Optimal Group Inc. (NASDAQ: OPMR) today announced its financial
results for the second quarter ended June 30, 2008. All references
are in U.S. dollars.
Revenues for the second quarter ended June 30, 2008 consisted of
revenues from both the Optimal Payments segment and the WowWee
segment. The WowWee segment operates in an industry that is
seasonal by nature and where a significant portion of revenues and
corresponding cash flow are typically generated in the second half
of the year.
Revenues for the second quarter ended June 30, 2008 were $41.6
million (which includes approximately $15.5 million related to the
WowWee segment; due to seasonality, the first and second quarters
are typically the weakest quarters of the year for this segment)
compared to $28.0 million for the second quarter ended June 30,
2007.
The Company's quarterly results for the second quarter of 2008
were significantly affected by certain non-cash charges and
seasonality. The net loss for the second quarter ended June 30,
2008 was $48.4 million or $1.87 per diluted share compared to net
earnings of $1.2 million or $0.05 per diluted share in the second
quarter ended June 30, 2007. The net loss in the quarter is mainly
attributable to non-cash charges relating to the transactions
described under the heading "Divestitures-Payments Segment" in this
press release and that include an impairment of goodwill of $29.1
million that was recognized in the Optimal Payments segment. This
charge resulted from Optimal's analysis of goodwill at June 30,
2008, where it was determined that the estimated fair value of
Optimal Payments was less than its carrying value. As a result of
the impairment of goodwill, Optimal also incurred non-cash tax
charges of approximately $13.3 million in the quarter. In addition,
the WowWee segment operates in an industry in which the first half
of the year typically has lower levels of shipments, resulting in
lower revenues, increased costs and weaker financial results.
EBITDA for the second quarter ended June 30, 2008 was a loss of
$0.5 million or $0.02 per diluted share compared to EBITDA of $3.3
million or $0.13 per diluted share for the comparable period in
2007.
EBITDA is a non-GAAP (generally accepted accounting principles)
financial measure calculated as earnings before investment income,
taxes, depreciation and amortization and excludes the impact of
impairment loss, non-controlling interest, stock-based
compensation, and discontinued operations. A reconciliation of
Optimal's EBITDA is included in Annex A.
Optimal's consolidated balance sheet remains strong. Optimal's
cash position grew slightly from the last quarter-end and, as at
June 30, 2008, the Company had cash and cash equivalents,
short-term investments (including amounts held in reserve) and
settlement assets net of customer reserves and security deposits,
of $43.1 million or $1.67 per issued and outstanding share; working
capital, excluding cash and short-term investments held as
reserves, of $11.9 million; and shareholders' equity of $147.2
million, or $5.70 per issued and outstanding share. The Company
continues to evaluate potential acquisition opportunities and
expects to grow the WowWee segment by executing on internal growth
initiatives and by actively pursuing complementary
acquisitions.
Divestitures - Payments Segment
The divestitures described below relate to the Company's
activities in the following payments areas: card-present
transaction processing in Canada; card-present transaction
processing in the United States; and "card-not-present" transaction
processing.
Divestiture of "Card-Not-Present" Transaction Processing
Optimal Payments Inc., a wholly-owned subsidiary of Optimal
Group Inc. has entered into an asset purchase agreement with an
affiliate of Card One Plus Ltd., a Toronto-based provider of
electronic payments solutions, under which they will purchase
substantially all of the assets that relate to Optimal Payments
"card-not-present" payments processing business. The purchase price
for this transaction will be $7.0 million plus the assumption of
certain liabilities. The purchaser will acquire the assets from
Optimal's Canadian-based subsidiary, Optimal Payments Inc., its
Irish-based subsidiary, Optimal Payments (Ireland) Limited,
UK-based Optimal Payments Limited, and U.S.-based Optimal Payments
Corp. Under the terms of this transaction, the purchaser will take
over Optimal Payments' head office facilities in Montreal,
Quebec.
The closing of this transaction is anticipated to take place on
August 29, 2008 and will result in impairment charges that are
previously described in this press release.
Divestiture of Canadian Card-Present Transaction Processing
Optimal Payments has also entered into an asset purchase
agreement with Sterling Payment Solutions Inc., a company led by an
executive of Optimal Payments, under which the purchaser will
purchase substantially all of the assets that relate to Optimal
Payments "card-present" payments processing business in Canada. The
purchase price for this transaction will be $2.0 million plus the
assumption of certain liabilities. The purchaser will acquire the
assets from Optimal's Canadian-based subsidiary, Optimal Payments
Inc.
The closing of this transaction is anticipated to take place on
August 29, 2008 and will result in impairment charges that are
previously described in this press release.
United States Card-Present Transaction Processing
As a result of these transactions, substantially all of the
employees and infrastructure involved in those payments businesses
will be transferred to the prospective purchasers. Optimal will
maintain its continued rights to residual payments and other
interests in Optimal's U.S.-based card-present transaction
processing sector, which generates the majority of Optimal's cash
flow from its payments business. Optimal believes that it is more
likely than not that all or part of its remaining interest in this
segment will be sold over the course of the next 12 months.
Under the Card One agreement, Optimal has secured transition
services arrangements under which Card One will perform certain
processing services on Optimal's behalf. These services relate to
Optimal's continued rights to residual payments and other interests
in merchant account portfolios in Optimal's U.S.-based card-present
transaction processing sector.
Preliminary Outlook for 2008
In its WowWee segment, the Company remains very cautious in the
face of a weak economy, diminished consumer spending, one of the
most challenging retail environments in recent times, rising raw
materials and transportation costs and the continuing difficulties
affecting companies that manufacture in China. As well, due to the
foregoing, retailers in general are delaying their orders as they
balance the risks in the general economy. This is affecting all
wholesalers and forcing companies to make challenging supply chain
decisions. For this segment, the Company continues to anticipate
revenue in the range of $130-140 million. This will represent year
over year revenue growth in this segment of 25-30%. Also, the
Company continues to significantly invest to execute upon its
growth strategies for the WowWee segment, which will compress
operating margins for 2008. These anticipated results should
continue to be viewed as preliminary and with caution due to the
seasonality of the WowWee segment and the industry in which it
operates, as well as the difficult circumstances facing the general
economy. The Company anticipates that greater clarity relating to
its operations and financial results will occur as the year
progresses.
During 2008, the Company continued to implement its strategies
for the WowWee segment. It continues to make significant
investments in its sales and distribution, as well as marketing and
promotion. The Company is also actively building out its online
presence, enhancing the consumer's ability to experience and
explore the Company's products through the Internet. As well, the
Company is pursuing a program of developing and distributing
products based on licensed properties. For 2008, the WowWee segment
has developed the broadest and most dynamic product offerings in
its history. These products have begun to be shipped in the second
quarter of 2008.
Key assumptions and sensitivities
In connection with any projections contained in this press
release, we have made the following principal assumptions: in
assessing the anticipated year over year revenue growth for the
WowWee segment, we have assumed the accuracy of the 2007 revenues
for the period ended November 6, 2007, as reported to us by the
vendors of the business; customers of the WowWee segment will
fulfill their anticipated purchases and the levels of sales
discounts will be consistent with levels experienced by the vendors
of the business over recent quarters, as reported to us; the cost
of producing the WowWee segment's products in China will not
increase more than currently anticipated.
Our statement as to projections is forward looking, and does not
take into account the potential impact of any future divestitures,
acquisitions, mergers or other business combinations. Furthermore,
our actual WowWee revenue is subject to the risks and uncertainties
summarized below under "Cautionary Statements Regarding
Forward-Looking Statements" and could differ materially from our
projection. As well, the non-GAAP financial results of Optimal's
results of operations are not meant to be considered superior to or
a substitute for Optimal's results of operations prepared in
accordance with GAAP.
Legal Matters
Following announcements by the U.S. Attorney's Office in the
Southern District of New York relating to its investigation of the
U.S. Internet gambling industry, the Company, in March 2007,
initiated discussions with the U.S. Attorney's Office and is in the
process of responding to a voluntary request for information issued
by the U.S. Attorney's Office.
As previously disclosed, Optimal Payments has received a request
for information from the U.S. Attorney's Office in the Eastern
District of New York pertaining to its former involvement in
processing payment transactions for Internet pharmacies. Optimal
Payments is currently in discussions with that Office relating to
those processing activities.
Conference call
Optimal will hold a conference call on Wednesday, August 6, 2008
at 9:00 a.m. (EDT). It is the intent of Optimal's conference call
to have the question and answer session limited to institutional
analysts and investors. The call can be heard beginning at 9:00
a.m. (EDT) as an audio webcast via Optimal's website at
www.optimalgrp.com. As well, Optimal invites retail brokers and
individual investors to hear the conference call replay by dialing
(514) 861-2272 or 1 (800) 408-3053 access code #3266491. The replay
may be heard beginning at 10:30 a.m. (EDT) on August 6, 2008 and
will be available for five business days thereafter.
About Optimal Group
Optimal Group Inc. has operated and, through various
subsidiaries, has actively managed a variety of businesses.
Optimal Group Inc. currently operates:
The WowWee group of companies has operations in Hong Kong, La
Jolla, California and Montreal, Quebec. WowWee Group Limited, based
in Hong Kong, is a leading designer, developer, marketer and
distributor of technology-based consumer robotic, toy and
entertainment products.
The Optimal Payments group of companies, with operations
primarily in North America and the United Kingdom. Optimal Payments
provides secure electronic payment and risk management solutions to
small and medium-sized businesses that sell and deliver goods and
services over the Internet, wireless, or generally in a
card-not-present environment.
Cautionary Statements Regarding Forward-Looking Statements
This press release contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as
"expects", "intends", "anticipates", "plans", "believes", "seeks",
"estimates", or variations of such words and similar expressions
are intended to identify such forward-looking statements.
Forward-looking statements include, but are not limited to,
statements about our current expectations with respect to our
future growth strategies, results, opportunities and prospects,
competitive position and industry environment. These
forward-looking statements are subject to a number of risks,
uncertainties and other factors that could cause our actual
results, performance, prospects or opportunities, or those of the
markets we serve, to differ materially from those expressed in, or
implied by, these forward-looking statements, including:
- existing and future governmental regulations and disputes with
governmental authorities;
- general economic, legal and business conditions in the markets
we serve;
- consumer confidence in the security of financial information
transmitted via the Internet;
- levels of consumer and merchant fraud, disputes between
consumers and merchants and merchant insolvency;
- liability for merchant chargebacks;
- our ability to safeguard against breaches of privacy and
security when processing electronic transactions and use of our
payments systems for illegal purposes;
- the imposition of and our compliance with rules and practice
procedures implemented by credit card and check clearing
associations;
- our ability to adapt to changes in technology, including
technology relating to electronic payments systems;
- our ability to protect our intellectual property;
- our relationships with our suppliers and the banking
associations that we rely upon to process our electronic
transactions;
- disruptions in the function of our electronic payments systems
and technological defects;
- our ability to complete, integrate and benefit from
acquisitions, divestitures, joint ventures and strategic
alliances;
- our ability to retain key personnel;
- currency exchange rate fluctuations;
- our ability to successfully implement our strategies for our
recently acquired WowWee business;
- changing consumer preferences for electronics and play
products;
- the seasonality of retail sales;
- concentration among our major retail customers for the
products of our WowWee business;
- economic, social and political conditions in China, where
WowWee's products are manufactured;
- the price and supply of raw materials used to manufacture
WowWee's products
- product liability claims and product recalls;
- increased competition;
- litigation; and
- the factors described under Item 1A "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31,
2007.
There may be additional risks and uncertainties and other
factors that we do not currently view as material or that are not
necessarily known. The forward looking statements made in this
document are only made as of the date of this document.
Except as required by applicable securities laws, we undertake
no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events,
changes in circumstances or any other reason after the date of this
press release.
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies without
fear of litigation. We are relying on the "safe harbor" provisions
of the Private Securities Litigation Reform Act in connection with
the forward-looking statements included in this press release.
Consolidated Balance Sheets, Statements of Operations and
Statements of Cash Flows follow:
OPTIMAL GROUP INC.
Consolidated Balance Sheets
June 30, 2008 and December 31, 2007
(expressed in thousands of U.S. dollars)
--------------------------------------------------------------------------
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June 30, December 31,
2008 2007
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Assets
Current assets:
Cash and cash equivalents $51,000 $47,193
Cash held as reserves 5,768 6,869
Short-term investments 2,383 12,477
Short-term investments held as reserves 1,795 1,710
Settlement assets 1,402 4,715
Accounts and other receivables 19,367 18,513
Inventories 15,954 3,103
Income taxes receivable and refundable
investment tax credits 576 4,169
Prepaid expenses and deposits 1,403 1,958
Future income taxes 876 714
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100,524 101,421
Restricted cash 19,183 19,183
Property and equipment 5,597 4,670
Goodwill 36,026 66,210
Intangible assets 77,817 86,858
Future income taxes - 6,200
Other asset - 5,739
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$239,147 $290,281
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $52,978 $47,083
Customer reserves and security deposits 19,233 21,324
Income taxes payable 7,681 7,251
Future income taxes 1,124 1,270
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81,016 76,928
Future income taxes 10,886 11,648
Shareholders' equity:
Share capital 210,741 211,998
Warrants 2,696 2,696
Additional paid-in capital 32,798 29,561
Deficit (97,506) (41,066)
Accumulated other comprehensive loss (1,484) (1,484)
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147,245 201,705
$239,147 $290,281
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OPTIMAL GROUP INC.
Consolidated Statements of Operations and Comprehensive Loss
Periods ended June 30, 2008 and 2007
(expressed in thousands of U.S. dollars, except per share amounts)
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Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------------------------
2008 2007 2008 2007
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Revenues $41,578 $28,042 $72,829 $58,108
Expenses:
Transaction processing
and cost of sales 26,668 18,096 46,063 36,769
Selling, general
and administrative 13,705 5,803 26,285 13,474
Amortization of
intangibles pertaining
to transaction
processing and cost
of sales 4,832 3,227 9,596 6,336
Amortization of
equipment pertaining
to cost of sales 832 - 1,661 -
Amortization of
equipment pertaining
to selling, general
and administrative 337 316 642 650
Stock-based
compensation
pertaining to
selling, general
and administrative 1,880 30 2,451 6,027
Research and
development 1,155 601 2,750 1,264
Operating leases 540 282 960 514
Impairment of
goodwill 29,097 - 29,097 -
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Loss before
undernoted item (37,468) (313) (46,676) (6,926)
Investment income 243 1,576 689 3,477
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(Loss) earnings
before income tax
provision and non
controlling interest (37,225) 1,263 (45,987) (3,449)
Income tax provision 11,169 106 10,453 887
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(Loss) earnings
before
non-controlling
interest (48,394) 1,157 (56,440) (4,336)
Non-controlling
interest - - - (159)
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Net (loss) earnings
and comprehensive
(loss) income $(48,394) $1,157 $(56,440) $(4,495)
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Weighted average
number of shares:
Basic 25,852,211 23,854,507 25,910,169 23,853,710
Plus impact of
stock options and
warrants - 542,407 - 617,135
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Diluted 25,852,211 24,396,914 25,910,169 24,470,845
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Earnings (loss) per
share:
Basic $(1.87) $0.05 $(2.18) $(0.19)
Diluted (1.87) 0.05 (2.18) (0.19)
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OPTIMAL GROUP INC.
Consolidated Statements of Cash Flows
Periods ended June 30, 2008 and 2007
(expressed in thousands of U.S. dollars)
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Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------------------------
2008 2007 2008 2007
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Cash flows from (used in)
operating activities:
Net (loss) earnings $(48,394) $1,157 $(56,440) $(4,495)
Adjustments for items not
affecting cash:
Non-controlling interest - - - 159
Amortization 6,001 3,543 11,899 6,986
Gain on settlement of
litigation - (1,612) - (1,612)
Impairment of goodwill 29,097 - 29,097 -
Future income taxes 11,730 (421) 10,637 (997)
Stock-based compensation 1,880 30 2,451 6,027
Foreign exchange (15) (108) (21) (138)
Net change in operating
assets and liabilities 2,877 (22,295) (418) (45,584)
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3,176 (19,706) (2,795) (39,654)
Cash flows from (used in)
financing activities:
Repurchase of Class "A" shares (148) - (471) -
Proceeds from exercise of
RSUs in OPIL - - - 58
Proceeds from issuance of
Class "A" shares - 34 - 52
Decrease in bank indebtedness - - - (8,581)
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(148) 34 (471) (8,471)
Cash flows from (used in)
investing activities:
Purchase of equipment and
intangible assets (2,063) (976) (3,380) (2,058)
Proceeds from maturity of
short-term investments 4,318 5,138 10,094 71,621
Decrease in long-term
receivables - 27 368 362
Repurchase of OPIL shares - - - (16,463)
Transaction costs - (6) - (1,748)
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2,255 4,183 7,082 51,714
Effect of exchange rate
changes on cash and cash
equivalents during the period 15 108 (9) 155
--------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 5,298 (15,381) 3,807 3,744
Cash and cash equivalents,
beginning of period 45,702 123,047 47,193 103,922
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Cash and cash equivalents,
end of period $51,000 $107,666 $51,000 $107,666
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Annex A
Non-GAAP Financial Measures
We are using a non-GAAP (generally accepted accounting
principles) measure to assess our operating performance. Earnings
and other measures adjusted to a basis other than GAAP do not have
standardized meanings and are unlikely to be comparable to similar
measures used by other companies. Accordingly, they should not be
considered in isolation. We are using EBITDA to measure the
Company's performance, which measure excludes certain items from
earnings that Optimal management does not stress in assessing the
Company's operating performance and financial condition. We also
believe this measure is routinely used by investors and analysts as
a basis for assessing company value.
EBITDA, as used by Optimal, is calculated as earnings before
investment income, taxes and depreciation and amortization and
excludes the impacts of impairment loss, non-controlling interest,
stock-based compensation and discontinued operations. We believe it
is useful to exclude these items as they are either non-cash
expenses, items that cannot be influenced by management in the
short term, or items that do not impact core operating performance.
Excluding these items does not imply they are necessarily
non-recurring.
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OPTIMAL GROUP INC.
Reconciliation of Non-GAAP Financial
Information
(expressed in thousands of U.S. dollars, except per share amounts)
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
Unaudited Unaudited Unaudited Unaudited
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Net (loss) earnings $(48,394) $1,157 $(56,440) $(4,495)
Add (deduct):
Amortization of
intangibles pertaining
to transaction
processing and cost
of sales 4,832 3,227 9,596 6,336
Amortization of
equipment pertaining
to selling,
general and
administrative 337 316 642 650
Amortization of
equipment pertaining
to cost of sales 832 - 1,661 -
Stock-based
compensation
pertaining to selling,
general and
administrative 1,880 30 2,451 6,027
Non-controlling interest - - - 159
Investment income (243) (1,576) (689) (3,477)
Income tax provision 11,169 106 10,453 887
Impairment of goodwill 29,097 - 29,097 -
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EBITDA $(490) $3,260 $(3,229) $6,087
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Diluted shares 25,852 24,397 25,910 24,471
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EBITDA per diluted share $(0.02) $0.13 $(0.12) $0.25
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Contacts: Optimal Group Inc. Gary Wechsler Chief Financial
Officer 514-738-8885 gary@optimalgrp.com www.optimalgrp.com
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