SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 333-89561
E-XACT TRANSACTIONS, LTD
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 98-0212722
(IRS Employer Identification No.) (State of Incorporation)
555 WEST HASTINGS STREET, SUITE 2410 VANCOUVER, B.C., V6B 4N4
(Address of principal executive offices) (City, state, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (604) 691-1670
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
----- -----
Transitional Small Business Disclosure format (check one):
Yes No X
----- -----
The number of shares outstanding of the Registrant's $0.001 par value common
stock on November 14, 2001 was 10,502,000.
E-XACT TRANSACTIONS, LTD
FORM 10-QSB
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated balance sheets -
September 30, 2001 and December 31, 2000 2
Consolidated statements of operations and deficit -
three months ended September 30, 2001 and
nine months ended September 30, 2001 3
Consolidated statements of cash flows -
Nine months ended September 30, 2001 and 2000 4
Notes to consolidated financial statements 5 - 11
Item 2. Management's discussion and analysis of financial condition
and results of operations 11 -16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
</Table>
- 1 -
E-XACT TRANSACTIONS LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Expressed in US Dollars
<Table>
<Caption>
SEPTEMBER 30 DECEMBER 31
2001 2000
------------ ------------
ASSETS
CURRENT
Cash $ -- $ 10,476
Accounts receivable (Note 3) 107,050 72,671
Prepaid expenses and deposits 5,416 5,356
------------ ------------
112,466 88,503
Capital assets (Note 4) 73,131 103,601
------------ ------------
TOTAL ASSETS $ 185,597 $ 192,104
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Bank indebtedness $ 471 $ --
Accounts payable and accrued liabilities (Note 5) 546,667 541,163
Income taxes payable 71,909 71,909
Advance payable (Note 6) 78,895 222,558
------------ ------------
TOTAL CURRENT LIABILITIES 697,942 835,630
------------ ------------
Continuing operations ( Note 1)
Commitments (Note 10)
CAPITAL DEFICIENCY
Special warrants (Note 7) $ 400,000 $ --
Common stock, common shares issued and outstanding (Note 7)
8,502,000 at September 30, 2001 and December 31, 2000 8,502 8,502
Additional paid-in capital 3,128,382 3,128,382
Accumulated deficit (4,049,229) (3,780,410)
------------ ------------
Capital deficiency (512,345) (643,526)
------------ ------------
TOTAL CAPITAL DEFICIENCY AND LIABILITIES $ 185,597 $ 192,104
============ ============
</Table>
- 2 -
E-XACT TRANSACTIONS LTD.
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(UNAUDITED)
Expressed in US Dollars
<Table>
<Caption>
3 months ended 9 months ended
2001 2000 2001 2000
September 30 September 30 September 30 September 30
------------ ------------ ------------ ------------
Revenue $ 101,961 $ 81,698 $ 284,819 $ 184,719
Cost of sales 25,497 44,868 60,242 87,575
------------ ------------ ------------ ------------
Gross margin 76,464 36,830 224,577 97,144
------------ ------------ ------------ ------------
Expenses:
General and administrative expenses 105,274 400,299 319,511 1,114,043
Sales and marketing 23,727 200,693 53,631 634,272
Research and development 30,619 227,955 136,848 703,633
Stock compensation expense -- 320,000 -- 320,000
------------ ------------ ------------ ------------
159,620 1,148,947 509,990 2,771,948
------------ ------------ ------------ ------------
Operating Loss (83,156) (1,112,117) (285,413) (2,674,804)
------------ ------------ ------------ ------------
Other Income (Expenses)
Interest Income -- (18,634) 456 (2,213)
Foreign exchange gain 4,890 29,242 16,138 102,245
------------ ------------ ------------ ------------
4,890 10,608 16,594 100,032
------------ ------------ ------------ ------------
Net Loss Before Income Taxes (78,266) (1,101,509) (268,819) (2,574,772)
Income taxes -- -- -- 58,724
------------ ------------ ------------ ------------
Net Loss (78,266)
(1,101,509) (268,819) (2,516,048)
(Deficit), beginning of period (3,970,963) (2,221,377) (3,780,410) (806,838)
------------ ------------ ------------ ------------
(Deficit), end of period (4,049,229) (3,322,886) (4,049,229) (3,322,886)
============ ============ ============ ============
Basic and diluted loss per share $ (0.01) $ (0.13) $ (0.03) $ (0.32)
Weighted average number of
shares used to calculate basic and
diluted loss per share : 10,502,000 8,472,989 9,656,412 7,756,048
</Table>
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E-XACT TRANSACTIONS LTD.
CONSOLIDATED STATEMENT OF CASHFLOWS
(UNAUDITED)
Expressed in US Dollars
<Table>
<Caption>
9 months ended 9 months ended
September 30 September 30
2001 2000
-------------- --------------
OPERATING ACTIVITIES
Net Loss $ (268,819) $ (2,516,048)
Item not affecting cash:
Warrants and share issued for financing -- 153,665
Stock compensation -- 320,000
Amortization 30,470 39,458
------------ ------------
(238,349) (2,002,925)
Net change in operating assets and liabilities
(Increase) in accounts receivable (34,379) (30,683)
(Increase) in prepaid expenses and deposits (60) (9,587)
(Increase) in income taxes recoverable -- (60,801)
Increase in accounts payable and accrued liabilities 5,504 17,459
------------ ------------
(267,284) (2,086,537)
------------ ------------
FINANCING ACTIVITIES
Proceeds on issuance of capital stock, net of offering costs $ -- $ 1,827,779
Proceeds on issuance of special warrants 400,000 --
Repayment of loan (368,365) --
Advances from shareholders 224,702 --
Deferred share issue costs, net of related accounts payables -- 175,545
------------ ------------
256,337 2,003,324
------------ ------------
INVESTING ACTIVITIES
Purchase of capital assets $ -- $ (200,293)
------------ ------------
-- (200,293)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,947) (283,506)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,476 304,668
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ (471) $ 21,162
============ ============
Supplemental disclosure of non-cash investing & financing
cashflow disclosures:
Warrants issued for financing services $ -- $ 75,220
Shares issued for financing services -- 74,556
Cash and cash equivalents are comprised of :
Cash $ -- $ 21,162
Bank indebtedness (471) --
------------ ------------
$ (471) $ 21,162
------------ ------------
</Table>
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E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(ALL FIGURES EXPRESSED IN US DOLLARS)
1. CONTINUING OPERATIONS
The Company specializes in online financial transaction processing supporting
customers' e-commerce activities. The Company was initially incorporated on
August 13, 1998 under the laws of British Columbia, Canada. On July 28, 1999 the
Company was reincorporated in the State of Delaware.
The Company was formed through the acquisition of certain software and other
intangible assets from Sutton Group Financial Services Ltd. ("Sutton") and Data
Direct Holdings Ltd. ("DataDirect"). In consideration for the acquisition of
these assets Sutton and Data Direct, two unrelated companies, at the time of the
acquisition, each received 2,100,000 common shares.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company incurred a net loss of
$78,266 for the quarter ended September 30, 2001 and at September 30, 2001 had a
working capital deficiency of $585,476 and capital deficiency of $512,345. The
success of the Company's future operations is dependent upon attaining
profitable operations, and upon its ability to raise additional financing.
Management's plans include obtaining the continued support of creditors, raising
additional financing and, ultimately, positioning the Company for profitable
operations.
These factors among others indicate that the Company may be unable to continue
as a going concern for a reasonable period of time. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. The Company's continuation as a going concern is dependent upon
achieving operating levels adequate to support the Company's cost structure and
obtaining adequate financial resources through a contemplated financing or
otherwise. However, there can be no assurance that such financings will be
successful.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with the following
significant accounting policies.
(a) Basis of consolidation
These consolidated financial statements include the assets, liabilities and
operating results of the Company and its wholly-owned subsidiary.
(b) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities at the date of the financial
statements and for the periods presented. Estimates are used for, but not
limited to, accounting for doubtful accounts, amortization, recoverability of
long-lived assets, income taxes, and contingencies. Actual results may differ
from those estimates.
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E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(ALL FIGURES EXPRESSED IN US DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Foreign Currency Translation
The Company determined that as of April 1, 2000 its functional currency was the
United States dollar ("US Dollars"). Previously the functional currency of the
Company was the Canadian dollar. The majority of the Company's operating and
financing transactions are now denominated in the US dollar. Monetary assets and
liabilities denominated in other than the US dollar are translated using the
exchange rates prevailing at the balance sheet date. Revenues and expenses are
translated using average exchange rates prevailing during the period. Gains and
losses on foreign currency transactions are recorded in the consolidated
statement of operations. The Company has re-measured its assets, liabilities,
revenues and expenses for prior periods using the historical exchange rate in
existence at the date of the transaction.
(d) Research and Development Costs
All research and development costs are expensed when incurred unless they meet
generally accepted accounting criteria for deferral and amortization. The
Company reassesses whether it has met the relevant criteria for deferral and
amortization at each reporting date. To date, no development costs have been
deferred.
(e) Deferred Share Issue Costs
Share issue costs incurred prior to the issuance of share capital are deferred
and netted against the proceeds when the related shares are issued.
(f) Capital Assets and Amortization
Capital assets are recorded at cost and amortized over the estimated useful
lives of the assets on the following basis:
Leasehold improvement 5 years on a straight-line basis
Computer software 100% declining balance
Computer equipment 30% declining balance
The Company periodically evaluates the recoverability of its capital assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. An impairment loss would be recognized when
estimates of future cash flows expected to result from the use of an asset and
its eventual disposition are less than its carrying amount. No impairment in
assets had been identified by the Company in the quarter ended September 30,
2001.
(g) Revenue Recognition
The Company's revenue is derived from the following source:
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
- 6 -
E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(ALL FIGURES EXPRESSED IN US DOLLARS)
Online Transactions
Revenue from the setup, maintenance, and processing of online transactions is
recognized when the services are performed, the amount of revenue is fixed or
determinable and collectability is reasonably assured.
(h) Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. This statement provides for a liability approach
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes become payable.
Deferred tax assets, if any, are recognized only to the extent that, in the
opinion of management, it is more likely than not that the income tax assets
will be realized.
(i) Basic and Diluted Loss Per Share
Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for the
period along with the contingently issuable common shares from the issuance of
special warrants which have been treated as outstanding as all necessary
conditions have been satisfied.
(j) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company has no comprehensive income items, other than the net
loss, in any of the periods presented.
3. ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of a $7,612 allowance for doubtful accounts
at September 30, 2001 (December 31, 2000 - $65,581).
4. CAPITAL ASSETS
<Table>
<Caption>
September 30, December 30,
2001 2000
------------------------------------------ ------------
Accumulated Net book Net book
Cost Amortization Value Value
------------ ------------ ------------ ------------
Leasehold improvements $ 4,940 $ 1,232 $ 3,708 $ 4,446
Computer software 87,251 83,626 3,625 14,344
Computer equipment 119,165 53,367 65,798 84,811
------------ ------------ ------------ ------------
$ 211,356 $ 138,225 $ 73,131 $ 103,601
============ ============ ============ ============
</Table>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The principal components of accounts payable and accrued liabilities were as
follows:
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E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(ALL FIGURES EXPRESSED IN US DOLLARS)
<Table>
<Caption>
-------------------------------------
September 30, 2001 December 31, 2000
------------------ -----------------
Trade payables $ 522,547 $ 498,149
Other accrued liabilities 24,120 43,014
-------------- --------------
$ 546,667 $ 541,163
============== ==============
</Table>
6. ADVANCES PAYABLE
The advances payable from certain stockholders of the Company bear interest at
prime plus one per cent and have no fixed terms of repayment. These advances are
secured by the assets of the Company.
7. COMMON STOCK, SPECIAL WARRANTS AND OPTIONS
(a) Authorized Stock
The Company was initially incorporated on August 13, 1998 under the laws of
British Columbia, Canada with 50,000,000 authorized common stock with no par
value. On July 28, 1999 the Company was reincorporated in the State of Delaware.
The Company has an authorized share capital of 50,000,000 common shares with a
par value of $0.001 per share. As a result of the re-incorporation and change to
par value shares, $37,930 was reclassified during 1998 from common stock to
additional paid in capital.
On September 2, 1999 the Company's common stock were split, twenty-one
thousand-for-one. All per share amounts of prior periods have been adjusted to
reflect the split.
7. COMMON STOCK, SPECIAL WARRANTS AND OPTIONS (continued)
(b) Issued and outstanding
- 8 -
E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(ALL FIGURES EXPRESSED IN US DOLLARS)
<Table>
<Caption>
Number of
Shares Amount Additional paid-in capital
------------ ------------ --------------------------
Issued and Outstanding:
Balance, December 31, 2000 8,502,000 $ 8,502 $ 3,128,382
------------ ------------ ------------
Balance, September 30, 2001 8,502,000 $ 8,502 $ 3,128,382
============ ============ ============
</Table>
Warrants - At September 30, 2001, the following warrants were outstanding:
<Table>
<Caption>
Date Granted Expiry Date Number of Shares Exercise Price
- ------------ ----------- ---------------- --------------
July 28, 1999 July 28, 2004 1,007,136 $ 1.00
August 2, 2000 August 2, 2002 549,532 $ 2.25
------------ ------------
Balance, September 30, 2001 1,556,668
============
</Table>
Stock Options - At September 30, 2001, the following stock options were
outstanding:
<Table>
<Caption>
Date Granted Expiry Date Number of Shares Exercise Price
- ------------ ----------- ---------------- --------------
January 12, 2000 January 11, 2005 407,000 $ 1.00
March 15, 2000 March 14, 2005 13,000 $ 1.00
May 17, 2000 May 16, 2005 78,500 $ 3.35
April 24, 2001 April 23, 2006 675,000 $ 0.25
--------------- -------------
Balance September 30, 2001 1,173,500
===============
</Table>
7. COMMON STOCK, SPECIAL WARRANTS AND OPTIONS (continued)
(c) Special Warrants
On April 26, 2001 the Company completed an offering of 2,000,000 special
warrants at $0.20 per special warrant, for total proceeds of $400,000. Each
warrant consists of one common share (at no cost to the
- 9 -
E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(ALL FIGURES EXPRESSED IN US DOLLARS)
holder) and one purchase warrant. Each purchase warrant will entitle the holder
to purchase one additional common share at a price of $0.23 per share in the
first year and $0.27 per share in the second year. The special warrants were
converted in October, 2001. Upon conversion, the proceeds of $400,000 will be
allocated between the warrants and common shares based on their relative fair
values.
8. FINANCIAL INSTRUMENTS
(a) Fair Value
The carrying values of cash, accounts receivable, deposits, accounts payable and
accrued liabilities income taxes payable and advances payable, as reflected in
the balance sheet, approximate their respective fair values as at September 30,
2001 and December 31, 2000 because of the demand or short-term maturity of these
instruments.
(b) Credit Risk and Economic Dependence
Financial instruments that potentially subject the Company to credit risk
consist of bank deposits and accounts receivable. Cash is deposited with high
credit quality financial institutions. Accounts receivable consist of amounts
receivable from trade and other receivables. The Company does not require
collateral or other security to support accounts receivable. The Company
estimates its allowance for doubtful accounts based on analysis of specific
accounts and its operating history. For the nine months ended September 30, 2001
revenue from one client accounted for approximately 14% of total revenue
compared to approximately 70% (obtained from two customers) for the nine months
ended September 30, 2000.
(c) Foreign Exchange Risk
During the period ended September 30, 2001, the majority of the Company's
operations were conducted in the Canada. The Company undertakes certain
transactions in Canadian dollars and is therefore exposed to foreign exchange
risk.
9. RELATED PARTY TRANSACTIONS
Related party transactions not otherwise disclosed in these financial statements
include: During the quarter ended September 30, 2001, the Company incurred
interest of $890 (September 30, 2000 - $nil) on advances from certain
stockholders of the Company. During the quarter ended September 30, 2001, the
Company incurred accounting service of $6,000 (September 30, 2000 - $nil) from a
company related to a stockholder of the Company. The Company also incurred
consulting services of $8,902 (September 30, 2000 - $nil) from a company related
to an officer of the Company.
10. COMMITMENTS
Future minimum operating lease payments for premises and equipment leases for
the years ended September 30, are due as follows:
- 10 -
E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(ALL FIGURES EXPRESSED IN US DOLLARS)
<Table>
<Caption>
2002 $ 37,882
2003 3,157
------------
$ 41,039
============
</Table>
11. SEGMENTED INFORMATION
The Company operates in one segment - electronic commerce services.
The Company attributes revenue among geographical areas based on the location of
the customers. During the nine months ended September 30, 2001, 95% of revenues
were derived in Canada and 5% from the US (nine months ended September 30, 2000
- - 100% of revenue was derived from Canada). Long-lived assets include capital
assets and are located in Canada.
The Company's customer sales concentration is discussed in Note 8 (b).
12. COMPARATIVE FIGURES
Where applicable, the previous periods figures have been reclassified to conform
with the presentation used in the current period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking Statements
The following Management Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
condensed financial statements and notes included in this report. Statements
made in this Form 10-QSB that are
- 11 -
not historical or current facts are "forward-looking statements" made pursuant
to the safe harbor provisions of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements often can
be identified by the use of terms such as "may," "will," "expect," "believes,"
"anticipate," "estimate," or "continue," or the negative thereof. The Company
intends that such forward-looking statements be subject to the safe harbors for
such statements. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Any forward-looking statements represent management's best judgment as to
risks, uncertainties and important factors beyond the control of the Company
that could cause actual results and events to differ materially from historical
results of operations and events from those presently anticipated or projected.
These factors include adverse economic conditions, entry of new and stronger
competitors, inadequate capital, unexpected costs, failure to gain product
approval in the United States or foreign countries and failure to capitalize
upon access to new markets. Additional risks and uncertainties that may affect
forward-looking statements about the Company's business and prospects include
the possibility that a competitor will develop a more comprehensive solution,
delays in market awareness of its products, possible delays in execution of
sales and marketing strategy, which could have an immediate and material adverse
effect. The Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Overview
The Company was incorporated under the laws of the Province of British Columbia
on August 13, 1998. On July 29, 1999 the Company filed a certificate of
domestication and certificate of incorporation with the Secretary of State of
the State of Delaware, thereby "domesticating" or transitioning from a Canadian
company to one organized under the laws of the State of Delaware.
The consolidated financial statements of the Company are prepared in accordance
with accounting policies generally accepted in the United States of America
which for this Company complies in all material respects with Canadian generally
accepted accounting principles.
The Company provides real-time financial transaction processing services using
web-centric technology. Its electronic commerce (e-commerce) software services
allow PC based cash registers, PCs, point-of-sale terminals, computer systems
and proprietary product platforms to accept credit card payments and submit
those payments to various payment processing companies for pre-authorization,
authorization and settlement/deposit. The Company is approved to act as a third
party payment processor to conduct transaction processing with major banks in
North America.
The Company's success will depend largely upon its ability to compete
successfully, develop new products and services and market them successfully in
a market that is becoming increasingly competitive.
- 12 -
Results of Operations
Interim Financial Results
(All amounts are expressed in U.S. dollars)
The Company earns its revenues by charging its customers setup fees, monthly
account maintenance fees and transaction fees for usage of its services.
Transaction fees are based on the number of transactions processed in a month.
Revenues. During the three month period ended September 30, 2001, revenues were
$101,961 compared to $81,698 for the three months ended September 30, 2000, and
$97,933 for the quarter ended June 30, 2001. Despite a slowdown in the economy,
the Company was able to produce an increase of 4% in revenue over the previous
quarter.
Revenues were derived primarily from transaction processing fees and monthly
service fees. Gross margins increased from 45% in quarter ended September 30,
2000 to 75% in the quarter ended September 30, 2001. The increase was primarily
due to the elimination of excess carrier costs. The Company continues to focus
on prospective customers referred to it by its channel partners such as banks as
well as by direct sales efforts with specific merchants
Revenue for the nine months ended September 20, 2001 amounted to $284,819
compared to $184,719 for the nine months ended September 30, 2000. This increase
of 54% over the comparable period in 2000 is primarily due to a more productive
customer base as well the elimination of unproductive customers.
Gross profit percentage for the nine months ended September 30, 2001 increased
from 53% in 2000 to 79% in 2001. The increase in margin is mainly due to higher
revenue volume and a reduction in data transmission costs.
Expenses. Total expenses during the three months ended September 30 , 2001
amounted to $159,620 compared to $1,148,947 for the three months ended September
30, 2000 and $146,904 for the quarter ended June 30, 2001. The Company continued
to maintain strict control over all operating expenses.
The operating expenses for the quarter ended September 30, 2001 consisted solely
of the Canadian operations whereas the comparable quarter ended September 30,
2000 included operations in the US.
Total expenses for the nine months ended September 30, 2001 amounted to $509,990
compared to $2,771,948 for the comparable period ended September 30, 2000. The
large reduction in expenses was due to the consolidation of operations in Canada
in 2001.
General and Administrative (G&A). During the three months ended September 30,
2001, G&A expenses were $105,274 compared to $400,299 for the comparable period
in 2000 and $98,675 for the quarter ended June 30, 2001. The 74% decrease in G&A
expenses over the comparable period in 2000 was the result of the closure of the
US operations. G&A expenses increased 6% over the previous quarter ended June
30, 2001. G&A expenses for the
- 13 -
nine months ended September 30, 2001 amounted to $319,511 compared to $1,114,043
in the comparable period September 30, 2000. The decrease of 71% is due to the
closure of the US operations in the fourth quarter of 2000 and first quarter of
2001.
Sales and Marketing. Sales and Marketing expenses for the quarter ended
September 30, 2001 amounted to $23,727 compared to $6,280 incurred in the
previous three months ended June 30, 2001 and $200,693 incurred in the quartered
ended September 30, 2000. The majority of the sales and marketing expense
consisted of payroll of employees involved with marketing and reallocation of
some expenses.
Sales and marketing expenses for the nine months ended September 30, 2001
amounted to $53,631 compared to $634,272 in the nine months ended September 30,
2000. The decrease is attributable to the closure of the US office.
Research and development. Research and development expenses consist primarily of
compensation expenses and consulting fees to support the development of the
Company's software, services and technologies. Research and development
expenditures were $30,619 for the three months ended September 30, 2001 compared
to $227,955 in the comparable period in 2000 and $41,949 for the three months
ended June 30, 2001. The Company has adequate resources to meet its software
development goals. The Company has contingency plans to hire contract developers
should the need arise.
Research and development expenses amounted to $136,848 for the nine months ended
September 30, 2001 compared to $703,633 for the nine months ended September 30,
2000. The decrease of 81% over the comparable period is due to a substantial
reduction in personnel as a result of the closure of the US office.
Net loss. The Company incurred a net loss (before income taxes) of $78,266 for
the three months ended September 30, 2001 compared to a loss of $1,101,509 for
the three months ended September 30, 2000 and a loss of $57,950 for the three
months ended June 30, 2001.
Net loss (before income taxes) for the nine months ended September 30, 2001
amounted to $268,819 compared to a net loss (before income taxes) of $2,574,772
for the comparable period ended September 30, 2000. The reduction of the loss is
attributable to the closure of the US office as well as a more productive
customer base.
Recent Accounting Pronouncements
In July 1999, the FASB announced a delay of the effective date of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities to the first
quarter of 2001. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities . It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Under SFAS No. 133, gains or losses resulting
from changes in the values of those derivatives are accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
Company adopted SFAS No. 133 on January 1, 2001 with no material effect on the
Company's financial position or results of operations.
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In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS
No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination and SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. These
standards require all future business combinations to be accounted for using the
purchase method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. The Company is required
to adopt SFAS No. 141 and 142 on a prospective basis as of January 1, 2002,
however, certain provisions of these new Standards may also apply to any
acquisitions concluded subsequent to June 30, 2001. The adoption of SFAS No. 141
and SFAS No. 142 is not expected to have a material effect on the Company's
financial position, results of operations and cash flows in 2002 and subsequent
years.
In August , 2001, the Financial Accounting Standards Board issued SFAS 144, "
Accounting for the impairment or disposal of long-lived assets ". SFAS 144
requires that long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. This statement also broadens the reporting of
discontinued operations from a business segment to include all components of an
entity with operations and cash flows that can be clearly distinguished from the
remainder of the entity. The Company is required to adopt SFAS 144 on a
prospective basis for fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 is not expected to have a material effect on the Company's
financial position or results of operations.
Liquidity & Capital Resources
Cash flow. The Company's net cash flows used for operating activities during the
nine months ended September 30, 2001 was a negative $267,284 compared to a
negative $2,086,537 for the nine months ended September 30, 2000. No investment
was made in capital equipment during the nine months ended September 30, 2001.
The Company's negative cash flow from operations is the result of inadequate
sales revenue to support its operating expenses. Management will continue to
review its operations and adjust its operations based on market conditions.
Capital resources. The Company had a capital deficiency of $512,345 as at
September 30, 2001 compared to a deficiency of $76,463 as at September 30, 2000.
Management believes that the Company will continue to incur losses through the
remainder of 2001. In the event that cash flow from operations, together with
the proceeds of any future financings, are insufficient to meet these expenses,
the Company will be required to re-evaluate its planned expenditures and
allocate its total resources in such manner as the board of directors and
management deems to be in the best interest of the Company and its stockholders.
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The Company is currently negotiating with its trade suppliers and creditors. The
success of the company is dependant upon the continuing support of its
creditors, its ability to continue to raise financing to fund operations and
ultimately upon its ability to achieve profitable operations.
Part II. Other Information
Item 1. Legal Proceedings
1. On June 8, 2001 Insight Direct USA Inc. ("Insight") filed a summons in the
Superior Court for the State of Arizona, County of Maricopa, against the Company
for alleged breach of contract. Insight alleges the Company failed to pay for
product supplied in the amount of $6,303 plus interest at 18% p.a.
On September 4, 2001, the Company filed a Statement of Defense, denying the
allegation that any moneys was due for software purchased as no software was in
fact delivered. The Company believes that Insight's summons is without merit and
intends to defend these proceedings and believes it is not likely to produce an
outcome which would have a material adverse effect on the Company's consolidated
financial position or results of operations.
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2. On October 2, 2001 Robert Roker, a former employee (the "Plaintiff") filed a
writ of summons in the Supreme Court of British Columbia, Vancouver County,
against the Company in connection with an employment contract dated November 26,
1999. The Plaintiff alleges that he was terminated without cause on September
11, 2001 and seeks severance pay of CAD$45,000 plus two weeks vacation and out
of pocket expenses of CAD$2,431.
On October 23, 2001 the Company filed a Statement of Defense denying
the allegation that any moneys are due to the Plaintiff.
The Company believes that the Plaintiff's complaint is without merit
and intends to vigorously defend these proceedings. The Company believes that
the Plaintiff was terminated with reasonable cause and has sufficient evidence
to support its case.
Item 2. Changes in Securities
On April 26, 2001 the Company completed a private placement of 2,000,000 special
warrants. Each special warrant entitles the holder to one common share and a
share purchase warrant. Each share purchase warrant entitles the holder to
purchase a further common share over a period of two years at a price of $0.23
per warrant share in the first year and at a price of $0.27 per warrant share in
the second year. The special warrants were issued outside the United States
pursuant to an exemption from the registration under Regulation S of the
Securities Act of 1933, as amended. The special warrants were purchased by non
U.S. persons outside the United States. These transactions are regarded as
unregistered transactions under the Securities Exchange Act of 1933. In October,
2001 the holders of the special warrants exercised their warrants and converted
them into 2,000,000 common shares. The Company also issued 2,000,000 share
purchase warrants under terms and conditions mentioned above. The share purchase
warrants expire May 31, 2003.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
No form 8-K reports were file in the quarter ended
September 30, 2001
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933 the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
E-XACT TRANSACTIONS LTD
(Registrant)
Dated: November 14, 2001 By: /s/ Peter Fahlman
-------------------------
Peter Fahlman
President and CEO
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