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Optimal Payments PLC (PAYS)

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Thursday 31 March, 2011

Optimal Payments PLC

Audited Results for year ended 31 December 2010

RNS Number : 9731D
Optimal Payments PLC
31 March 2011
 



Optimal Payments Plc

 

Audited Results for the year ended 31 December 2010

 

Thursday, 31 March 2011 - Optimal Payments Plc (LSE: OPAY) ("Optimal", the "Group" or the "Company"), the leading alternative payments business, presents its audited results for the year ended 31 December 2010.

 

Operational Highlights

·      Transformational acquisition of Optimal Payments straight through processing ("STP") business concluded on 1 February 2011

·      New Stored Value platform "Newteller" fully live

·      Business Transformation programme - headcount down significantly to 309 at year end

·      Substantial progress on delivering Group three year strategic objectives, including growing our STP business, extending our verticals outside of gaming and delivering a North American presence

·      Name change from NEOVIA Financial Plc to Optimal Payments Plc completed

Financial Highlights

·      EBITDA (2) of $11.2m (2009: $8.0m)

·      Trading revenue of $60.7m, up $0.2m (2009: $60.5m) - weaker stored value revenues offset by 15% improvement in Straight Through Processing (STP) revenues

·      Profit before tax and other items of $2.3m (2009: loss $1.7m)

·      Balance sheet strength maintained with total Group cash of $64.2m at year end  and no debt - before acquisition of Optimal Payments business

Financial summary (audited)

 

Year ended 31 December                                                                                 2010                      2009

                                                                                                             US$ million          US$ million

Revenue (1)

Stored Value                               (NETELLER eWallet & Net+ cards)                     44.0                      46.0           

Straight Through Processing         (NETBANX gateway & bureau)                            16.7                      14.5

Trading revenue                                                                                                60.7                      60.5

 

Investment income                                                                                                0.8                        1.6

Total revenue                                                                                                    61.5                      62.1

EBITDA (2)                                                                                                          11.2                        8.0

Profit / (loss) before other items (3)                                                                      2.3                      (1.7)

                    

(1)   Revenue for 2009 was reclassified to reflect the impact of rebates which had previously been shown gross.  2009 reported revenue of $64.5 million included $2.4 million of rebates.

(2)   EBITDA shown before other items including share option expense, foreign exchange gain/loss, loss on investment, impairment loss, restructuring costs, loss on disposal of assets, acquisition costs and acquisition costs impairment. 

(3)   Profit/(loss) before other items is EBITDA after deducting share option expense, foreign exchange/loss and depreciation and amortisation.

 

 

Commenting on today's results announcement, Mark Mayhew, President & CEO, said:

 

"2010 proved to be a year of extremes for the company; positive progress has been made in realising our medium term business strategy and achieving materially improved earnings. However revenues were in line with 2009 and below the Board's expectations for the year.

 

Our NETBANX processing business delivered a strong performance with volumes processed up by 165%, revenues up by 15%. The need to materially diversify our business was shown by the softness in our second half gaming derived stored value revenues as the impact of changed regulatory environments in France and certain Asian markets was felt.

 

The creation of Optimal Payments Plc marks a watershed in the Company's recent history: the platform of people, processes and proven proprietary technology that has been 'injected' into the enlarged entity provides greater diversity within the business and the scale to succeed in the fast growing globally accessible e-commerce market.

 

The Company successfully delivered much of the planned Business Transformation programme: member management is handled now solely from the Calgary infrastructure. Headcount was reduced to 309 but many of the process and product related changes scheduled for adoption in H2 have been deferred into 2011 by the late, but successful, deployment of Newteller in Q3.

 

The Newteller programme has largely defined the Company's positioning in the stored value market. Its inherently complex nature contributed to a delay in launching the new platform and increases in cost. However, we are proud to have a wholly new generation stored value platform at the heart of our business and the clear loss of competitive position in the last two years will be corrected as a result of its availability. This is the focus for the newly installed leadership in the stored value division.

 

Current trading and outlook

 

Revenue in the first two months of 2011 has been in line with management's expectations and the Board continues to be optimistic about the outlook for the Group. With good progress made in 2010 and the opportunities from a successful integration programme, product and process enhancements delivered from a fully functioning Newteller and a strengthened leadership team, the Board is confident about the Group's prospects going forward." 

 

 

For further information contact:

 

Optimal Payments Plc                                                                     + 44 (0) 207 638 9571 (31 March)

 

Mark Mayhew                                       President & CEO

Joel Leonoff                                          CEO

Keith Butcher                                        CFO        

Andrew Gilchrist                                   VP Communications                + 44 (0) 1624 698 713

Email:  [email protected]m

 

Citigate Dewe Rogerson                                                                     + 44 (0) 207 638 9571

Sarah Gestetner / George Cazenove

 

Daniel Stewart & Co Plc                                                                     + 44 (0) 207 776 6550

Paul Shackleton

 

 

Analyst meeting and further information

 

Optimal Payments will hold a briefing for invited UK-based analysts at the offices of Citigate Dewe Rogerson, 3 London Wall Buildings, London, EC2M 5SY, at 9.00 a.m. today.  From this time, copies of the analyst presentation will be available on the Company's website, www.optimalpaymentsplc.com.

 

 

* * * * *

 

About Optimal Payments Plc

 

Trusted by businesses and consumers in over 180 countries to move and manage billions of dollars each year, Optimal Payments Plc is a leading independent payments company offering a true alternative to banks and card schemes. Merchants use the NETBANX® processing service to simplify how they accept and settle card, direct-from-bank, e-wallets and cash payments; and the NETELLER® payment account to increase margins, capture new customers and increase their lifetime value. Being independent has allowed the company to support tens-of-thousands of retailers and merchants in many geographies and across multiple industries.

 

Optimal Payments Plc is quoted on the London Stock Exchange's AIM market, with a ticker symbol of OPAY. Subsidiary company NETELLER (UK) Ltd is authorised and regulated as an e-money issuer by the UK's Financial Services Authority (FSA).

 

For more information about Optimal Payments visit www.optimalpaymentsplc.com or subscribe at

www. optimalpaymentsplc.com/feeds/. 

 

 

* * * * *

 

 

Disclaimer

 

Certain statements made in this announcement are forward-looking statements.  These forward-looking statements are not historical facts but rather are based on the Company's current expectations, estimates and projections about its industry, its beliefs and assumptions.  Words such as 'anticipates,' 'expects,' 'intends,' 'plans,' 'believes,' 'seeks,' 'estimates,' and similar expressions are intended to identify forward-looking statements.  These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors, some of which are beyond the Company's control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.  The Company cautions shareholders and prospective shareholders not to place undue reliance on these forward-looking statements, which reflect the view of the Company only as of the date of this announcement.  The forward-looking statements made in this announcement relate only to events as of the date on which the statements are made.  The Company will not undertake any obligation to release publicly any revisions or updates to these forward-looking statements to reflect events, circumstances or unanticipated events occurring after the date of this announcement except as required by law or by any appropriate regulatory authority.

 

 

 

Chairman's Statement

 

This year, I am pleased to report that we have made substantial progress on many of our stated objectives towards becoming the leader in alternative payments.  Our newly adopted corporate name, Optimal Payments Plc, reflects precisely that ambition and focus.

 

The transformational acquisition of the Optimal Payments business which completed on 1 February 2011 represents the culmination of tremendous effort and dedication from all of the team from the old NEOVIA business and our new colleagues at Optimal Payments. We start 2011 with the task of integrating these two businesses and there are promising signs that this combination will deliver all we expect in generating improved shareholder value in both the short and long term.

 

2010 achievements

 

As set out in more detail in the CEO's Statement and Business Review, 2010 also represented a year of many achievements for the former NEOVIA business.  We launched our new stored value platform "Newteller" with limited disruption to our customers; we simplified our operations through the ongoing Business Transformation programme, bringing our headcount more in line with our revenue; and we started processing payments for a number of very significant online merchants.  This all contributed to an improvement in reported EBITDA to $11.2 million up from $8.0 million in 2009. 

 

Whilst the Board recognises these achievements and the considerable challenges posed by external factors and the delayed implementation of Newteller, it is noted that our expectations for revenue growth were not fully met.

 

Board and governance

 

A number of changes to the composition of the Board were made as the Company seeks to continue to strengthen oversight and decision making effectiveness.  We appointed Keith Butcher, former FD of DataCash, as CFO in May, bringing his considerable payments and listed company expertise to the Group.  Keith is the first CFO to be appointed to the board, bringing us in line with recommended governance best practice.  In September 2010, we appointed Ian Francis, a qualified accountant and former partner with Ernst & Young, to the Board and subsequently as chairman of the Audit Committee. 

 

My sincere thanks are extended to all of our directors for their commitment, time and efforts over the past year, and for their continuing support.  Two non-executive directors stepped down from the Board on 29 April 2010 - Don Lindsay and John Webster had served NETELLER and subsequently NEOVIA tirelessly through many challenging events and I wholeheartedly thank them. I also wish to thank Ian Cobbold, who has indicated his intent to step down in April from his roles on our Audit Committee and as a non-executive director of our FSA regulated subsidiary Neteller UK Limited.

 

I extend my warm welcome to Joel Leonoff who joined as Co-CEO and director, alongside Mark Mayhew, on 1 February 2011 following completion of the Optimal Payments acquisition.  Joel (together with his highly experienced management team and staff) brings an incredible breadth of knowledge and expertise in both the online payments and online gaming businesses.  We are fortunate to have two such strong leaders driving our business forward and I am confident that the Co-CEO structure we have adopted will leverage the multiple growth options in front of us.

 

Looking forward

 

We are excited by the prospects for the new Optimal Payments and the opportunity to build a true alternative payments powerhouse.  Much of the global market's corporate development activity in 2010 served to demonstrate that we had correctly identified the right place to focus our own efforts: straight through processing and the ability to build scale in stored value by linking these capabilities for merchants and other payments industry players alike. The year has started in line with our expectations and the Board continues to monitor options to accelerate further the growth trajectory we have set ourselves for the current year.

 

Dividend

 

We have decided that it is in our shareholders' best interests to continue to reinvest our cash to generate growth opportunities.  Accordingly we have decided not to declare a dividend for shareholders.  This policy remains under regular review.

 

Change of name

 

The Company changed its name to Optimal Payments Plc from NEOVIA Financial Plc following the Extraordinary General Meeting of shareholders that took place on 28 February 2011.

 

People

 

The positive achievements in 2010 and the optimism with which we embrace 2011 are a direct result of our committed team members and their efforts.  On behalf of the Board I earnestly thank them all for their contributions.  As we continue to grow our business, committed and talented people remain key to building our technology-rich service offerings.  Together, we will build Optimal Payments into a true leader in the alternative payments market.

 

 

Dale Johnson

Chairman

 

30 March 2011

 

 

 

CEO's Statement

 

Introduction

The past twelve months since my last statement have seen much positive progress in pursuit of building a world-class alternative payments company.  The focus of our efforts for 2010 was to drive success on the operational agenda to deliver immediate improved financial health for the Company and take the key first steps towards realising our strategic ambition. I am pleased to report that through the determination and commitment of the team, we have been able to achieve positive results on both these ambitions, albeit the short term financial performance, especially with regards to revenue, still lags our underlying operational achievements.

 

Operational objectives

 

We set out to simplify much of the former NEOVIA business.  Our objectives were threefold: first, to "conclude, embed and leverage" the Newteller stored platform development; secondly, to drive the Business Transformation programme to ensure material benefits were achieved during 2010 and beyond; and thirdly, to take the first steps to achieving the longer term strategy for the company.

 

We launched Newteller, the new platform for our core eWallet processing capabilities, in September following an extensive testing regime.  We have made a series of updates to the platform since then, as we have embedded Newteller within our day-to-day operations. We were six months later in deploying the platform than we planned. The focus since launch and going forward is to secure the performance that our customers, merchants and members alike, have come to expect.

 

As a result of the delayed launch, several of the anticipated process and product enhancements have been delayed into 2011, with only modest changes implemented in December to benefit our customers. Much more is in the pipeline to see us recover our competitive position especially in our core e-gaming franchise.

 

The Business Transformation programme reached into every corner of our organisation, examining our processes and identifying ways we could improve the way we do business.  We ended 2010 with 309 employees, having started the year with 447.  This transition was managed well and a better alignment of cost structures with revenues was achieved.

 

However, Business Transformation was not just about reducing staff.  Focusing on simplification, a number of initiatives were concluded to make the way we operate day-to-day less complex and costly:

 

·      Regulatory centralisation:  we successfully concluded the transfer of our non-EU eWallet members into our FSA regulated entity Neteller (UK) Limited.  The provision of e-money services to members is highly regulated, and this move will see us continue to operate to highest acknowledged standards.

 

·      Member servicing: we removed the inherent complexities of split customer service regimes (in Calgary and Hong Kong) for our members by locating all aspects of customer services in a single location (Calgary) under unified leadership. This should contribute to an improvement in overall service levels and for our important VIP members in particular.

 

·      Asia restructuring: during the year, we largely completed moving to an outsourced model for the provision of payment processing services in certain Asian countries. As a result of the restructuring which we have implemented we no longer have any staff directly employed by the Group in the Asia Pacific region. 

 

·      PCI compliance: a key part of our compliance and risk management approach is ensuring that we meet the requirements of payment industry standards which our merchants expect.  Significant investment was made during the year and we continue to focus on developing our systems and building on the Newteller platform to improve our capabilities in this important area.

 

·      Property review: a thorough review of our property and space requirements was undertaken during the year, resulting in the Group vacating certain surplus space in Canada and, closing our Asian premises.  We also added a small London office to facilitate merchant meetings and are consolidating our facilities in Cambridge.

 

·      Contracts review: certain supplier relationships were no longer appropriate for the business either due to their nature or the smaller size of our organisation.  These contracts were reviewed, renegotiated where possible, or terminated if unduly onerous. New procedures were implemented to ensure future supply agreements achieve value for money.

 

We continue to look for ways to simplify the operational processes, and improve the organisation's effectiveness and ability to deliver for our customers.

 

Longer term strategy

I set out in my 2009 statement the "twin pillars" concept: that we are a "payment network" focused on two core propositions - stored value services, (through our NETELLER eWallet and Net+ prepaid cards,  together, our NETELLER Payment Account) and straight through processing ("STP") (through our NETBANX gateway offering).  I also stressed the importance of achieving scale - the key to success in the payments business, which is essentially a supply-side innovative industry.

 

We set out a number of key strategic and operational objectives to clarify our intent for 2010 and beyond in support of our adopted vision: to be the leader in frictionless payments.

 

Strategic objectives

·      Deliver enhanced end-to-end straight through processing capability for merchants;

·      Develop a meaningful North American market presence;

·      Build greater scale in our stored value business;

·      Broaden distribution through opening up our payment network; and

·      Extend verticals outside of gaming.

 

Operational objectives

·      Complete Business Transformation programme in 2010;

·      Deepen penetration in online gaming market;

·      Enhance risk management processes; and

·      Build awareness of the brand portfolio, developing a unified brand and identity.

 

While the focus of our everyday efforts was necessarily operational in nature, we also devoted considerable resources during 2010 towards furthering our longer term strategic objectives.

 

The principal result of this was acquisition of the business and certain assets of Optimal Payments, a leading Canadian based straight through processor ("OP").  OP provides solutions to merchants in North America and Europe, processing more than $2.5 billion in transactions annually.

 

The OP acquisition

 

The OP acquisition represents a transformational deal for the former NEOVIA, delivering significant benefits on four of our five key strategic objectives: the OP business is a strong strategic fit with the stored value ("NETELLER") business and adds very significant scale to our existing processing capabilities ("NETBANX"); it dramatically diversifies and broadens our merchant base, it provides a strong North American presence and it gives fuller exposure to rapidly growing e-commerce verticals beyond e-gaming.

 

There is strong financial rationale for the transaction: the OP business is profitable and cash generative, enjoys high and sustainable margins resulting from its operational focus and provides ample scope for synergies and increased scale.  The consideration was structured with $20 million of the $50 million total

consideration deferred and contingent on the performance of the OP business over the next two years (the "earnout").  An incentive plan has been put in place for the leadership of the business acquired for delivery of performance beyond the earnout.  We financed the acquisition with support from a number of our largest shareholders and we thank them for their support of our strategic ambitions.

 

I am pleased to welcome the senior leadership team of the OP business, and in particular, Joel Leonoff, the founder, President & CEO, as my Co-CEO and an executive director.  We are already working together effectively and sharing the responsibilities of managing this exciting business. Joel brings a tremendous level of knowledge and experience of both online payments and gaming and we look forward together to developing the business into a truly global player with enhanced scale to succeed in alternative payments.

 

One of the first steps following the acquisition was to implement an appropriate management structure for the combined business.  With Danny Chazonoff leading a combined STP business and Dennis Jones heading up stored value, we have a strong and proven leadership in place at the operational level.  For our merchants in the e-gaming space we have a talented and known sales and marketing resource, technology rich platforms and enhanced risk and fraud resources to get back to growth that had stalled in the last few years.  We plan to provide further updates on progress on a regular basis.

 

2011 objectives

We believe that we are well positioned to take advantage of the exciting opportunities that lie ahead in 2011.  We are focused on successfully integrating and leveraging the acquisition of the OP business.  We will continue to drive towards simplifying the business, streamlining our processes and platforms to improve our offering for our customers.  We will seek to regain our leadership position in stored value, particularly in e-gaming, as we build on the Newteller platform and broaden the distribution of our eWallet service.   We will aim to make further progress on our longer term strategic objectives, adding further scale to both our processing and stored value businesses, broadening distribution through opening up our payment network, and continuing to extend our reach outside of gaming. 

Our success in achieving this will deliver solid financial performance and profitability for our shareholders.  Our ability to attract, hire and retain the best available talent to support our customers and partners is paramount to our ambitions to develop into a true scale player in the alternative payments market.  I believe we can build on the achievements of 2010 and look forward to a year of success and progress.

Current trading and outlook

Revenue in the first two months of 2011 has been in line with management's expectations and the Board continues to be optimistic about the outlook for the Group.   With the good progress made in 2010 and the opportunities from a successful integration programme, product and process enhancements delivered from a fully functioning Newteller and a strengthened leadership team, the Board is confident about the Group's prospects going forward. 

 

 

Mark Mayhew

President & Co-CEO

 

30 March 2011

 

 

 

Business Review

 

Overview

 

The old NEOVIA business comprised two lines of business:

 

Stored Value services                                             NETELLER eWallet and Net+ card business

 

Straight Through Processing ("STP")                        NETBANX payment gateway and bureau services

 

In support of the strategy outlined one year ago, our NETBANX processing business delivered improved performance with volumes processed up significantly and revenues up by 15%. The need to diversify materially our business was demonstrated by the softness in our second half gaming derived stored value revenues as the impact of changed regulatory environments in France and certain Asian markets was felt combined with a delay in launching the Newteller platform.

 

Since the year end we have concluded the acquisition of Optimal Payments, a leading STP business focusing on merchants in North America and Europe. Whilst this commentary reviews the stored value core of the former NEOVIA business, looking forward, our focus on STP will be more clearly evident as we believe this is where the most immediate opportunities for growth exist.  We will retain NETBANX as our "go to market" brand for the STP business, and NETELLER and Net+ for our stored value services.  The combination creates a more balanced business, by product, geography and merchant vertical, which is better able to deliver a fuller suite of payments solutions for our customers.

 

Stored Value services

Stored Value - Product

The NETELLER stored value business was the larger part of the old NEOVIA group.  Stored value products allow the consumer to hold monetary value via an eWallet or card, such as a prepaid card, which can then be used to pay for transactions at merchants.  The NETELLER eWallet, established in 1999, has to date attracted many millions of consumers who value simplicity, convenience, anonymity and security. Consumers deposit funds into their eWallet accounts via one of the many payment options we make available, such as credit or debit cards, internet bank transfer or vouchers, and then use those funds in the eWallet accounts at their chosen online merchants to pay directly for goods or services.  Our focus has traditionally been on the online gaming market since payments to merchants in this space have proven difficult and sometimes risky, due to geographical, currency or timing issues.  The eWallet solution allows merchants to receive indemnified funds from a signed up NETELLER consumer ("member") in return for payment of a fee to NETELLER.

 

During 2010, we continued to improve our eWallet offering, by adding new countries and deposit options.  Customers from Russia and Ukraine and, since January 2011, Indonesia, Montenegro and Philippines, can now benefit from the eWallet offering, with an increasing number of deposit options such as cards and international bank transfers.  We partnered with Moneta to introduce new payment options (Qiwi, Evroset, Elecset) for our members, and we extended the UKash option to a further seven countries - we now offer this option in 31 countries.  New local deposit options for our Latin American members included Cobro Express, Bapro, 7-11, OXXO, Dineromail, reflecting the increasing importance of Argentina, Brazil and Mexico for the stored value business. However, the extended delay in bringing Newteller live materially impacted our development plans for the eWallet offering in 2010, contributing significantly to the revenue softness we experienced.

 

The NETELLER value proposition combines the eWallet with the award-winning Net+ Prepaid card.  The Net+ card allows NETELLER members to withdraw funds directly from their eWallet via an ATM or pay for goods and services anywhere MasterCard is accepted.  The Net+ card is also available as a virtual card, so consumers can complete online transactions using funds directly from their eWallet anywhere MasterCard cards are accepted.  This greatly improves the convenience and flexibility to the consumer.  

 

Volumes transacted via Net+ cards were up 48% on 2009 to $220 million.  We processed more than 1.1 million Net+ transactions, an increase of 71%.  Our active cards grew 40% year-on-year.  Since its launch in October 2008, the Net+ programme has been a success and recognised in our industry.  The success in marketing the card to our existing members gained us a nomination for "Best Prepaid Marketing Campaign" at the prestigious Prepaid Awards 2010 event.  Since the year end, we have won further recognition with three awards (Best Prepaid Card Overall, Best Gaming Prepaid Card, Best Prepaid Card Innovation) and three runner up positions (Best General Spend Prepaid Card, Best Free Prepaid Card and Best Prepaid Marketing Campaign) in the 2011 Prepaid365 Prepaid Card Awards.

 

Stored Value - Customer

The focus for the stored value business has historically been the online gaming market since the eWallet has specific advantages in this market - segmenting consumers' funds, security and anonymity.  Our pre-eminence in the online gaming market - and our continued operational drive  on this vertical - was demonstrated through a number of new merchant wins in 2010 including BSkyB's Sky Betting and Gaming's portfolio of e-gaming sites (SkyBet, SkyPoker, SkyVegas and SkyBingo), SEGA, Bet-at-Home, CAI Games, Littlewoods Game On, Buzzluck and Play'n'Go.  We now count 23 out of the world's top 25 online poker websites (including PokerStars, Full Tilt Poker and PartyPoker) as customers, where the advantages of frictionless payments make the NETELLER eWallet the de facto choice for poker players.  We have been partially successful in broadening our mix beyond the very competitive poker market with a spread of merchants across casino, bingo and sports betting - 8 of the top 10 sportsbetting sites worldwide that accept UK customers (and 22 of the UK's top 25 sportsbook sites) now accept the NETELLER eWallet.  In bingo, 85% of the UK's online bingo operators, including Wink Bingo, 888 Ladies, Posh Bingo and the market-leading Foxy Bingo, provide the eWallet as a deposit and withdrawal option to their customers.  We ran a number of member-targeted promotions around the World Cup and also a partnership promotion with Virgin Bingo, a leading UK bingo operator.

During 2010 progress was made in extending into new verticals for the eWallet, particularly in the provision of micropayments solutions.  We continued to develop our MMOG ("massively multiplayer online gaming") presence, with the adoption of the eWallet by Travian, a leading games developer with over 5 million players worldwide, to provide a quick and simple payment process for its customers. A number of other games developers adopted the eWallet, including Crafty Studios, the operator of Bulido, Offgamers, a virtual goods trading platform, and Cherry Credits, a one-stop payment solution to over 125 online games.

The emergence of "internet TV" (IPTV) as a media channel has presented new opportunities for us. Customers such as SeeSaw, Filmflex and Muronia recognised the eWallet as an ideal way to handle small value, high volume payment transactions due to the low level of friction in processing payments. We already offered straight through processing for these customers' online transactions, and the addition of the eWallet provides them an even more compelling customer experience. Littlewoods Europe, part of the Shop Direct Group, has recently added NETELLER to its range of payment options for its customers across 30 European countries.

Affiliates continue to offer us a significant channel to build our business.  We were voted Best Payment System for Affiliates at the iGaming Affiliate Awards in London for the third consecutive year.  Our programme offers best-in-class cash incentives to affiliates who refer customers to use NETELLER as their payment system of choice.  Gaming and retail affiliates are able to increase both their conversions and commissions when promoting NETELLER alongside merchant brands.  The programme has successfully signed affiliates in key countries including Poland, Portugal, Germany, Brazil and Japan, with thousands of active referrals, showing good growth in 2010.

Stored Value - Performance

The Group's primary driver of fee revenue from its eWallet is the active eWallet user base.  An active eWallet user is defined as a consumer whose eWallet account balance has changed during the previous 90 day period.  The change in balance may be due to adding, removing, transferring or receiving funds.

 

The number of active eWallets at the end of 2010 was 92,355, an 8% decline from 99,978 in 2009. Our European active eWallets (72,101) were down 5% principally due to the impact of regulation in France.  Asian active eWallets (11,108) declined 30% as we changed the mix of services provided to merchants in

that region to better align with market maturities and risk management objectives.  Rest of world (ROW) active eWallets increased 11% to 9,146 as the Group continued to expand its presence in emerging markets.

 

The average fee revenue earned per active eWallet declined 9% from $116 in 2009 to $106.  European fees per active eWallet decreased 9% from $117 in 2009 to $106.  Asia fees declined 25% from $129 in 2009 to $97.  ROW declined 11% to $67 from $75 in 2009 as new eWallet members in these markets tend to transact less than in the more developed markets of Europe and Asia.

 

We determined to reduce a large number of long term dormant/inactive member accounts.  This significantly increased dormant account income in 2010, will reduce our data storage and management costs going forward with ongoing inactivity fees charged reduced accordingly.

 

Average daily deposits for members in 2010 were $440,359, a 10% decrease from $488,641 in 2009.  The decline was driven by the changing offering to our merchants in Asia, as well as diversification into emerging markets where deposit volumes per active member are traditionally lower.

 

Average daily sign ups of new customers continue to show year over year improvements, increasing in all regions.  In 2010, 1,248 customers signed per day, a 19% increase from 1,048 in 2009. By region, average daily sign ups for 2010 were 817 for Europe, 242 for Asia Pacific and 128 for the Rest of World.

 

From the above it will be apparent that our eWallet underperformed in 2010: a combination of specific internal factors in the year (namely the delays in bringing Newteller live) coupled with inadequate VIP member servicing, together with stronger competition and the impact of changed regulatory environments. Action already taken or shortly to be taken will see these factors removed or neutralised moving forward.

 

Straight through processing (STP)

 

The Group's processing business, NETBANX, provides payment processing services for merchants whose customers transact online.  NETBANX processes both card and non-card payments for a very diverse set of European e-commerce businesses, including Littlewoods Online, SeeSaw, Woolworths.co.uk, MoreTh>n, NPower, Companies House and TrendMicro. NETBANX provides a fully PCI DSS Level 1 compliant and certified service, for multi-channel cardholder not present transactions, including web, IVR and call centre/mail-order, telephone-order purchases.  We process all major credit cards including Visa and MasterCard, with additional payment support for global processing of American Express, NETELLER, PayPal, Ukash, and direct-from-bank payments such as iDEAL, Giropay and Direct Debit - all through a single integration.

 

STP - Gateway

NETBANX processed more than $2.7 billion in transaction value in 2010, with over 22 million transactions completed, an increase of 165% over 2009.  The NETBANX gateway demonstrated its ability to handle greatly larger volumes of transactions with very little impact, a testament to its scalability and flexibility.  Uptime for the NETBANX platform throughout 2010 was very good, especially relative to a number of other processors, meeting all of the performance standards.

 

Shop Direct Group, the UK's leading online and home shopping retailer with over 5 million active customers, represents an excellent example of our ability to develop mutually beneficial relationships.  We initially started processing payments for its Littlewoods UK online business in 2009.  During 2010, NETBANX was selected to process all payments for Shop Direct Group's brands via online and telephone (MOTO and IVR) sales channels in the UK, Ireland and continental Europe. Shop Direct Group has annual sales of around £1.7 billion, via its market-leading brands, including Littlewoods, Woolworths.co.uk, VERY.co.uk, Additions, Marshall Ward, Empire Stores, Choice, Great Universal and Kays.  As well as addressing compliance needs, NETBANX provided new payment types to Shop Direct Group's customers, including PayPal, NETELLER, Giropay and iDEAL.  Recently, the NETELLER eWallet was added to the Littlewoods Europe online sites, enabling customers from over 30 countries to pay online via our eWallet offering.

 

We made particular progress in attracting new customers for the NETBANX service from the emerging IPTV market. We started processing payments for paid-for content with SeeSaw, the UK's leading IPTV provider with content from BBC; 4 On Demand; Channel 5; Universal and MTV; and Perform TV, a major producer of live streaming content. We also announced FilmFlex, a joint venture between Sony and Disney, and billed as the UK's leading 'on demand' online film service, as users of NETBANX to process all online payments for its recently launched broadband video-on-demand streaming service. Virgin Media was the first client to be announced for this service.

 

STP - Bureau

 

The introduction of a new bureau service was part of a significant upgrade of our value proposition.  Merchants are now able to directly accept and settle card payments through the NETBANX service without the complexity and cost of managing an additional bank acquiring relationship.  Our partnership with AIB Merchant Services to provide this service has been successful to date in attracting a number of important e-commerce merchants.

 

The OP business that we acquired in early 2011 will add considerable scale to the combined business' bureau offering.  It has a proven track record of developing tailored payments solutions for its customers, combining its multi-bank acquiring model with a strong risk and fraud management toolkit.  The Optimal business has also been successful at growing its customer base with recent wins including CN Rail, Canada's leading railroad provider, LotoQuebec, the Quebecois state lottery operation, and Desjardins, a leading mid-market banking institution.  Other major customers include CoastalContacts, the world's largest optical store, BeyondtheRack.com, Reebok, Adidas, and, in an important segment of the market - online dating - Lavalife, Mate1 and PlentyofFish. We are excited by the opportunities of using the team's experience and expertise to combine and leverage our two STP businesses, for the benefit of our customers.

 

Risks

 

Managing the risks the Group faces remains a key focus for us.  As set out in more detail in our Annual Report in the Business Risks section, we have identified the key risks to our operations and performance within the following areas: complex global operations; regulation and compliance; global economic conditions; competition; product innovation; human resource management; security and fraud; transaction processing; and acquisitions and partnerships. The Group adopts an Enterprise Risk Management ("ERM") approach to identifying, assessing and mitigating risks it may face.  Investment in this area has continued during 2010 both as part of the Newteller replatforming and through separate initiatives such as the adoption of ERTMS service, provided by Actimize, which allows risk monitoring in real-time of transactions being processed through the NETELLER payment account.

 

 

 

Financial Review

 

The consolidated Group results for the year ended 31 December 2010 are presented below.

 

Highlights

The Group reported improved EBITDA of $11.2 million, a 40% increase from $8.0 million in 2009 as the impact of the Business Transformation programme was felt, with headcount reducing from 447 to 309 at year end.

 

Fee revenues increased $0.2 million to $60.7 million from $60.5 million while cost reductions focused on process improvement and employee headcount produced material benefits for the year. The net loss for 2010 was $3.8 million (which included $6.6 million in depreciation and amortisation charges), a $6.0 million improvement from the previous year's net loss of $9.8 million.  On 21 September 2010, a significant milestone was achieved with the launch of the new stored value platform, Newteller, which is expected to generate efficiencies within the organisation and open up opportunities for new revenue streams in the future.

 

Revenue

 

Trading revenues in 2010 increased from $60.5 million in 2009 to $60.7 million, with gains in the straight through processing business offset by a slight decline in stored value revenues. Revenue is earned through fees charged to merchants and members for processing of transactions via the NETELLER eWallet or NETBANX gateway services.  Interest income was down in 2010 as a result of decreased market interest rates. Interest revenue is earned on the Group's cash and the cash held by the Group on behalf of merchants and members.

 

Group revenue - by business

 

($ millions)                                    2010             2009        % growth          H1 2010          H2 2010           % growth

 

Stored value revenue                    44.0              46.0                 -4 %                 23.4                 20.7                  -12 %

STP revenue (1)                               16.7              14.5                15 %                   7.1                   9.6                    37 %

Trading revenue                            60.7              60.5                   0 %                 30.4                 30.3                      -  %

 

Interest                                               0.8                 1.6              -51 %                    0.4                   0.4                   16 %

Total                                                 61.5              62.1                 -1 %                  30.8                 30.7                       - %

 

Group revenue - by geography

 

($ millions)                                    2010             2009        % growth          H1 2010          H2 2010           % growth

 

Europe                                             39.8              40.5                 -2 %                 20.5                 19.3                     -6 %

Asia Pacific  (1)                                18.0              17.6                  3 %                    8.5                   9.5                    11 %

Rest of world                                     3.0                2.5                22 %                    1.4                   1.6                   18 %

Trading revenue                            60.7              60.5                   -  %                 30.4                 30.3                      -  %

 

(1)           Including reclassification  of NETBANX Asia revenues by $2.4 million to reflect repricing of fees and rebates in July 2009

 

Transaction fee revenue from the top five countries represented 49% of the total for 2010 (2009: 54%) while the top ten countries accounted for approximately 71% (2009: 76%) of total transaction fees.  The decreasing reliance on the top 10 countries is due to fee competition in established markets balanced by an increasing diversification into emerging markets.

 

Fee revenues for the second half of 2010 totalled $30.3 million, compared to $30.4 million for the first half.

 

 

Stored Value (eWallet and Net+ card) fee revenue

 

Stored Value revenue decreased slightly from $46.0 million in 2009 to $44.0 million in 2010.  The decrease in the European eWallet was mainly due to regulatory developments in France as well as customers moving towards transacting directly in a wider range of currencies, with a resulting decrease in foreign exchange revenue. Asian eWallet revenues decreased as a result of regulatory issues in certain markets that caused a shift in revenue mix from eWallet to gateway services.  ROW eWallet revenue increased in 2010 with continued growth in emerging markets such as Brazil.

 

Straight Through Processing (gateway and bureau) fee revenue

 

Straight Through Processing gateway fees are earned from NETBANX and NETBANX Asia and totalled $16.7 million in 2010, a 15% increase from $14.5 million in 2009. NETBANX primarily operates in the UK, and saw a 10% increase in revenue from $4.8 million in 2009 to $5.3 million in 2010.  The gain was the result of several notable contract wins, as well as an overall increase in volumes processed.  NETBANX Asia gateway fees increased by 17% to $11.4 million in 2010 compared to $9.7 million in 2009 as revenues moved from the Stored Value eWallet to the 'straight through processing' gateway services.

 

Reclassification of NETBANX Asia revenues

 

In July 2009, NETBANX Asia fees and rebates were re-priced so that rebates were eliminated and fees correspondingly reduced.  During the first half of 2009, NETBANX Asia issued $2.4 million of fee rebates to merchants and recorded these as cost of sales.  In the second half of 2009, NETBANX Asia fees were reduced and rebates were eliminated.  In order to facilitate comparability with prior periods, the 2009 results have been reclassified so that 2009 revenue is now shown net of the $2.4 million in rebates.  Similarly, cost of sales was also reduced by $2.4 million.  Gross margin remains unchanged for 2009.

 

Interest revenue

 

Interest revenue in 2010 was $0.8 million, down from $1.6 million in 2009.  The decrease was primarily due to declining average interest rates of approximately 0.4% in 2010 relative to 0.8% in 2009.  Low interest rates are expected to continue throughout 2011.  

 

Gross margin

 

Gross margin decreased to 55.9% in 2010 from 56.7% in 2009.  

 

Deposit and withdrawal fees arise on facilitating the movement and settlement of cash via the banking system and third party processors.  These fees increased by 4% to $11.8 million in 2010 from $11.3 million in 2009.  The increase is the result of the related increase in NETBANX Asia revenue, which has lower margins than the eWallet.  

 

Bad debt expense was $1.2 million in 2010, down from $1.7 million in 2009.  The decrease was the result of significant and non-recurring provisions recorded against customer and merchant accounts in 2009.

 

Customer support comprises call centre services such as live chat, phone support, translation services and verification services.  These services are largely provided out of Canada, and as such, a large proportion of costs are incurred in Canadian funds.  Costs have decreased from $8.6 million in 2009 to $7.0 million in 2010, despite an 11% increase in the Canadian dollar relative to the US dollar during the year.  The cost savings primarily resulted from efficiencies achieved through headcount reductions in Q1 2010.  

 

Website maintenance increased 29% from $4.9 million in 2009 to $6.3 million in 2010. The increase is due to additional server hosting and related infrastructure requirements for the Newteller platform and the new emergency recovery data centre.

 

Marketing and promotions increased 95% to $0.9 million in 2010 from $0.4 million in 2009.  The increase was made in an effort to both attract and retain current business, as well as to compete with aggressive promotions offered by competitors.

 

A significant proportion of the expenditures shown in the cost of goods sold section consist of costs that are largely fixed in nature.  These include server hosting costs, marketing and promotions and some wages.

 

Processing costs and bad debts are the only costs to be considered to be directly variable in line with revenues.  For 2010, variable costs for our Stored Value (eWallet/Net+ card) and Straight Through Processing businesses were 11% and 44% of revenue respectively. Further information is set out in note 14 of the Financial Statements.

 

Operating expenses

 

General and administrative

General and administrative expenses decreased 14% to $22.7 million from $26.5 million in 2009.  A large portion of the cost savings were achieved through targeted headcount reductions as part of our Business Transformation programme in order to increase efficiencies, despite the Canadian dollar rising 11% relative to the US dollar in 2010 (note that the majority of the salary costs for the Group are denominated in Canadian dollars).  In addition, a conscious effort was made to reduce discretionary costs on travel and professional fees during the year.

 

Share option expense

Share option expense decreased 63% to $1.0 million in 2010 from $2.6 million in 2009.  The decrease resulted from the full amortisation of a number of share options, less the effect of share grants made during the year to certain executives for achieving specific targets.

 

Foreign exchange loss

The results from the Group's subsidiaries in Canada, the UK and Macau are reported in local functional currencies. As required under IFRS, foreign exchange on consolidation of a subsidiary's balance sheet is captured in equity, but the subsidiary's individual exposure to foreign currency is captured in income. The Group employs forward exchange contracts to mitigate exposure of financial risk associated with foreign currency balances. During 2010, foreign exchange losses of $1.3 million were generated compared to $0.1 million in 2009.  Note that large balances in a number of currencies are held on deposit for members and merchants.  These balances fluctuate due to members and merchants not always choosing to deposit and withdraw funds in the same source currency. While these tendencies benefit the Group through the generation of significant foreign exchange revenue, it also means that it is impossible to perfectly predict balances to hedge.  As a result, the foreign exchange loss for 2010 was $1.2 million higher than 2009.

 

Depreciation and amortisation

In 2010, depreciation and amortisation of $6.6 million (2009: $6.3 million) included $3.6 million of amortisation of intangible assets (2009: $3.9 million) and $3.0 million in depreciation of capital assets (2009: $2.5 million).  The Newteller platform was launched on 21 September 2010 and is being amortised over five years on a straight line basis.

 

Restructuring costs

 

Restructuring costs increased from $2.4 million in 2009 to $3.4 million in 2010.  This amount included severance paid to employees as a result of our Business Transformation initiatives undertaken in Q1.  Also included in restructuring costs are salaries for specific staff recruited to implement the Business Transformation programme as well as costs for vacant space in the Calgary office that the Group has been unable to sublet due to a large over-supply of commercial space on the local market.  The lease on the space in question expires in July 2011, with all remaining costs expensed in 2010 as an onerous lease as required by IFRS.

 

Taxes

 

The tax model is based on the mark-up of services provided by various subsidiaries to the Group's parent in the Isle of Man, where source revenues are non-taxable because of the zero rate of tax on companies other than banks.  The 2010 provision for income taxes includes a recovery of $0.1 million (2009: $0.2 million recovery).

 

Balance sheet

 

The gross quantum of cash available to the Group, including restricted cash surpluses and the excess of qualifying liquid assets held in respect of e-money issued to members over balances payable, totalled $64.2 million at 31 December 2010.  This compared with $73.5 million at 31 December 2009.  These cash figures are before deduction of current liabilities.  The decline in cash is due to investment in Newteller and other capital expenditures.

 

The cash and cash equivalents balance at 31 December 2010 of $51.1 million represents the unrestricted cash of the Group (2009: $61.1 million).  Included in cash and cash equivalents is a transient cash balance that relates to merchant transactions processed via the NETBANX UK and NETBANX Asia (1-Pay Direct) gateway operations.  These gateway operations do not fall within the EU definition of "e-money" nor does a legal right of offset exist between this cash and the corresponding merchant liabilities.  The cash and the merchant liabilities relating to gateway operations are therefore both recognised on the face of the balance sheet as cash and cash equivalents and trade and other payables respectively.

 

The Group maintains bank accounts which are segregated from operating funds and which contain funds held on behalf of merchants, representing pooled merchant funds.  The bank accounts are designated as client accounts (see below discussion of Qualifying Liquid Assets relating to 2009 categorisation of non-European member balances).  Balances in the segregated client accounts are maintained at a sufficient level to fully offset amounts owing to the Group's merchants.  A legal right of offset exists between the balances owing to the merchants and the cash balances segregated in the client accounts.  As such, only the net balance of surplus cash is disclosed on the balance sheet as Restricted Cash.  The Group, as a matter of policy, holds small amounts of excess cash in the account to ensure intraday balance movements do not result in a shortfall in the cash position. The net excess is disclosed as a corporate asset.

 

In compliance with FSA rules and regulations, the Group held qualifying liquid assets at least equal to the amounts owing to members.  These amounts are maintained in accounts which are segregated from operating funds.

 

All Qualifying Liquid Assets are held in Neteller (UK) Ltd, which is an FSA regulated entity.  In 2009, only European member balances were held within Neteller (UK) Ltd.  However, on 1 December 2010 all non-European balances were transferred to Neteller (UK) Ltd (from Neteller Operations Ltd).  Accordingly, the 2009 comparatives show qualifying liquid assets and the related payable for only European members, whereas the 2010 amounts reflect such balances for all members. These Qualifying Liquid Assets and the amounts payable to members are reported gross on the balance sheet.

 

Total current liabilities of $119.3 million have increased by $19.3 million from $100.0 million due to all members being held in the FSA regulated Neteller (UK) Ltd, whereas previously only European members were recorded here.  In 2009, the corresponding balance was shown net in restricted cash.

 

The net book value of intangible assets at 31 December 2010 was $37.0 million compared to $32.1 million as at 31 December 2009.  During the year, the group incurred significant development costs on concluding the Newteller platform (the new stored value platform which went live in September 2010).

 

Foreign currency exposure

 

The Group's expanding global operations have necessitated an increasing foreign currency exposure.  The objective of the Group's treasury policy is to identify material foreign currency exposures and to manage

those exposures to minimize the potential effects of currency fluctuations on reported consolidated cash flow and results of operations.

 

Off balance sheet arrangements

 

As of 31 December 2010, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.  All merchant funds are held in designated client accounts and excluded from the consolidated balance sheet.  There are no investments held at 31 December 2010 that are part of the US sub-prime investment vehicles.

 

 

 

 

Consolidated Statement of Financial Position

as at 31 December 2010


31 DECEMBER

2010

31 DECEMBER

2009


$

$

ASSETS



Current



    Cash and cash equivalents

51,116,045

61,070,438

    Restricted cash (Note 4)

2,293,894

5,152,253

    Qualifying Liquid Assets held for Members (Note 5)

107,026,942

83,612,310

    Receivable from Merchants (Note 6)

647,000

354,000

    Trade and other receivables

982,276

793,188

    Prepaid expenses and deposits

1,847,652

2,554,780


163,913,809

153,536,969

Non-current assets



    Property, plant & equipment (Note 7)

9,319,426

7,828,139

    Intangible assets (Note 8)

36,967,850

32,072,846

Total Assets

210,201,085

193,437,954




LIABILITIES



Current



    Trade and other payables (Note 10)

21,183,368

21,370,500

    Payable to Members (Note 5)

96,230,213

76,384,591

    Taxes payable (Note 11)

1,840,169

2,224,304


119,253,750

99,979,395







SHAREHOLDERS' EQUITY



    Share capital (Note 12)

39,725

39,725

    Share premium

50,554,492

50,554,492

    Capital redemption reserve

147

147

    Equity reserve on share option issuance

9,586,371

8,601,168

    Translation reserve (Note 13)

(88,867)

(392,908)

    Retained earnings

30,855,467

34,655,935


90,947,335

93,458,559

Total Liabilities & Equity

210,201,085

193,437,954




 

 

 

Consolidated Statement of Comprehensive Income

for the Year Ended 31 December 2010


YEAR ENDED

31 DECEMBER

2010

$

YEAR ENDED

31 DECEMBER

2009

$

Revenue



    Transaction fees (Note 14)

60,745,484

60,533,032

    Investment income

801,231

1,644,620


61,546,715

62,177,652




Cost of sales        



    Deposit and withdrawal fees

11,769,385

11,314,611

    Customer support

6,995,878

8,616,979

    Website and platform maintenance

6,347,599

4,918,297

    Marketing and promotions (Note 15)

856,717

439,085

    Bad debts

1,182,736

1,664,048

Gross profit

34,394,400

35,224,632




Operating expenses



    General and administrative

22,736,253

26,521,093

    Share option expense (Note 20)

985,203

2,646,440

    Management bonus

500,805

708,934

    Foreign exchange loss

1,304,585

144,919

    Depreciation and amortisation (Note 16)

6,595,005

6,342,598

    Loss on investment (Note 9)

-

533,116

Profit/(loss) before other items

2,272,549

(1,672,468)




Other items



    Impairment loss (Note 9)

-

4,568,511

    Restructuring costs (Note 17)

3,400,552

2,442,875

    Loss on disposal of assets (Notes 7)

877,339

381,302

Acquisition costs (Note 30)

1,936,767

-

    Acquisition costs impairment (Note 25)

-

932,317

Loss before tax

(3,942,109)

(9,997,473)




Income tax recovery (Note 11)

(141,641)

(182,802)




Net loss for the year

(3,800,468)

(9,814,671)

 

Other comprehensive income

 

 

304,041

 

927,509

 

    Foreign currency translation differences for foreign operations,

    net of income tax




Total comprehensive loss for the year

(3,496,427)

(8,887,162)


 

Basic loss per share (Note 18)

$(0.03)

$(0.08)




Diluted loss per share (Note 18)

$(0.03)

$(0.08)







 

 

 

Consolidated Statement of Changes in Equity

for the Year Ended 31 December 2010


SHARE

CAPITAL -ORDINARY

SHARES

$

SHARE

CAPITAL -DEFERRED

SHARES

$

TOTAL

SHARE

CAPITAL

$

 

 

SHARE

PREMIUM

$

EQUITY

RESERVE ON

SHARE

OPTION

ISSUANCE

$

TRANSLATION

RESERVE ON

FOREIGN

OPERATIONS

$

CAPITAL

REDEMPTION

RESERVE

$

 

RETAINED

EARNINGS

$

 

 

TOTAL

$

Balance as at
1 January 2009

 

21,725

 

18,000

 

39,725

 

50,554,492

 

5,954,728

 

(1,320,417)

 

147

 

44,470,606

 

99,699,281











Net loss for the year

-

-

-

-

-

-

-

(9,814,671)

(9,814,671)

Other comprehensive loss for the year










Foreign currency   translation differences

 

-

 

-

 

-

 

-

 

-

 

927,509

 

-

 

-

 

927,509

Total comprehensive loss

 

-

 

-

 

-

 

-

 

-

 

927,509

 

-

 

(9,814,671)

 

(8,887,162)

Equity reserve on option issuance

 

-

 

-

 

-

 

-

 

2,646,440

 

-

 

-

 

-

 

2,646,440

Balance as at 31 December 2009

 

21,725

 

18,000

 

39,725

 

50,554,492

 

8,601,168

 

(392,908)

 

147

 

34,655,935

 

93,458,559

Balance as at
1 January 2010

 

21,725

 

18,000

 

39,725

 

50,554,492

 

8,601,168

 

(392,908)

 

147

 

34,655,935

 

93,458,559











Net loss for the year

-

-

-

-

-

-

-

(3,800,468)

(3,800,468)

Other comprehensive loss for the year










Foreign currency translation differences

 

-

 

-

 

-

 

-

 

-

 

304,041

 

-

 

-

 

304,041

Total comprehensive loss

 

-

 

-

 

-

 

-

 

-

 

304,041

 

-

 

(3,800,468)

 

(3,496,427)











Equity reserve on option issuance 

(Note 20)

 

-

 

-

 

-

 

-

 

985,203

 

-

 

-

 

-

 

985,203

Balance as at 31 December 2010

 

21,725

 

18,000

 

39,725

 

50,554,492

 

9,586,371

 

(88,867)

 

147

 

30,855,467

 

90,947,335











 

 

 

Consolidated Statement of Cash Flows

for the Year Ended 31 December 2010


 

YEAR ENDED

31 DECEMBER

2010

YEAR ENDED

31 DECEMBER

2009


$

$

OPERATING ACTIVITIES



Loss before tax

(3,942,109)

(9,997,473)




Adjustments for:



   Depreciation and amortisation

6,595,005

6,342,598

   Unrealised foreign exchange loss/(gain)

3,833,303

(3,571,426)

   Share option expense

985,203

2,646,440

   Investment loss (Note 9)

-

533,116

   Impairment loss (Note 9)

-

4,568,511

   Asset disposal (Notes 7 & 8)

877,339

381,302

Operating cash flows before movements in working capital

8,348,741

903,068




   (Increase)/decrease in receivables from Members

(293,014)

348,000

   (Increase)/decrease in trade and other receivables

(189,088)

460,398

   Decrease in prepaid expenses and deposits

707,128

754,345

   (Decrease)/increase in trade and other payables

(362,971)

2,751,524

Cash generated by operations

8,210,796

5,217,335




Tax (paid)/refunded

(242,494)

502,634




Net cash generated by operating activities

7,968,302

5,719,969




INVESTING ACTIVITIES



    Increase in payables to Members

19,845,622

16,077,245

    Purchase of property, plant & equipment

(13,762,730)

(18,793,817)

    Decrease/(increase) in restricted cash accounts

2,858,359

(2,210,710)

Increase in Qualifying Liquid Assets held for Members

(23,414,633)

(20,168,032)

    Investment in associate (Note 9)

-

(16,553)




Net cash consumed by investing activities

(14,473,382)

(25,111,867)




FINANCING ACTIVITIES



    Mortgage receivable

-

284,563




Net cash generated by financing activities

-

284,563




Decrease in cash and cash equivalents during the year

(6,505,080)

(19,107,335)

 

Net effect of foreign exchange on cash and cash equivalents

(3,657,449)

3,871,720

 

Translation of foreign operations

 208,136

59,884




Cash and cash equivalents, beginning of year

61,070,438

76,246,169




Cash and cash equivalents, end of year

51,116,045

61,070,438




 

 

 

Notes to Consolidated Financial Statements for the Year Ended 31 December 2010

 

1.             GENERAL

 

NETELLER plc (the "Company") was a private company incorporated under the laws of the Isle of Man ("IOM") on 31 October 2003 and was registered as a public company on 1 April 2004.  NETELLER plc changed its name to NEOVIA Financial Plc on 17 November 2008. On 1 March 2011 NEOVIA Financial Plc changed its name to Optimal Payments Plc.  The principal activities of the Company and the Group are described in Note 2.  The Group includes the Company and its wholly owned subsidiaries as set out under "Principles of consolidation" in note 3 and "Subsidiaries" in note 22.

 

These financial statements are presented in US dollars ("$") which is the Company's functional currency.

 

At 31 December 2010, the Group had 309 employees (2009: 447 employees).

 

 

2.             NATURE OF OPERATIONS

 

The Group provides services to businesses and individuals to allow the processing of direct debit, electronic cheque and credit card payments.  The Group processes direct debit, electronic cheque and credit card payments for internet Merchants.  NETELLER (UK) Ltd (a wholly-owned subsidiary of Optimal Payments Plc) is authorised and regulated by the Financial Services Authority in the United Kingdom as an e-money issuer.

 

 

3.             SIGNIFICANT ACCOUNTING POLICIES

 

The financial statements have been prepared in accordance with applicable IOM law and International Financial Reporting Standards ("IFRS"). 

 

The consolidated financial statements were authorised for issue by the Board of Directors on 30 March 2011. 

 

The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position:

 

·      derivative financial instruments are measured at fair value

·      liabilities for cash-settled share-based payments arrangements are measured at fair value

 

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. The following principal accounting policies have been applied:

 

Changes in accounting policies

 

From 1 January 2010 the Group has applied IFRS 3 Business Combinations (2008) in accounting for business combinations.  The change in accounting policy has been applied prospectively and has had no material impact on earnings per share.

 

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.  Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.  In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.

 

Acquisitions on or after 1 January 2010

 

For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as:

 

·      The fair value of consideration transferred; plus

·      The recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of existing equity interest in the acquiree; less

·      The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed

 

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.

 

The consideration transferred does not include amounts related to the settlement of pre-existing relationships.  Such amounts are generally recognised in profit or loss.

 

Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

 

Any contingent consideration payable is recognised at fair value at the acquisition date.  If the contingent consideration is classified as equity, it is not re-measured and settlement is accounted for within equity.  Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.

 

When share based payments awards (replacement awards) are required to be exchanged for awards held by the acquiree's employees (acquiree's awards) and relate to past services, then all or a portion of the amount of the acquirer's replacement awards is included in measuring the consideration transferred in the business combination.  The determination is based on the market based value of the replacement awards compared with the market based value of the acquiree's awards and the extent which the replacement awards relate to past and/or future service.

 

Presentation of financial statements

 

The Group applies revised IAS 1 Presentation of Financial Statements (2007), which became effective as of 1 January 2009. As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share.

 

Principles of consolidation

 

The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (and its subsidiaries) as at the year end.  Control is achieved where the Company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities.  The consolidated financial statements include the accounts of the Company and its principal wholly owned subsidiaries, NETELLER Operations Limited, NetAdmin Limited, Net ID Limited, NT Services Limited, NETELLER (UK) Ltd, NetBanx Limited, Quick Access International Limited, Charter Access Co. Limited, 1155259 Alberta Limited, NT Services Building Corporation, NETELLER Express Limited, Cardload Incorporated and Optimal Payments (UK) Limited.  All inter-company transactions and balances between Group enterprises are eliminated on consolidation.

 

In the non-consolidated financial statements of the Company, investments in subsidiaries are stated at cost.

 

Investments in associates

 

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

 

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting.  Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

 

Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group's interest in the relevant associate.

 

Cash and cash equivalents

 

Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

 

Intangible assets

 

Intellectual property is recorded at cost and is amortised on a straight-line basis over its estimated useful life which is assessed to be three years.

 

Website and platform development costs are recorded at cost and amortised over their estimated useful life using the declining-balance method at 30%.  On 21 September 2010, the Newteller platform went live and all associated costs specifically related to this are amortised over 5 years on a straight-line basis.

 

Property, plant & equipment

 

Land is not depreciated.  Property, plant & equipment are recorded at cost and are amortised over their estimated useful lives, using the declining-balance method, on the following basis:

               

                Communication equipment                20%

                Furniture and equipment                    20%

                Computer equipment                           30%

 

Other assets are depreciated over their estimated useful lives, using the straight-line method, on the following basis:

               

                Computer software                                                              2 years

                Building & leasehold improvements                                4% and 10 years respectively

 

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.

 

Impairment

 

The carrying amounts of the Group's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment.  If any such indication exists, then the asset's recoverable amount is estimated.  For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.  An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amounts.

 

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell.  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.  For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU.  Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes.  Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from synergies of the combination.

 

The Group's corporate assets do not generate separate cash inflows and are utilised by more than one CGU.  Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.

Impairment losses are recognised in profit or loss.  Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.

 

An impairment loss in respect of goodwill is not reversed.  In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists.  An impairment loss is reversed if there has been a change in estimates used to determine the recoverable amount.  An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss has been recognised.

 

The Group performs goodwill and intangible impairment tests at least annually or whenever events or changes in circumstances indicate that the goodwill and intangible carrying value for a business unit may not be recoverable. 

 

Goodwill

               

Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of subsidiaries at the date of acquisition.

 

Goodwill is recognised as an asset and reviewed for impairment at least annually.  Any impairment is recognised immediately in the income statement and is not subsequently reversed.

 

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

 

Receivable from Merchants

 

Trade and other receivables, including receivables from Merchants, are stated at their amortised cost less impairment losses and doubtful accounts.

 

Income tax

 

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.

 

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

 

The Group uses the balance sheet liability method of accounting for income taxes.  Temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate deferred tax assets or liabilities.  Deferred tax assets or liabilities are calculated using tax rates anticipated to exist in the periods that the temporary differences are expected to reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

 

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

 

Segment reporting

 

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. All operating segments' operating results are reviewed regularly by the Group's CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

 

Revenue recognition

 

The Group is involved in transaction processing services.  Revenues from transaction processing services are recognised at the time services are rendered.  Member revenue is recognised either as a fee calculated as a percentage of funds processed or as a charge per transaction, pursuant to the respective Member agreements.  Merchant revenue is recognised as a fee calculated as a percentage of funds processed on behalf of Merchants.

 

Interest income is accrued on a monthly basis, by reference to the principal outstanding and at the effective interest rate applicable.

 

Leases

 

All leases are classified as operating leases as the terms of the lease do not transfer substantially all the risks and rewards of ownership to the lessee.  Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease.

 

Foreign exchange

 

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in United States dollars, which is the functional currency of Optimal Payments Plc, and the presentation currency for the consolidated financial statements.

 

In preparing the financial statements of the individual entities, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period, except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

 

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations (including comparatives) are expressed in United States dollars using exchange rates prevailing on the balance sheet date. Income and expense items (including comparatives) are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group's translation reserve. Such translation differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

 

Goodwill and fair value adjustments arising on the acquisition of foreign operations are treated as assets and liabilities of the foreign operation and translated at the closing rate.

 

                Related party transactions

 

Monetary related party transactions in the normal course of operations are recorded at fair value, and transactions between related parties, not in the normal course of operations, are recorded at the carrying value as recorded by the transferor.

 

Use of estimates

 

The preparation of the Group's financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies at the date of the Group's financial statements, and revenue and expenses during the reporting period.  Actual results could differ from those estimated.  Significant estimates in the Group's financial statements include depreciation and amortisation, impairment testing of long-lived assets, share based payments, income taxes and the valuation of the Group's new platform (see note 8).  By their nature, these estimates and assumptions are subject to measurement uncertainty and the effect on the Group's financial statements of changes in estimates in future periods could be significant.

 

                Foreign exchange contracts

               

The Group uses foreign exchange contracts to reduce its exposure to adverse fluctuations in foreign exchange rates.  These financial instruments are presented in the accompanying consolidated financial statements at fair value.  Fair values are based on market quotes, current foreign exchange rates or management estimates, as appropriate, and gains and losses on the foreign exchange contracts are reflected in the consolidated income statement.  The increase or decrease in the fair value of the contracts has been taken to income.

 

                Research and development

 

Research expenditure is written off to the income statement in the period in which it is incurred.

 

Development expenditure is written off in the same way unless management is satisfied as to the technical, commercial and financial viability of the individual projects generating future economic benefits, and the Group intends to and has sufficient resources to complete development and to use or sell the asset.  In this situation, the expenditure is capitalised at cost, less a provision for any impairment in value, and is amortised on the commencement of use over the period in which benefits are expected to be received by the Group.  The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use.

 

Share-based payments

 

The Company issues share options to certain employees, including Directors.  Share options are measured at fair value at the date of grant.  The fair value determined at the grant date of the share option is expensed on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest.  Fair value is measured using the trinomial lattice pricing model.  When necessary, the expected life used in the model is adjusted, based on management's best estimates, for the effects of non-transferability, exercise restrictions and behavioural considerations.

 

Offsetting

 

Financial assets and liabilities are set off and the net amount presented in the balance sheet when, and only when, the Group has a legal enforceable right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

 

Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group's trading activity.

 

Defined contribution pension plans

         

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement in the periods during which services are rendered by employees.

 

Restructuring

 

A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for.

 

Earnings per share

 

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held and for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.

 

New standards and interpretations not yet adopted

 

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2010, and have not been applied in preparing these consolidated financial statements.  None of these is expected to have a significant effect on the consolidated financial statements of the Group, except for IFRS 9 Financial Instruments, which becomes mandatory for the Group's 2013 consolidated financial statements and could change the classification and measurement of financial assets.  The Group does not plan to adopt this standard early and the extent of the impact has not been determined.

 

 

4.             RESTRICTED CASH

 

For NETELLER and NETELLER Asia e-wallet Merchants, the Group maintains bank accounts with the Company's principal bankers which are segregated from operating funds and which contain funds held on behalf of Merchants, representing pooled Merchant funds (in 2009, these funds also included non-European Member balances - see note 5).  Balances in the segregated accounts are maintained at a sufficient level to fully offset amounts owing to the Group's Merchants.  A legal right of offset exists between the balances owing to the Merchants and the cash balances segregated in the client accounts.  As such, only the net balance of surplus cash is disclosed on the balance sheet as Restricted Cash.

 

At 31 December 2010, the Group had the following balances:

 


CLIENT

ACCOUNT

FUNDS

BALANCE

OWING

RESTRICTED

CASH


$

$

$





Merchants

58,676,304

56,382,410

2,293,894






               

 

                At 31 December 2009, the Group had the following balances:

 


CLIENT

ACCOUNT

FUNDS

BALANCE

OWING

RESTRICTED

CASH


$

$

$





Non-European Members

26,400,113

25,375,833

1,024,280





Merchants

60,954,194

56,826,221

4,127,973






87,354,307

82,202,054

5,152,253

 

 

5.             QUALIFYING LIQUID ASSETS HELD FOR MEMBERS

 

In compliance with the Financial Services Authority (FSA) rules and regulations, the Group holds Qualifying Liquid Assets at least equal to the amounts owing to Members.  These amounts are maintained in accounts which are segregated from operating funds.

 

All Qualifying Liquid assets are held in Neteller (UK) Ltd, which is an FSA regulated entity.  In 2009, only European Member balances were held within Neteller (UK) Ltd.  However, effective 1 December 2010 all non-European balances were transferred to Neteller (UK) Ltd. Accordingly, the 2009 comparatives show Qualifying Liquid Assets and the related Payables for only European Members, whereas the 2010 amounts reflect such balances for all Members.

 

The Group had the following balances:

 


AS AT 31

DECEMBER 2010

$

AS AT 31

DECEMBER 2009

$

Qualifying Liquid Assets held for Members

107,026,942

83,612,310

Payable to Members

(96,230,213)

(76,384,591)


10,796,729

7,227,719

 

 

6.             RECEIVABLE FROM MEMBERS AND MERCHANTS

 

                The Group had the following balances:

               

AS AT 31

DECEMBER 2010

AS AT 31

DECEMBER 2009


$

$




Receivable from  Merchants

1,818,667

1,334,748




Provision for doubtful accounts

(1,171,667)

(980,748)





647,000

354,000

 

 

Receivable from Merchants consists of balances due that are in the process of collection.  The net receivable from Merchants represents the amounts which are expected to be collected through the normal course of business. 

 

 

7.             PROPERTY, PLANT & EQUIPMENT

 

                The Group had the following balances:

               


COMMUNICATION

EQUIPMENT

$

FURNITURE AND EQUIPMENT

$

COMPUTER

EQUIPMENT

$

COMPUTER

SOFTWARE

$

BUILDING AND IMPROVEMENTS

$

 

TOTAL

$

Cost







As at 31 December 2008

3,206,215

2,179,066

3,687,930

8,837,653

431,764

18,342,628

Additions

214,658

61,232

631,858

1,609,478

-

2,517,226

Disposals

-

(2,981)

-

-

-

(2,981)

Re-classification (Note 8)

-

-

-

(1,658,622)

-

(1,658,622)

Exchange difference

508,150

301,608

570,974

707,220

58,621

2,146,573

As at 31 December 2009

3,929,023

2,538,925

4,890,762

9,495,729

490,385

21,344,824

Additions

76,633

7,285

3,111,763

791,272

-

3,986,953

Disposals

(748,690)

(284,746)

(195,653)

(198,484)

-

(1,427,573)

Re-classification (Note 8)

(1,450,956)

-

1,450,956

6,541,842

203,979

6,745,821

Exchange difference

(12,524)

77,676

191,888

328,956

20,326

606,322

As at 31 December 2010

1,793,486

2,339,140

9,449,716

16,959,315

714,690

31,256,347








Accumulated depreciation







As at 31 December 2008

1,512,493

990,149

2,591,697

4,418,005

71,216

9,583,560

Charge for the year

439,495

251,497

396,289

1,371,070

17,824

2,476,175

Disposals

-

(1,610)

-

-

-

(1,610)

Exchange Difference

311,687

162,560

424,611

552,645

7,057

1,458,560

As at 31 December 2009

2,263,675

1,402,596

3,412,597

6,341,720

96,097

13,516,685

Charge for the year

284,113

221,621

735,740

1,743,687

31,962

3,017,123

Disposals

(690,737)

(142,367)

(78,628)

(160,110)

-

(1,071,842)

Reclassification

(859,433)

-

859,433

5,898,711

112,278

6,010,989

Exchange Difference

(11,630)

49,687

151,787

269,726

4,396

463,966

As at 31 December 2010

985,988

1,531,537

5,080,929

14,093,734

244,733

21,936,921








Net book value







As at 31 December 2008

1,693,722

1,188,917

1,096,233

4,419,648

360,548

8,759,068

Net book value







As at 31 December 2009

1,665,348

1,136,329

1,478,165

3,154,009

394,288

7,828,139

Net book value







As at 31 December 2010

807,498

807,603

4,368,787

2,865,581

469,957

9,319,426

 

 

The Company had the following balances:

 

 

 

COMMUNICATION

EQUIPMENT

$

FURNITURE AND EQUIPMENT

$

 

COMPUTER

EQUIPMENT

$

 

COMPUTER

SOFTWARE

$

 

BUILDING AND IMPROVEMENTS

$

Cost






 

As at 31 December 2008

55,892

70,468

132,305

3,698,809

48,406

4,005,880

Additions

-

-

206,646

456,735

-

663,381

Disposals

-

(2,902)

-

-

-

(2,902)

Reclassification (Note 8)

-

-

-

(1,658,622)

-

(1,658,622)

As at 31 December 2009

55,892

67,566

338,951

2,496,922

48,406

3,007,737

Additions

-

7,472

2,871,526

212,564

-

3,091,562

Reclassification (Note 8)

-

-

-

13,022

-

13,022

As at 31 December 2010

55,892

75,038

3,210,477

2,722,508

48,406

6,112,321








Accumulated depreciation






 

As at 31 December 2008

29,841

39,748

89,090

875,825

33,826

1,068,330

Charge for the year

5,210

6,048

19,817

376,243

1,609

408,927

Disposals

-

(1,589)

-

-

-

(1,589)

As at 31 December 2009

35,051

44,207

108,907

1,252,068

35,435

1,475,668

Charge for the year

4,168

5,903

263,813

327,318

1,610

602,812

As at 31 December 2010

39,219

50,110

372,720

1,579,386

37,045

2,078,480








Net book value






 

As at 31 December 2008

26,051

30,720

43,215

2,822,984

14,580

2,937,550

Net book value






 

As at 31 December 2009

20,841

23,359

230,044

1,244,854

12,971

1,532,069

Net book value






 

As at 31 December 2010

16,673

24,928

2,837,757

1,143,122

11,361

4,033,841

 

 

2010

 

The Group disposed of the following intangibles and property, plant and equipment:

 

 

 

COMMUNICATION

EQUIPMENT

$

FURNITURE

AND

EQUIPMENT

$

 

COMPUTER

EQUIPMENT

$

 

COMPUTER

SOFTWARE

$

WEBSITE AND PLATFORM DEVELOPMENT

$

 

 

TOTAL

$







 

 

Net book value

57,954

142,380

117,024

38,374

522,984

878,716

 

Proceeds on sale

-

1,377

-

-

-

1,377

 

Loss on disposal

(57,954)

(141,003)

(117,024)

(38,374)

(522,984)

(877,339)

 

 

2009

 

The Group disposed of the following intangibles and property, plant and equipment:

 

 

FURNITURE AND

EQUIPMENT

$

WEBSITE AND

PLATFORM

DEVELOPMENT

$

 

 

TOTAL

$




 

Net book value

1,371

44,658

46,029

Proceeds on sale

1,074

-

1,074

Loss on disposal

(297)

(44,658)

(44,955)

 

In 2009, the Group recognised a loss on disposal of its Calgary property (27th Avenue) of $4,792 due to legal fees incurred subsequent to the sale. In addition, the remaining $331,555 mortgage receivable on the property was written off and shown as a loss on the income statement due to the inability of the purchaser to repay the full amount. 

 

 

8.             INTANGIBLE ASSETS

 

The Group had the following balances:

 


INTELLECTUAL PROPERTY

$

WEBSITE AND PLATFORM

DEVELOPMENT

$

 

TOTAL

$

Cost




As at 31 December 2008

6,741,974

22,241,808

28,983,782

Additions

44,349

16,228,525

16,272,874

Disposals

-

(60,984)

(60,984)

Reclassification (Note 7)

-

1,658,622

1,658,622

Exchange difference

-

626,609

626,609

As at 31 December 2009

6,786,323

40,694,580

47,480,903

Additions

12,758

9,764,396

9,777,154

Disposals

-

(947,876)

(947,876)

Reclassification (Note 7)

-

(6,745,821)

(6,745,821)

Exchange difference

-

(409,321)

(409,321)

As at 31 December 2010

6,799,081

42,355,958

49,155,039

Accumulated amortisation



As at 31 December 2008

6,548,737

4,562,225

11,110,962

Charge for the year

87,077

3,779,346

3,866,423

Disposal

-

(16,326)

(16,326)

Exchange difference

-

446,998

446,998

As at 31 December 2009

6,635,814

8,772,243

15,408,057

Charge for the year

91,158

3,486,724

3,577,882

Disposal

-

(424,892)

(424,892)

Reclassification (Note 7)

-

(6,010,989)

(6,010,989)

Exchange difference

-

(362,869)

(362,869)

As at 31 December 2010

6,726,972

5,460,217

12,187,189

Net book value




As at 31 December 2008

193,237

17,679,583

17,872,820

Net book value




As at 31 December 2009

150,509

31,922,337

32,072,846

Net book value




As at 31 December 2010

72,109

36,895,741

36,967,850

 

 

9.             INVESTMENT IN ASSOCIATE

 

In the second quarter of fiscal 2009, the Group recorded an impairment loss of $4.6 million, representing complete impairment of the investment in Centricom Pty Ltd.  In accordance with IAS 36, an impairment loss should be recognised when the recoverable amount of an asset is less than its carrying amount.  The recoverable amount was deemed to be zero, based on an analysis of the unit's future cash flow projections and management's best estimate of the set of economic conditions that will exist over the remaining useful life of the assets.  In the fourth quarter of fiscal 2010, the Group received $34,782 cash for the sale of all shares held in Centricom Pty Ltd.

 


AS AT 31

DECEMBER

 2010

 $

AS AT 31

DECEMBER

 2009

 $

Cost



Opening balance

-

5,085,074

Contributions to associate

-

16,553

Group and Company's share of investment loss

-

(533,116)

 

Impairment loss

-

(4,568,511)


-

-

 

 

10.          TRADE AND OTHER PAYABLES

 

The Group had the following balances:

 


AS AT 31

DECEMBER

2010

 $

AS AT 31

DECEMBER

2009

$

Accounts payable

13,751,637

14,898,990

Accrued liabilities

6,832,727

5,855,662

Payroll liabilities

599,004

615,848


21,183,368

21,370,500

 

The Company had the following balances:

 


AS AT 31

DECEMBER

2010

$

AS AT 31

DECEMBER

2009

$

Accounts payable

1,048,456

1,959,940

Accrued liabilities

5,368,408

4,933,507

Payroll liabilities

20,858

46,654


6,437,722

6,940,101

 

 

Included in Group accounts payable are Merchant processing liabilities arising from the gateway operations of NETBANX and NETBANX Asia.  In addition, included in cash and cash equivalents is a transient cash balance that relates to Merchant transactions processed via the gateway operations.  The gateway operations do not fall within the EU definition of "e-money" nor does a legal right of offset exist between this cash and the corresponding Merchant liabilities. 

 

 

11.          TAX

 

The Company is incorporated in the IOM and is subject to a tax rate of zero percent and accordingly pays no tax in the IOM.

 

Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

 

The charge for the year can be reconciled to the profit per the consolidated income statement as follows:

 

 


YEAR ENDED

31 DECEMBER

2010

 $

YEAR ENDED

31 DECEMBER

2009

 $

Loss before tax

(3,942,109)

(9,997,473)

Effect of different tax rates

of subsidiaries operating in other jurisdictions

141,641

182,802

Effective tax rate for the year

-3.59%

-1.83%

 

At 31 December 2010, foreign taxes of $1,840,169 (2009: $2,224,304) were outstanding.

 

 

12.          SHARE CAPITAL

 


AS AT 31

DECEMBER

2010

AS AT 31

DECEMBER

2009


£

£

Authorised:



200,000,000 ordinary shares of £0.0001 per share

(At 31 December 2009: 200,000,000 ordinary shares of £0.0001 per share)

20,000

20,000




1,000,000 deferred shares of £0.01 per share

(At 31 December 2009: 1,000,000 deferred shares £0.01 per share)

10,000

10,000




Issued and fully paid

$

$

119,920,953 ordinary shares of £0.0001 per share

(At 31 December 2009: 119,920,953 ordinary shares of £0.0001 per share)

 

21,725

 

21,725




1,000,000 deferred shares of £0.01 per share

(At 31 December 2009: 1,000,000 deferred shares of £0.01 per share)

18,000

18,000




Total share capital

39,725

39,725

 

 

Holders of the ordinary shares are entitled to receive dividends and other distributions, to attend and vote at any general meeting, and to participate in all returns of capital on winding up or otherwise.

 

Holders of the deferred shares are not entitled to vote at any annual general meeting of the Company and are only entitled to receive the amount paid up on the shares after the holders of the ordinary shares have received the sum of £1,000,000 for each ordinary share held by them and shall have no other right to participate in assets of the Company.

 

 

13.          TRANSLATION RESERVE

 


YEAR ENDED

31 DECEMBER

2010

$

YEAR ENDED

31 DECEMBER

2009

$

Balance at beginning of year

(392,908)

(1,320,417)

Arising on translation of foreign operations

304,041

927,509

Balance at end of year

(88,867)

(392,908)

 

Exchange differences relating to the translation from the functional currencies of the Group's foreign subsidiaries into US dollars are brought to account by entries made directly to the foreign currency translation reserve.

 

 

14.          SEGMENTAL REPORTING

 

The Group has two segments as disclosed below. For each of the segments, the Group's CEO reviews internal management reports on a monthly basis. The following summary describes the operations in each of the Group's reportable segments.

 

Stored Value: fees are generated on transactions between Members and Merchants using the NETELLER eWallet and Net+ prepaid cards.

 

Straight Through Processing (STP): fees are generated through the NETBANX and NETBANX Asia gateway platforms where customers send money directly to Merchants.

 

Information regarding the results of each reportable segment is included below.

 


STORED VALUE

$

STRAIGHT

THROUGH

PROCESSING

$

TOTAL

$





Revenue

44,089,214

16,656,270

60,745,484

Variable costs




   Processing costs

3,831,001

7,162,505

10,993,506

   Bad debt

847,507

270,522

1,118,029

Total variable costs

4,678,508

7,433,027

12,111,535

Variable margin

39,410,706

9,223,243

48,633,949

 

Variable margin percentage

89%

55%

80%

 

A significant proportion of the expenditures shown in the cost of goods sold section consist of costs that are largely fixed in nature.  These include server hosting costs, marketing and promotions and some wages.

 

Processing costs and bad debt are the only two costs which vary directly with revenue, and accordingly have been shown separately as variable costs.  For 2010, variable costs for stored value and straight through processing were 11% and 45% of revenue respectively.

 

Major Merchants

 

The Group has one Merchant who represents 17% (2009: 13%) of total fee revenue across all reportable segments and geographies. 

 

 

15.          MARKETING AND PROMOTIONS

 

Total marketing and promotions costs for the year were $856,717 (2009: $439,085).  These consisted of targeted VIP rebates, fee rebates and cash paid to contest winners.

 

 

16.          PROFIT FROM OPERATIONS

 

                Profit from operations has been arrived at after charging:

 


GROUP

COMPANY


YEAR ENDED

31 DECEMBER

2010

$

YEAR ENDED

31 DECEMBER

2009

$

YEAR ENDED

31 DECEMBER

2010

$

YEAR ENDED

31 DECEMBER

2009

$

Depreciation of property, plant and equipment

3,017,123

2,476,175

602,812

408,927

Amortisation of intellectual property

3,577,882

3,866,423

3,240,982

1,977,903


6,342,598

3,843,794

2,386,830

 

 

Remuneration of the auditors for audit, advisory and other services has been recorded as follows:

 


YEAR ENDED

31 DECEMBER

2010

$

YEAR ENDED

31 DECEMBER

2009

$

Audit services



Statutory audit

396,000

415,000




Non-audit services



Tax and other advisory services

170,200

132,000

Total

566,200

547,000

 

 

17.          RESTRUCTURING COSTS

 

The Group incurred restructuring costs relating the reorganisation of its cost structure.  Severance was paid to employees in response to reduced business levels and the resulting need to achieve efficiencies. Additional restructuring costs were incurred in 2009 and 2010 for specific persons hired to reorganise the business, lease impairment costs and various legal fees.

 

The Group has incurred the following costs:

 


YEAR ENDED 31

DECEMBER 2010

$

YEAR ENDED 31

DECEMBER 2009

$

Severance and retention

1,145,770

1,840,359

Supplier contract renegotiation recovery

-

(94,922)

Provision for supplier receivable

-

147,031

Professional and legal fees and expenses

153,539

512,409

Other restructuring costs

-

37,998

Business change salaries

1,119,990

-

Lease impairment

981,253

-


3,400,552

2,442,875

 

 

18.          LOSS PER SHARE FROM CONTINUING OPERATIONS

 

The calculation of the basic and diluted earnings or loss per share is based on the following data:

 

 

YEAR ENDED

31 DECEMBER

2010

YEAR ENDED

31 DECEMBER

2009

 

$

$

Loss


 

Loss for the purposes of basic and diluted earnings per share being net loss attributable to equity share holders of the parent

(3,800,468)

(9,814,671)




Number of shares



Weighted average number of ordinary shares for the



purpose of basic loss per share

119,920,953

119,920,953

Effect of dilutive potential ordinary shares due to employee share options

438,064

 

4,267

 

Weighted average number of ordinary shares for the

 

120,359,017

 

119,925,220

purpose of diluted loss per share

 



Basic loss per share

$(0.03)

$(0.08)

Fully diluted loss per share

$(0.03)

$(0.08)

 

 

19.          OPERATING LEASE ARRANGEMENTS

 

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments, which fall due as follows:

 


AS AT

31 DECEMBER

 2010

AS AT

31 DECEMBER 2009


$

$

Within one year

1,291,545

1,853,289

In the second to fifth years inclusive

1,383,134

2,541,205

After five years

90,855

140,998

 

Operating lease payments represent rentals payable by the Group for certain of its office properties.  Current leases have a remaining average life of 1.6 years.  The lease payments recognised in expense for the year are $1,910,846 (2009: $1,921,557).

 

 

20.          SHARE BASED PAYMENTS

 

The Company's share option plan was adopted pursuant to a resolution passed on 7 April 2004 and amended by the Board on 15 September 2008.  The 2008 amendment included the addition of a new approved plan for UK based employees.  Under the approved and unapproved plans, the Board of Directors of the Company may grant share options to eligible employees including directors of Group companies to subscribe for ordinary shares of the Company.  No further grants were made during 2010 under either the approved or unapproved share option plans following the introduction of the Company's Long Term Incentive Plan ("LTIP") in 2010.

 

No consideration is payable on the grant of an option. Options may generally be exercised to the extent that they have vested. Options vest according to the relevant schedule over the grant period following the date of grant.  Typically, options have been granted for a three and a half year grant period and have vested in equal thirds on or about the anniversary of the grant date.  However, the Directors are permitted under the Plan Rules to alter the vesting schedule and the grant period.  The exercise price is determined by the Board of Directors of the Company, and shall not be less than the market value at the date of grant. The option plan provides for a grant price to equal the average quoted market price of the Company shares on the three days prior to the date of grant. Share options are forfeited if the employee leaves the Group before the options vest. A participant of the share option plan has 30 days following the date of grant to surrender the option and if surrendered, the option will not be deemed granted.

 

On 14 April 2010 a total of 2,369,157 options granted on 20 November 2006 with an exercise price of £1.38 expired.

 

The Company adopted an LTIP program on 18 March 2010 and certain executives and managers of the Group were awarded grants over 2,182,393 ordinary shares in the Company for £0.0001 per share.  The LTIP award grants vest in three equal tranches over each of the 2010, 2011 and 2012 financial years of the Company based on performance conditions to be determined for each year, based on annual "stretch" EBITDA targets.  

 

Options recorded under share option expense may not agree to the total options granted in the period.  The accounting for options coincides with the day following the last day for acceptance of the option, which is subsequent to their date of grant.

 

Equity-settled share option plan

 

 

31 DECEMBER

2010

WEIGHTED

AVERAGE

EXERCISE PRICE

£

YEAR ENDED

31

DECEMBER

2010

OPTIONS

31 DECEMBER

2009

WEIGHTED

AVERAGE

EXERCISE PRICE

£

YEAR ENDED

31

DECEMBER

2009

OPTIONS

 

 

Outstanding at the

beginning of year

0.86

 

7,590,521

1.49

 

8,216,215

Granted during the year

-

-

0.50

100,000

Forfeited during the year

0.60

(1,680,857)

0.72

(630,156)

Exercised during the year

-

-

-

-

Expired during the year

1.38

(2,369,157)

7.85

(395,808)

Outstanding at the end of year

0.63

 

3,540,507

0.86

 

7,590,521

Exercisable at the end of the year

0.66

 

3,049,245

1.00

 

5,037,519

 

The options outstanding at the end of the period had a weighted average remaining contractual life of 1.18 years (31 December 2009: 1.65 years).

The options granted in under the 2008 and 2009 share-based payment plan were valued using a trinomial lattice model to reflect factors including employee exercise behaviour, option life and option forfeitures.

The inputs into the model are as follows:

 

 

YEAR ENDED 31

DECEMBER 2010

 

YEAR ENDED 31

DECEMBER 2009

Weighted average exercise price

£0.50

£0.50

Expected volatility

56%

56%

Expected life

3.5 years

3.5 years

Risk free interest rate

0.5%

0.5%

Expected dividends

-

-

Employee exit rate

7%

7%

Expected volatility was determined by calculating the historical volatility of the Company's share price from the time of issue to the date of grant. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

Given the nature of the performance condition, the options granted under the 2010 share-based payment plan are recognised when these conditions are met using the then prevailing share price. In addition to the 2010 share-based payment plan, the Company granted awards over 87,146 shares of the Company under the LTIP plan to Mark Mayhew, CEO and 300,000 shares to two other employees for a total expense of $311,116.

The Company recognised total expenses of $985,203(2009: $2,646,440) related to the equity-settled share-based payments transactions in 2010. 

 

 

21.          FINANCIAL INSTRUMENTS

 

Financial instruments consist of cash and cash equivalents, restricted cash, Qualifying Liquid Assets held for Members, receivable from Members, trade and other receivables, payable to Members and Merchants, payable to Members and trade and other payables.  All financial instruments are classified as held for trading.

 

(i)           Fair values

 

The fair values of cash and cash equivalents, restricted cash, Qualifying Liquid Assets held for Members, receivable from members and Merchants, trade and other receivables, payable to Members and trade and other payables approximate the carrying values due to the short-term nature of these instruments.

 

The fair value of property, plant, and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably.  The fair value of items of plant, property, equipment, fixtures and fittings is based on the market approach and cost approaches using the quoted market price for similar items when available and replacement cost when appropriate.  Depreciated replacement cost estimates reflect adjustments for physical deterioration as well as functional and economic obsolescence.

 

The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payment that has been avoided as a result of the patent or trademark being owned.  The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows.

 

The fair value of foreign exchange contracts are marked to market each reporting period using the period end rates based on quoted prices (unadjusted) in the active market. The Group does not carry any other financial instruments at fair value.

 

(ii)          Credit risk and concentrations

 

The Group is exposed to credit risk to the extent that its members may charge back credit card purchases.  The Group manages the exposure to credit risk by employing various online identification verification techniques, enacted transaction limits and having a significant number of members and Merchants.   As these members are geographically widespread and the Merchants are active in various industries, the exposure to credit risk and concentration is mitigated.

 

(iii)         Interest rate risk

 

The Group is exposed to interest rate risk to the extent that investment revenue earned on cash and cash equivalents, client account funds, and Qualifying Liquid Assets held for Members is subject to fluctuations in interest rates.  The Group's exposure to interest rate risk is limited as investments are held in liquid and short-term funds.

 

(iv)         Currency risk

 

The Group is not significantly exposed to foreign currency exchange risk, as the majority of the transactions are denominated in US dollars.  The Group manages the exposure to currency risk by commercially transacting in US dollars and by limiting the use of other currencies for operating expenses, thereby minimising the realised and unrealised foreign exchange gain/(loss).  Where limited exposures exist, these are managed through entering into forward foreign exchange contracts as appropriate (Note 3).

 

(v)           Market segment risk

 

Market segment risk may arise due to adverse changes in legislation relating to internet, payment processing or on-line gambling.  The Group is exposed to market segment risk to the extent that legislation impacts operational presence and related revenue streams, which may be significant.  The Group manages this exposure through geographical diversification and participation in non gambling sources of revenue.  The Group closely monitors local legislation in key markets (new or existing) and does not have economic reliance on any one country.

 

(vi)         Liquidity risk

 

Liquidity risk is the risk that the Group will be unable to meet its financial obligations as they fall due.  The Group's major exposure relates to trade payables and amounts owed to Members.  Trade payables are short-term in nature.  Amounts owed to Members are fully supported by qualifying liquid assets (see note 4 for further details).  Management controls and monitors the Group's cash flow on a regular basis, including forecasting future cash flows. 

 

 

22.          SUBSIDIARIES

 

Details of the Company's principal subsidiaries as at 31 December 2010 are as follows:

 

NAME OF SUBSIDIARY

PLACE OF

INCORPORATION

AND OPERATION

PROPORTION

OF

OWNERSHIP

INTEREST

PROPORTION

OF VOTING

POWER HELD

PRINCIPAL ACTIVITY

NETELLER (UK) Ltd

United Kingdom

100%

100%

Authorised e-money issuer

NT Services Limited

Canada

100%

100%

Employment and administration

NetBanx Limited

United Kingdom

100%

100%

Full service payment processing

Quick Access International Limited

Macau

100%

100%

Debit card payment processing

1155259 Alberta Limited

Canada

100%

100%

Financing

NT Services Building Corporation

Canada

100%

100%

Property leasing company

Cardload Incorporated

Canada

100%

100%

Dormant

Lime Enterprises Limited

Isle of Man

100%

100%

Holding company

Jade Enterprises Limited

Isle of Man

100%

100%

Holding company

Net Group Holdings Limited

Isle of Man

100%

100%

Holding company

NetAdmin Limited

Isle of Man

100%

100%

Employment & administration

Neteller Operations Limited

Isle of Man

100%

100%

Merchant services

Net ID Limited

Isle of Man

100%

100%

Identification verification

NetB Limited

Isle of Man

100%

100%

Holding company

Greenscroft Limited

Isle of Man

100%

100%

Holding company

Optimal Payments Limited (formerly Neovia Financial Limited)

United Kingdom

100%

100%

Dormant 

Netinvest Limited

United Kingdom

100%

100%

Holding company

Netpro Limited

United Kingdom

100%

100%

Holding company

Neovia Gibraltar Limited

Gibraltar

100%

100%

Holding Company

Netbanx BV (Limited)

Netherlands

100%

100%

Holding company

Charter Access Limited

Hong Kong

100%

100%

Property leasing company

Optimal Payments (UK) Limited (formerly Neovia Financial (UK) Limited)

United Kingdom

100%

100%

Sales and administration services

NETBX Technologies Inc.

Canada

100%

100%

Canadian technology/development co (Dormant at 31 December 2010)

NBX Merchant Services Inc

Canada

100%

100%

Canadian sales company (Dormant at 31 December 2010)

NBX Merchant Services Corporation

United States

100%

100%

US sales company (Dormant at 31 December 2010)

NETBX Services Inc

Canada

100%

100%

Canadian support company (Dormant at 31 December 2010)

 

 

23.          INTERCOMPANY BALANCES

 

Details of the Company's intercompany balances are as follows:

 


YEAR ENDED

31 DECEMBER 2010

$

YEAR ENDED

31 DECEMBER 2009

$

Receivable from subsidiaries



Receivable from NETELLER (UK) Ltd

21,282,728

17,343,665

Receivable from NetBanx Limited

5,468,205

1,996,676

Receivable from Quick Access International Limited

-

3,415,741

Receivable from 1155259 Alberta Limited

164,651

167,391

Receivable from NetAdmin Limited

95,606

91,071

Receivable from Net ID Limited

34,364

183,343

Receivable from Optimal Payments (UK) Ltd

193,272

-

Receivable from Neteller Operations Ltd

-

-


27,238,826

23,197,887

Investment in subsidiaries



Investment in NETELLER (UK) Ltd

3,430,418

3,430,418

Investment in NT Services Limited

100

100

Investment in NetBanx Limited

8,435,634

8,435,634

Investment in Quick Access International Limited

720,540

                                          720,540

Investment in 1155259 Alberta Limited

67,001

67,001


12,653,693

12,653,693

Due to subsidiaries



Due to NT Services Limited

1,430,136

11,779,487

Due to Quick Access International Limited

3,930,461

-

Due to Neteller Operations Ltd.

2,344,825


Due to Charter Access Co. Ltd.

1,977,990

908,606


9,683,412

12,688,093




 

24.          INTERCOMPANY TRANSACTIONS

 

Details of the Company's intercompany transactions are as follows:

 

Transaction fees, as noted in the Company financial statements, represent transaction fees earned in the Company's wholly owned subsidiary Neteller Operations Limited, which was an e-money issuer to non-European Members until December 2010 and thereafter principally a Merchant payment service business.  The Company holds trust account funds and balances owing to Merchants (2009: Merchants and non-European Members) on behalf of Neteller Operations Limited.  All revenues are transferred to the Company in exchange for transaction and processing services. Neteller Operations Limited is a company registered in the Isle of Man and incorporated on 23 December 2005.  There were no intercompany balances at the year end.

 

NetAdmin Limited, a wholly owned subsidiary of the Company, is a company registered in the Isle of Man and incorporated on 23 December 2005.  NetAdmin Limited provides employment and administration services to the Company. All expenses incurred in NetAdmin Limited are charged to the Company at cost.  These expenses were recognised in the Company's income statement.

 

Net ID Limited, a wholly owned subsidiary of the Company, is a company registered in the Isle of Man and incorporated on 11 April 2006.  Net ID Limited provides identification verification services to the Company. All expenses incurred in Net ID Limited are charged to the Company at cost.  These expenses were recognised in the Company's income statement.

 

 

25.          ACQUISITION COSTS IMPAIRMENT

 

On 1 December 2008, the Group entered into an agreement to acquire IDT Corporation's European Prepaid Payment Services Division, IDT Financial Services Holdings Limited ("IDTFSH").  The proposed acquisition was subject to the approval of the Gibraltar FSC and MasterCard accepting the proposed change of control of IDTFSH.  On 20 March 2009, the Gibraltar FSC advised the Group that it was unable to consent to the acquisition.  A substantial underlying shareholder of the Company, who under Gibraltar banking law was to become a controller of IDTFSH and about whom information therefore needed to be provided to the FSC in connection with the approval process, refused to provide the requisite notification to the FSC. The FSC in these circumstances determined that it was unable to consent to the change of control of IDTFSH from IDT Corporation to the Company. 

 

 

26.          RELATED PARTIES

 

During the year, the Group and Company entered into the following transactions with related parties who are not Members of the Group or Company:

 

 

Purchase of goods

and services in 2010

£

Amounts owed to

related parties 2010

£

Purchase of goods and

services in 2009

£

Amounts owed to

 related parties 2009

£

Amber Business Limited

-

-

17,982

-

Intelligence Limited

-

-

136,061

-

JAC Group Holdings Limited

-

-

1,995

1,995

 

Amber Business Limited was a related party of the Group and Company as John Webster, a director and majority shareholder of Amber Business Limited, was a Director of the Company until his retirement on 29 April 2010.  Amber Business Limited provided secretarial and administrative services to the Group in the Isle of Man, and all transactions were at fair market value.

 

Intelligence Limited was a related party of the Group and Company as John Webster, a director and majority shareholder of Intelligence Limited, was a Director of the Company throughout the period until his retirement on 29 April 2010.  Intelligence Limited provided executive search and recruitment services to the Group and all transactions were at fair market value.

 

JAC Group Holdings Limited was a related party of the Group and Company as Mark Mayhew, a director and shareholder of JAC Group Holdings Limited, was a Director of the Company from 1 September 2009.  A subsidiary of JAC Group Holdings Limited provided travel and related booking services to the Group and all transactions were at fair market value.

 

During the year, Dale Johnson (Non-Executive Chairman) provided consulting services to the Group amounting to £Nil (2009: £10,687).

 

 

27.          CONTINGENT LIABILITIES

 

From time to time the Group is subject to legal claims and actions. The Group takes legal advice as to the likelihood of success of the claims and actions and no provision or disclosure is made where the Directors feel, based on that advice, the action is unlikely to result in a material loss or a sufficiently reliable estimate of the potential obligation cannot be made. 

 

As at 31 December 2010, NetBanx Limited, a wholly owned subsidiary, has net current liabilities.  Optimal Payments Plc will continue to provide financial support to enable NetBanx Limited to meet its existing and future liabilities and continue as a going concern.

 

28.          EBITDA

               

EBITDA is defined as results of operating activities before depreciation and amortisation and exceptional items which are defined as items of income and expense of such size, nature or incidence, that in the view of management their disclosure is relevant to explain the performance of the Group for the period.

 

EBITDA is not a financial measure calculated in accordance with IFRS. The presentation on these financial measures may not be comparable to similarly titled measures reported by other companies due to the differences in the ways the measures are calculated.

 

 

 

 

YEAR ENDED

31 DECEMBER

2010

$

YEAR ENDED

31 DECEMBER

2009

$




Profit / (loss) before other items

2,272,549

(1,672,468)

  Depreciation and amortisation

6,595,005

6,342,598

  Share option expense

985,203

2,646,440

  Foreign exchange (gain)/loss

1,304,585

144,919

  Loss on investment

-

533,116

EBITDA

11,157,342

7,994,605

 

 

29.          PRIOR PERIOD RECLASSIFICATION

 

Management determined that the gross method used to present rebates on transaction fees for Gateway transactions in 2009 was incorrect and has restated these amounts on a net basis.  The gross inflows of economic benefits include amounts collected which do not result in increases in equity for the Group, thus, supporting the statement of these costs on a net basis.

 

The reclassification allows comparability from period to period and has no affect on the income of the Group.  The reclassification reduces transaction fee revenue and deposit and withdrawal fees as reported previously in 2009 by $2,355,165.

 

 

30.          SUBSEQUENT EVENTS

 

On 1 February 2011, the Group purchased certain assets of Optimal Payments ("OP"), a world class international provider of cardholder-not-present (CNP) straight through processing ("STP") payment solutions.  The assets purchased include customer contracts, intellectual property, banking relationships and processor relationships.

 

The purchase of OP represents a major transformational step for the Group and will enable the group to enhance end-to-end straight through processing capability for Merchants, diversification of the Group from stored value to straight through processing, and to establish a meaningful presence in the North America market. 

 

As part of the asset acquisition, the Group acquired intellectual property, customer contracts and supplier and customer lists and the Group is currently in the process of determining the fair value of the assets assumed.

 

 

The consideration paid comprised:

 

Consideration ($)

Cash paid on closing

25,000,000

Vendor shares issued

2,500,000

Cash held back on sale

2,500,000

Contingent consideration

20,000,000

Total Purchase Price

50,000,000



Equity instruments issued

The fair value of the ordinary shares issued was based on the 31 January 2011 closing price of 64.25 pence.

 

Contingent consideration

The Group has agreed to pay the selling shareholders an additional consideration of $20,000,000 when certain revenue targets for 2011 and 2012 are met. The Group has included the maximum amount payable as part of the consideration which represents the fair value at acquisition date.  Management has assessed the factors used to determine the pay-out and concluded that the total amount payable is probable.

 

Management bonus

The Group has implemented a Supplementary Bonus scheme, which is not part of the deal consideration, for the senior management of the acquired Optimal Payments to incentivise and reward them for delivering performance in excess of the Contingent Consideration thresholds above. This scheme is based on EBITDA performance of the business acquired and applies in 2011 and 2012.

 

Acquisition-related cost

The Group incurred acquisition related costs of $1,936,767 were expensed in 2010 relating to this transaction. 

 

Taxes paid on acquisition

The Group paid $2,251,533 in taxes in 2011 on the acquisition of the assets and expects to recover the amount in full.

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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