stock options and warrants: |
| (a) | Optimal Group Inc.: |
The Company has various stock-based incentive plans for employees and directors. A description of the plans is provided in Note 15 to the 2009 annual audited consolidated financial statements. During the three months ended March 31, 2009, the Company cancelled 975,042 options under the plans. This cancellation resulted in an expense of $1,486 representing the remaining unrecognized stock-based compensation cost related to the cancelled options. All approvals required for these cancellations were obtained during the period.
Details of outstanding stock options are as follows:
| Number of options | Weighted average exercise price per share | |||||||
| Options outstanding December 31, 2009 | 27,400 | $ | 21.05 | |||||
| Expired | (200 | ) | 21.05 | |||||
| Options outstanding March 31, 2010 | 27,200 | $ | 21.05 | |||||
During the three-month period ended March 31, 2010 and 2009, no options were granted.
As at March 31, 2010, 27,200 (March 31, 2009 - 34,222) stock options were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
The remaining options have a weighted average remaining contractual life of 4.63 years, and all of these options were exercisable at March 31, 2010.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 8. | Stock options and warrants (continued): |
| (a) | Optimal Group Inc. (continued): |
At March 31, 2010, there are 164,000 warrants outstanding, exercisable at an exercise price of $27.80. These warrants expire in November 2014. All of these warrants could potentially dilute basic earnings per share in the future. All of these warrants were excluded from the calculation of diluted earnings per share because they were anti-dilutive for the three-month periods ended March 31, 2010 and 2009.
The intrinsic value of all options and warrants was nil as at March 31, 2010 and December 31, 2009.
| (b) | Terra Payments Inc.: |
All options under the Terra Payments Inc. plan expired in April 2009. At March 31, 2009, 5,136 stock options were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
| 9. | Contingencies and guarantees: |
| (a) | The Company is party to litigation arising in the normal course of operations. The Company does not expect the resolution of such matters to have a material adverse effect on its financial position or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of these legal matters or should several legal matters be resolved against the Company in the same reporting period, the consolidated operating results of a particular reporting period could be materially adversely affected. |
| (b) | In the sale or other disposition of assets out of the ordinary course of business, in addition to possible indemnification relating to failure to perform covenants and breach of representations and warranties, the Company might agree to indemnify the buyer against claims from its past conduct of its business. Typically, the term and amount of such indemnification will be limited by agreement. No provision has been made in these financial statements with respect to this item as the Company does not expect to make any payments for these items and the standby liability is nominal. |
| (c) | OGOP Payments Inc. (formerly Optimal Payments Inc.) has received a request for information from the U.S. Attorney’s Office in the Eastern District of New York pertaining to its former involvement in processing transactions for internet pharmacies. OGOP Payments Inc. has had discussions with that Office relating to those processing activities. No provision has been recorded by OGOP Payments Inc. for this matter because the outcome of these discussions and the amount of any loss, if any, are not determinable. |
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 9. | Contingencies and guarantees (continued): |
| (d) | In October 2009, the Company entered into a non-prosecution agreement with the U.S. Attorney's Office related to the Company's processing of settlement transactions from online gambling originating from United States customers. The Company ceased to process such transactions in 2006. Pursuant to the non-prosecution agreement and on the basis of advice received by management that a court would not enforce the Company's obligation to pay certain merchant reserve accounts payable balances, liabilities in the amount of $9,642 were derecognized (reversed) in the third quarter of fiscal 2009. Certain of these merchants may nevertheless initiate legal proceedings against the Company in an attempt to enforce payment of the liabilities that have been derecognized (reversed), which the Company would be forced to defend. The Company has not recorded any provision in relation to these potential proceedings because the amoun t of loss, if any, is not determinable. |
| (e) | The Company has granted a letter of guarantee, issued by highly rated financial institutions, to indemnify third parties in the event the Company does not perform its contractual obligations. As at March 31, 2010, and as at December 31, 2009, the maximum potential liability under this letter of guarantee was $110. |
As at March 31, 2010 and December 31, 2009, the Company recorded no liability with respect to this guarantee, as the Company does not expect to make any payment for the aforementioned items. Management believes that the fair value of the non-contingent obligations, to stand ready to perform in the event that specified triggering events or conditions occur, approximates the cost of obtaining the letter of guarantee.
| 10. | Income taxes: |
During the three-month period ended March 31, 2010, the Company recorded an income tax provision of nil. The difference between the effective tax rate of 0% and the expected statutory tax rate of 31% is mainly due to the fact that the Company has recorded a valuation allowance with respect to certain net operating losses which the Company does not believe are more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income, the reversal of taxable temporary differences, and/or tax planning strategies.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 11. | Supplemental disclosure of cash flows and other information: |
| (a) | Net change in operating assets and liabilities: |
March 31, 2010 | March 31, 2009 | |||||||
| Accounts receivable | $ | 10,035 | $ | 17,680 | ||||
| Inventories | 3,308 | (1,436 | ) | |||||
| Prepaid expenses and deposits | 254 | 853 | ||||||
| Accounts payable and accrued liabilities | (8,697 | ) | (11,456 | ) | ||||
| Income taxes payable | 562 | (728 | ) | |||||
| Net change in operating assets and liabilities | $ | 5,462 | $ | 4,913 | ||||
| (b) | Cash and cash equivalents: |
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Cash and cash equivalents consist of: | ||||||||
| Cash balances with banks | $ | 10,278 | $ | 14,745 | ||||
| Short-term investments, bearing nominal interest. | 5,171 | 5,170 | ||||||
| $ | 15,449 | $ | 19,915 | |||||
| (c) | Non-cash transactions: |
| March 31, | March 31, | |||||||
| 2010 | 2009 | |||||||
| Change in additions of property, equipment and intangibles included in accounts payable and accrued liabilities | $ | 597 | $ | 451 | ||||
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 11. | Supplemental disclosure of cash flows and other information (continued): |
| (d) | Other revenues: |
At March 31, 2010, the Company continues to operate a merchant portfolio. Effective January 1, 2009, the results of operations of the remaining merchant portfolio is presented on a net basis and as part of “Other Revenues” in the condensed consolidated statement of operations and comprehensive loss. Included are gross revenues of $5,367 (March 31, 2009 - $6,321), net of transaction processing costs and commissions of $4,799 (March 31, 2009 - $5,524). Other expenses related to the merchant portfolio and not included in “Other Revenues” are amortization of intangibles of $345 (March 31, 2009 - $652).
Included in intangible assets on the condensed consolidated balance sheets is $3,447 (December 31, 2009 - $3,791) of customer and ISO/ISA relations, related to the remaining portfolio. Total assets related to the portfolio are comprised mainly of intangible assets.
| (e) | Foreign exchange: |
Included in “Selling, general and administrative expenses” in the condensed consolidated statement of operations and comprehensive loss is a foreign exchange (loss) gain relating to financial assets and liabilities of ($314) for the three-month period ended March 31, 2010 (March 31, 2009 - $24).
| (f) | Amortization: |
| March 31, | March 31, | |||||||
| 2010 | 2009 | |||||||
| Amortization of intangibles pertaining to cost of sales and transaction processing | $ | 1,109 | $ | 2,550 | ||||
| Amortization of equipment pertaining to cost of sales | 569 | 588 | ||||||
| Amortization of equipment pertaining to selling, general and administrative | 448 | 187 | ||||||
| $ | 2,126 | $ | 3,325 | |||||
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 12. | Financial instruments: |
| (a) | Fair values: |
The Company has determined that the fair value of its short-term financial assets and liabilities approximates their respective carrying values as at the balance sheet dates because of the short-term maturity of those instruments. The fair value of the long-term loan payable to a selling shareholder is not determinable as the terms were agreed to by related parties. The carrying value of other loans also approximates its fair value. The fair value of other loans is calculated using the present value of future principal payments discounted at the current market rate for the remaining term to maturity.
| (b) | Financial income and expense: |
| (i) | Other income includes interest income earned on cash equivalents and short-term investments and on balance of sale receivable. |
| (ii) | The Company recorded a bad debt expense of $112 for the three-month period ended March 31, 2010 (March 31, 2009 - $288) in "Selling, general and administrative expenses" in the condensed consolidated statement of operations and comprehensive loss. |
| (c) | Other: |
The Company seeks to mitigate its exposure to foreign currency transaction risk which is mainly due to purchases of inventory denominated in foreign currencies in relation to the Company’s European subsidiary, by monitoring its foreign currency transaction exposure for the year and partially manage such exposure using foreign currency forward exchange contracts. At March 31, 2010, the Company had entered into forward and future contract to sell Euro and to buy US dollars with a notional amount of $4,875 (March 31, 2009 - $3,700) at rate of 1.3567 and 1.3663 US/EUR (March 31, 2009 - 1.2622 to 1.3615 US/EUR). The contract matured in April 2010 (March 31, 2009 - various dates to April 30, 2009). The Company has also entered into an interest rate swap contract (from variable rate receive to fixed rate pay) on a notional amount of EUR 1,000. This contract matures in March 2013. At March 31, 2010 and 2009, the fair values of these contracts were not significant.
| 13. | Segmented information: |
During the period ended March 31, 2010, the Company operated in the consumer robotic, toy and entertainment products segment. Prior to fiscal 2009, the Company also operated in the payment processing segment, which is now considered a discontinued operation with the exception of a residual portfolio (refer to note 11 (d)).
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 14. | Canadian/U.S. reporting differences: |
The consolidated financial statements of the Company are prepared in accordance with U.S. GAAP, which conform, in all material respects, with Canadian GAAP, except as described below:
| (a) | Consolidated balance sheets: |
Differences between U.S. and Canadian GAAP in the presentation of share capital, additional paid-in capital and deficit are as follows:
| (i) | Share capital: |
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Share capital in accordance with U.S. GAAP | $ | 252,488 | $ | 252,488 | ||||
Stock-based compensation costs on options exercised: (1) | ||||||||
| Cumulative effect of prior years | (39,868 | ) | (39,868 | ) | ||||
Change in reporting currency (2) | (2,588 | ) | (2,588 | ) | ||||
| Share capital in accordance with Canadian GAAP | $ | 210,032 | $ | 210,032 | ||||
| (ii) | Additional paid-in capital: |
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Additional paid-in capital in accordance with U.S. GAAP | $ | 65,746 | $ | 65,746 | ||||
Stock-based compensation costs: (1) | ||||||||
| Cumulative effect of prior years | (68,757 | ) | (68,757 | ) | ||||
Stock-based compensation costs on options exercised: (1) | ||||||||
| Cumulative effect of prior years | 39,868 | 39,868 | ||||||
Change in reporting currency (2) | (968 | ) | (968 | ) | ||||
| Additional paid-in capital in accordance with Canadian GAAP | $ | 35,889 | $ | 35,889 | ||||
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 14. | Canadian/U.S. reporting differences (continued): |
| (a) | Consolidated balance sheets (continued): |
| (iii) | Deficit: |
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| Deficit in accordance with U.S. GAAP | $ | (305,998 | ) | $ | (296,187 | ) | ||
Stock-based compensation costs: (1) | ||||||||
| Cumulative effect of prior years | 68,757 | 68,757 | ||||||
Stock-based compensation to non-employees (1) | 834 | 834 | ||||||
Change in reporting currency (2) | 1,189 | 1,189 | ||||||
| Deficit in accordance with Canadian GAAP | $ | (235,218 | ) | $ | (225,407 | ) | ||
| (1) | Stock-based compensation: |
The Company accounted for its stock-based compensation plans using the recognition and measurement provisions of APB No. 25, Accounting for Stock Issued to Employees, and Related Interpretations, versus a settlement accounting basis followed for Canadian GAAP up to January 1, 2003. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Share-based Payments, and CICA Handbook 3870, Stock-based Compensation and Other Stock-based Payments, and therefore there were no further differences between Canadian GAAP and U.S. GAAP.
| (2) | Change in reporting currency: |
In 1998, the Company adopted the U.S. dollar as its reporting currency. Under Canadian GAAP, at the time of change in reporting currency, the historical financial statements were presented using a translation of convenience. Under U.S. GAAP, the financial statements, including prior years, are translated using the current rate method. Accordingly, the cumulative translation account included as part of accumulated other comprehensive income in shareholders' equity under Canadian GAAP does not exist for U.S. GAAP purposes.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Periods ended March 31, 2010 and 2009
(expressed in thousands of U.S. dollars, except share and per share amounts)
| 14. | Canadian/U.S. reporting differences (continued): |
| (b) | Accumulated other comprehensive loss: |
Accumulated other comprehensive loss under Canadian GAAP is $(1,484) as at March 31, 2010 and December 31, 2009, which resulted solely from the translation of the financial statements up to June 30, 2000, the date on which the Company adopted the United States dollar as its functional currency, in accordance with the current rate method. Prior to the change in functional currency which occurred as of June 30, 2000, the Company adopted the USD as its reporting currency during 1998, and used the current rate method under US GAAP compared to a translation of convenience method under Canadian GAAP.
| 15. | Takeover bid to purchase the Company's outstanding shares: |
On March 16, 2010, the Company entered into a Support Agreement with a corporation (the "Offeror") established by two directors of the Company's wholly-owned subsidiaries. Under the terms of the Support Agreement, the Offeror has agreed to make an offer by way of a takeover bid for all of the outstanding shares of the Company at an offer price of $2.40 per share, to be paid in cash and the Company has agreed to support the Offer. As a result of the directors' involvement with the Offeror, the offer will be an "insider bid" and a going private transaction for purposes of applicable securities laws. Under the terms of the Support Agreement, the Company has agreed to pay a termination fee of approximately $500 to the Offeror if the Support Agreement is terminated in certain circumstances. The takeover bid circular containing the ful l terms of the offer was filed on March 31, 2010. The offer will remain open for acceptance until May 21, 2010.
In connection with the offer, certain senior officers of the Company have entered into an agreement with the Offeror whereby they will receive certain assets of the Company in partial satisfaction of the severance payments that will be owing to them upon the closing of the transaction. Included in the assets to be transferred to the senior officers are the balance of sale receivable and other intangible assets related to the discontinued payment processing business with a carrying value of $6,839 at March 31, 2010.
| 16. | Comparative figures: |
Certain of the comparative figures have been reclassified in order to conform with the current period’s presentation.
| Item 2. | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of the financial condition and results of operations of our Company describes our business, seasonality and trends within our business environment, the critical accounting policies of our Company that will help you understand our interim condensed consolidated financial statements, and the principal factors affecting our results of operations, liquidity and capital resources. This discussion should be read in conjunction with our consolidated financial statements and management discussion and analysis for the year ended December 31, 2009, and the factors set forth below under “Cautionary Statements Regarding Forward-Looking Statements”. Effective January 1, 2009, we prepare our interim condensed consolidated financial statements in accordance with generally accepted accounting principles (“GA AP”) in the United States, with a reconciliation to Canadian GAAP, as disclosed in note 14 of the notes to our interim condensed consolidated financial statements. Previously, our accounting principles conformed to Canadian GAAP and reconciled differences with U.S. GAAP through our financial statement disclosures.
In this Form 10-Q, except where otherwise indicated, references to “dollars” or “$” are to United States dollars, references to our “common shares” are to our Class “A” shares, references to “our interim condensed consolidated financial statements” are to our interim condensed consolidated financial statements as at and for the period ended March 31, 2010, which are included in “Item 1. Financial Statements”, and all dollar amounts, except those expressed in millions of dollars, are rounded to the nearest thousand. Any reference in this Form 10-Q to uniform resource locator (URL) website locations are inactive textual references only and the contents of such websites do not form a part of this Form 10-Q.
Cautionary Statements Regarding Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as “expects”, “intends”, “anticipates”, “plans”, “believes”, “seeks”, “estimates”, or variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include, but are not limited to, statements about our current expectations with respect to our future growth strategies, results, opportunities and prospects, competitive position and industry environment. These forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, or those of the markets we serve, to differ materially from those expressed in, or implied by, these forward-looking statements, including:
| · | our ability to continue as a going concern; |
| · | general economic, legal and business conditions in the markets we serve; |
| · | our existing cash and cash equivalents could prove to be inadequate to meet our funding requirements; |
| · | our ability to continue to satisfy Nasdaq's conditions for continued listing of our common shares on The NASDAQ Global Market; |
| · | our ability to complete, integrate and benefit from acquisitions, divestitures, joint ventures and strategic alliances; |
| · | our ability to successfully implement our strategies for our WowWee business; |
| · | changing consumer preferences for electronics and play products; |
| · | the seasonality of retail sales; |
| · | concentration among our major retail customers for the products of our WowWee business; |
| · | increased competition; |
| · | our ability to protect our intellectual property; |
| · | currency exchange rate fluctuations; |
| · | the price and supply of raw materials used to manufacture WowWee’s products; |
| · | economic, social and political conditions in China, where WowWee’s products are manufactured; |
| · | existing and future government regulations and disputes with governmental authorities; |
| · | product liability claims and product recalls; |
| · | litigation; |
| · | our ability to retain key personnel; |
| · | consumer confidence in the security of financial information transmitted via the Internet; |
| · | levels of consumer and merchant fraud, disputes between consumers and merchants and merchant insolvency; |
| · | liability for merchant chargebacks; |
| · | our ability to safeguard against breaches of privacy and security when processing electronic transactions and use of our payments systems for illegal purposes; |
| · | the imposition of and our compliance with rules and practice procedures implemented by credit card associations; |
| · | our relationships with our suppliers and the banking associations that we rely upon to process our electronic transactions; |
| · | disruptions in the function of our electronic payments systems and technological defects; and |
| · | the factors described under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009. |
There may be additional risks and uncertainties and other factors that we do not currently view as material or that are not necessarily known. The forward looking statements made in this document are only made as of the date of this document.
Except as required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in circumstances or any other reason after the date of this quarterly report.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation. We are relying on the “safe harbor” provisions of the Private Securities Litigation Reform Act in connection with the forward-looking statements included in this quarterly report.
Future operations
Basis of Presentation and Going Concern
The accompanying interim condensed consolidated financial statements have been prepared on a going concern basis in accordance with U.S. GAAP. The going-concern basis of presentation assumes that we will continue our operations for the foreseeable future and be able to realize our assets and discharge our liabilities and commitments in the normal course of business.
We have incurred a net loss from continuing operations of $9.8 million for the three-month period ended March 31, 2010 ($67.8 million for the year ended December 31, 2009) and net cash outflows from operating activities excluding discontinued operations of $2.5 million for the three month period ended March 31, 2010 ($19.8 for the year ended December 31, 2009). The recent banking and financial crisis and the global economic recession have created an extremely challenging retail and economic environment in the United States, Canada and Europe, which has negatively impacted our operating performance and potentially that of our customers and suppliers. Our ability to continue as a going concern depends on the success of management’s plans to overcome these conditions and ultimately achieve positive cash flows from operations and be come profitable.
We currently fund the majority of our operations from our cash and cash equivalents and bank indebtedness. The majority of our bank indebtedness is based on qualifying accounts receivable and is otherwise not fully available to be drawn on during seasonal low sale periods due to the lack of accounts receivable available at the time. We have been unable to secure any new significant sources of financing not secured by accounts receivable which will be required during low seasonal sale periods of the year. Our balance of cash and cash equivalents generally decreases during the second and third quarters of the year, as cash is used to fund product development and production, and increases in the fourth and first quarters in connection with the shipping and collection periods. During the first quarter 2010, the cash and cash equivalents d ecreased which is contrary to the usual trend for a first quarter.
If operating performance continues its current trend, we will require financing in order to meet our cash flow requirements and fund our operations especially during the second and third quarters of 2010. However, additional financing may not be available in amounts or on terms that are acceptable to us. Without financing, we may be unable to fund product development and the production of inventory required for sales in the third and fourth quarters and therefore will not be able to capitalize on potential future sales. Refer to note 15 of the notes to our interim condensed consolidated financial statements for the three-month period ended March 31, 2010, for the details of a take-over bid to purchase our outstanding shares which is being supported by us. If we are unable to obtain additional financing in the near term, we may be required to curtail operations in order to offset the lack of available funding, which could have a material adverse impact on us, and consequently, there is a substantial doubt about our ability to continue as a going concern.
Our interim condensed consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these interim condensed consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. The appropriateness of the going concern basis is dependent upon, among other things, future profitable operations, the ability to negotiate new sources of financing and the ability to generate sufficient cash from operations and financing arrangements to meet our obligations.
The results of certain payment processing portfolios which were sold in 2009, are presented separately under discontinued operations in the interim condensed consolidated statements of operations and comprehensive loss for the current and prior periods. The balance sheet also presents the assets and liabilities related to the discontinued operations separately at the end of the current period and the prior year.
The effect of the take-over transaction as described in note 15 of the notes to our interim condensed consolidated financial statements for the three-month period ended March 31, 2010, on our financial position and future cash flows, was not considered in the preparation of the interim condensed consolidated financial statements for the three-month period ended March 31, 2010.
Recent Developments
On March 16, 2010, we entered into a Support Agreement with a corporation (the "Offeror") established by two directors of our wholly-owned subsidiaries. Under the terms of the Support Agreement, the Offeror has agreed to make an offer by way of a takeover bid for all of the outstanding shares of Optimal Group Inc., at an offer price of $2.40 per share to be paid in cash and we have agreed to support the Offer. As a result of the directors' involvement with the Offeror, the offer will be an "insider bid" and a going private transaction for purposes of applicable securities laws. Under the terms of the Support Agreement, we have agreed to pay a termination fee of approximately $0.5 million to the Offeror if the Support Agreement is terminated in certain circumstances. The takeover bid circular containing the full terms of the offer was filed on March 31, 2010. The offer will remain open for acceptance until May 21, 2010.
In connection with the offer, certain of our senior officers have entered into an agreement with the Offeror whereby they will received certain of our assets in partial satisfaction on the severance payments that will be owing to them upon the closing of the transaction. Included in the assets to be transferred to the senior officers are the balance of sale receivable and other intangible assets related to the discontinued payment processing business with a carrying value of $6.8 million at March 31, 2010.
Overview
During the period ended March 31, 2010, we operated in the consumer robotic, toy and entertainment product segment through WowWee, which is comprised of WowWee Group Limited, WowWee Canada Inc., WowWee USA, Inc. and WW Sablon Holdings. We design, develop, market and distribute technology-based, consumer robotic, toy and entertainment products. In the first and second quarters of 2009, we operated in a second segment, through Optimal Merchant Services Inc. (formerly, Optimal Payments Corp.) where we processed credit card payments for retail point-of-sale merchants, and which is now primarily considered discontinued operations with the exception of a portfolio of small and medium-sized retail point-of-sale merchant processing. Optimal Merchant Services Inc. also holds a balance of sale from the disposition in 2009 of a stream of residual payments under a card-present merchant portfolio.
WowWee
Based in Hong Kong, with offices in Carlsbad, California, New York, New York, Wauthier-Braine, Belgium, and Montreal, Quebec, WowWee designs, develops, markets and distributes technology-based, consumer robotic, toy and entertainment products that can be sold at a variety of price points. For 2010, WowWee’s product offering encompassed five distinct lines: WowWee Robotics, WowWee Alive, WowWee Entertainment, WowWee Technologies and Think Wow Toys.
WowWee products are sold in a range of brick and mortar channels, including grocery stores, pharmacies, toy shops, department stores and high-end consumer technology stores. A majority of our retail customers in the United States also carry the full line of WowWee products on their Internet sales sites. Online sales of WowWee’s products are also made available through Internet-based “e-tailers” such as Amazon.com and Buy.com.
WowWee’s products are predominately produced in China by third party manufacturers with which WowWee has long-standing relationships. Consistent with industry practice, the use of third party manufacturers allows WowWee to avoid incurring fixed manufacturing costs, while improving flexibility, capacity and production technology. By outsourcing its manufacturing process, WowWee maintains a flexible business model that enables it to be responsive to changing technology. In addition, once a product has reached its commercialization phase, WowWee is able to minimize inventory risk by manufacturing products based upon actual customer orders. Nonetheless, certain customer orders may be subject to cancellation. Upon final assembly, products can be shipped directly from the manufacturing l ocations to retailers and distributors, with title to the products passing to retail customers in the country of origin. Although WowWee does not conduct the day-to-day manufacturing of its products, it is extensively involved in the design of the product prototype and production tools, dies and molds for its products and seeks to ensure quality control by actively reviewing the production process and testing the products produced by its manufacturers. WowWee employs quality control inspectors who rotate among its manufacturers’ factories to monitor the production of substantially all of its products. WowWee’s quality assurance personnel advise as to compliance with applicable regulations during each phase of product development, perform compliance testing and coordinate third party independent compliance testing on all WowWee products. Once pre-production testing has been completed and product production has been approved, WowWee`s quality assurance personnel monitor production at the manufactur er’s facility for compliance with WowWee’s quality requirements.
Within the United States, Canada and Europe, WowWee sells its products directly to its retail customers through its direct sales channel and through independent sales representatives. For retailers across the rest of the world, WowWee utilizes a network of distributors located in various jurisdictions. In 2009, WowWee distributed its products in Europe directly to retailers through Sablon. In 2009, approximately 56% of its products were sold in North America, with the balance being sold internationally. WowWee does not have written agreements with its customers. Instead, sales are made based on purchase orders, primarily against letters of credit. The majority of orders are traditionally written during the first two quarters of the year. The majority of product shipments occur during the third and fourth quarters of the year. Revenue is recognized when (i) persuasive evidence of an arrangement exists; (ii) products are shipped to customers who assume risk of loss, (iii) collection of the respective receivable is probable and (iv) sales price is fixed or determinable. Accruals for customer discounts, rebates, incentives and allowances are recorded when the related revenues are recognized, as a reduction of revenues.
WowWee’s engineering and design team develops new technologies using internal capabilities and seeks to identify emerging or underutilized innovations that are currently being developed or that are available in the marketplace. In order to leverage the man-hours invested in prior products, older generations of products frequently form the foundation for the next generation of products as well as new product lines. New technologies are then integrated to enhance the overall functionality of the product. In sourcing technologies, WowWee reviews the latest technology innovations at trade-shows, conferences, colleges and universities, on the Internet, and through word-of-mouth. WowWee regularly reviews technologies or product concepts from third party sources that it believes could hav e potential synergies with WowWee’s current product line or that could be successfully commercialized based upon WowWee’s development process. WowWee also licenses third party technologies for development within unique consumer applications developed by WowWee.
Seasonality
Revenue in our business is subject to seasonal variability. In 2009, the majority of our net sales were made in the third and fourth quarters. In our business, and the toy business in general, the first quarter is the period of lowest shipments and sales and therefore the least profitable due to various fixed costs. Seasonality factors will cause our operating results to fluctuate significantly from quarter to quarter. Our results of operations may also fluctuate as a result of factors such as the timing of new products (and related expenses), the advertising activities of our competitors, delivery schedules set by our customers and the emergence of new market entrants.
These seasonal purchasing patterns and requisite production lead times cause risk in our business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly in recent years, requiring us to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase the risk that we may not be able to meet demand for certain products at peak demand times, or that our own inventory levels may increase due to the need to pre-build products before orders are placed.
In anticipation of retail sales in the traditional holiday season, we significantly increase production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of our fiscal year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements.
We ship products in accordance with delivery schedules specified by our customers, who usually request delivery of their products within three to six weeks of the date of their orders on orders shipped FOB China or Hong Kong and within three to five days on orders shipped domestically. Because customer orders may be canceled at any time without penalty, our backlog may not accurately indicate sales for any future period.
Critical Accounting Policies and Estimates
Our interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires us to make numerous estimates and assumptions. Financial results as determined by actual events could differ from those estimates and assumptions, and therefore affect our reported results of operations and financial position. Changes in accounting policies are more fully described in note 3 of the notes to our annual audited consolidated financial statements included in our Form 10-K Annual Report for the year ended December 31, 2009 and note 2of the notes to our interim condensed consolidated financial statements. Our significant accounting policies are more fully described in note 4 of the notes to our annual audited consolidated financial statements inclu ded in our Form 10-K Annual Report for the year ended December 31, 2009. The critical accounting policies described here are those that are most important to the depiction of our financial condition and results of operations. The preparation of financial statements also involves significant management judgment in making estimates about the effect of matters that are inherently uncertain which are more fully described in note 4 (p) of the notes to our annual audited consolidated financial statements included in our Form 10-K Annual Report. While best estimates have been used for reporting financial statement items subject to measurement uncertainty, management considers that it is possible, based on existing knowledge, that changes in future conditions in the near term could affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. “Near term” is considered to be within one year from the date of the financial statements.
Goodwill and Other Intangibles
We accounted for prior business acquisitions using the purchase method. Accordingly, the purchase price of a business acquisition is allocated to its identifiable net assets, including identifiable intangible assets, on the basis of estimated fair values as at the date of purchase, with any excess being assigned to goodwill. We estimate the fair value of assets and liabilities acquired at the date of acquisition using a projected discounted cash flow method and other valuation methods. We make a number of significant estimates when calculating fair value using a projected discounted cash flow method. These estimates include estimating projected future cash flows, the number of years used, the discount rate and others. We believe that our estimates and valuation methods are reasonable. Th ey are consistent with our inherent planning and reflect our best estimates, but they have inherent uncertainties that management may not be able to control.
Goodwill is not amortized but rather evaluated under an impairment approach. Factors we consider important which could trigger an impairment review include the following: a) significant underperformance relative to expected historical or projected future operating results; b) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and c) significant negative industry or economic trends.
Due to the subjective nature of the impairment analysis, significant changes in the assumptions used to develop the estimate could materially affect the conclusion regarding the future cash flows necessary to support the valuation of long-lived assets, including goodwill. The valuation of goodwill involves a high degree of judgment and consists of a comparison of the fair value of a reporting unit with its book value. Based on the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. If the fair value is more than the book value of the reporting unit, an impairment loss is not indicated. If impairment exists, the fair value of the reporting unit is allocated to all of its assets and liabilities excluding goodwil l, with the excess amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.
To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flow). The factor most sensitive to change with respect to our discounted cash flow analyses is the estimated future cash flows of each reporting unit which is, in turn, sensitive to our estimates of future revenue growth and margins for these businesses. If actual revenue growth and/or margins are lower than our expectations, the impairment test results could differ. We applied what we believe to be the most appropriate and consistent valuation methodology for each of the reporting units. If we had established different reporting units or utilized different valuation methodologies, the impairment test results could differ.
In the near term, should our operating performance deteriorate lower than currently forecasted for 2010, it is reasonably possible that these intangibles could be further impaired.
Intangible assets acquired either individually or with a group of other assets are initially recognized and measured at cost. The cost of a group of intangible assets, including those acquired in a business combination that meet the specified criteria for recognition apart from goodwill, is allocated to the individual assets based on their fair values.
Long-lived assets, consisting of property and equipment and intangible assets with finite useful lives, are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment is recognized for long-lived assets when the carrying amount of an asset to be held and used exceeds the sum of the undiscounted cash flows expected from its use and disposal; the impairment recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. The size of the allowance for doubtful accounts is also affected by the timing of the realization of uncollectible accounts receivable balances as well as the offsetting allowance.
Major customers’ accounts are monitored on an ongoing basis; more in-depth reviews are performed based on changes in a customer’s financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance adjusted to reflect our current assessment of credit loss.
Revenue Recognition
Our revenue recognition policy is to recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred (product shipment), the price is fixed or readily determinable, and collectability is probable. Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data. We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross revenue in the period the related revenue is recognized.
Reserve for Inventory Obsolescence
We value our inventory at the lower of weighted average cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value.
Failure to accurately predict and respond to consumer demand could result in our under producing popular items or overproducing less popular items. Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.
Management estimates are monitored on a quarterly basis and a further adjustment to reduce inventory to its net realizable value is recorded, as an increase to cost of sales, when deemed necessary under the lower of cost or market standard.
Income Taxes
We provide for income taxes using the asset and liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. We establish a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized. In assessing the reliability of tax assets, we consider whether it is more likely than not that some portion or all of the tax assets will not be realized. The ultimate realization of the future tax assets is dependent upon the generatio n of future taxable income during the periods in which the temporary differences become deductible. We considered the scheduled reversal of tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based on management’s assessment of all relevant information, and is periodically reviewed and adjusted as circumstances warrant. As of March 31, 2010, our income tax reserve was approximately $9.5 million, as compared to approximately $9.1 million as at December 31, 2009.
Contingent liabilities
OGOP Payments Inc. (formerly Optimal Payments Inc.) has received a request for information from the U.S. Attorney’s Office in the Eastern District of New York pertaining to its former involvement in processing transactions for internet pharmacies. OGOP Payments Inc. has had discussions with that Office relating to those processing activities. No provision has been recorded by OGOP Payments Inc. for this matter because the outcome of these discussions and the amount of any loss, if any, are not determinable.
In October 2009, we entered into a non-prosecution agreement with the U.S. Attorney’s Office related to our processing of settlement transactions from online gambling originating from United States customers. We ceased to process such transactions in 2006. Pursuant to the non-prosecution agreement and on the basis of advice received by management that a court would not enforce our obligation to pay certain merchant reserve accounts payable balances, liabilities in the amount of $9.6 million were derecognized (reversed) in the third quarter of fiscal 2009. Certain of these merchants may nevertheless initiate legal proceedings against us in an attempt to enforce payment of the liabilities that have been derecognized (reversed), which we would be forced to defend. We have not recorded any provision in relation to these potenti al proceedings because the amount of loss, if any, is not determinable.
We are also party to litigation arising in the normal course of operations. The results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should several legal matters be resolved against us in the same reporting period, the consolidated operating results of a particular reporting period could be materially adversely affected.
Recent Accounting Pronouncements
(a) Accounting Framework
The following accounting standards have recently been issued by the Financial Accounting Standards Board (FASB) and the Canadian Institute of Chartered Accountants (CICA), that are relevant to us.
Effective January 1, 2009, we prepare our interim condensed consolidated financial statements in accordance with U.S. GAAP with a reconciliation to Canadian GAAP as described in note 14 of the notes to our interim condensed consolidated financial statements. The comparative periods have also been prepared and presented pursuant to U.S. GAAP. Previously our accounting principles conformed to Canadian GAAP and reconciled differences with U.S. GAAP through its financial statement disclosures. There was no effect on our results for 2009 and 2008 as a consequence of this change.
(b) New Accounting Policies
SFAS No. 166 – Accounting for Transfers of Financial Assets
Effective January 1, 2010, we adopted the Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets, which was primarily codified into FASB ASC Topic 860, Transfers and Servicing. SFAS No. 166 amends SFAS No. 140, Accounting for the Transfers and Servicing of Financial Assets and the Extinguishments of Liabilities, and seeks to improve the relevance and comparability of the information that a reporting entity provides in our financial statements about transfers of financial assets; the effects of the transfer on our financial position, financial performance, and cash flows; and a transferor’s contin uing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this standard did not have an impact on our interim condensed consolidated financial statements.
Financial Condition
As at March 31, 2010, cash and cash equivalents, was $15.4 million compared to $19.9 million as at December 31, 2009. The decrease in cash and cash equivalents is primarily due to the use of cash in operations for the first quarter and the repayment of bank indebtedness. Historically the first and second quarters are the periods of lowest shipments and sales and therefore the least profitable due to various fixed costs.
We have various credit facilities through our subsidiaries located in Belgium and Hong Kong, of which $6.8 million were used at March 31, 2010. As at March 31, 2010 and December 31, 2009, our cash and cash equivalents, net of bank indebtedness were as follows:
| March 31, | December 31, | |||||||
| (U.S. dollars, in thousands) | 2010 | 2009 | ||||||
| Cash and cash equivalents | $ | 15,449 | $ | 19,915 | ||||
| Less: | ||||||||
| Bank indebtedness | (6,788 | ) | (8,848 | ) | ||||
| Net cash position | $ | 8,661 | $ | 11,067 | ||||
Working capital as at March 31, 2010 was $(2.9) million, as compared to $5.5 million at December 31, 2009. This decrease resulted primarily from the loss from operations.
Accounts and other receivables as at March 31, 2010 were $4.5 million, as compared to $14.6 million at December 31, 2009. The decrease is due primarily to the seasonal decrease in revenues in the three-month period ended March 31, 2010, and the collection of accounts receivable which were generated from sales in the third and fourth quarters of 2009.
Inventories decreased by $3.3 million from $12.8 million as at December 31, 2009 to $9.5 million as at March 31, 2010. The decrease is primarily due to sales in the three-month period ended March 31, 2010.
Intangible assets decreased by $1.1 million, from $18.8 million as at December 31, 2009 to $17.7 million as at March 31, 2010, due to amortization of $1.1 million recorded in the period.
Accounts payable decreased by $8.1 million from $30.6 million for the three-month period ended March 31, 2010 to $22.5 million for the comparable period in 2009. This decrease is due primarily to the payment of our suppliers for goods and services purchased in 2009.
Shareholders’ equity as at March 31, 2010 was $11.9 million, as compared to $21.7 million as at December 31, 2009. The decrease is attributable primarily to our net loss.
Results of Operations
As at March 31, 2010, WowWee’s open order position appears encouraging and is primarily due to the interest shown for our Paper Jamz™ product line up. These orders are not guaranteed and can be cancelled at any time by our customers.
Three-month period ended March 31, 2010 compared to the three-month period ended March 31, 2009
Revenues increased by $5.1 million, from $2.1 million for the three-month period ended March 31, 2009 to $7.2 million for the three-month period ended March 31, 2010. The increase is attributed primarily to monetizing our inventories at lower margins, the slightly improved economic environment, and increased revenue due to an improved product offering.
Cost of sales increased by $4.4 million, from $1.5 million for the three-month period ended March 31, 2009 to $5.9 million for the three-month period ended March 31, 2010. The increase is consistent with the increase in revenue. Furthermore, the focus on monetizing our inventories has resulted in lower margins on some of our products.
Other revenues decreased by $0.2 million, from $0.8 million in the three-month period ended March 31, 2009 to $0.6 million for the three-month period ended March 31, 2010. The decrease is due to the attrition of revenues related to a merchant portfolio that formed part of the payment processing segment.
Selling, general and administrative expenses increased by $0.5 million, from $8.5 million for the three-month period ended March 31, 2009 to $9.0 million for the three-month period ended March 31, 2010. The increase is due primarily to professional fees related to the take-over bid to purchase our outstanding shares and additional marketing and media costs.
Amortization of intangibles pertaining to transaction processing costs and cost of sales was $1.1 million for the three-month period ended March 31, 2010 and $2.6 million for the comparable period in 2009. The decrease results from a lower unamortized carrying value due to the impairment charges taken in 2009.
The provision for income taxes is nominal for the three-month periods ended March 31, 2010 and 2009. This is primarily due to the effect of an increase in the valuation allowance against operating losses carry forward which we do not believe are more likely than not to be realized.
Our net loss for the three-month period ended March 31, 2010 was $9.8 million (or $1.91 per share), compared to a net loss of $12.4 million (or $2.41 per share) for the three-month period ended March 31, 2009. The decrease is attributed primarily to an increase in sales volume in an effort to monetize our inventories at lower margins, the slightly improved economic environment, and increased revenue due to an improved product offering.
We previously used EBITDA to assess our operating performance, which was a non-GAAP financial measure that excluded non-cash expenses, items that cannot be influenced by Management in the short-term or items that do not impact core operating performance. We believe that this measure no longer provides any additional meaningful information and therefore have discontinued the use of this measure in the second quarter of 2009.
Liquidity and Capital Resources
We have incurred a net loss from continuing operations of $9.8 million for the three-month period ended March 31, 2010 ($67.8 million for the year ended December 31, 2009) and net cash outflows from operating activities excluding discontinued operations of $2.5 million for the three month period ended March 31, 2010 ($19.8 for the year ended December 31, 2009). The recent banking and financial crisis and the global economic recession have created an extremely challenging retail and economic environment in the United States, Canada and Europe, which has negatively impacted our operating performance and potentially that of our customers and suppliers. Our ability to continue as a going concern depends on the success of management’s plans to overcome these conditions and ultimately achieve positive cash flows from operations and be come profitable.
We currently fund the majority of our operations from our cash and cash equivalents and bank indebtedness. The majority of our bank indebtedness is based on qualifying accounts receivable and is otherwise not fully available to be drawn on during seasonal low sale periods due to the lack of accounts receivable available at the time. We have been unable to secure any new significant sources of financing not secured by accounts receivable which will be required during low seasonal sale periods of the year. Our balance of cash and cash equivalents generally decreases during the second and third quarters of the year, as cash is used to fund product development and production, and increases in the fourth and first quarters in connection with the shipping and collection periods. During the first quarter 2010, the cash and cash equivalents d ecreased which is contrary to the usual trend for a first quarter.
If operating performance continues its current trend, we will require financing in order to meet our cash flow requirements and fund our operations especially during the second and third quarters of 2010. However, additional financing may not be available in amounts or on terms that are acceptable to us. Without financing, we may be unable to fund product development and the production of inventory required for sales in the third and fourth quarters and therefore will not be able to capitalize on potential future sales. Refer to note 15 of the notes to our interim condensed consolidated financial statements for the three-month period ended March 31, 2010, for the details of a take-over bid to purchase our outstanding shares which is being supported by us. If we are unable to obtain additional financing in the near term, we may be required to curtail operations in order to offset the lack of available funding, which could have a material adverse impact on us, and consequently, there is a substantial doubt about our ability to continue as a going concern.
Our interim condensed consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these interim condensed consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. The appropriateness of the going concern basis is dependent upon, among other things, future profitable operations, the ability to negotiate new sources of financing and the ability to generate sufficient cash from operations and financing arrangements to meet our obligations.
The effect of the take-over transaction as described in note 15 of the notes to our interim condensed consolidated financial statements for the three-month period ended March 31, 2010, on our financial position and future cash flows, was not considered in the preparation of the interim condensed consolidated financial statements for the three-month period ended March 31, 2010.
As at March 31, 2010, cash and cash equivalents, was $15.4 million compared to $19.9 million as at December 31, 2009. The decrease in cash and cash equivalents is primarily due to the use of cash in operations for the first quarter and a repayment of bank indebtedness.
We have various credit facilities through our subsidiaries located in Belgium and Hong Kong, of which $6.8 million were used at March 31, 2010. As at March 31, 2010, our cash and cash equivalents and short term investments, net of bank indebtedness, totaled $8.7 million.
Operating activities used $2.6 million of cash and cash equivalents in the three-month period ended March 31, 2010, as compared to using $4.1 million in the three-month period ended March 31, 2009. This change is due mainly to the decrease in the net loss from continuing operations, and of the timing of the payments of the trade payables.
Financing activities used $1.8 million of cash and cash equivalents in the three-month period ended March 31, 2010, as compared to using $4.1 million in the three-month period ended March 31, 2009, due primarily to the decrease in cash used to reduce bank indebtedness.
Investing activities used $0.1 million of cash and cash equivalents for the three-month period ended March 31, 2010, as compared to generating $6.9 million of cash and cash equivalents for the three-month period ended March 31, 2009, primarily due to the proceeds from the disposition of the payment processing business and proceeds from the maturity of short term investments.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The registrant has nothing to report under this item.
| Item 4. | Controls and Procedures |
As of March 31, 2010 (the “Evaluation Date”), under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Additionally, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we concluded that there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
There were no material changes to the disclosure of legal proceedings contained in our Annual Report on Form 10-K for the year ended December 31, 2009.
| Item 1A. | Risk Factors |
There were no material changes to the disclosure of risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2009.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
There were no sales of unregistered equity securities.
| Item 3. | Defaults Upon Senior Securities |
The registrant has nothing to report under this item.
| Item 4. | Submission of Matters to a Vote of Security Holders |
The registrant has nothing to report under this item.
| Item 5. | Other Information |
The registrant has nothing to report under this item.
| Item 6. | Exhibits |
| Exhibit Number | Exhibit |
| Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| May 19, 2010 | Optimal Group Inc. | |
| By: | /s/ NEIL S. WECHSLER | |
| Neil S. Wechsler, Co-Chairman | ||
| and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ GARY S. WECHSLER | |
| Gary S. Wechsler, Chief Financial Officer | ||
| (Principal Accounting Officer) | ||
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