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 MARCH 31, 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 April 26, 2002 was 10,502,000.
E-XACT TRANSACTIONS, LTD
FORM 10-QSB
TABLE OF CONTENTS
<Table>
<Caption>
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated balance sheets -
March 31, 2002 and December 31, 2001 2
Consolidated statements of operations and deficit -
three months ended March 31, 2002 and
three months ended March 31, 2001 3
Consolidated statements of cash flows -
Three months ended March 31, 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-
E-XACT TRANSACTIONS LTD.
CONSOLIDATED BALANCE SHEETS
Expressed in Canadian Dollars
<Table>
<Caption>
MARCH 31 DECEMBER 31
2002 2001
------------ ------------
(Unaudited)
ASSETS
CURRENT
Cash $ 18,946 $ 33,402
Accounts receivable (Note 3) 142,599 99,569
Prepaid expenses and deposits 14,275 12,520
------------ ------------
175,820 145,491
Capital assets (Note 4) 86,412 94,296
------------ ------------
TOTAL ASSETS $ 262,232 $ 239,787
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Accounts payable and accrued liabilities (Note 5) $ 855,732 $ 878,749
Income taxes payable 16,263 9,846
Advances payable (Note 6) 205,168 188,335
------------ ------------
TOTAL CURRENT LIABILITIES 1,077,163 1,076,930
------------ ------------
CONTINUING OPERATIONS (Note 1)
COMMITMENTS (Note 10)
CAPITAL DEFICIENCY
Common stock, common shares issued and outstanding (Note 7)
10,502,000 at March 31, 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 (5,941,454) (5,963,666)
------------ ------------
Capital Deficiency (814,931) (837,143)
------------ ------------
TOTAL CAPITAL DEFICIENCY AND LIABILITIES 262,232 239,787
============ ============
</Table>
See accompanying notes to consolidated financial statements
-2-
E-XACT TRANSACTIONS LTD.
CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
Expressed in Canadian Dollars
<Table>
<Caption>
For the three month period ended March 31 2002 2001
- ----------------------------------------- ------------ ------------
(Unaudited) (Unaudited)
REVENUE $ 245,488 $ 179,903
COST OF SALES 28,731 22,278
------------ ------------
GROSS MARGIN 216,757 157,625
------------ ------------
EXPENSES:
General and administrative expenses 115,998 223,923
Sales and marketing 29,691 36,093
Research and development 53,921 98,209
------------ ------------
199,610 358,225
------------ ------------
OPERATING INCOME (LOSS) 17,147 (200,600)
------------ ------------
OTHER INCOME (EXPENSES)
Other Income 5,065 (59,105)
------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES 22,212 (259,705)
Income taxes -- --
------------ ------------
NET INCOME (LOSS) 22,212 (259,705)
Deficit, beginning of period (5,963,666) (5,498,658)
------------ ------------
Deficit, end of period $ (5,941,454) $ (5,758,363)
============ ============
Basic and diluted earnings (loss) per share $ 0.00 $ (0.03)
------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE LOSS PER SHARE
BASIC 10,502,000 8,502,000
DILUTED 10,647,227 8,502,000
</Table>
See accompanying notes to consolidated financial statements
-3-
E-XACT TRANSACTIONS LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
Expressed in Canadian dollars
<Table>
<Caption>
For the three month period ended March 31 2002 2001
- ----------------------------------------- ------------ ------------
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 22,212 $ (259,705)
Item not affecting cash:
Amortization 7,111 15,130
Loss on disposal of capital assets 426 --
------------ ------------
29,749 (244,575)
Net change in operating assets and liabilities
(Increase) in accounts receivable (43,030) (68,658)
(Increase) in prepaid expenses and deposits (1,755) (18,756)
Decrease in income taxes recoverable 6,417 5,523
(Decrease) Increase in accounts payable and accrued
liabilities (23,017) 108,235
------------ ------------
(31,636) (218,231)
------------ ------------
FINANCING ACTIVITIES
Advances from stockholders 16,833 250,835
------------ ------------
16,833 250,835
------------ ------------
INVESTING ACTIVITIES
(Purchase) Disposal of capital assets 347 (3)
------------ ------------
347 (3)
------------ ------------
INCREASE (DECREASE) IN CASH $ (14,456) $ 32,601
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,402 15,709
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,946 $ 48,310
============ ============
</Table>
See accompanying notes to consolidated financial statements
-4-
E-XACT 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 continued into 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 $22,212 for the quarter ended
March 31, 2002 and at March 31, 2002 had a working capital deficiency
of $901,343 and capital deficiency of $814,931. 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.
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.
-5-
E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES
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.
(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 US 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 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.
-6-
E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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
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 quarters ended March 31, 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-
E-XACT 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
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.
(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 from the issuance of
special warrants which have been treated as outstanding as all
necessary conditions 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 is required to adopt SFAS No. 141 and No. 142 on a
prospective basis as of July 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 did not to have a material effect on
the Company's financial position or results of operations.
-8-
E-XACT 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 will be 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.
(k) Stock options
Stock options are denominated in US dollars and are therefore
subject to variable accounting. For the quarter ended
March 31, 2002 no compensation expense was recognized as the
exercise price of the options was less than market price.
3. ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of a $18,732 allowance for
doubtful accounts at March 31, 2002 (December 31, 2001 - $19,999).
4. CAPITAL ASSETS
<Table>
<Caption>
December 31
March 31, 2002 2001
---------------------------------------------- ------------
Accumulated Net Book Net Book
Cost Amortization Value Value
------------ ------------ ------------ ------------
Leasehold improvements ....... $ 7,333 $ 2,566 $ 4,767 $ 5,143
Computer software ............ 130,828 130,336 492 775
Computer equipment ........... 175,944 94,791 81,153 88,378
------------ ------------ ------------ ------------
$ 314,105 $ 227,693 $ 86,412 $ 94,296
============ ============ ============ ============
</Table>
-9-
E-XACT 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>
March 31, 2002 December 31, 2001
-------------- -----------------
Trade payables .................. $ 823,484 $ 845,221
Other accrued liabilities ....... 32,248 33,528
------------ ------------
$ 855,732 $ 878,749
============ ============
</Table>
6. ADVANCES PAYABLE
The advances payable from certain stockholders of the Company bear
interest at prime plus one percent and have no fixed terms of
repayment. 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 to par value shares, $60,317 was reclassified
during 1998 from common stock to additional paid in capital.
(b) 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.
-10-
E-XACT TRANSACTIONS LTD.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
7. STOCKHOLDERS' EQUITY (CONTINUED)
(c) Stock Options
The following table summarizes information about stock options
outstanding at March 31, 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>
(d) Warrants
The following warrants were outstanding as at March 31, 2002
<Table>
<Caption>
Date granted Expiry date Number of options Exercise price
------------ ----------- ----------------- --------------
28-Jul-99 28-Jul-04 1,007,136 US$ 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 March 31, 2002
and 2001 because of the demand or short-term maturity of these
instruments.
-11-
E-XACT 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 quarter ended March
31, 2002 - $91,435 (quarter ended March 31, 2001 - $25,382) of
revenue was derived from two customers. As at March 31, 2002
accounts receivable included $70,102 (March 31, 2001 -
$14,125) due from two customers.
9. RELATED PARTY TRANSACTIONS
Related party transactions not otherwise disclosed in these financial
statements include:
(a) As at March 31, 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 March 31, 2002, the Company incurred
interest of $2,341 (2001 - $12,660) on advances from certain
stockholders of the Company; and,
(c) As at March 31, 2002, $205,169 (December 31, 2001 - $232,493)
was due to stockholders and directors of the Company;
10. COMMITMENTS
Future minimum operating lease payment for premises and equipment
leases for the years ended March 31, are due as follows:
<Table>
2002 ...................................... $ 32,067
2003 ...................................... 7,356
2004 ...................................... 1,000
-----------
$ 40,423
===========
</Table>
-12-
E-XACT 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 March 31, 2002, 93%
of revenues were derived in Canada (quarter ended March 31, 2001 -
100%). Long-lived assets include capital assets and are located in
Canada.
The Company's customer sales concentration is discussed in Note 8 (b).
12. SUBSEQUENT EVENT
Subsequent to March 31, 2002 the Company received a statement of
assessment from Canada Customs and Revenue Agency ("CCRA") denying the
Company's filing position with regards to its continuation to the U.S.
CCRA has assessed a liability of $335,000. The Company intends to
strongly defend its position. No provision for this amount has been
recorded as the outcome is uncertain.
-13-
E-XACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED MARCH 31, 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
condensed 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 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.
-14-
E-XACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED MARCH 31, 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
US 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 transaction.
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 March 31, 2002, revenues
increased by 36% over the comparable period in 2001. The increase was due
primarily to an increase in the number of customers as well as an increase in
the number of transactions processed per customer. As at March 31, 2002 the
Company had 289 customers compared to 200 customers as at March 31, 2001. The
total value of transactions processed by the Company for the quarter ended March
31, 2002 amounted to approximately $321 million compared to $292 million in the
comparable quarter in 2001.
Gross profit percentage for the three months ended March 31, 2002 marginally
increased from 87.6% in 2001 to 88.3% in 2002. The Company was able to contain
its cost of sales despite an increase in revenue.
Expenses
Total expenses during the three months ended March 31, 2002 amounted to $199,610
compared to $358,225 for the three months ended March 31, 2001. The decrease of
44% in operating expenses was due primarily to the closure of the US office. The
remaining staff in the US office were terminated in the first quarter of 2001.
General and Administrative (G&A): During the three months ended March 31, 2002,
G&A expenses amounted to $115,998 compared to $223,923 in the comparable period
in 2001. The decrease of approximately 48% in G&A expenses over the comparable
period was due to the closure of the US office as well as some onetime expenses.
For the quarter ended March 31, 2001, the Company incurred additional accounting
expenses as it had to relocate and restore its accounting records, and accounts
receivable was re-evaluated with the resultant write off of non-performing
receivables. Accounting expenses decreased from $29,340 in 2001 to $10,441 in
2002, bad debts decreased from $50,225 to
-15-
E-XACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2002
$3,246 in 2002. Telephone expenses decreased from $11,635 in 2001 to $1,859 in
2002, rent decreased from $18,478 in 2001 to $11,281 in 2002. Amortization of
equipment decreased from $15,574 in 2001 to $7,638 in 2002. Wages and salaries
decreased from $74,027 in 2001 to $49,286 in 2002.
Sales and Marketing: Sales and Marketing expenses for the quarter ended March
31, 2002 amounted to $29,691 compared to $36,093 incurred in the three months
ended March 31, 2001. The majority of the sales and marketing expense consisted
of 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 $53,921 for the three months ended March 31, 2002
compared to $98,209 in the comparable period in 2001. The decreased in R&D
expenses in the current period over the comparable period 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 (before income taxes) of $22,212 for the three
months ended March 31, 2002 compared to a loss of $(259,705) for the three
months ended March 31, 2001. Management believes that it has the right mix of
customers that would 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.
The Company is required to adopt SFAS No. 141 and No. 142 on a prospective basis
as of July 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 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 will
be 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.
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E-XACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2002
Critical Accounting Policies and Estimates
The significant accounting policies are outlined within note 2 to the 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, a 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 flow used for operating activities during the
three months ended March 31, 2002 was a negative $31,636 compared to a
negative $ 218,231 for the three months ended March 31, 2001. 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 March 31, 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 $814,931 as
at March 31, 2002 compared to a deficiency of $1,226,290 as at March
30, 2001 and 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 these expenses, the Company
will be required to re-evaluate its
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E-XACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2002
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.
Subsequent events
Subsequent to March 31, 2002 the Company received a statement of
assessment from Canada Customs and Revenue Agency ("CCRA") denying the
Company's filing position with regards to its continuation to the U.S.
CCRA has assessed a liability of $335,000. The Company intends to
strongly defend its position. No provision for this amount has been
recorded as the outcome is uncertain.
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E-XACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED MARCH 31, 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 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
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 March 31,
2002
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E-XACT TRANSACTIONS LTD.
FORM 10-QSB
QUARTER ENDED MARCH 31, 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: May 22, 2002 By: /s/ Peter Fahlman
----------------------------
Peter Fahlman
President and CEO
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