UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[
X
]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2009
Commission file number 0-28572
.
|
|
|
OPTIMAL GROUP INC.
|
(Exact name of registrant as specified in its charter)
|
|
|
|
|
Canada
|
98-0160833
|
(State or other jurisdiction
|
(I.R.S. Employer
|
of incorporation or organization)
|
Identification No.)
|
|
|
|
|
3500 de Maisonneuve Blvd. West, Suite 800,
|
(514) 738-8885
|
Montreal, Quebec, Canada, H3Z 3C1
|
|
(Address of principal executive offices and postal code)
|
(Registrant telephone number, including area code)
|
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|
Yes
x
No
o
|
|
|
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
|
Yes
o
No
o
|
|
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):
|
|
|
|
|
Large Accelerated filer
o
|
Accelerated filer
x
|
Non-accelerated filer
o
|
Smaller reporting company
o
|
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
|
Yes
o
No
x
|
|
|
At August 3, 2009 the registrant had 25,742,223 common shares designated as Class “A” shares (without nominal or par value) outstanding.
|
OPTIMAL GROUP INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Financial Statements of
(Unaudited)
OPTIMAL GROUP INC.
Three and six months ended June 30, 2009 and 2008
(expressed in U.S. dollars)
OPTIMAL GROUP INC.
Condensed Consolidated Financial Statements
|
Three and six months ended June 30, 2009 and 2008
|
(expressed in U.S. dollars)
|
OPTIMAL GROUP INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 and December 31, 2008
|
|
|
|
|
|
|
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,871
|
|
|
$
|
32,849
|
|
Short-term investments
|
|
|
–
|
|
|
|
6,296
|
|
Accounts and other receivables (net of allowance for doubtful accounts
of $470; 2008 - $758)
|
|
|
8,374
|
|
|
|
24,169
|
|
Current portion of balance of sale receivable
|
|
|
2,221
|
|
|
|
–
|
|
Inventories
|
|
|
22,716
|
|
|
|
19,364
|
|
Prepaid expenses and deposits
|
|
|
1,321
|
|
|
|
1,817
|
|
Current assets related to discontinued operations
|
|
|
1,366
|
|
|
|
4,358
|
|
|
|
|
59,869
|
|
|
|
88,853
|
|
|
|
|
|
|
|
|
|
|
Balance of sale receivable
|
|
|
8,000
|
|
|
|
–
|
|
Property and equipment
|
|
|
4,099
|
|
|
|
4,219
|
|
Intangible assets
|
|
|
35,937
|
|
|
|
45,109
|
|
Long-term assets related to discontinued operations (note 9 (c))
|
|
|
19,183
|
|
|
|
30,837
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
127,088
|
|
|
$
|
169,018
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank indebtedness
|
|
$
|
10,029
|
|
|
$
|
11,547
|
|
Accounts payable and accrued liabilities
|
|
|
23,546
|
|
|
|
34,518
|
|
Accounts payable and accrued liabilities related to discontinued operations
|
|
|
4,443
|
|
|
|
6,403
|
|
Current portion of long-term debt
|
|
|
877
|
|
|
|
1,010
|
|
Income taxes payable
|
|
|
198
|
|
|
|
1,370
|
|
Deferred income taxes
|
|
|
838
|
|
|
|
838
|
|
|
|
|
39,931
|
|
|
|
55,686
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
6,420
|
|
|
|
6,965
|
|
Long-term debt
|
|
|
1,928
|
|
|
|
2,005
|
|
Long-term liabilities related to discontinued operations (note 9 (c))
|
|
|
10,819
|
|
|
|
10,871
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
252,488
|
|
|
|
252,488
|
|
Warrants
|
|
|
2,696
|
|
|
|
2,696
|
|
Additional paid-in capital
|
|
|
65,678
|
|
|
|
64,173
|
|
Deficit
|
|
|
(249,855
|
)
|
|
|
(222,849
|
)
|
Accumulated other comprehensive loss
|
|
|
(3,017
|
)
|
|
|
(3,017
|
)
|
|
|
|
67,990
|
|
|
|
93,491
|
|
Contingencies and guarantees (note 9)
Subsequent events (note 15)
|
|
|
|
|
|
|
|
|
|
|
$
|
127,088
|
|
|
$
|
169,018
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
|
|
OPTIMAL GROUP INC.
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Three and six months ended June 30, 2009 and 2008
|
|
|
|
(expressed in thousands of U.S. dollars, except per share amounts)
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,538
|
|
|
$
|
15,486
|
|
|
$
|
8,667
|
|
|
$
|
20,386
|
|
Other revenues (note 11 (d))
|
|
|
807
|
|
|
|
9,469
|
|
|
|
1,670
|
|
|
|
19,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
6,357
|
|
|
|
10,750
|
|
|
|
7,819
|
|
|
|
14,460
|
|
Selling, general and administrative
|
|
|
8,645
|
|
|
|
8,245
|
|
|
|
17,305
|
|
|
|
14,561
|
|
Stock-based compensation pertaining to selling, general and administrative
|
|
|
48
|
|
|
|
1,863
|
|
|
|
1,505
|
|
|
|
2,378
|
|
Research and development
|
|
|
768
|
|
|
|
657
|
|
|
|
1,427
|
|
|
|
1,275
|
|
Operating leases
|
|
|
284
|
|
|
|
237
|
|
|
|
561
|
|
|
|
474
|
|
Amortization (note 11 (f))
|
|
|
3,347
|
|
|
|
3,751
|
|
|
|
6,710
|
|
|
|
7,368
|
|
Transaction processing costs
|
|
|
–
|
|
|
|
8,660
|
|
|
|
–
|
|
|
|
17,462
|
|
Impairment loss (note 5)
|
|
|
4,000
|
|
|
|
–
|
|
|
|
4,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before undernoted item
|
|
|
(16,104
|
)
|
|
|
(9,208
|
)
|
|
|
(28,990
|
)
|
|
|
(18,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
342
|
|
|
|
243
|
|
|
|
587
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes (recovery)
|
|
|
(15,762
|
)
|
|
|
(8,965
|
)
|
|
|
(28,403
|
)
|
|
|
(17,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (recovery)
|
|
|
(763
|
)
|
|
|
1,467
|
|
|
|
(636
|
)
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(14,999
|
)
|
|
|
(10,432
|
)
|
|
|
(27,767
|
)
|
|
|
(18,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from discontinued operations, net of income taxes (note 3 (b))
|
|
|
428
|
|
|
|
(37,962
|
)
|
|
|
761
|
|
|
|
(37,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
$
|
(14,571
|
)
|
|
$
|
(48,394
|
)
|
|
$
|
(27,006
|
)
|
|
$
|
(56,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
25,742,233
|
|
|
|
25,852,211
|
|
|
|
25,742,223
|
|
|
|
25,910,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.59
|
)
|
|
|
(0.40
|
)
|
|
|
(1.08
|
)
|
|
|
(0.71
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
0.02
|
|
|
|
(1.47
|
)
|
|
|
0.03
|
|
|
|
(1.47
|
)
|
Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.57
|
)
|
|
|
(1.87
|
)
|
|
|
(1.05
|
)
|
|
|
(2.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
|
Three and six months ended June 30, 2009 and 2008
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accu-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addi-
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tional
|
|
|
|
|
|
compre-
|
|
|
|
|
|
|
Class
"
A
"
shares
|
|
|
|
|
|
paid-in
|
|
|
|
|
|
hensive
|
|
|
|
|
|
|
Number
|
|
|
Dollars
|
|
|
Warrants
|
|
|
capital
|
|
|
Deficit
|
|
|
loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
25,742,223
|
|
|
$
|
252,488
|
|
|
$
|
2,696
|
|
|
$
|
64,173
|
|
|
$
|
(222,849
|
)
|
|
$
|
(3,017
|
)
|
|
$
|
93,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,505
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(27,006
|
)
|
|
|
–
|
|
|
|
(27,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
|
25,742,223
|
|
|
$
|
252,488
|
|
|
$
|
2,696
|
|
|
$
|
65,678
|
|
|
$
|
(249,855
|
)
|
|
$
|
(3,017
|
)
|
|
$
|
67,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
25,983,148
|
|
|
$
|
254,454
|
|
|
$
|
2,696
|
|
|
$
|
59,418
|
|
|
$
|
(111,846
|
)
|
|
$
|
(3,017
|
)
|
|
|
201,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of shares pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock buyback program
|
|
|
(154,058
|
)
|
|
|
(1,257
|
)
|
|
|
–
|
|
|
|
786
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,451
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,451
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(56,440
|
)
|
|
|
–
|
|
|
|
(56,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
25,829,090
|
|
|
$
|
253,197
|
|
|
$
|
2,696
|
|
|
$
|
62,655
|
|
|
$
|
(168,286
|
)
|
|
$
|
(3,017
|
)
|
|
$
|
147,245
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
OPTIMAL GROUP INC.
|
|
|
|
(Unaudited)
|
|
|
|
Three and six months ended June 30, 2009 and 2008
|
|
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,571
|
)
|
|
$
|
(48,394
|
)
|
|
$
|
(27,006
|
)
|
|
$
|
(56,440
|
)
|
(Add) deduct (loss) earnings from discontinued operations
|
|
|
428
|
|
|
|
(37,962
|
)
|
|
|
761
|
|
|
|
(37,962
|
)
|
Net loss from continuing operations
|
|
|
(14,999
|
)
|
|
|
(10,432
|
)
|
|
|
(27,767
|
)
|
|
|
(18,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for items not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
3,347
|
|
|
|
3,751
|
|
|
|
6,710
|
|
|
|
7,368
|
|
Deferred income taxes
|
|
|
(334
|
)
|
|
|
11,730
|
|
|
|
(545
|
)
|
|
|
10,824
|
|
Impairment of intangibles
|
|
|
4,000
|
|
|
|
–
|
|
|
|
4,000
|
|
|
|
–
|
|
Stock-based compensation
|
|
|
48
|
|
|
|
1,863
|
|
|
|
1,505
|
|
|
|
2,378
|
|
Foreign exchange
|
|
|
4
|
|
|
|
(15
|
)
|
|
|
(342
|
)
|
|
|
69
|
|
Net change in operating assets and liabilities (note 11 (a))
|
|
|
(4,504
|
)
|
|
|
2,941
|
|
|
|
512
|
|
|
|
1,574
|
|
Operating cash flows from (used in) discontinued operations
|
|
|
2,619
|
|
|
|
(6,662
|
)
|
|
|
2,013
|
|
|
|
(6,530
|
)
|
|
|
|
(9,819
|
)
|
|
|
3,176
|
|
|
|
(13,914
|
)
|
|
|
(2,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in bank indebtedness
|
|
|
2,658
|
|
|
|
–
|
|
|
|
(1,447
|
)
|
|
|
–
|
|
Repayment of long-term debt
|
|
|
(188
|
)
|
|
|
–
|
|
|
|
(228
|
)
|
|
|
–
|
|
Repurchase of Class "A" shares
|
|
|
–
|
|
|
|
(148
|
)
|
|
|
–
|
|
|
|
(471
|
)
|
|
|
|
2,470
|
|
|
|
(148
|
)
|
|
|
(1,675
|
)
|
|
|
(471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and intangible assets
|
|
|
(681
|
)
|
|
|
(1,930
|
)
|
|
|
(1,132
|
)
|
|
|
(3,163
|
)
|
Net proceeds from maturity of short-term investments
|
|
|
–
|
|
|
|
4,318
|
|
|
|
6,296
|
|
|
|
10,094
|
|
Proceeds from disposition of payment processing businesses
|
|
|
–
|
|
|
|
–
|
|
|
|
1,035
|
|
|
|
–
|
|
Proceeds from balance of sale receivable
|
|
|
145
|
|
|
|
–
|
|
|
|
251
|
|
|
|
–
|
|
Transaction costs related to business acquisitions and disposals
|
|
|
(68
|
)
|
|
|
–
|
|
|
|
(126
|
)
|
|
|
–
|
|
Investing cash flows (used in) from discontinued operations
|
|
|
–
|
|
|
|
(133
|
)
|
|
|
–
|
|
|
|
151
|
|
|
|
|
(604
|
)
|
|
|
2,255
|
|
|
|
6,324
|
|
|
|
7,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents during the period
|
|
|
506
|
|
|
|
15
|
|
|
|
287
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7,447
|
)
|
|
|
5,298
|
|
|
|
(8,978
|
)
|
|
|
3,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
31,318
|
|
|
|
45,702
|
|
|
|
32,849
|
|
|
|
47,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
23,871
|
|
|
$
|
51,000
|
|
|
$
|
23,871
|
|
|
$
|
51,000
|
|
|
|
Supplemental cash flow information (note 11)
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
|
|
OPTIMAL GROUP INC.
Notes
to Condensed Consolidated Financial Statements
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
1. Basis of presentation and future operations:
Basis of presentation:
These condensed consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary to present a fair statement of the
results of the interim periods. With the exception of changes referred to in note 2, these interim condensed consolidated financial statements follow the same accounting policies and methods of their application as described in note 4 and note 25 to the annual audited consolidated financial statements for the year ended December 31, 2008. The interim condensed consolidated financial statements do not include all disclosures required for annual financial statements and should
be read in conjunction with the most recent annual audited consolidated financial statements of Optimal Group Inc. (the "Company") as at and for the year ended December 31, 2008.
The Company’s revenues and expenses are subject to seasonal variations. The results of operations and cash flows for any interim period are not necessarily indicative of the results or cash flows for an entire year.
All amounts in the attached notes are unaudited unless otherwise specifically identified.
Future operations:
These financial statements have been prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The recent banking and financial crisis and the global economic recession have created an extremely challenging retail and economic environment in the United States and Canada, which has negatively impacted the Company’s operating performance and potentially that of our customers and suppliers. Moreover, the lack of resolution in
the Company’s continuing discussions with the U.S. Attorney’s Office has impeded the Company’s access to traditional sources of financing to fund its operations.
The Company currently funds the majority of its operations from its cash and cash equivalents. The Company’s balance of cash and cash equivalents generally decreases during the second and third quarters of the year, as cash is used to fund product development and production, and increases in the fourth and first quarters
in connection with the shipping and collection periods. In January 2009, the Company implemented a cost reduction program and since that time management has taken steps to more closely manage its working capital.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
1. Basis of presentation and future operations (continued):
Future operations (continued):
Although the Company currently forecasts that its cash and cash equivalents, together with cash to be generated from operations, will be adequate to meet the Company’s needs for at least the next twelve months, if operating performance is significantly lower than currently forecasted, the Company would thereafter require financing
in order to meet its cash flow requirements and fund its operations. The Company’s operating performance is impacted by economic, financial, competitive, legislative and regulatory factors, as well as other events that are beyond the Company’s control, including the possible negative impact the current economic environment is having on our customers and suppliers.
If the Company was to require financing in order to meet its cash flow requirements and fund its operations and such financing was not available to the Company, or was not available to the Company on terms that are acceptable to the Company, there could, at the time, be significant uncertainty about the Company’s ability to continue
as a going-concern, and its capacity to realize the carrying value of its assets and repay its existing and future obligations as they generally become due. These financial statements do not reflect adjustments that would be necessary if the going-concern assumptions were not appropriate under these circumstances.
2. Changes in accounting policies:
(a) New accounting policies:
Effective January 1, 2009, the Company prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) with reconciliation to Canadian GAAP as described in note 14. The comparative periods have also been prepared and presented pursuant to U.S. GAAP. Previously,
the Company’s accounting principles conformed to Canadian GAAP and reconciled differences with U.S. GAAP through its financial statement disclosures. There was no effect on the Company’s results for 2009 and 2008 as a consequence of this change.
SFAS No. 165 - Subsequent events:
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 165,
Subsequent Events
, which is effective for interim periods ending after June 15, 2009. SFAS No. 165 establishes general standards for accounting for, and disclosure
of, events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 sets forth the period after the balance sheet date during which the management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should
be made about events or transactions that occur after the balance sheet date. In preparing these financial statements, the Company evaluated the events and transactions that occurred between June 30, 2009 through August 7, 2009, the date on which these financial statements were issued.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
2. Changes in accounting policies (continued):
(a) New accounting policies (continued):
SFAS No. 141R - Business combinations:
Effective January 1, 2009, the Company adopted SFAS No. 141R,
Business Combinations,
on a prospective basis. This standard is a revised standard on accounting for business combinations. For a summarized description of the major changes to accounting for
business combinations, refer to note 25 (f) of the annual consolidated financial statements. The adoption of this standard did not have an impact on the Company’s results as there were no business acquisitions in the three-month and six-month period ended June 30, 2009.
SFAS No. 160 - Non-controlling interest in consolidated financial statements:
Effective January 1, 2009, the Company adopted SFAS No. 160,
Non-controlling Interest in Consolidated Financial Statements
. This standard is a revised standard on accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated
financial statements. For a summarized description of the major changes resulting from this standard, refer to note 25 (f) of the annual consolidated financial statements.
SFAS No. 160 is applied prospectively to all non-controlling interests, including any that arose before the effective date. The adoption of this standard did not have an impact on the Company’s results.
SFAS No. 161 - Disclosures about derivative instruments and hedging activities, an amendment to FASB Statement No. 133:
Effective January 1, 2009, the Company adopted SFAS No. 161,
Disclosures about derivative instruments and hedging activities, an amendment to FASB Statement No. 133
. This standard requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related contingent features on derivative agreements. The adoption of this standard did not have an impact on the Company’s disclosures.
SFAS No. 162 - The hierarchy of generally accepted accounting principles and SFAS 163 - Accounting for financial guarantee insurance contracts:
Effective January 1, 2009, the Company adopted SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles
, and SFAS No. 163,
Accounting for Financial Guarantee Insurance Contracts
. The
adoption of these standards did not have an impact on the Company’s results.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
2. Changes in accounting policies (continued):
(b) Recent accounting pronouncements:
In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 166,
Accounting for Transfers of Financial Assets
, an amendment of FASB Statement No. 140. SFAS No. 166 amends SFAS No. 140,
Accounting
for the Transfers and Servicing of Financial Assets and the Extinguishments of Liabilities
, and seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets; the effects of the transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose
entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. The Company has not completed its evaluation, but does not expect the adoption of SFAS No. 166 will have a material impact on its consolidated
financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB
Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles
, a replacement of FASB Statement No. 162. SFAS No. 168 replaces SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
, to establish the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America. SFAS No. 168 is effective for interim and annual reporting periods ending after September 15, 2009. The Company
does not expect the adoption of SFAS No. 168 will have a material impact on its consolidated financial statements.
In April 2009, the FASB issued FSP No. SFAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or the Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
. FSP No. SFAS 157-4 amends SFAS No. 157 to provide additional
guidance on (i) estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, and (ii) circumstances that may indicate that a transaction is not orderly. FSP No. SFAS 157-4 also requires additional disclosures about fair value measurements in interim and annual reporting periods. FSP No. SFAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009.
The Company does not expect the adoption of FSP No. SFAS 157-4 will have a material effect on its financial statements.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
2. Changes in accounting policies (continued):
(b) Recent accounting pronouncements (continued):
In April 2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
(“FSP No. SFAS 115-2”). FSP No. SFAS 115-2 provides additional guidance on the timing of impairment recognition and greater clarity about
the credit and non-credit components of impaired debt securities that are not expected to be sold. FSP No. SFAS 115-2 also requires additional disclosures about impairments in interim and annual reporting periods. FSP No. SFAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of FSP No. SFAS 115-2 will have a material effect on its financial statements.
In April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments
. FSP No. SFAS 107-1 and APB 28-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
,
to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends Accounting Principles Board (“APB”) Opinion No. 28,
Interim Financial Reporting
, to require those disclosures in all interim financial statements. FSP No. SFAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The Company does not expect the adoption of FSP
No. SFAS 107-1 and APB 28-1 will have a material effect on its financial statements.
|
(c)
|
The Accounting Standards Board of the Canadian Institute of Chartered Accountants (“CICA”) has announced its decision to require all publicly accountable enterprises to report under International Financial Reporting Standards (IFRS) for the years beginning on or after January 1, 2011. However, the Company is a domestic registrant in the U.S. and therefore files its financial statements
in accordance with U.S. GAAP. As such, the Company has decided not to report under IFRS by 2011 and to continue reporting under U.S. GAAP. In August 2008, the SEC issued a roadmap for the potential convergence to IFRS for U.S. domestic registrants. The proposal stipulates that the SEC will decide in 2011 whether to move forward with the convergence to IFRS with the transition beginning in 2014. Should the SEC adopt such a proposal, the Company will convert its reporting
to IFRS at such time.
|
3.
|
Business acquisitions and disposals:
|
On August 29, 2008, the Company acquired all the outstanding shares of Sablon Distribution S.A. (“Sablon”), a Belgium-based toy distributor operating in the Benelux countries, France and Germany. In July 2008, the Company purchased certain assets and liabilities of a toy operation based in New York, USA.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
3.
|
Business acquisitions and disposals (continued):
|
|
(a)
|
Acquisitions (continued):
|
The total purchase price for both acquisitions was $8,502, consisting of cash consideration paid of $6,557 and transaction costs of $271 and, in connection with the Sablon acquisition, additional consideration payable of approximately $1,674 (EUR 1,200). Additional consideration is also payable in each of 2009 and 2010 based on the consolidated
net revenues of Sablon in these years. In connection with the second acquisition, the agreement provides for an additional payment payable upon the achievement of defined financial milestones. Any additional contingent consideration paid for these acquisitions will be accounted for as goodwill. No additional consideration has been paid in the period for these acquisitions.
The acquisitions were accounted for using the purchase method, and the results were consolidated with those of the Company from the dates of acquisition. The Company has allocated the purchase prices on a preliminary basis to the assets acquired and the liabilities assumed based on management’s best estimate of their fair
values and taking into account all relevant information available at that time. Since the Company is still in the process of finalizing the valuation of identifiable intangible assets as well as other assets acquired and liabilities assumed at the dates of acquisition, the allocation of the purchase price is subject to change. The Company expects to finalize the allocation of the purchase price during 2009 and any changes will be disclosed when finalized.
|
Sale of Payment Processing Portfolios:
|
On February 2, 2009, the Company entered into an agreement with a buyer, giving the Company the right to cause the buyer to purchase, and giving the buyer the right to cause the Company to sell, a portfolio of residual payments from merchants processing credit card-present transactions. In substance, the transaction represents
the sale of a portfolio of residual payments from merchants processing credit card-present transactions for proceeds of approximately $11,000.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
3.
|
Business acquisitions and disposals (continued):
|
|
(b)
|
Disposals (continued):
|
|
(i)
|
2009 disposals (continued):
|
|
Sale of Payment Processing Portfolios (continued):
|
|
The aggregate amount of monthly residuals earned on the portfolio, net of a service fee, will be set off against and will reduce the balance of sale receivable. The agreement established that the calculation be based on the results of this portfolio from November 2008 onwards. The adjustment of $1,077 for the amount earned between November 2008 to the transaction date is reflected as a reduction to the proceeds.
The discounted balance of sale receivable is increased monthly by a rate of interest of 1 % per month. The interest income earned on the balance of sale receivable is included in other income on the condensed consolidated statement of operations and comprehensive loss. The Company's right to cause the buyer to purchase (to effectively settle the balance of sale) may be exercised any time on or after February 2, 2011. The buyer's right to cause the Company to sell the portfolio (to effectively
settle the balance of sale) may be exercised at any time up to December 31, 2014. Under the terms of this agreement, the Company has also received a warrant, exercisable for a nominal consideration, giving the Company the right to acquire treasury shares, representing up to 3.5% of the outstanding shares of the purchaser, if the purchase price is not settled prior to specified dates.
|
|
Effective February 4, 2009, the Company sold a portfolio of merchant processing contracts and associated sales channel contracts for a cash consideration of approximately $1,035.
|
|
Sale of Canadian Card-Present and Card-Not-Present Businesses:
|
During fiscal 2008, the Company sold substantially all of the payment processing assets that were used exclusively in the business of processing payments for “card-not-present” transactions and substantially all of the payment processing assets that were used exclusively in the business of processing payments for Canadian card-present
business. In connection with the second transaction, additional proceeds of $500 may be received by the Company based on the achievement of certain earnings goals by the purchaser. No additional consideration has been received in the period for this disposition.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
3.
|
Business acquisitions and disposals (continued):
|
|
(b)
|
Disposals (continued):
|
The results of operations for these disposed businesses are included in discontinued operations in the condensed consolidated statements of operations and comprehensive loss, and the remaining assets and liabilities of these segments are classified separately as assets and liabilities of discontinued operations in the consolidated balance
sheets.
The following table summarizes the book value of the assets and liabilities relating to the businesses sold:
|
|
June 30,
2009
|
|
|
Decembe31,
2008
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and short-term investments held in reserve
|
|
$
|
–
|
|
|
$
|
6,010
|
|
|
Settlement assets
|
|
|
–
|
|
|
|
1,679
|
|
|
Accounts receivable
|
|
|
160
|
|
|
|
3,622
|
|
|
Inventories
|
|
|
74
|
|
|
|
12
|
|
|
Prepaid expenses and deposits
|
|
|
–
|
|
|
|
215
|
|
|
|
|
|
234
|
|
|
|
11,538
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
72
|
|
|
|
738
|
|
|
Intangible assets
|
|
|
11,286
|
|
|
|
811
|
|
|
|
|
|
11,358
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
–
|
|
|
|
4,169
|
|
|
Customer reserves and security deposits
|
|
|
–
|
|
|
|
7,868
|
|
|
|
|
|
–
|
|
|
|
12,037
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets sold
|
|
|
11,592
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale, net of transaction cost of $126 and adjustments of $1,019 ($312 in 2008)
|
|
|
10,890
|
|
|
|
8,188
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sale of net assets
|
|
$
|
(702
|
)
|
|
$
|
7,138
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
3. Business acquisitions and disposals (continued):
|
(b)
|
Disposals (continued):
|
The summarized results of operations of the businesses disposed of are as follows:
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
–
|
|
|
$
|
16,623
|
|
|
|
1,436
|
|
|
$
|
33,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(14
|
)
|
|
|
(28,260
|
)
|
|
|
(489
|
)
|
|
|
(28,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) from discontinued operations
|
|
|
496
|
|
|
|
(37,962
|
)
|
|
|
1,463
|
|
|
|
(37,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on disposal of net assets
|
|
|
(68
|
)
|
|
|
–
|
|
|
|
(702
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from discontinued operations
|
|
$
|
428
|
|
|
$
|
(37,962
|
)
|
|
|
761
|
|
|
$
|
(37,962
|
)
|
The results of operations include management assumptions and adjustments related to cost allocations, which are inherently subjective.
4. Inventories:
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
10,147
|
|
|
$
|
7,286
|
|
Finished goods
|
|
$
|
12,569
|
|
|
$
|
12,078
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,716
|
|
|
$
|
19,364
|
|
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
5. Intangible assets:
June 30, 2009
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
amount
|
|
|
amortization
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
Customer relations
|
|
$
|
30,426
|
|
|
$
|
9,865
|
|
|
$
|
20,561
|
|
ISO/ISA relations
|
|
|
5,608
|
|
|
|
3,847
|
|
|
|
1,761
|
|
Intellectual property
|
|
|
5,520
|
|
|
|
3,067
|
|
|
|
2,453
|
|
Tradename
|
|
|
14,797
|
|
|
|
4,931
|
|
|
|
9,866
|
|
Other
|
|
|
2,191
|
|
|
|
895
|
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,542
|
|
|
$
|
22,605
|
|
|
$
|
35,937
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
amount
|
|
|
amortization
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
Customer relations
|
|
$
|
32,854
|
|
|
$
|
7,939
|
|
|
$
|
24,915
|
|
ISO/ISA relations
|
|
|
7,180
|
|
|
|
3,334
|
|
|
|
3,846
|
|
Intellectual property
|
|
|
5,520
|
|
|
|
2,147
|
|
|
|
3,373
|
|
Tradename
|
|
|
14,797
|
|
|
|
3,453
|
|
|
|
11,344
|
|
Other
|
|
|
2,184
|
|
|
|
553
|
|
|
|
1,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,535
|
|
|
$
|
17,426
|
|
|
$
|
45,109
|
|
As at June 30, 2009, the Company tested for impairment the customer relations and ISO/ISA intangible assets related to certain merchant portfolios that are part of the payment processing business, as the Company determined that the estimated attrition rate should be increased due to new information. As a result of this analysis,
the Company recorded a non-cash impairment charge of $4,000 at June 30, 2009 based on an estimated fair value established using a discounted cash flow methodology.
The recent banking and financial crisis and global recession has negatively impacted the Company’s operating performance (refer to note 1, Future operations). Other than the impairment on the payments processing intangibles, the Company has recorded no impairment charges on the remaining intangible assets during 2009. However,
it is reasonably possible that the Company’s determination that these intangibles are not impaired could change in the near term should the Company’s operating performance deteriorate lower than is currently forecasted.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
6. Long-term debt:
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
|
|
|
Loan payable to a selling shareholder, assumed at date of acquisition, maturing in 2011, bearing interest at 7% thereafter (EUR 1,500)
|
|
$
|
2,104
|
|
$
|
2,231
|
|
|
|
|
|
|
|
|
Other loans, bearing interest at rates ranging from 5% to 7.9% (Dec 31, 2008 - 5% to 8.85%) (EUR 500 (Dec 31, 2008 - EUR 562))
|
|
|
701
|
|
|
784
|
|
|
|
2,805
|
|
|
3,015
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
877
|
|
|
1,010
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
1,928
|
|
$
|
2,005
|
7. Share capital:
On November 5, 2008, the Board of Directors renewed its stock buyback program authorizing the Company to purchase up to 5% of its outstanding Class A shares on the open market through the facilities of the NASDAQ Stock Market. The 2008 program will expire on November 20, 2009. All shares purchased under the stock buyback
program will be cancelled. There were no shares repurchased during the six months ended June 30, 2009.
8. Stock options and warrants:
The Company has various stock-based incentive plans for employees and directors. A description of the plans is provided in Note 15 to the 2008 annual audited consolidated financial statements. During the six months ended June 30, 2009, the Company cancelled 4,875,209 options under the plans. This cancellation resulted in an
expense of $1,486, representing the remaining unrecognized stock-based compensation cost related to the cancelled options. All approvals required for these cancellations were obtained during the period.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
8. Stock options and warrants (continued):
|
(a)
|
Optimal Group Inc. (continued):
|
|
Details of outstanding stock options are as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
|
Number of
|
|
|
price
|
|
|
|
options
|
|
|
per share
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2008
|
|
|
5,471,874
|
|
|
$
|
6.24
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(440,665
|
)
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(4,875,209
|
)
|
|
|
6.29
|
|
|
|
|
|
|
|
|
|
|
Options outstanding June 30, 2009
|
|
|
156,000
|
|
|
$
|
4.21
|
|
During the six-month period ended June 30, 2009, no options were granted.
As at June 30, 2009, 156,000 (June 30, 2008 - 5,504,541) stock options were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
The remaining options have a weighted average remaining contractual life of 5.38 years, and 78,000 of these options were exercisable as at June 30, 2009.
At June 30, 2009, there are 820,000 warrants outstanding, exercisable at $5.56 per share. These warrants expire in November 2014, 410,000 are currently exercisable and the balance will be exercisable in November 2009. All of these warrants were excluded from the calculation of diluted earnings per share because they
were anti-dilutive.
During the period ended June 30, 2009, 134,113 U.S. dollar options and 54,384 Canadian dollar options expired. There are no outstanding Terra Payments Inc.’s options as at June 30, 2009.
As at June 30, 2008, 256,218 stock options were excluded from the calculation of diluted earnings per share because they were anti-dilutive.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
9. Contingencies and guarantees:
|
(a)
|
The Company is party to litigation arising in the normal course of operations. The Company does not expect the resolution of such matters to have a material adverse effect on its financial position or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of these legal matters or should several
legal matters be resolved against the Company in the same reporting period, the consolidated operating results of a particular reporting period could be materially adversely affected.
|
While best estimates have been used for reporting financial statement items subject to measurement uncertainty, management considers that it is possible that changes in future conditions in the near term could require a material change in the recognized amounts of certain assets and liabilities. “Near term” is considered
to be within one year from the date of the financial statements.
|
(b)
|
In the sale or other disposition of assets out of the ordinary course of business, in addition to possible indemnification relating to failure to perform covenants and breach of representations and warranties, the Company might agree to indemnify the buyer against claims from its past conduct of its business. Typically, the term and amount of such indemnification will be limited by agreement. No
provision has been made in these financial statements with respect to this item as the Company does not expect to make any payments for these items and the standby liability is nominal.
|
|
(c)
|
As previously announced, immediately following the enactment of the Unlawful Internet Gambling Enforcement Act of 2006 (the “Act”) on October 13, 2006, the Company’s then majority-owned subsidiary, OPIL, ceased to process settlement transactions originating from United States consumers. This represented a substantial portion of its revenues derived from processing transactions from online
gambling. The Company is exposed to adverse consequences as a result of possible enforcement proceedings, governmental investigations or lawsuits initiated against it in jurisdictions where online gambling is restricted or prohibited.
|
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 announced on May 8, 2007 that it had initiated discussions with the U.S. Attorney’s Office in the Southern District of New York and it was in the process
of responding to a voluntary request for information issued by the U.S. Attorney’s Office. In connection with such ongoing investigation, the Company announced on May 11, 2007 that it had received a copy of warrants of seizure issued by the U.S. Attorney’s Office against funds of certain payment processors that were on deposit with two U.S. banks. These funds included $19,183 on deposit to the credit of the Company's affiliates. The total amount seized of $19,183 is
presented as long-term asset related to discontinued operations on the consolidated balance sheets. The Company is not receiving any interest income on this amount. No provision has been recorded by the Company for this matter because the outcome of these discussions and the amount of loss, if any, are not currently determinable.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
9. Contingencies and guarantees (continued):
|
Furthermore, the Company has long-term liabilities related to discontinued operations of $10,871, which represent customer reserves from merchants that may only be settled upon resolution of the investigation.
|
(e)
|
The Company has one letter of guarantee, issued by a highly rated financial institution to indemnify a third party in the event the Company does not perform its contractual obligations. As at June 30, 2009, the maximum potential liability under this letter of guarantee was $110. As at December 31, 2008, the maximum potential liabilities
under these letters of guarantee were $110 and $1,232 (CA$1,500).
|
As at June 30, 2009 and December 31, 2008, the Company recorded no liability with respect to these guarantees, as the Company does not expect to make any payment for the aforementioned items. Management believes that the fair value of the non-contingent obligations, to stand ready to perform in the event that specified
triggering events or conditions occur, approximates the cost of obtaining the letter of guarantee.
10. Income taxes:
During the six-month period ended June 30, 2009, the Company recorded an income tax recovery of $636 resulting in an effective tax rate of 2%, compared to an income tax provision of $903 and effective tax rate of (5)% for the six-month period ended June 30, 2008. The difference is largely due to the write-off in 2008 of previously recognized
future tax assets that no longer met the criteria for recognition.
The difference between the effective tax rates and the expected statutory tax rate of 31% is mainly due to the fact that the Company has recorded a valuation allowance with respect to certain net operating losses which the Company does not believe are more likely than not to be realized, as well as a significant portion of operations being
taxable in Hong Kong at a lower effective rate than in Canada. In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future income tax assets will be realized. The ultimate realization of future tax assets is dependent upon generation of future taxable income, the reversal of taxable temporary differences, and/or tax planning strategies.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
11. Supplemental disclosure of cash flows and other information:
|
(a)
|
Net change in operating assets and liabilities:
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,007
|
)
|
|
|
(5,635
|
)
|
|
|
15,795
|
|
|
|
2,064
|
|
Inventories
|
|
|
(1,916
|
)
|
|
|
(8,118
|
)
|
|
|
(3,352
|
)
|
|
|
(12,868
|
)
|
Prepaid expenses and deposits
|
|
|
(356
|
)
|
|
|
2,717
|
|
|
|
497
|
|
|
|
3,663
|
|
Accounts payable and accrued liabilities
|
|
|
219
|
|
|
|
13,541
|
|
|
|
(11,256
|
)
|
|
|
7,459
|
|
Income taxes payable
|
|
|
(444
|
)
|
|
|
436
|
|
|
|
(1,172
|
)
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in operating assets and liabilities
|
|
|
(4,504
|
)
|
|
|
2,941
|
|
|
|
512
|
|
|
|
1,574
|
|
|
(b)
|
Cash and cash equivalents:
|
|
June 30,
|
|
|
December 31,
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
Cash and cash equivalents consist of:
|
|
|
|
|
|
Cash balances with banks
|
$
|
23,871
|
|
|
$
|
26,925
|
|
Short-term investments, bearing interest at 2.57%
|
|
–
|
|
|
|
5,924
|
|
|
|
|
|
|
|
|
|
|
$
|
23,871
|
|
|
$
|
32,849
|
|
|
(c)
|
Non-cash transactions:
|
|
June 30,
|
|
June 30,
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
Change in additions of property, equipment and intangibles included in accounts payable and accrued liabilities
|
$
|
167
|
|
$
|
240
|
|
Adjustments to WowWee purchase price equation to goodwill
|
|
–
|
|
|
1 085
|
|
|
|
|
|
|
|
|
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
11. Supplemental disclosure of cash flows and other information (continued):
At June 30, 2009, the Company continues to operate certain merchant portfolios that formed part of the payment processing segment. Effective January 1, 2009, the results of operations of the remaining merchant portfolios are presented on a net basis and as part of “Other Revenues” in the condensed consolidated statement
of operations and comprehensive loss. Included, for the three months ended June 30, 2009, are gross revenues of $7,356, net of transaction processing costs and commissions of $6,549, and for the six months ended June 30, 2009, gross revenues of $14,810, net of transaction processing costs and commissions of $13,140. Other expenses related to these merchant portfolios and not included in “Other Revenues” for the three-month period ended June 30, 2009 are amortization of intangibles of $697 (June 30,
2008 - $961) and an impairment loss on intangibles of $4,000 (June 30, 2008 - nil). The amortization of intangibles for the six-month period ended June 30, 2009 was $1,387 (June 30, 2008 - $1,922) and an impairment loss on intangibles of $4,000 (June 30, 2008 - nil).
For the three-month period ended June 30, 2008, the results of these portfolios are presented on a gross basis and $946 of selling costs are included in transaction processing costs. The expense for the six-month period ended June 30, 2008 was $1,866.
Included in intangible assets on the condensed consolidated balance sheets is $4,679 (December 31, 2008 - $10,061) of customer and ISO/ISA relations, related to these remaining portfolios. Total assets related to these portfolios are comprised mainly of intangible assets.
Included in “Selling, general and administrative expenses” in the condensed consolidated statement of operations and comprehensive loss is a foreign exchange loss relating to financial assets and liabilities of $494 for the three-month period ended June 30, 2009 (June 30, 2008 - $394) and $470 for the six-month period ended
June 30, 2009 (June 30, 2008 - $417).
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
11. Supplemental disclosure of cash flow and other information (continued):
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles pertaining to cost of sales and transaction processing
|
|
$
|
2,597
|
|
|
$
|
2,769
|
|
|
$
|
5,185
|
|
|
$
|
5,460
|
|
Amortization of equipment pertaining to cost of sales
|
|
|
536
|
|
|
|
832
|
|
|
|
1,124
|
|
|
|
1,661
|
|
Amortization of equipment pertaining to selling, general and administrative
|
|
|
214
|
|
|
|
150
|
|
|
|
401
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,347
|
|
|
$
|
3,751
|
|
|
$
|
6,710
|
|
|
$
|
7,368
|
|
12.
|
Financial instruments:
|
The Company has determined that the fair value of its short-term financial assets and liabilities approximates their respective fair values as at the balance sheet dates because of the short-term maturity of those instruments. The carrying value of the long-term debt also approximates its fair value. The fair value
of the long-term debt is calculated using the present value of future principal payments discounted at current market rate for the remaining term to maturity. The fair values of the long-term assets and liabilities related to discontinued operations have not been determined because of the uncertainty related to the timing and resolution of the investigation by the U.S. Attorney's office. See note 9 (c).
(b)
|
SFAS No. 157 - Fair value adjustments:
|
Effective January 1, 2009, The Company adopted SFAS No. 157, for all non-financial assets and liabilities that are measured at fair value on a non-recurring basis, such as goodwill and identifiable intangible assets. The adoption of SFAS No. 157 for non-financial assets and liabilities that are measured at fair value on
a non-recurring basis did not impact the Company’s financial position or results of operations for the three and six months ended June 30, 2009.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
12.
|
Financial instruments (continued):
|
|
(c)
|
Financial income and expense:
|
|
(i)
|
Other income includes interest income earned on cash equivalents and short-term investments and on balance of sale receivable.
|
|
(ii)
|
The Company recorded a bad debt (recovery) expense of $(97) for the three-month period ended June 30, 2009 (June 30, 2008 - $11) in "Selling, general and administrative expenses" in the condensed consolidated statement of operations and comprehensive loss. The expense for the six-month period ended June 30, 2009 was $191 (June 30, 2008 - $15).
|
The Company seeks to mitigate its exposure to foreign currency transaction risk which is mainly due to purchases of inventory denominated in foreign currencies in relation to the Company’s European subsidiary, by monitoring its foreign currency transaction exposure for the year and partially manage such exposure using foreign currency
swap contracts. At June 30, 2009, the Company had entered into a swap contract to buy U.S. dollars with a notional amount of $3,150 at the rate of 1.393 US/EUR. The contract matures on August 28, 2009. The Company has also entered into an interest rate swap contract (from variable rate receive to fixed rate pay) on a notional amount of EUR 1,000. This contract matures in March 2013. At June 30, 2009, the fair value of these contracts was not significant. No contracts
were outstanding at June 30, 2008.
13.
|
Segmented information:
|
During the period ended June 30, 2009, the Company operated in the consumer robotic, toy and entertainment products segment. In 2008, the Company also operated in the payment processing segment, which is now considered a discontinued operation with the exception of two residual portfolios (refer to note 11 (d)).
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
14.
|
Canadian/U.S. reporting differences:
|
The condensed consolidated financial statements of the Company are prepared in accordance with U.S. GAAP, which conform, in all material respects, with Canadian GAAP, except as described below:
|
(a)
|
Consolidated balance sheets:
|
Differences between U.S. and Canadian GAAP in the presentation of share capital, additional paid-in capital and deficit are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Share capital in accordance with U.S. GAAP
|
|
$
|
252,488
|
|
|
$
|
252,488
|
|
Stock-based compensation costs on options exercised:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
(39,868
|
)
|
|
|
(39,868
|
)
|
Change in reporting currency
(2)
|
|
|
(2,588
|
)
|
|
|
(2,588
|
)
|
|
|
|
|
|
|
|
|
|
Share capital in accordance with Canadian GAAP
|
|
$
|
210,032
|
|
|
$
|
210,032
|
|
|
(ii)
|
Additional paid-in capital:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Additional paid-in capital in accordance with U.S. GAAP
|
|
$
|
65,678
|
|
|
$
|
64,173
|
|
Stock-based compensation costs:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
(68,757
|
)
|
|
|
(68,757
|
)
|
Stock-based compensation costs on options exercised:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
39,868
|
|
|
|
39,868
|
|
Change in reporting currency
(2)
|
|
|
(968
|
)
|
|
|
(968
|
)
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital in accordance with Canadian GAAP
|
|
$
|
35,821
|
|
|
$
|
34,316
|
|
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
|
Periods ended June 30, 2009 and 2008
|
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
14.
|
Canadian/U.S. reporting differences (continued):
|
|
(a)
|
Consolidated balance sheets (continued):
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Deficit in accordance with U.S. GAAP
|
|
$
|
(249,855
|
)
|
|
$
|
(222,849
|
)
|
Stock-based compensation costs:
(1)
|
|
|
|
|
|
|
|
|
Cumulative effect of prior years
|
|
|
68,757
|
|
|
|
68,757
|
|
Stock-based compensation to non-employees
(1)
|
|
|
834
|
|
|
|
834
|
|
Change in reporting currency
(2)
|
|
|
1,189
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
Deficit in accordance with Canadian GAAP
|
|
$
|
(179,075
|
)
|
|
$
|
(152,069
|
)
|
|
(1)
|
Stock-based compensation:
|
The Company accounted for its stock-based compensation plans using the recognition and measurement provisions of APB No. 25,
Accounting for Stock Issued to Employees, and Related Interpretations
, versus a settlement accounting basis followed for Canadian GAAP up to January 1,
2003. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123,
Share-based Payments
, and CICA Handbook 3870,
Stock-based Compensation and Other Stock-based Payments
, and therefore there were no further differences between Canadian GAAP and U.S. GAAP.
|
(2)
|
Change in reporting currency:
|
In 1998, the Company adopted the U.S. dollar as its reporting currency. Under Canadian GAAP, at the time of change in reporting currency, the historical financial statements were presented using a translation of convenience. Under U.S. GAAP, the financial statements, including prior years, are translated using the
current rate method. Accordingly, the cumulative translation account included as part of accumulated other comprehensive income in shareholders' equity under Canadian GAAP does not exist for U.S. GAAP purposes.
|
(b)
|
Accumulated other comprehensive loss:
|
Accumulated other comprehensive loss under Canadian GAAP is $(1,484) as at June 30, 2009 and December 31, 2008, which resulted solely from the translation of the financial statements up to June 30, 2000, the date on which the Company adopted the United States dollar as its functional currency, in accordance with the current rate method.
Prior to the change in functional currency which occurred as of June 30, 2000, the Company adopted the USD as its reporting currency during 1998, and used the current rate method under US GAAP compared to a translation of convenience method under Canadian GAAP.
OPTIMAL GROUP INC.
Notes to Condensed Consolidated Financial Statements, Continued
|
Periods ended June 30, 2009 and 2008
|
(expressed in thousands of U.S. dollars, except share and per share amounts)
|
14.
|
Canadian/U.S. reporting differences (continued):
|
(c) New accounting policies:
Effective January 1, 2009, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064,
Goodwill and Intangible Assets
, which replaces Section 3062,
Goodwill and Other Intangible Assets
,
and Section 3450,
Research and Development Costs
. The standard provides guidance on the recognition of intangible assets in accordance with the definition of an asset and the criteria for asset recognition, as well as clarifying the application of the concept of matching revenues and expenses, whether these assets are separately acquired or internally developed. The adoption of this standard did not have a significant impact on the
Company's financial results.
Effective January 1, 2009, the Company adopted CICA EIC-173,
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
, which clarifies that the credit risk of counterparties should be taken into account in determining the fair value of derivative financial instruments. The
adoption of this standard did not have a significant impact on the Company’s financial results.
15. Subsequent events:
On August 7, 2009, shareholders of the Company approved an amendment to the Articles of Continuance of the Company to consolidate all issued and outstanding Class A shares on the basis that each holder of a Class A share shall receive one (1) Class A share for every five (5) Class A shares so consolidated. The proposed share
consolidation will become effective upon the filing of the Articles of Amendment and the issuance of a Certificate of Amendment in respect thereof.
16. Comparative figures:
Certain of the comparative figures have been reclassified in order to conform with the current period’s presentation.
Item 2.
|
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion of the financial condition and results of operations of our Company describes our business, seasonality and trends within our business environment, the critical accounting policies of our Company that will help you understand our interim condensed consolidated financial statements, and the principal factors affecting
our results of operations, liquidity and capital resources. This discussion should be read in conjunction with our consolidated financial statements and management discussion and analysis for the year ended December 31, 2008, and the factors set forth below under “Cautionary Statements Regarding Forward-Looking Statements”. Effective January 1, 2009, we prepare our interim condensed consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) in
the United States, with a reconciliation to Canadian GAAP, as disclosed in note 14 of the notes to our interim condensed consolidated financial statements. Previously, our accounting principles conformed to Canadian GAAP and reconciled differences with U.S. GAAP through our financial statement disclosures.
In this Form 10-Q, except where otherwise indicated, references to “dollars” or “$” are to United States dollars, references to our “common shares” are to our Class “A” shares, references to “our interim condensed consolidated
financial statements” are to our interim condensed consolidated financial statements as at and for the period ended June 30, 2009, which are included in “Item 1. Financial Statements”, and all dollar amounts, except those expressed in millions of dollars, are rounded to the nearest thousand. Any reference in this Form10-Q to uniform resource locator (URL) website locations are inactive textual references only and the contents of such websites do not form a part of this Form 10-Q.
Cautionary Statements Regarding Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Words such as “expects”, “intends”,
“anticipates”, “plans”, “believes”, “seeks”, “estimates”, or variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include, but are not limited to, statements about our current expectations with respect to our future growth strategies, results, opportunities and prospects, competitive position and industry environment. These forward-looking statements are subject to a number
of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, or those of the markets we serve, to differ materially from those expressed in, or implied by, these forward-looking statements, including:
|
·
|
existing and future governmental regulations and disputes with governmental authorities;
|
|
·
|
general economic, legal and business conditions in the markets we serve;
|
·
|
our ability to continue to satisfy Nasdaq's conditions for continued listing of our common
shares on The NASDAQ Global Market;
|
|
·
|
consumer confidence in the security of financial information transmitted via the Internet;
|
|
·
|
levels of consumer and merchant fraud, disputes between consumers and merchants and merchant insolvency;
|
|
·
|
liability for merchant chargebacks;
|
|
·
|
our ability to safeguard against breaches of privacy and security when processing electronic transactions and use of our payments systems for illegal purposes;
|
|
·
|
the imposition of and our compliance with rules and practice procedures implemented by credit card associations;
|
|
·
|
our 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;
|
|
·
|
while we believe that our cash and cash equivalents will be adequate to meet our operating needs
for at least the next 12 months, our existing cash and cash equivalents could prove to be inadequate to meet our funding requirements;
|
|
·
|
our ability to successfully implement our strategies for our WowWee business;
|
|
·
|
changing consumer preferences for electronics and play products;
|
|
·
|
the seasonality of retail sales;
|
|
·
|
concentration among our major retail customers for the products of our WowWee business;
|
|
·
|
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;
|
|
·
|
the factors described under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.
|
There may be additional risks and uncertainties and other factors that we do not currently view as material or that are not necessarily known. The forward looking statements made in this document are only made as of the date of this document.
Except as required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in circumstances or any other reason after the date of this quarterly report.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation. We are relying on the “safe harbor” provisions of
the Private Securities Litigation Reform Act in connection with the forward-looking statements included in this quarterly report.
Future operations
Our financial statements have been prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that we will continue our operations for the foreseeable future and be able to realize our assets and discharge our liabilities and commitments in the normal course of business.
The recent banking and financial crisis and the global economic recession have created an extremely challenging retail and economic environment in the United States and Canada, which has negatively impacted our operating performance. Moreover, the lack of resolution in our continuing discussions with the U.S. Attorney’s Office has
impeded our access to traditional sources of financing to fund our operations.
We currently fund the majority of our operations from our cash and cash equivalents. The balance of cash and cash equivalents, generally decreases during the second and third quarters of the year, as cash is used to fund product development and production, and increases in the fourth and first quarters in connection with the shipping and
collection periods. In January 2009, we implemented a cost reduction program and since that time management has taken steps to more closely manage our working capital.
Although we currently forecast that our cash and cash equivalents, together with cash to be generated from operations, will be adequate to meet our needs for at least the next twelve months, if operating performance is significantly lower than currently forecasted we would thereafter require financing in order to meet our cash flow requirements
and fund our operations. Our operating performance is impacted by economic, financial, competitive, legislative and regulatory factors, as well as other events that are beyond our control.
If we were to require financing in order to meet our cash flow requirements and fund our operations and such financing was not available to us, or was not available to us on terms that are acceptable to us, there could, at the time, be significant uncertainty about our ability to continue as a going-concern, and our capacity to realize
the carrying value of our assets and repay our existing and future obligations as they generally become due. Our financial statements do not reflect adjustments that would be necessary if the going concern assumptions were not appropriate under these circumstances.
Overview
During the period ended June 30, 2009, we operated in the consumer robotic, toy and entertainment product segment through WowWee, which is comprised of WowWee Group Limited, WowWee Canada Inc., WowWee USA, Inc. and WW Sablon Holdings. We design, develop, market and distribute technology-based, consumer robotic, toy and entertainment products. In
2008, we also operated in the payment processing segment, which is now primarily considered a discontinued operation.
WowWee
Based in Hong Kong, with offices in Carlsbad, California, New York, New York, Montreal, Quebec, and Wauthier-Braine, Belgium, WowWee designs, develops, markets and distributes technology-based, consumer robotic, toy and entertainment products that can be sold at a variety of price points. For
2009, WowWee’s product offerings encompass five distinct lines: WowWee Robotics, WowWee Flytech,WowWee Alive,Think Wow Toys and WowWee Technologies.
WowWee products are sold in a range of brick and mortar channels including grocery stores, pharmacies, toy shops, department stores and high-end consumer technologies stores. A majority of our retail customers in the United States also carry the full line of WowWee products on their Internet
sales sites. WowWee’s products are available for purchase online at WowWee’s website (http://www.wowweestore.com) and are also made available through Internet-based “e-tailers” such as Amazon.com and Buy.com.
WowWee’s products are predominantly produced in China by third party manufacturers, many with whom WowWee has long-standing relationships. Consistent with industry practice, the use of third party manufacturers allows WowWee to avoid incurring fixed manufacturing costs, while improving
flexibility, capacity and production technology. By outsourcing its manufacturing process, WowWee maintains a flexible business model that enables it to be responsive to changing technology. In addition, once a product has reached its commercialization phase, WowWee is able to minimize inventory risk by manufacturing products based upon actual customer orders; however, certain customer orders may be subject to cancellation. Upon final assembly, products can be shipped directly from the manufacturing locations
to retailers and distributors, with title to the products passing to retail customers in the country of origin. Although WowWee does not conduct the day-to-day manufacturing of its products, it is extensively involved in the design of the product prototype and production tools, dies and molds for its products and seeks to ensure quality control by actively reviewing the production process and testing the products produced by its manufacturers. WowWee employs quality control inspectors who rotate among its manufacturers’
factories to monitor the production of substantially all of its products. WowWee’s quality assurance personnel ensure the compliance with applicable regulations during each phase of product development, and perform compliance testing, and coordinate third party independent compliance testing, on all WowWee products. Once pre-production testing has been completed and product production has been approved, WowWee’s quality assurance personnel monitor production at the manufacturer’s facility for
compliance with WowWee’s quality requirements.
Within the United States and Canada, WowWee sells its products directly to its retailer customers through its direct sales channel, through independent sales representatives and through distributors. As of January 1, 2009, WowWee products are sold to most European countries directly
through WowWee Europe, a recently established division resulting from the acquisition of Sablon Distribution SA, a former independent distributor – see “Recent Developments” below. For retailers in the rest of the world, WowWee utilizes a network of distributors located in various jurisdictions. WowWee products are also available for sale through WowWee’s Internet-based store (http://www.wowweestore.com). In 2008, approximately 62% of its products were sold in North America, with the balance
being sold internationally.WowWee does not have written agreements with its customers. Instead, sales are made based on purchase orders, primarily against letters of credit. The majority of orders are traditionally written during the first two quarters of the year, with shipments occurring throughout the year as new product becomes available. The majority of the product shipments occur during the third and fourth quarters of the year. Revenue is recognized when (i) persuasive evidence of an arrangement exists;
(ii) products are shipped to customers who assume risk of loss, (iii) collection of the respective receivable is probable and (iv) sales price is fixed or determinable. In practice, this results in revenue being recognized when the product is shipped from Hong Kong. Accruals for customer discounts, rebates, incentives and allowances are recorded when the related revenues are recognized.
WowWee’s engineering and design team develops new technologies using internal capabilities and seeks to identify emerging or underutilized innovations that are currently being developed or that are available in the marketplace. In order to leverage the man-hours invested in prior products,
older generations of products frequently form the foundation for the next generation of products as well as new product lines. New technologies are then integrated to enhance the overall functionality of the product. In sourcing technologies, WowWee reviews the latest technology innovations at trade-shows, conferences, colleges and universities, on the Internet, and through word-of-mouth. WowWee regularly reviews technologies or product concepts from third party sources that it believes could have potential synergies
with WowWee’s current product line or that could be successfully commercialized based upon WowWee’s development process. WowWee also licenses third party technologies for development within unique consumer applications developed by WowWee.
We expect the unfavorable economic conditions experienced in 2008 to continue in 2009. We also expect revenues to be under pressure in 2009 as a result of a continued reluctance of consumers to spend and desire of retailers to reduce inventories, weakening foreign exchange in international
markets and the sale of fewer entertainment-related products in 2009. As a result we are managing our business based on reduced revenue assumptions and taking actions intended to improve gross margins and strengthen our balance sheet.
Recent Developments
On February 2, 2009, we entered into an agreement with a buyer, giving us the right to cause the buyer to purchase, and giving the buyer the right to cause us to sell, a portfolio of residual payments from merchants processing credit card-present transactions. In substance, the transaction represents the sale of a portfolio
of residual payments from merchants processing credit card-present transactions for proceeds of approximately $11.0 million. The aggregate amount of monthly residuals earned on the portfolio, net of a service fee, will be set-off against and will reduce the balance of sale receivable. The agreement established that the calculation be based on the results of this portfolio from November 2008 onwards. The adjustment for the amount earned between November 2008 to the transaction date is reflected as a reduction
to the proceeds. The adjusted balance of sale is increased monthly by a rate of interest of 1% per month. Our right to cause the buyer to purchase (to effectively settle the balance of sale) may be exercised any time on or after February 2, 2011. The buyer's right to cause us to sell the portfolio (to effectively settle the balance of sale) may be exercised at any time up to December 31, 2014. Under the terms of this agreement, we have also received a warrant, exercisable for a nominal consideration,
giving us the right to acquire treasury shares, representing up to 3.5% of the outstanding shares of the purchaser, if the purchase price is not settled prior to specified dates.
Effective February 4, 2009, we sold a portfolio of merchant processing contracts and associated sales channel contracts for a cash consideration of approximately $1.0 million.
The results of operations for these disposed portfolios are included as discontinued operations in the interim condensed consolidated statements of operations and comprehensive loss for the three-month and six-month periods ended June 30, 2009.
On August 29, 2008 we acquired all the outstanding shares of Sablon Distribution S.A., a Belgium-based toy distributor operating in the Benelux countries, France and Germany.
Seasonality
Revenue in our business is subject to seasonal variability. In 2008, the majority of our net sales were made in the third and fourth quarters. In our business and the toy business in general, the first quarter is the period of lowest shipments and sales and therefore the least profitable
due to various fixed costs. Seasonality factors will cause our operating results to fluctuate significantly from quarter to quarter. Our results of operations may also fluctuate as a result of factors such as the timing of new products (and related expenses), the advertising activities of our competitors, delivery schedules set by our customers and the emergence of new market entrants. We believe, however, that the low retail price of our lower-priced products may be less subject to seasonal fluctuations
than our higher priced toy products.
These seasonal purchasing patterns and requisite production lead times cause risk in our business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly in recent years, requiring us to ship products closer
to the time the retailers expect to sell the products to consumers. These factors increase the risk that we may not be able to meet demand for certain products at peak demand times, or that our own inventory levels may increase due to the need to pre-build products before orders are placed.
In anticipation of retail sales in the traditional holiday season, we significantly increase production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of our fiscal year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters
in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements.
We ship products in accordance with delivery schedules specified by our customers, who usually request delivery of their products within three to six weeks of the date of their orders on orders shipped FOB China or Hong Kong and within three days on orders shipped domestically. Because customer
orders may be canceled at any time without penalty, our backlog may not accurately indicate sales for any future period.
Critical Accounting Policies and Estimates
Effective January 1, 2009, we prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) with a reconciliation to Canadian GAAP as described in note 14 of the notes to our interim condensed consolidated financial statements.
Previously, our accounting principles conformed to Canadian GAAP and reconciled differences with U.S. GAAP through our financial statement disclosures.
Our interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires us to make numerous estimates and assumptions. Financial results as determined by actual events could differ from those estimates and assumptions, and therefore affect our
reported results of operations and financial position. Changes in accounting policies are more fully described in note 25 of the notes to our annual audited consolidated financial statements included in our Form 10-K Annual Report for the year ended December 31, 2008 and note 2 of the notes to our interim condensed consolidated financial statements. Our significant accounting policies are more fully described in note 4 of the notes to our annual audited consolidated financial statements included in
our Form 10-K Annual Report for the year ended December 31, 2008. The critical accounting policies described here are those that are most important to the depiction of our financial condition and results of operations. The preparation of financial statements also involves significant management judgment in making estimates about the effect of matters that are inherently uncertain which are more fully described in Note 4 (q) of the notes to our annual audited consolidated financial statements included
in our Form 10-K Annual Report. While best estimates have been used for reporting financial statement items subject to measurement uncertainty, management considers that it is possible, based on existing knowledge, that changes in future conditions in the near term could affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. “Near term” is considered to be within one year from the date of the financial statements.
Intangibles
Intangible assets with finite lives continue to be amortized over their estimated useful lives. The amounts recorded as intangible assets at the date of acquisition represent the estimated fair value of these assets based on estimated future cash flows discounted at appropriate discount rates. Intangibles with finite lives, are reviewed
for potential impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, such assessments require us to make estimates of future cash flows to be generated from the related assets. The recent banking and financial crisis and global recession has negatively impacted our operating performance. Other than the impairment on the payments processing intangibles, we have recorded no impairment charges on the remaining intangible assets during 2009. However,
it is reasonably possible that our determination that these intangibles are not impaired could change in the near term should our operating performance deteriorate lower than is currently forecasted.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were
a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. The size of the allowance for doubtful accounts is also affected by the timing of the realization of uncollectible accounts receivable balances as well as the offsetting allowance.
Major customers’ accounts are monitored on an ongoing basis; more in depth reviews are performed based on changes in a customer’s financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer,
and on a quarterly basis, the allowance is reviewed for adequacy and the balance adjusted to reflect our current assessment of credit loss.
Revenue Recognition
Our revenue recognition policy is to recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred (product shipment), the price is fixed or readily determinable, and collectability
is probable. Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data. We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Accruals for these programs
are recorded as sales adjustments that reduce gross revenue in the period the related revenue is recognized.
Reserve for Inventory Obsolescence
We value our inventory at the lower of cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to
its net realizable value.
Failure to accurately predict and respond to consumer demand could result in our under producing popular items or overproducing less popular items. Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.
Management estimates are monitored on a quarterly basis and a further adjustment to reduce inventory to its net realizable value is recorded, as an increase to cost of sales, when deemed necessary under the lower of cost or market standard.
Income Taxes
We provide for income taxes using the asset and liability method of tax allocation. Under this method, deferred income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities
using enacted income tax rates expected to be in effect for the year in which the differences are expected to reverse. We establish a valuation allowance against deferred income tax assets if, based on available information, it is more likely than not that some or all of the deferred income tax assets will not be realized. In assessing the reliability of tax assets, we consider whether it is more likely than not that some portion or all of the tax assets will not be realized. The ultimate realization of the deferred
tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. We considered the scheduled reversal of tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based on management’s assessment of all relevant information, and is periodically reviewed and adjusted
as circumstances warrant.
Stock-based Compensation
We use the fair value-based method to account for stock-based compensation and other stock-based payments, such as stock options and restricted share units. Under the fair value-based method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s
vesting period. The fair value of stock options granted is determined at the date of grant using the Black-Scholes option pricing model, which requires certain assumptions, including future stock price volatility, risk-free interest rates, and expected time to exercise. Changes to any of these assumptions, or the use of a different option pricing model, would result in different fair values for stock-based compensation.
Contingent liabilities
Our former gaming payment processing services segment derived a substantial portion of its revenue prior to October 13, 2006 from processing transactions from U.S. based gaming. Therefore, we may be exposed to adverse consequences as a result of enforcement proceedings, governmental investigations
or lawsuits initiated against us in jurisdictions where gaming is restricted or prohibited. 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, we announced on May 8, 2007 that we had initiated discussions with the U.S. Attorney’s Office in the Southern District of New York and were in the process of responding to a voluntary request for information issued by the U.S. Attorney’s Office.
We have not recorded any provision for this matter because the outcome of these discussions and the amount of loss, if any, are not determinable. While best estimates have been used for reporting financial statement items subject to measurement uncertainty, management considers that it is possible that changes in future conditions in the near term could require a material change in the recognized amounts of certain assets and liabilities. “Near term” is considered to be within one year from the date
of the financial statements.
OGOP Payments Inc. (formerly Optimal Payments Inc.) has received a request for information from the U.S. Attorney’s Office in the Eastern District of New York pertaining to its former involvement in processing transactions for internet pharmacies. OGOP Payments Inc. has had discussions with that Office relating to those
processing activities. No provision has been recorded by OGOP Payments Inc. for this matter because the outcome of these discussions and the amount of any loss, if any, are not determinable.
We are also party to litigation arising in the normal course of operations. The results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should several legal matters be resolved against us in the same reporting period, the
consolidated operating results of a particular reporting period could be materially adversely affected.
Recent Accounting Pronouncements
(a)
New Accounting Policie
s
The following accounting standards have recently been issued by the Financial Accounting Standards Board (FASB) and the Canadian Institute of Chartered Accountants (CICA), that are relevant to us.
Effective January 1, 2009, we prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) with a reconciliation to Canadian GAAP as described in note 14 of the notes to our interim consolidated financial statements. Previously
our accounting principles conformed to Canadian GAAP and reconciled difference with U.S. GAAP through its financial statement disclosure.
SFAS No. 165 - Subsequent Events
We adopted Statement of Financial Accounting Standards (“SFAS”) No. 165,
Subsequent Events w
hich is effective for interim periods ending after June 15, 2009. SFAS No. 165 establishes general standards for accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued. SFAS No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that should be made about events or transactions
that occur after the balance sheet date. In preparing these financial statements, we evaluated the events and transactions that occurred between June 30, 2009 through August 7, 2009, the date these financial statements were issued.
SFAS No. 141R - Business combinations
Effective January 1, 2009, we adopted the statement of Financial Accounting Standards SFAS No. 141R,
Business Combinations
on a prospective basis. This standard is a revised standard on accounting for business combinations. The major changes to accounting
for business combinations include the following: all business acquisitions will be measured at fair value; the existing definition of a business has been expanded; pre-acquisition contingencies will be measured at fair value; most acquisition-related costs will be recognized as expenses as incurred (they would no longer be part of the purchase consideration); obligations for contingent consideration will be measured and recognized at fair value at the acquisition date (measurement would no longer need to wait
until the contingency is settled); non-controlling interests will be measured at fair value at the date of acquisition (i.e., 100% of the assets and liabilities will be measured at fair value even when an acquisition is for less than 100%); goodwill, if any, arising on a business combination reflects the excess of the fair value of the acquiree, as a whole, over the net amount of the recognized identifiable assets acquired and liabilities assumed, and will be allocated to the acquirer and the non-controlling
interest. The adoption of this standard did not have an impact on our results as there were no business acquisitions in the six-month period ended June 30, 2009.
SFAS No. 160 - Non-controlling interest in consolidated financial statements
Effective January 1, 2009, we adopted SFAS No. 160,
Non-controlling interest in consolidated financial statements
. This standard is a revised standard on accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated
financial statements. This statement specifies that non-controlling interests are to be treated as a separate component of equity, not as a liability or other item outside of equity. Because non-controlling interests are an element of equity, increases and decreases in the parent’s ownership interest that leave control intact are accounted for as capital transactions rather than as step acquisitions or generating dilution gains or losses. The carrying amount of the non-controlling
interests is adjusted to reflect the changes in ownership interests, and any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity attributable to the controlling interests.
This standard requires net income and comprehensive income to be displayed for both the controlling and the non-controlling interests. Additional required disclosures and reconciliations include a separate schedule that shows the effects of any transactions with the non-controlling interests on the equity attributable to the
controlling interests.
SFAS No. 160 is applied prospectively to all non-controlling interests, including any that arose before the effective date. The adoption of this standard did not have an impact on our results.
SFAS No. 161 - Disclosures about derivative instruments and hedging activities, an amendment to FASB Statement No. 133
Effective January 1, 2009, we adopted SFAS No. 161,
Disclosures about derivative instruments and hedging activities, an amendment to FASB Statement No. 133
. This standard requires qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related contingent features on derivative agreements. The adoption of this standard did not have an impact on our results.
SFAS No. 162 - The hierarchy of generally accepted accounting principles and SFAS 163 - Accounting for financial guarantee insurance contracts
Effective January 1, 2009, we adopted SAFS No. 162,
The hierarchy of generally accepted accounting principles
, and SFAS No. 163,
Accounting for financial guarantee insurance contracts
. The adoption
of these standards did not have an impact on our results.
Goodwill and Other Intangible Assets; Research and Development Costs
Effective January 1, 2009, we adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064,
Goodwill and Intangible Assets
, which replaces Section 3062,
Goodwill and Other Intangible Assets
, and Section
3450,
Research and Development Costs
. The standard provides guidance on the recognition of intangible assets in accordance with the definition of an asset and the criteria for asset recognition, as well as clarifying the application of the concept of matching revenues and expenses, whether these assets are separately acquired or internally developed. The adoption of this standard did not have a significant impact on our financial results.
EIC-173 - Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
Effective January 2009, we adopted CICA EIC-173,
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities,
which clarifies that the credit risk of counterparties should be taken into account in determining the fair value of derivative financial instruments. The
adoption of this standard did not have a significant impact on our financial results.
(b) Future Accounting Pronouncements
The following accounting pronouncements have recently been issued by the the FASB and CICA and may be relevant to us.
In June 2009, FASB issued
SFAS No. 166, Accounting for Transfers of Financial Assets
— an amendment of FASB Statement No. 140. SFAS No. 166 amends SFAS No. 140, Accounting for the Transfers and Servicing of Financial Assets and the Extinguishments
of Liabilities, and seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets; the effects of the transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a
portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. We have not completed our evaluation, but we do not expect the adoption of SFAS No. 166 to have a material impact on our consolidated financial statements.
In June 2009, the FASB issued
SFAS No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles
, a replacement of FASB Statement No. 162 SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles, to establish the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America. SFAS No. 168 is effective for interim and annual reporting periods ending after September 15, 2009We do not expect the adoption of SFAS No. 168
to have a material impact on our consolidated financial statements.
SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or the Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
In April 2009, the FASB issued FSP No. SFAS 157-4,
Determining Fair Value When the Volume and Level of Activity for the Asset or the Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.
FSP No. SFAS 157-4 amends SFAS No. 157 to provide additional
guidance on (i) estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, and (ii) circumstances that may indicate that a transaction is not orderly. FSP No. SFAS 157-4 also requires additional disclosures about fair value measurements in interim and annual reporting periods. FSP No. SFAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009.
We do not expect the adoption of FSP No. SFAS 157-4 to have a material effect on our financial statements.
SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
In April 2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
(“FSP No. SFAS 115-2”)
. FSP No. SFAS 115-2 provides additional guidance on the timing of impairment recognition and greater clarity about the credit and noncredit components of impaired debt securities that are not expected to be sold. FSP No. SFAS 115-2 also requires additional disclosures about impairments in interim and annual reporting periods. FSP No. SFAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009. We do not expect the adoption of FSP No.
SFAS 115-2 to have a material effect on our financial statements.
SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments.
FSP No. SFAS 107-1 and APB 28-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
,
to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends Accounting Principles Board (“APB”) Opinion No. 28,
Interim Financial Reporting
, to require those disclosures in all interim financial statements. FSP No. SFAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. We do not expect the adoption of FSP No. SFAS
107-1 and APB 28-1 to have a material effect on our financial statements.
International Financial Reporting Standards
The Accounting Standards Board of the Canadian Institute of Chartered Accountants (“CICA”) has announced its decision to require all publicly accountable enterprises to report under International Financial Reporting Standards (IFRS) for the years beginning on or after January 1, 2011. However, we are a domestic registrant
in the U.S. and therefore file our financial statements in accordance with U.S. GAAP. As such, we have decided not to report under IFRS by 2011 and to continue reporting under U.S. GAAP. In August 2008, the SEC issued a roadmap for the potential convergence to IFRS for U.S. domestic U.S. registrants. The proposal stipulates that the SEC will decide in 2011 whether to move forward with the convergence to IFRS with the transition beginning in the 2014. Should the SEC adopt such a proposal, we will convert our reporting
to IFRS at such time.
Financial Condition
As at June 30, 2009, cash and cash equivalents, and short-term investments, totaled $23.9 million compared to $39.1 million as at December 31, 2008.
The decrease in cash and cash equivalents, and short-term investments is primarily due to the use of cash in operations as the first two quarters are the periods of lowest shipments and sales and therefore the least profitable due to various fixed costs, as well as the repayment of $1.5
million of bank indebtedness. We have various credit facilities through our subsidiaries located in Belgium and Hong Kong, amounting to approximately $14.4 million, of which $10.0 million was used at June 30, 2009. As at June 30, 2009 and December 31, 2008, our cash and cash equivalents and short-term investments, net of bank indebtedness were as follows:
|
|
June 30,
|
|
December 31,
|
|
(U.S. dollars, in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,871
|
|
$
|
32,849
|
Short-term investments
|
|
|
-
|
|
|
6,296
|
|
|
|
23,871
|
|
|
39,145
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
Bank indebtedness
|
|
|
(10,029
|
)
|
|
(11,547
|
)
|
|
|
|
|
|
|
|
|
Net cash position
|
|
$
|
13,842
|
|
$
|
27,598
|
Our portfolio of liquid and investment grade short-term investments as at December 31, 2008, consisted of U.S. denominated discounted and undiscounted notes and bonds.
Working capital as at June 30, 2009 was $19.9 million, as compared to $33.2 million at December 31, 2008. This decrease resulted primarily from the loss from operations.
Accounts and other receivables as at June 30, 2009 were $8.4 million, as compared to $24.2 million at December 31, 2008. The decrease is due primarily to the seasonal decrease in revenues in the six-month period ended June 30, 2009, and the collection of accounts receivable which were generated from sales in the third and fourth quarter
of 2008.
Inventories increased by $3.3 million from $19.4 million as at December 31, 2008 to $22.7 million as at June 30, 2009. The increase is primarily due to the buildup of inventory levels in the first two quarters of 2009 in preparation for the anticipated sales in the last two quarters.
Intangible assets decreased by $9.2 million, from $45.1 million as at December 31, 2008 to $35.9 million as at June 30, 2009, due to amortization of $5.2 million recorded in the six-month period ended June 30, 2009 and an impairment charge of $4.0 million related to certain merchant portfolios that formed part of the payment
processing business.
Shareholders’ equity as at June 30, 2009 was $68.0 million, as compared to $93.5 million as at December 31, 2008. The decrease is attributable primarily to the loss from operations.
Results of Operations
We expect the unfavorable economic conditions experienced in 2008 to continue throughout 2009. We also expect revenues to be under pressure in 2009 as a result of a continued reluctance by consumers to spend and desire by retailers to reduce inventories, weakening foreign exchange in
international markets, and the sale of fewer entertainment-related products in 2009. Although there are several external indications that the economic environment is improving, we believe it is still too early to project when, and how quickly this recovery will impact our business. As a result, we are managing our business based on reduced revenue assumptions and taking actions intended to improve gross margins and strengthen our balance sheet.
Revenue is subject to seasonal variability with a significant portion of annual revenues expected to be generated in the third and fourth quarter of each calendar year.
Six-month period ended June 30, 2009 compared to the six-month period ended June 30, 2008
Revenues decreased by $11.7 million, from $20.4 million for the six-month period ended June 30, 2008 to $8.7 million for the six-month period ended June 30, 2009. The decrease is attributed primarily to the continuing unfavorable economic conditions, as mentioned above, primarily the desire by retailers to reduce inventories as well as
changes in our distribution model whereby we sell a larger proportion directly to retailers and consumers, who in turn are issuing purchase orders only later in the buying season.
Effective January 1, 2009, the results of operations from payment processing are presented on a net basis as other revenues, whereas the results for the comparative six-month period ended June 30, 2008 were reported on a gross basis. As a result other revenues decreased by $17.6 million, from $19.3 million for the six-month period ended
June 30, 2008 to $1.7 million for the six-month period ended June 30, 2009.
Cost of sales decreased by $6.7 million, from $14.5 million for the six-month period ended June 30, 2008 to $7.8 million for the six-month period ended June 30, 2009. The decrease is consistent with the reduction in revenue.
Transaction processing costs for the six-month period ended June 30, 2008 were $17.5 million, however for the six-month period ended June 30, 2009 there was no transaction processing expenses presented as the related revenues were reported net of such costs as part of “other revenues”.
Selling, general and administrative expenses increased by $2.7 million, from $14.6 million for the six-month period ended June 30, 2008 to $17.3 million for the six-month period ended June 30, 2009. The increase is due primarily to selling, general and administrative expenses related to Sablon and Think Wow Toys which were acquired in
the third quarter of 2008, offset by a reduction in travel and sales sample expenses.
Stock-based compensation pertaining to selling, general and administrative expense decreased by $0.9 million, from $2.4 million for the six-month period ended June 30, 2008 to $1.5 million for the six-month period ended June 30, 2009. The decrease is due to the cancellation of 4,875,209 options during the six months ended June
30, 2009, which represented the majority of the remaining options.
Research and development expenses increased by $0.1 million, from $1.3 million for the six-month period ended June 30, 2008 to $1.4 million for the six-month period ended June 30, 2009.
Amortization of intangibles pertaining to transaction processing and cost of sales remained relatively constant at $5.2 million for the six-months ended June 30, 2009, compared to $5.5 million for the comparable period in 2008.
Amortization of equipment pertaining to cost of sales was $1.1 million for the six-months ended June 30, 2009, compared to $1.7 million for the comparable period in 2008. This expense is related to the amortization of moulds used in the production of our products.
Amortization of equipment pertaining to selling, general and administrative expense was $0.4 million for the six-month ended June 30, 2009, compared to $0.2 million for the comparable period in 2008.
As at June 30, 2009, we tested for impairment on the customer relations and ISO/ISA intangible assets related to certain merchant portfolios that are part of our former payment processing segment, as we determined that the estimated attrition rate should be increased due to new information. As a result of this analysis, we recorded
a non-cash impairment charge of $4.0 million at June 30, 2009 based on an estimated fair value established using a discounted cash flow methodology.
The provision for income taxes consisted of a recovery of $0.6 million for the six-month period ended June 30, 2009 compared to a charge of $0.9 million for the six-month period ended June 30, 2008. The difference is largely due to the write-off in 2008 of previously recognized future tax assets that no longer met the criteria for recognition.
Significant components of the consolidated tax provision for the six-month period ended June 30, 2009 included the effect of tax differences in tax rates in foreign jurisdictions, an increase of valuation allowances against operating losses carry forward and non-deductible stock-based compensation. Our operations are taxable
in Hong Kong at a lower effective tax rate than in Canada, which affected the provision by $0.9 million compared to $1.0 million for the six-month period ended June 30, 2008. In addition, the 2009 tax provision includes the tax effect of non-deductible stock-based compensation expense in the amount of $0.5 million compared to $0.8 million for the six-month period ended June 30, 2008.
Our tax provision also includes the effect of future taxes on unrealized foreign exchange gains and losses, which arise upon the conversion into Canadian dollars of net monetary assets and liabilities denominated in U.S. dollars for purposes of determining taxable income under Canadian income tax regulations. Since the U.S. dollar is our
measurement currency and our consolidated financial statements are presented in U.S. dollars, these foreign exchange gains and losses do not affect earnings before income taxes.
Our net loss for the six-month period ended June 30, 2009 was $27.0 million (or $1.05 per share), as compared to a net loss of $56.4 million (or $2.18 per share) for the six-month period ended June 30, 2008. The decrease is due primarily to the following 2008 items: a non-cash impairment loss from discontinued operations of $29.0 million
for goodwill, as well as related charges of $5.7 million for the “other asset” and $7.6 million of future tax assets that no longer met the criteria for recognition.
We previously used EBITDA to assess our operating performance, which was a non-GAAP financial measure that excluded non-cash expenses, items that cannot be influenced by Management in the short-term or items that do not impact core operating performance. We believe that this measure no longer provides any additional meaningful information
at this time and therefore have discontinued the use of this measure during the three-month period ended June 30, 2009.
Three-month period ended June 30, 2009 compared to the three-month period ended June 30, 2008
Revenues decreased by $9.0 million, from $15.5 million for the three-month period ended June 30, 2008 to $6.5 million for the three-month period ended June 30, 2009. The decrease is attributed primarily to the continuing unfavorable economic conditions, as mentioned above, primarily the desire by retailers to reduce inventories as well
as changes in our distribution model whereby we sell a larger proportion directly to retailers and consumers, who in turn are issuing purchase orders only later in the buying season.
Cost of sales decreased by $4.4 million, from $10.8 million for the three-month period ended June30, 2008 to $6.4 million for the three-month period ended June 30, 2009. The decrease is consistent with the reduction in revenue.
Transaction processing costs for the three-month period ended June 30, 2008 were $8.7 million, however for the three-month period ended June 30, 2009 there was no transaction processing expenses presented as the related revenues were reported net of such costs as part of “other revenues”.
Selling, general and administrative expenses increased by $0.4 million, from $8.2 million for the three-month period ended June 30, 2008 to $8.6 million for the three-month period ended June 30, 2009. The increase is due primarily to selling, general and administrative expenses related to
Sablon and Think Wow Toys which were acquired in the third quarter of 2008, offset by a reduction in travel and sales sample expenses.
Stock based compensation pertaining to selling, general and administrative decreased by $1.8 million. The decrease is due to the cancellation of 4,875,209 options during the three months ended March 31, 2009, which represented the majority of the remaining options.
Research and development expenses remained consistent at $0.8 million for the three-month period ended June 30, 2009 to $0.7 million for the comparable period in 2008.
Amortization of intangibles pertaining to transaction processing costs and cost of sales remained relatively constant at $2.6 million for the three-month period ended June 30, 2009 and $2.8 million for the comparable period in 2008.
Amortization of equipment pertaining to cost of sales for the three-month period ended June 30, 2009 was $0.6 million compared to $0.8 million for the comparable period in 2008. This expense is related to the amortization of moulds used in the production of our products.
Amortization of property and equipment pertaining to selling, general and administrative remained constant at $0.2 million.
As at June 30, 2009, we tested for impairment on the customer relations and ISO/ISA intangible assets related to certain merchant portfolios that are part of the payment processing segment, as we determined that the estimated attrition rate should be increased due to new information. As a result of this analysis, we recorded
a non-cash impairment charge of $4.0 million at June 30, 2009 based on an estimated fair value established using a discounted cash flow methodology.
The provision for income taxes consisted of a recovery of $0.8 million for the three-month period ended June 30, 2009 compared to a charge of $1.5 million for the three-month period ended June 30, 2008. The difference is largely due to the write-off in 2008 of previously recognized future tax assets that no longer met the criteria for
recognition.
The difference between the effective tax rate of 5% and the expected statutory tax rates of 31% is mainly due to the fact that we recorded a valuation allowance with respect to certain net operating losses carry-forward which we do not believe is more likely than not to be realized. In addition, a significant portion of our operations
are taxable in Hong Kong at a lower effective tax rate than in Canada.
Our net loss for the three-month period ended June 30, 2009 was $14.6 million (or $0.57 per diluted share), compared to a net loss of $48.4 million (or $1.87 per diluted share) for the three-month period ended June 30, 2008. The decrease is due primarily to the following 2008 items: a non-cash impairment loss from discontinued operations
of $29.0 million for goodwill, as well as related charges of $5.7 million for the “other asset” and $7.6 million of future tax assets that no longer met the criteria for recognition.
We previously used EBITDA to assess our operating performance, which was a non-GAAP financial measure that excluded non-cash expenses, items that cannot be influenced by Management in the short-term or items that do not impact core operating performance. We believe that this measure no longer provides any additional meaningful information
at this time and therefore have discontinued the use of this measure during the three-month period ended June 30, 2009.
Liquidity and Capital Resources
As at June 30, 2009, cash and cash equivalents, and short-term investments, totaled $23.9 million compared to $39.1 million as at December 31, 2008.
The decrease in cash and cash equivalents, and short-term investments is primarily due to the use of cash in operations as the first two quarters are the periods of lowest shipments and sales and therefore the least profitable due to various fixed costs, as well as the repayment of $1.5
million of the bank indebtedness. We have various credit facilities through our subsidiaries located in Belgium and Hong Kong, amounting to approximately $14.4 million, of which $10.0 million was used at June 30, 2009. The terms and rates of these credit facilities have not changed from December 31, 2008.
Operating activities used $9.8 million of cash and cash equivalents in the three-month period ended June 30, 2009, as compared to generating $3.2 million in the three-month period ended June 30, 2008. This change is due mainly to the increase in the net loss from continuing operations, and
of the timing of payments of the trade payables.
Financing activities generated $2.5 million of cash and cash equivalents in the three-month period ended June 30, 2009, as compared to using $0.1 million used in the three-month period ended June 30, 2008. This change is due to the increase of $2.7 million of bank indebtedness in the three-month period ended June 30, 2009.
Investing activities used $0.6 million of cash and cash equivalents for the three-month period ended June 30, 2009, as compared to generating $2.3 million of cash and cash equivalents for the three-month period ended June 30, 2008, primarily from the maturity of short-investments.
Also refer to the disclosure under ”Future Operations” above under this Item 2.
Current Economic Environment
The downturn in the global economy had a significant negative effect on the toy industry and us. Consumer confidence reached low levels in December of 2008, driving retail sales weakness in the fourth quarter as consumers, fearful of the economy’s direction, cut back their discretionary spending. Toy retailers and manufacturers were
impacted by the economic downturn, with estimates that a significant number of Chinese toy manufacturers will close their operations and a significant number of toy sellers in the U.S., U.K., Mexico and other major markets will close or significantly reduce their operations or enter bankruptcy.
We expect the unfavourable economic conditions experienced in 2008 to continue in 2009. We also expect revenues to be under pressure in 2009 as a result of a continued reluctance of consumers to spend and desire of retailers to reduce inventories, weakening foreign exchange in international markets, and the sale of fewer entertainment-related
products in 2009. As a result, we are managing our business based on reduced revenue assumptions and taking actions intended to improve margins and strengthen our balance sheet.
Risk management strategies are likely to evolve in response to future conditions and circumstances, including the effects and consequences resulting from the current economic downturn. These future strategies may not fully insulate us in the near term from adverse effects, the more significant of which relate to liquidity and capital resources
as well as exposure to credit losses.
We expect to focus on margins and conserve cash in 2009. As a result, we are attempting to tightly manage our inventories, capital expenditures and other spending activity in 2009. We expect that some of our customers and vendors may experience difficulty in obtaining the liquidity required to buy inventory or raw materials.
Our focus in 2009 is on strengthening our balance sheet and managing costs in line with anticipated reduced revenues with the goal of improving our results of operations and the cash flows generated by our business.
We believe that our cash and cash equivalents will be adequate to meet our needs for at least the next 12 months.
We have no off-balance sheet arrangements, other than long-term lease commitments for our premises in the United States, Canada, Hong Kong and Europe. During the six-month period ended June 30, 2009, there have been no material changes in contractual obligations and commercial commitments
from those summarized in note 16 (a) of the notes to our annual audited consolidated financial statements included in our Form 10-K Annual Report for the year ended December 31, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the disclosures about market risk contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 4. Controls and Procedures
As of June 30, 2009 (the “Evaluation Date”), under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms.
Additionally, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we concluded that there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
There were no material changes to the disclosure of legal proceedings contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 1A. Risk Factors
There were no material changes to the disclosure of risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities and there were no repurchases under our stock purchase program during the six-month period ended June 30, 2009.
Item 3. Defaults Upon Senior Securities
The registrant has nothing to report under this item.
Item 4. Submission of Matters to a Vote of Security Holders
The registrant has nothing to report under this item.
Item 5. Other Information
The registrant has nothing to report under this item.
Item 6. Exhibits
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
August 7, 2009
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Optimal Group Inc.
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By:
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/s/ NEIL S. WECHSLER
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Neil S. Wechsler, Co-Chairman
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and Chief Executive Officer
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(Principal Executive Officer)
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By:
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/s/ GARY S. WECHSLER
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Gary S. Wechsler, Chief Financial Officer
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(Principal Accounting Officer)
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