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 JUNE 30, 2002
[ ] 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
(State of Incorporation) (IRS Employer Identification No.)
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 June 30, 2002 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 -
June 30, 2002 and December 31, 2001 2
Consolidated statements of operations and deficit -
three months ended June 30, 2002 and 2001, and
six months ended June 30 , 2002 and 2001 3
Consolidated statements of cash flows -
three months ended June 30, 2002 and 2001, and
six months ended June 30, 2002 and 2001 4
Notes to consolidated financial statements 5 - 13
Item 2. Management's discussion and analysis of financial condition
and results of operations 14 -18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</Table>
-1-
EXACT TRANSACTIONS LTD.
CONSOLIDATED BALANCE SHEETS
Expressed in Canadian Dollars
<Table>
<Caption>
JUNE 30 DECEMBER 31
2002 2001
------------ ------------
(Unaudited)
ASSETS
CURRENT
Cash $ 3,143 $ 33,402
Accounts receivable (Note 3) 130,097 99,569
Prepaid expenses and deposits 22,293 12,520
------------ ------------
155,533 145,491
Capital assets (Note 4) 79,301 94,296
------------ ------------
TOTAL ASSETS $ 234,834 $ 239,787
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
CURRENT
Accounts payable and accrued liabilities (Note 5) $ 811,150 $ 888,595
Advances payable (Note 6) 199,368 188,335
------------ ------------
1,010,518 1,076,930
------------ ------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS (Note 10)
CONTINGENCIES(Note 12)
CAPITAL DEFICIENCY
Common stock, common shares issued and outstanding (Note 7)
10,502,000 at June 30, 2002 and December 31, 2001 11,715 11,715
Share purchase warrants 281,465 281,465
Additional paid In capital 4,833,343 4,833,343
Accumulated deficit (5,902,207) (5,963,666)
------------ ------------
(775,684) (837,143)
------------ ------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 234,834 $ 239,787
============ ============
</Table>
See accompanying notes to consolidated interm financial statements
-2-
EXACT TRANSACTIONS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Expressed in Canadian Dollars
<Table>
<Caption>
3 months ended June 30 6 months ended June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE $ 223,169 100,338 $ 468,656 280,240
Cost of sales 24,242 31,074 52,973 53,352
------------ ------------ ------------ ------------
GROSS MARGIN $ 198,927 69,264 $ 415,683 226,888
------------ ------------ ------------ ------------
EXPENSES:
General and administrative expenses 124,388 104,293 240,386 328,216
Sales and marketing 25,973 9,678 55,664 45,770
Research and development 61,379 64,648 115,300 162,857
------------ ------------ ------------ ------------
211,740 178,619 411,350 536,843
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) $ (12,813) (109,355) $ 4,333 (309,955)
------------ ------------ ------------ ------------
OTHER INCOME
Other Income 52,060 70,343 57,126 11,238
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES 39,247 (39,012) 61,459 (298,717)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 39,247 (39,012) $ 61,459 (298,717)
Deficit, beginning of period (5,941,454) (5,758,363) (5,963,666) (5,498,658)
------------ ------------ ------------ ------------
Deficit, end of period $ (5,902,207) (5,797,375) $ (5,902,207) (5,797,375)
============ ============ ============ ============
Basic earnings (loss) per share $ 0.004 $ (0.005) $ 0.006 $ (0.035)
------------ ------------ ------------ ------------
Diluted earning (loss) per share $ 0.004 $ (0.005) $ 0.006 $ (0.035)
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE LOSS PER SHARE
BASIC 10,502,000 8,502,000 10,502,000 8,502,000
DILUTED 10,502,000 8,502,000 10,502,000 8,502,000
</Table>
See accompanying notes to consolidated interm financial statements
-3-
EXACT TRANSACTIONS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Expressed in Canadian Dollars
<Table>
<Caption>
3 months ended June 30 6 months ended June 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 39,247 (39,012) $ 61,459 (298,717)
Item not affecting cash:
Amortization of capital assets 7,444 15,706 14,890 31,283
Loss on disposal of capital assets -- 415 --
Net change in operating assets and liabilities
(Increase) decrease in accounts receivable 12,502 6,725 (30,528) (61,932)
(Increase) decrease in prepaid expenses and deposits (8,019) 5,890 (9,773) (12,866)
Increase (decrease) in accounts payable and accrued liabilities (60,844) (121,858) (77,445) (8,100)
--------- --------- --------- ---------
(9,670) (132,549) (40,982) (350,332)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Advances from shareholders (5,800) 123,456 11,033 374,292
--------- --------- --------- ---------
(5,800) 123,456 11,033 374,292
--------- --------- --------- ---------
INVESTING ACTIVITIES
Proceeds on disposal of capital assets (333) (580) (310) (1,031)
--------- --------- --------- ---------
(333) (580) (310) (1,031)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH $ (15,803) (9,672) $ (30,259) 22,929
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,946 48,310 33,402 15,709
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,143 38,638 $ 3,143 38,638
========= ========= ========= =========
</Table>
See accompanying notes to consolidated interm financial statements
-4-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN 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 ("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 profit of $39,247 for the quarter ended June
30, 2002, and at June 30, 2002 had a working capital deficiency of
$854,985 and capital deficiency of $775,684. 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.
In the event that cash flow from operations, if any, together with the
proceeds of any future financings, are insufficient to meet the
Company's current operating expenses, the Company will be required to
reevaluate its planned expenditures and allocate its total resources in
such manner as the Board of Directors and management deems to be in the
Company's best interest. This may result in the substantial reduction
of the scope of existing and planned operations.
The success of the Company's future operations is dependent upon
maintaining its profitability, 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.
-5-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the
annual financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have
been condensed or omitted pursuant to those rules or regulations. The
interim financial statements are unaudited, but reflect all adjustments
which are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. These financial
statements should be read in conjunction with the consolidated
financial statements and related notes thereto in the Company's Annual
Report on Form 10KSB for the year ended December 31, 2001. The results
of operations for the interim periods are not necessarily indicative of
the results to be expected in the future periods.
These financial statements have been prepared in accordance with the
following significant accounting polices.
(a) Basis of consolidation
These consolidated financial statements include the assets,
liabilities and operating results of the Company and its
wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated.
(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.
(c) Foreign Currency Translation
On January 1, 2002 the Company changed its functional currency
from the United States dollar to the Canadian dollar. The
majority of the Company's operating transactions are
denominated in Canadian dollars. Monetary assets and
liabilities denominated in other than the Canadian dollars 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 rates in existence
at the date of the transactions.
-6-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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) 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
In the year of acquisitions, half the above-mentioned rates
are used.
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 periods ended June 30, 2002 and 2001.
(f) Revenue Recognition
The Company's revenue is derived from the following sources:
(i) Online Transactions
Revenue from the setup, maintenance, customization
and processing of online transactions is recognized
when the services are performed, the amount of
revenue is fixed or determinable and collectibility
is reasonably assured.
(ii) Web Development
Revenue from services related to web development are
recognized when the services are performed, the
amount of revenue is fixed or determinable and
collectibility is reasonably assured. Provision for
estimated losses on contracts is recorded when
identified.
-7-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("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 temporary differences will reverse.
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.
(h) 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 on exercise of special
warrants which have been treated as outstanding as all
necessary conditions for their exercise have been satisfied.
(i) 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.
(j) Recent Accounting Pronouncements
In July 2001,the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 addresses
the initial recognition and measurement of intangible assets
acquired in a business combination and SFAS No. 142 addresses
the subsequent 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 business combinations to be accounted
for using the purchase method of accounting. Goodwill is no
longer amortized but instead is subject to impairment tests at
least annually.
The Company was required to adopt SFAS No. 141 and No. 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 No. 142 did not to have a
material effect on the Company's financial position or results
of operations.
-8-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) Recent Accounting Pronouncements (continued)
The FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, in August 2001. SFAS No. 144,
which addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to
be disposed of, supersedes SFAS No. 121 and is effective for
fiscal years beginning after December 15, 2001. Therefore, the
Company was required to adopt SFAS No. 144 as of January 01,
2002. The adoption of SFAS No. 144 did not have a material
impact on the Company's financial position or results of
operations.
(k) Stock options
Stock options are denominated in United States dollars and are
therefore subject to variable accounting. For the periods
ended June 30, 2002 no compensation expense was recognized as
the exercise price of the options was greater than market
price.
(l) Comparative figures
Certain comparative figures have been reclassed to conform
with the current period's presentation
3. ACCOUNTS RECEIVABLE
Accounts receivable and other are recorded net of a $13,352 allowance
for doubtful accounts at June 30, 2002 (December 31, 2001 - $19,999)
4. CAPITAL ASSETS
<Table>
<Caption>
June 30 December 31
---------------------------------------- -----------
2002 2001
---------------------------------------- -----------
Accumulated Net Book Net Book
Cost Amortization Value Value
-------- ------------ -------- -----------
Leasehold improvements ....... $ 7,333 2,933 4,400 $ 5,143
Computer software ............ 130,828 130,499 329 775
Computer equipment ........... 175,944 101,372 74,572 88,378
-------- -------- -------- --------
$314,105 $234,804 $ 79,301 $ 94,296
======== ======== ======== ========
</Table>
-9-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The principal components of accounts payable and accrued liabilities
were as follows:
<Table>
<Caption>
June 30 December 31
--------- -----------
2002 2001
-------- -----------
Trade payables ............... $781,761 $855,067
Other accrued liabilities .... 29,389 33,528
-------- --------
$811,150 $888,595
======== ========
</Table>
6. ADVANCES PAYABLE
The advances payable from certain stockholders of the Company bear
interest at bank prime rate plus one percent and have no fixed terms of
repayment. The advances are secured by certain assets of the Company.
7. STOCKHOLDERS' EQUITY
(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 authorized 50,000,000 common stock with a par
value of $0.001 per share. As a result of the re-incorporation
and change from no par value to par value shares, $60,317 was
reclassified during 1998 from common stock to additional paid
in capital.
-10-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
7. STOCKHOLDERS' EQUITY (CONTINUED)
(b) Stock Options
The following table summarizes information about stock options
outstanding at June 30, 2002:
<Table>
<Caption>
Date granted Expiry date Number of options Exercise price
(US dollars)
12-Jan-00 11-Jan-05 357,000 $ 1.00
21-Mar-00 20-Mar-05 13,000 1.00
17-May-00 16-May-05 78,500 3.35
24-Apr-01 23-Apr-06 625,000 0.25
---------
1,073,500
---------
</Table>
(c) Warrants
The following warrants were outstanding as at June 30, 2002
<Table>
<Caption>
Date granted Expiry date Number of shares Exercise price
(US dollars)
28-Jul-99 28-Jul-04 1,007,136 $ 1.32
02-Aug-00 02-Aug-02 549,532 2.25
26-Apr-01 26-Apr-03 2,000,000 0.23
---------
3,556,668
---------
</Table>
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 June 30, 2002
and December 31, 2001 because of the demand or short-term
maturity of these instruments.
-11-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
(b) Credit Risk and Economic Dependence
Financial instruments which 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.
The Company is subject to credit risk as it earns revenue from
a limited number of customers. During the six months ended
June 30, 2002 $134,885 (2001 - $49,256) and the quarter ended
June 30, 2002 - $58,506 (2001 - $27,186) of revenue was
derived from two customers. As at June 30, 2002 accounts
receivable included $44,374 (December 31, 2001 - $6,235) due
from these two customers.
9. RELATED PARTY TRANSACTIONS
Related party transactions not otherwise disclosed in these financial
statements include:
(a) As at June 30, 2002 accounts payable and accrued liabilities
included $115,055 (December 31, 2001 - $83,028) due to two
corporate stockholders for operating costs paid on its behalf;
(b) During the quarter ended June 30, 2002, the Company incurred
interest of $2,556 (2001 - $7,931) and for the six months then
ended, the Company incurred interest of $4,897 (2001- $20,591)
on advances from certain stockholders of the Company; and,
(c) As at June 30, 2002, $199,368 (December 31, 2001 - $188,335)
was due to certain stockholders and directors of the Company;
10. COMMITMENTS
Future minimum operating lease payment for premises and equipment
leases for the years ended June 30, are due as follows:
<Table>
2003 ................................. $16,069
2004 ................................. 4,516
-------
$20,585
=======
</Table>
-12-
EXACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
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 quarter ended June 30, 2002, 86%
of revenues were derived in Canada (quarter ended June 30, 2001 - 93%).
During the six months ended June 30, 2002, 92% of revenues were derived
in Canada (six months ended June 30, 2002 - 96%). Long-lived assets
include capital assets and are located in Canada.
The Company's customer sales concentration is discussed in Note 8 (b).
12. CONTINGENCIES
The Company received a statement of assessment from Canada Customs and
Revenue Agency ("CCRA") on April 18, 2002 denying the Company's filing
position with regards to its continuation in the U.S. CCRA has assessed
a liability of $324,484. Subsequent to June 30, 2002 the Company filed
its Notice of Objection strongly defending its position. No provision
for this amount has been recorded, as the outcome of this assessment is
uncertain.
On October 2, 2001 Robert Roker, a former employee (the "Plaintiff")
filed a complaint 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 $45,000
plus two weeks vacation and out of pocket expenses of $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.
-13-
EXACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
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
consolidated interim financial statements and notes included in this report.
Statements made in this Form 10-QSB that are 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 North American 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 principles 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.
-14-
EXACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
The Company determined that as of January 1, 2002 its functional currency was
the Canadian dollar. Previously the functional currency of the Company was the
United States dollar. The change in the Company's functional currency was made
as the majority of the Company's operating transactions are now denominated in
the Canadian dollar. Monetary assets and liabilities denominated in other than
Canadian dollars were translated using the exchange rates prevailing at the
balance sheet date. Revenues and expenses were translated using average exchange
rates prevailing during the period. Gains and losses on foreign currency
transactions were recorded in the consolidated statement of operations and
deficit. The Company remeasured its assets, liabilities, revenues and expenses
for prior periods using historical exchange rates in existence at the date of
the transactions. As at June 30, 2002 a significant component of the existing
accounts payable and accrued liabilities and advances payable were denominated
in United States dollars ($425,421). The impact of a 1% increase in the relative
value of the Canadian dollar to the United States dollar would reduce accounts
payable and and accrued liabilities and advances payable and increase net income
from operations by $4,254 United States dollars - approximately $6,300 Canadian
dollars.
Results of Operations
Interim Financial Results
(All amounts are expressed in Canadian 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
The revenues are derived primarily from transaction processing fees and monthly
service fees. During the three month period ended June 30, 2002, revenues
increased by 222.42% over the comparable period in 2001. The increase was due
primarily to an increase in the number of customers, an increase in the number
of transactions processed per customer, and custom solutions for certain
customers. As at June 30, 2002 the Company had 304 customers compared to 270
customers as at June 30, 2001. The total value of transactions processed by the
Company for the quarter ended June 30, 2002 amounted to approximately $321
million compared to $292 million in the comparable quarter in 2001. For the six
month period ended June 30, 2002, revenue increased by 167.2% over the
comparable period in 2001 for the above mentioned reasons.
Gross profit percentage for the three months ended June 30, 2002 increased from
69.03% in 2001 to 89.1% in 2002. For the six months then ended, gross profit
percentages were 88.70% in 2002 and 80.96% in 2001. The Company was able to
contain its cost of sales despite an increase in revenue.
Expenses
Total expenses during the three months ended June 30, 2002 amounted to $211,740
compared to $178,619 for the three months ended June 30, 2001. The increase of
18.5% in operating expenses was due additional development costs for new product
initiatives and costs related to the Notice of Objection filed with the CCRA in
dispute of the Company's 2000 tax assessment. The decrease in operating expenses
from $536,843 for the six months ended June 30, 2001 to $411,350 in 2002 is
largely attributable to the closing of the Company's office in the United
States.
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EXACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
General and Administrative (G&A): During the three months ended June 30, 2002,
G&A expenses amounted to $124,388 compared to $104,293 in the comparable period
in 2001. The increase of approximately 19% in G&A expenses over the comparable
period was due to the fact that there was a $43,000 recovery of a bad debt in
the quarter ended June 30, 2001, thereby having the effect of reducing the
overall G & A expenses in 2001. Accounting expenses decreased from $ 29,841 in
2001 to $17,845 in 2002, rent decreased from $12,339 in 2001 to $10,401 in 2002.
Amortization of equipment decreased from $15,710 in 2001 to $7,446 in 2002.
Wages and salaries decreased from $51,337 in 2001 to $ 48,236 in 2002. For the
six months ended June 30, 2002, G&A expenses decreased from $200,783 in 2001 to
$147,354. Besides the above mentioned quarterly changed for 2002 and 2001, the
decrease in G&A expenses can be largely contributed to the closing of the office
in the United States in the first quarter of 2001.
Sales and Marketing: Sales and Marketing expenses for the six months ended June
30, 2002 were $35,333 compared to $29,904 for the same period ended 2001 and
quarter ended June 30, 2002 amounted to $25,973 compared to $9,678 incurred in
the three months ended June 30, 2001. The majority of the sales and marketing
expense consisted of the payroll of employees involved in marketing.
Research and Development (R&D): 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 $61,379 for the three months ended June 30, 2002
compared to $64,648 in the comparable period in 2001. For the six months ended
June 30, 2002, research and development expenditures were $115,300 compared to
$162,857 in the comparable period in 2001. The decrease in R&D expenses was due
to a reduction of US staff in 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.
Net Profit:
The Company incurred a net profit of $39,247 for the three months ended June 30,
2002 and $61,459 for the six months then ended compared to a loss of $39,012 for
the three months ended June 30, 2001 and $298,717 for the six months then ended.
As the Company has a significant amount of its trade payables denominated in
United States dollars and because the Canadian dollar had strengthened against
the United States dollar during the quarter ended June 30, 2002, it recognized
approximately $40,000 of unrealized foreign exchange gains included in other
income in this quarter. Management believes that it has the right mix of
customers to enable it to maintain its profitability in the future.
Recent Accounting Pronouncements
In July 2001,the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 addresses the initial recognition and measurement of
intangible assets acquired in a business combination and SFAS No. 142 addresses
the subsequent 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 business combinations to be accounted for
using the purchase method of accounting. Goodwill is no longer amortized but
instead is subject to impairment tests at least annually.
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EXACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
The Company is required to adopt SFAS No. 141 and No. 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 No. 142 did not to have a material effect on the
Company's financial position or results of operations.
The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in August 2001. SFAS No. 144, which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, supersedes SFAS No. 121 and is effective
for fiscal years beginning after December 15, 2001. Therefore, the Company was
required to adopt SFAS No. 144 as of January 1, 2002. The adoption of SFAS No.
144 has not had a material impact on the Company's financial position or results
of operations.
Critical Accounting Policies and Estimates
The significant accounting policies are outlined within note 2 to the
consolidated interim financial statements. Some of those accounting policies
require the Company to make estimates and assumptions that affect the amounts
reported by the Company. The following items require the most significant
judgment or estimation:
Revenue Recognition:
New customers are required to complete a Merchant Registration Form and a
Transactions Processing Agreement. The term of the Agreement is normally
for a year with an automatic renewal at the anniversary date. The Company
receives it revenue from three sources: new account activations, monthly
service/membership fees and online transactions fees. New account
activations fees are recognized as revenue when customers' production
accounts are activated while monthly services fees are recognized when
customers are invoiced. Online transaction fees are recognized when
services have been performed.
Accounts Receivable:
The Company performs monthly reviews of its accounts receivable. Customers
who are in arrear are normally given the opportunity to pay off arrear
balances prior to suspension of processing services. Provision for doubtful
accounts are normally based on customers who are 120 days in arrear.
However, the review is also based on a case by case basis depending on the
customer's circumstances. A significant change in the financial position of
the Company's customers could have a material adverse impact on the
collectability of the accounts receivable.
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 and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Examples include provisions for
bad debts, and the contingencies described in Legal Proceedings in item 1
following. Actual results could differ from those estimates.
Liquidity & Capital Resources
Cash flow:
The Company's net cash outflow during the three months ended June 30, 2002
was $15,803 compared
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EXACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
to $ 9,672 for the three months ended June 30, 2001 and for the six months
ended June 30, 2002 was $30,259 compared to a net inflow of $22,929 for the
six months ended June 30, 2002. The Company's cash position is expected to
improve as it expects to activate new accounts as a result of its
relationship with Scotiabank.
No investment was made in capital equipment during the three months ended
June 30, 2002. Management will continue to review its operations and adjust
its operations based on market conditions.
Capital resources. The Company had a capital deficiency of $775,684 as at
June 30, 2002 compared to a deficiency of $837,143 as at December 31, 2001.
In the event that cash flow from operations, together with the proceeds of
any future financings, are insufficient to meet the Company's 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.
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.
The Company incurred a net profit of $39,247 for the quarter ended June 30,
2002, $61,459 for the six months ended, and at June 30, 2002 had a working
capital deficiency of $854,985 and capital deficiency of $775,684. 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.
In the event that cash flow from operations, if any, together with the
proceeds of any future financings, are insufficient to meet the Company's
current operating expenses, the Company will be required to reevaluate its
planned expenditures and allocate its total resources in such manner as the
Board of Directors and management deems to be in the Company's best
interest. This may result in the substantial reduction of the scope of
existing and planned operations.
The success of the Company's future operations is dependent upon
maintaining its profitability, 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.
Subsequent events
The Company received a statement of assessment from Canada Customs and
Revenue Agency ("CCRA") on April 18, 2002 denying the Company's filing
position with regards to its continuation to the U.S. CCRA has assessed a
liability of $324,484. Subsequent to June 30, 2002 the Company filed its
Notice of Objection strongly defending its position. No provision for this
amount has been recorded, as the outcome is of this assessment uncertain.
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EXACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
Part II. Other Information
Item 1. Legal Proceedings
1. On October 2, 2001 Robert Roker, a former employee (the "Plaintiff") filed a
complaint 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 $45,000 plus two weeks vacation and out of pocket
expenses of $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
No changes in securities.
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 June
30, 2002
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EXACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2002
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: August 14, 2002 By: /s/ Peter Fahlman
Peter Fahlman
President and CEO
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