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Optimal Payments PLC (PAYS)

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Tuesday 19 March, 2013

Optimal Payments PLC

Final Results

RNS Number : 2908A
Optimal Payments PLC
19 March 2013
 



 

Press release


For immediate release

 

Optimal Payments Plc

Audited Results for the year ended 31 December 2012

Strong 2012 performance - well positioned for further growth in 2013

Tuesday, 19 March 2013 - Optimal Payments Plc (LSE: OPAY) ("Optimal" or the "Group"), a leading provider of online payments, today announces its results for the year ended 31 December 2012.

Highlights

·      EBITDA(1) up 58% to $27.6m (2011: $17.5m); revenues up 40% to $179.1m (2011: $127.9m).

·      Strong second half performance across all group businesses. H2 EBITDA of $16.4m (H1: $11.2m), which partly reflects seasonality within the business.

·     Solid improvement in profitability: profit before tax of $3.6m (2011: loss of $26.2m).

·    Strong organic growth from NETBANX Straight Through Processing ("STP") division, up 60% to        $138.9m (2011: $86.8m) with particularly strong growth in Asian processing business.

·      NETELLER Stored Value ("SV") revenues marginally ahead of 2011 at $38.8m (2011: $37.9m (2)). Strong second half revenues of $22.4m, up 37% on H1 revenues of $16.4m driven by successful e-wallet growth initiatives.

·      Well positioned for US gaming opportunities as more US states consider regulation following recent New Jersey and Nevada legislative developments, capitalising on major partnerships including Caesars Interactive and Vantiv.

·      Balance sheet strengthened with total Group cash of $57.9m net of merchant cash (2011: $44.1m). Group convertible loans reduced to $24.2m (2011: $32.8m) and further reduced to $16.6m at today's date as some loans have converted in 2013. Free cash at year end was approximately $15.0m (5).

·      Continued focus on strategic development and deployment of white label gateways and mobile-enabled wallets.

·      Strong start to new financial year - sales pipeline and current trading underpin prospects for further growth in 2013.

 

 

Financial summary (audited)

 

Year ended 31 December                                                                                                                 2012                         2011

                                                                                                                                                              US $m                   US $m(3)

Revenue

NETBANX Straight Through Processing (STP)                                                      138.9                    86.8

NETELLER Stored Value (SV)                                                                              38.8                    37.9(2)

NETELLER Stored Value - discontinued revenues                                                    -                        2.1

Investment income                                                                                                 1.4                     1.1

Total revenue                                                                                                  179.1                 127.9

EBITDA (1)                                                                                                           27.6                    17.5

Adjusted profit before impairment charge                                                          3.6                     (4.9)

Impairment charge of NETELLER SV platform                                                             -                   (21.3)

Profit/(loss) before tax                                                                                         3.6                   (26.2)

Taxation (4)                                                                                                           (2.5)                    (0.0)

Net profit/(loss) for the period                                                                             1.1                   (26.2)

 

 

 

(1)    EBITDA is defined as results of operating activities before depreciation and amortisation and exceptional non-recurring items which are defined as items of income and expense of such size, nature or incidence that, in the view of management, should be disclosed to explain the performance of the Group.

(2)    Excluding discontinued revenues of $2.1m - derived from e-money expiry, which is now subject to different rules under the Electronic Money Regulations 2011.

(3)    2011 comparables include only 11 months of revenues and costs from the OP Inc business acquired on 1 February 2011.

(4)    Tax charge in the period relates to expected reassessment of 2004/5 Canadian taxes following a review commenced in 2005 by the Canadian Revenue Agency. The Board has made a full provision for the amount it believes it is likely to be required to pay in respect of withholding taxes and interest. 

(5)    Free cash is own cash less cash tied up in running the business. This includes Restricted NETELLER Member and Merchant cash, security deposits with certain acquiring banks and cash in transit. This totals approximately $32.5m at 31 December 2012 leaving free cash of approximately $15m at year end.

 

 

Commenting on today's results, Joel Leonoff, President & CEO, said:  

"2012 was an excellent year for Optimal Payments, with a strong performance from our NETBANX STP businesses, a material upturn in the NETELLER SV business in the second half and a continuing improvement in the Group's profitability. Organic growth in revenues and EBITDA led to the Group exiting 2012 with a strong run rate and, as a result, the Group is well positioned for further growth in 2013.

The Group also has a number of exciting growth opportunities in 2013 including re-entry into the US gaming market and new innovative product developments particularly mobile. With all of the outstanding loans from the OP acquisition expected to convert or be repaid in the next 12 months along with trading momentum and strong cash generation, the Group expects to be in a position to consider M&A opportunities to further accelerate growth in 2013.

Consequently, we are confident and excited about the Group's future prospects."

 

 

For further information contact:

 

Optimal Payments Plc                                                                    

Joel Leonoff                                         President & CEO

Keith Butcher                                        CFO        

Andrew Gilchrist                                   EVP Corporate Affairs              + 44 (0) 203 544 7250

Email:  [email protected]

 

Citigate Dewe Rogerson                                                                + 44 (0) 207 638 9571

Angharad Couch / Nicola Swift / Priscilla Garcia

 

Canaccord Genuity Limited                                                           + 44 (0) 207 523 8000

Simon Bridges / Cameron Duncan

 

 

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.optimalpayments.com.

* * * * *

About Optimal Payments Plc

Trusted by businesses and consumers in over 200 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 values. Being independent has allowed the company to support tens of thousands of retailers and merchants in many countries 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 Optimal Payments Ltd is authorised and regulated as an e-money issuer by the UK's Financial Services Authority (FSA) (FRN:900015)

For more information about Optimal Payments visit www.optimalpayments.com or subscribe at www.optimalpayments.com/feed/

 

 

CEO's Review

Introduction

2012 was the first full year of the combined Group following the acquisition of OP Inc. in February 2011. While 2011 was focused on integration and rationalisation, 2012 was focused largely on growth and product innovation and development. EBITDA increased by $10.1m (58%) to $27.6m in 2012, driven by a $51.2m (40%) increase in revenues to $179.1m. Revenue growth was concentrated mainly in the NETBANX side of the business, which accounted for over three quarters of 2012 revenues. The NETELLER business also performed strongly, particularly in the second half where the wallet grew 37% relative to the first half results. The Group had 387 employees (378 FTEs) at year end, approximately 25 fewer than on the date of the acquisition of OP Inc. on 1 February 2011. Geographically, the business now has a material presence in the North American market, as well as strong market positions in Europe and Asia. 

Technology and innovation continue to drive growth and opportunities in our business. NETELLER is improving its competitive edge through enhancing functionality and the introduction of new payment methods throughout the 200 countries we now service. Our NETBANX STP business continues to develop as we strengthen our gateway offerings with technological improvements and innovations, including focused attention on mobile to enhance the user experience.

As the payment industry has evolved, Optimal has devoted considerable attention to the introduction of new technologies and functionality. Our recent efforts have been focused on delivering a next generation mobile enabled e-wallet for the traditional retail marketplace.

The regulatory environment has evolved during 2012 and, while this did not materially impact our revenues, some uncertainty remains.

The Group is now one of the leading independent players in the online payments market, which has seen considerable consolidation and corporate activity in recent years, the most recent of which was the acquisition of Ogone Payment Services by Ingenico SA for €360 million - a multiple of 28.6 times 2012 EBITDA.

Almost two thirds of the outstanding vendor loans used to fund the OP Inc. acquisition in 2011 have now been converted or repaid at today's date. With the expected conversion of 75% of the remaining vendor loans into equity in April 2013, and the business continuing to be cash generative, the Group expects to be in a strong cash position, which will enable it to consider further M&A opportunities during 2013 to accelerate growth.

NETBANX STP Division

The Group's NETBANX STP businesses saw strong growth, particularly in Asia, where the Group utilises a network of local third party payment processors to provide merchant services, with full year revenues of $138.9m (2011: $86.8m). The second half growth demonstrated its typical seasonal uplift with Q4 growth in travel and retail, as well as robust organic growth from existing gaming and non-gaming customers in Asia and Europe and from new customers added during 2012.

We have made real progress in moving our technology to the forefront for the NETBANX STP business, through continual focus on innovation and resulting introduction of new features aimed at simplifying the user experience. Mobile enabled tools and features as well as enhanced merchant-centric risk management tools have been a key area of concentration.

Customer retention remains high as NETBANX provides a wide range of payment and fraud prevention services through a single customer integration as well as access to more than a dozen acquiring banks worldwide.  This business model, together with investment in an expanded UK sales team, underpins our confidence that NETBANX can continue to win business in all territories, particularly in Europe.

The NETBANX STP business has also been successful at growing its customer base with new merchants signed in the year including FX Pro, Teambuy, Caesars Interactive, YMCA, Seatwave, Plusgrade and Distributel.

Our partnership with Desjardins, a leading Canadian bank for whom we have operated and managed a white label version of our payments gateway solution since 2011, continues to grow.

The NETBANX business had a gross margin of 42% with the bulk of the direct processing costs being fees to acquiring banks. This is down from 45% in 2011 as a result of the mix of revenue growth. Lower risk merchants typically command lower fees and, consequently, the margin varies by merchant type and size. The underlying platform is scalable, and can cope with large numbers of new customers. However, the business is investing in an enhanced STP platform in 2013 to provide even greater stability and uptime, to enable it to win new customers and to facilitate new banking partnerships.

NETELLER Stored Value Division

The Group's NETELLER SV business (comprising the NETELLER e-wallet and Net+ prepaid card) performed slightly ahead of 2011, achieving revenues of $38.8m (2011: $37.9m, excluding discontinued revenues from e-money expiry in 2011 of $2.1m). The NETELLER business demonstrated particular strength in the second half with a 21% increase in new member signups and 54% improvement in conversions, which together helped drive H2 revenues of $22.4m (H1: $16.4m), a 37% improvement. This upward growth trend has continued into 2013.

This represents the first sustained material uplift in NETELLER revenues since the Group exited the US market in early 2007 and we are encouraged by the future prospects for this side of the business. Growth has been driven by a number of factors including key hires and the NETELLER member loyalty program launched in January 2012 that rewards use of the NETELLER e-wallet, aimed at attracting and retaining our higher spending VIPs. We enhanced our affiliate program, strengthened our sales team so that members and merchants have more regular contact, and made a number of changes to deposit options for members - adding new payment options in new territories and changing pricing to encourage member behaviour. These have all contributed to increased market share, primarily in the European gaming market where NETELLER remains one of the two major e-wallet players. Key lead indicators such as number of member signups and conversion rates continue to be encouraging.

The second half growth of NETELLER, fuelled by adding new local deposit options, produced incremental revenues at a lower margin than for debit and credit cards, and this resulted in the gross margin for NETELLER falling from 85% in 2011 to 78% in 2012. It is likely that future growth will be at a slightly lower margin than the current average gross margin but we expect to maintain the margin at around 75% in 2013. The gearing from the predominantly fixed cost base of the NETELLER SV business means that any gross margin growth in NETELLER will largely fall through to the bottom line.

The Group completed the rationalisation of the NETELLER SV business with a final round of headcount cuts at the end of Q1 2012, predominantly in the development team as the new NETELLER platform was completed. The level of continued investment into the NETELLER platform has considerably reduced (as indicated a year ago). However, we continue to make more modest enhancements to the product offering, particularly by expanding the offering into new territories, and this yielded favourable returns in the second half.

In August 2012, we announced that we had achieved principal issuer status with MasterCard. This enables us to issue our own prepaid cards including our award-winning Net+ Prepaid MasterCard programme into all EEA countries, rather than issuing these cards through a third party bank at a considerably higher cost.   The Net+ programme continues to grow, with more than 31,000 active cards in issue.  We processed more than $260 million in transaction value from Net+ cards in 2012 with over 1.6 million transactions.

US gaming opportunities

In our interim results announcement in September, I outlined our initiatives to position the Company for the anticipated regulated market for online gambling in the US and we announced agreements with Caesars Interactive and Vantiv during 2012. In February 2013, New Jersey legalised online poker and casino games, and other US states appear to be moving in the same direction. We are in discussions with a number of other leading land based gaming operators in the US regarding possible partnerships. We are excited about the opportunities for future growth in this area as the US market re-opens and re-emerges as a significant market for online gaming companies. However, the timing and revenue impact of these developments remain uncertain.

Other Initiatives

The Group continues to be recognised as a leader in payment solutions through a number of awards. 

In April, Optimal Payments was named as the winner of the "Best Mobile Billing Application" at the mGaming Awards and also won the "Innovation in Payment Solutions" Award at the eGaming Review B2B Awards ceremony in May. In June, at the Prepaid365 Awards 2012, the Net+ Prepaid MasterCard® was selected as the winner in three major categories: Best General Spend Prepaid Card, Best Gaming Prepaid Card and Best Free Prepaid Card. In January 2013, we won "Corporate Services Supplier of the Year" at the International Gaming Awards, recognising our continuing contribution as a provider of outsourced technology solutions to the online gaming industry.

In May 2012, the Company announced that it had been appointed as an Official Partner of the Lotus F1 Team. This innovative commercial agreement provides the opportunity for Optimal Payments to leverage Lotus F1 Team's corporate relationships and reach to provide payment processing solutions to their business partners and sponsors. 

We continue to pursue major partners who deploy our technology on a white label basis and our recent efforts have concentrated on delivering to the market a next generation mobile enabled e-wallet focused on the traditional retail marketplace, enabling merchants to offer a comprehensive "omni-channel" solution that bridges the offline and online worlds.

Current trading and outlook

2012 was an excellent year for Optimal Payments, with a strong performance from our NETBANX STP businesses, a material upturn in the NETELLER SV business in the second half, and a continuing improvement in the Group's profitability. Organic growth in revenues and EBITDA, led to the Group exiting 2012 with a strong run rate and, as a result, the Group is well positioned for further growth in 2013.

 The Group also has a number of exciting growth opportunities in 2013 including re-entry into the US gaming market and new innovative product developments particularly mobile. With all of the outstanding loans from the OP acquisition expected to convert or be repaid in the next 12 months along with trading momentum and strong cash generation, the Group expects to be in a position to consider M&A opportunities to further accelerate growth in 2013.

 

Joel Leonoff

President & CEO

18 March 2013

 

 

Business Overview 

Optimal Payments has two main lines of business:

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

NETELLER Stored Value ("SV"), comprised of NETELLER e-wallet and Net+ card businesses

 

NETBANX STP

The Group's STP business, NETBANX, provides payment processing services for gaming and non-gaming merchants whose customers transact principally online.  These services are provided on two platforms - one for Europe and North America, and the other for Asia.

In Europe and North America, NETBANX processes both card and non-card payments for a very diverse set of e-commerce businesses, including Shop Direct Group, CN Rail, Ford Credit, Ritchie Brothers, BeyondTheRack.com and Mindbody. This is a fully PCI DSS Level 1 compliant and certified service for multi-channel cardholder-not-present transactions, including web, IVR, call centre, mail-order, and telephone-order purchases.  NETBANX processes 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, via multiple acquiring banks.

In Asia, NETBANX provides a bespoke gateway service that leverages in-country processors to facilitate payments to merchants.  Most of these payments are initiated via debit cards.

NETBANX earns fees for processing online transactions either as a fixed fee per transaction (the "gateway" model) or as a percentage of the transaction value (the "bureau" model, where the Group takes on the risk of managing the transaction process instead of an acquiring bank). NETBANX processed over $8.5 billion in transaction value in 2012 with over 97 million transactions completed, materially ahead of 2011.

Reliability of the NETBANX platforms throughout 2012 was exceptional at 99.99% uptime, especially relative to a number of other processors, meeting all of the Group's performance standards.

NETELLER SV

The NETELLER SV offering allows consumers to store monetary value via the NETELLER e-wallet and associated Net+ prepaid card, which can then be used to pay for transactions at merchants.  The NETELLER e-wallet, established in 1999, has attracted millions of consumers who value simplicity, convenience, anonymity and security. Consumers deposit funds into their e-wallet accounts via one of the multiple payment options, such as credit or debit cards, internet bank transfers and vouchers, and then use those funds in the e-wallet accounts at their chosen online merchants to pay directly for goods or services.  We processed more than $2.8 billion through NETELLER SV during 2012, including over $350 million via our rapidly growing money transfer business.

Our stored value business proposition combines the NETELLER e-wallet with the award-winning Net+ Prepaid card.  The Net+ card allows members to withdraw funds directly from their e-wallet accounts via ATMs or to pay for goods and services anywhere MasterCard is accepted. 

The focus for the NETELLER SV business has historically been the online gaming market since the e-wallet has specific advantages in this market - segmenting consumers' funds, speed of moving funds, security, anonymity and rewards for usage.  The e-wallet solution allows merchants to receive indemnified funds from a signed-up consumer ("member") in return for payment of a fee to NETELLER.  Our pre-eminence in the online gaming market is demonstrated by the acceptance of the NETELLER e-wallet by more than 2,000 online gaming merchants. The NETELLER service is now offered in more than 200 countries.

Affiliates continue to offer a significant channel to build the NETELLER SV business, as our programme offer best-in-class cash incentives to affiliates who refer customers to use NETELLER as their payment system of choice. 

 

 

Financial Review

The consolidated Group results for the year ended 31 December 2012 are presented below.

Highlights

The Group reported substantially improved EBITDA of $27.6 million, a $10.1 million (58%) increase from $17.5 million in 2011. Fee revenues increased by $50.9 million to $177.7 million from $126.8 million in 2011, driven mainly by the Group's NETBANX STP division which now represents over three quarters of the Group's revenues with the NETELLER SV business making up the balance.

The Group reported profit before tax for 2012 of $3.6 million (2011: loss of $26.2 million, which included an impairment charge of $21.3 million against the NETELLER SV platform) and net income after tax of $1.1 million (2011: net loss after tax $26.2 million).

Revenue

Group revenues increased from $127.9 million in 2011 to $179.1 million in 2012, driven by strong organic growth in the NETBANX STP division and a substantial improvement in high margin NETELLER revenues in the second half. Revenues for the second half of 2012 totalled $100.1 million, compared to $79.0 million for the first half.

NETBANX STP Revenue

Through its NETBANX brand, the Group is a leading provider of STP solutions to merchants worldwide, processing over $8.5 billion in transaction value annually. NETBANX STP revenues increased by 60% to $138.9 million (2011: $86.8 million).  NETBANX earns fees for processing online transactions either as a fixed fee per transaction (the "gateway" model) or as a percentage of the transaction value (the "bureau" model, where the Group takes on the risk of managing the transaction process instead of an acquiring bank).

NETELLER SV Revenue

NETELLER SV revenues were slightly ahead of 2011 at $38.8 million (2011: $37.9 million net of $2.1 million of discontinued expired e-money revenues). However, the second half saw a significant increase in revenues to $22.4 million (H1: $16.4 million) as the number of new member monthly signups increased by 44% between December 2011 and December 2012 and monthly conversions increased 96%. Overall we converted 36% more members in 2012 than 2011.

This represents the first sustained material uplift in NETELLER revenues since it exited the US market in early 2007. Growth has been driven by a number of factors including:

 

·      Key hires - several key NETELLER hires were made in early 2012;

·      Launch of a member loyalty programme - we introduced a new member loyalty programme and re-launched our VIP programme in February 2012 to reward use of the NETELLER wallet, which has been successful in recapturing and retaining our higher spending VIPs;

·      Enhanced affiliate programme - we considerably expanded and enhanced our affiliate programme;

·      Strengthened NETELLER merchant account management team - our merchants have more regular contact and much stronger operational and marketing support;

·      Improved deposit options - we made a number of changes to deposit options for members - adding new options and improving existing methods while extending the number of countries we serve; and

·      Revised pricing structure - we reduced or eliminated some fees and raised others to increase transaction volumes and margins.

 

Interest Income

Interest income was up in 2012 to $1.4 million (2011: $1.1 million) as a result of higher member and merchant balances held. 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)                                  2012       2011  % growth     H1 2012       H2 2012       % growth

STP revenue                               138.9        86.8         60 %          61.9             77.0              24 %

SV revenue - continuing                38.8        37.9           3 %          16.4             22.4              37 %

SV revenue - discontinued (1)              -          2.1           -                                                            

Fee revenue                             177.7      126.8          40 %          78.3             99.4              27 %

Interest                                          1.4          1.1         23 %            0.7              0.7            (13 %)

Total revenue                           179.1      127.9          40 %          79.0           100.1              26 %

 

(1) SV revenue for 2011 included $2.1 million of discontinued revenues derived from expiry of e-money, which is now subject to different rules under the Electronic Money Regulations 2011.

 

 

Group revenue - by geography

($ millions)                           2012          2011    % growth

 

Europe                                 55.2           50.3           10 %

North America                       47.9           39.0           23 %

Asia Pacific                          70.9           33.8          110 %

Rest of world                          3.7            3.7             0 %

Fee revenue                      177.7         126.8             40%

Interest                                  1.4            1.1           27 %

Total revenue                    179.1         127.9            40 %

 

The Group has one Merchant who represents 33.6% (2011: 20.5%) of total fee revenue across all reportable segments and geographies.  The majority of this revenue comes from Asia Pacific. 

Gross Margin

NETBANX STP Division

The NETBANX STP gross margin in 2012 was 42% (2011: 45%). Processing costs and bad debts are the only costs that are directly variable in line with revenues in the STP division.  STP costs and bad debts were 58% and 0.1% of revenue respectively in 2012 compared to 55% and 0.1% in 2011. Increased merchant volume naturally leads to reduced rates and the NETBANX STP division experienced some margin reduction in 2012 as volumes and revenues have grown in a competitive marketplace.

NETELLER SV Division

The NETELLER SV gross margin in 2012 was 78% (2011: 85%). The principal direct costs of this division that vary directly with revenue (included in cost of sales) are transaction related deposit and withdrawal fees and bad debts. Additionally, with growth in customer signups, there are 'stepped' costs of additional headcount in the call centre and the risk department.  Deposit and withdrawal fees arise on facilitating the movement and settlement of cash in and out of the members' NETELLER e-wallets via the banking system and third party processors. These fees increased in 2012 in line with revenue growth as a result of the successful addition of several higher cost deposit options to broaden the Group's offering to customers - mainly through broadening the number of countries in which NETELLER is able to accept local deposit methods. These lower margin deposit methods contributed to the strong growth seen in the second half of 2012 but also meant the overall gross margin reduced as revenues grew. We expect the gross margin to gradually decline to around 75% as the growth seen in the second half of 2012 continues in 2013.

Operating expenses

Operating expenses saw increases in wages and salaries due to success related variable compensation, in variable marketing costs directly related to the new NETELLER loyalty program targeted at VIP members, and in software costs.  The Group implemented a two year supplementary bonus scheme in 2011 for the senior management of OP Inc. to incentivise and reward them for delivering performance in excess of the contingent consideration thresholds. This scheme was based on EBITDA performance of the business acquired in 2011 and 2012.  The supplementary bonus payable for fiscal 2012 performance is $5.6 million (payable in April 2013) and $3.0 million was paid in relation to 2011 performance. The supplementary bonus scheme ended with the conclusion of the financial year ended 31 December 2012.

Share Option Expense

Share option expense in 2012 was $3.9 million (2011: $1.0 million). The Group continues to use share options and LTIPs to incentivise its employees and management team. The performance conditions for the 2011 LTIP award were met in 2012 and the cost has therefore been recognised in 2012. We have also recognised some of the cost of the 2012 award based on an expected outturn.  The Group is considering introducing a new long term incentive plan in 2013 based on a measure of total shareholder return.

Foreign Exchange Gains

The results from the Group's subsidiaries in Canada and the UK 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 some of the exposure of financial risk associated with foreign currency balances. During 2012, a foreign exchange gain of $0.7 million was generated (2011:  gain of $1.3 million).  Large balances in a number of currencies are held on deposit for members and merchants and 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 foreign exchange revenue, it is impossible to perfectly predict balances to hedge. 

Depreciation and amortisation

Depreciation and amortisation was $12.3 million in 2012 (2011: $16.7 million) which included $8.7 million of amortisation of intangible assets (2011: $12.9 million) and $3.6 million in depreciation of capital assets (2011: $3.8 million).  Approximately $4.1 million of the depreciation and amortisation charge in 2012 relates to the assets acquired through the acquisition of OP Inc. (2011: $4.7 million). The Group's new NETELLER SV platform was launched at the end of 2010 and is being amortised over five years on a straight line basis.

Impairment

There are no impairment charges for 2012.

Between 2008 and 2012, a substantial investment was made in building an entirely new platform for the NETELLER SV business. Upon completion in Q1 2012, the size of the development team was significantly reduced, resulting in a considerable reduction in capitalised costs going forward. Following a review of projected cash flows, an impairment charge of $21.3 million was made in 2011 against the NETELLER SV platform. As the NETELLER business performed strongly in the second half of 2012 no impairment was deemed to be required in 2012.

Restructuring costs

Restructuring costs were $0.7 million in 2012 (2011: $1.6m and 2010: $3.4 million).  This amount included severance paid to employees as a result of the reduction in headcount in the Group's NETELLER business at the end of Q1 2012 following the completion of the Group's new NETELLER SV platform. Restructuring costs are not expected to be material going forward.

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 2012 provision for income taxes of $2.46 million includes $2.9 million in relation to Canadian withholding taxes that are deemed to have arisen on the relocation of assets to the Isle of Man from Canada in the 2004 and 2005 taxation years. Following a seven year investigation, the Canadian Revenue Agency (CRA) claims that additional withholding taxes are payable by the Group.  Management has provided in full for the amount it believes it is likely to be required to pay in respect of such withholding taxes and interest. Without this charge there would have been an income tax recovery of $0.6 million in the year (2011: $0.03 million recovery).

Balance Sheet

Cash

The gross quantum of cash available to the Group was $95.4 million at 31 December 2012 (2011: $69.1 million). This included cash and cash equivalents plus restricted cash surpluses and the excess of qualifying liquid assets held in respect of e-money issued to members over balances payable.  These cash figures are before the deduction of current liabilities. 

The cash and cash equivalents balance at 31 December 2012 of $82.2 million represents the unrestricted cash of the Group (2011: $69.1 million).  Included in cash and cash equivalents is a transient cash balance totalling $37.5 million that relates to merchant transactions processed via the NETBANX gateway operations and security deposits held from the Group's bureau merchants.  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 and merchant security deposits are therefore recognised both on the face of the balance sheet as cash and cash equivalents and in trade and other payables respectively.

The Group's cash position at 31 December 2012 after deducting merchant cash balances of $37.5 million (2011: $25.0 million) was $57.9 million (2011: $44.1 million) as set out in the table below.

Cash reconciliation summary



2012


2011



$m

$m


$m

$m








Cash and cash equivalents


82.2



58.0


NETELLER Member cash (note 6)







Qualifying liquid assets held for Members

118.1



106.1



Due to Members

(110.2)



(97.7)



Restricted Member cash


7.8



8.4









NETELLER Merchant cash (note 5)







Cash held in Merchant segregated accounts

73.2



55.8



Due to Merchants

(67.7)



(53.0)



Restricted merchant cash


5.4



2.8








Total Cash (Cash plus restricted cash)


95.4



69.1

less NETBANX merchant processing liabilities (note 11)


(37.5)



(25.0)

Total Group "own cash"


57.9



44.1







Group "own cash" of $57.9 million does not represent the "free cash" of the business as a significant portion is tied up in various payment processing channels and security deposits. Free cash at 31 December 2012 was approximately $15.0 million.

NETELLER Member Funds: In compliance with FSA rules and regulations, the Group held Qualifying Liquid Assets in excess of the amounts owing to NETELLER members.  These amounts are maintained in accounts that are segregated from operating funds.  All Qualifying Liquid Assets are held in Optimal Payments Ltd (formerly Neteller (UK) Ltd), which is an FSA regulated entity.  These Qualifying Liquid Assets and the amounts payable to members are reported gross on the balance sheet.

NETELLER Merchant Funds: The Group maintains bank accounts that are segregated from operating funds and which contain funds held on behalf of NETELLER merchants, representing pooled merchant funds. The bank accounts are designated as segregated client accounts.  Balances in the segregated client accounts are maintained at a sufficient level to at least fully offset amounts owing to the Group's merchants. All NETELLER merchant funds are held by Neteller Operations Ltd, an Isle of Man based subsidiary with which all merchants contract.  A legal right of offset exists between the balances owing to the merchants and the cash balances segregated in the client accounts.  The Group, as a matter of policy, holds excess cash in the accounts to ensure intraday balance movements do not result in a shortfall in the cash position. The net excess is disclosed as Restricted Merchant Cash. In October 2012, Neteller Operations Ltd became licensed by the Financial Services Commission ('FSC') in the Isle of Man.

Intangible Assets

The net book value of intangible assets at 31 December 2012 was $28.0 million compared to $32.8 million as at 31 December 2011.  This includes the assets acquired from OP Inc on 1 February 2011 for $50.0 million. Management considered that the carrying value of these acquired assets did not need to be impaired. During the year, the Group incurred development costs to add new functionality to the NETELLER SV platform. Management determined that no impairment was required at 31 December 2012 in relation to this platform. At 31 December 2011, an impairment charge of $21.3 million was deemed appropriate in relation to the new NETELLER platform.

Liabilities

At 31 December 2012, the Group had convertible loans payable to the vendors of OP Inc totalling $16.4 million (2011: $22.9 million). On 28 February 2013, one of the vendors, representing 33.78% of the loans, converted its portion of the loans. Following this conversion the Group has outstanding loans payable to the vendors of $7.36 million, which are repayable on 15 April 2013. However, as a result of the current share price, the Company expects 75% of the value of these loans to convert into equity on or before that date with the balance of 25% being repaid in cash in accordance with the deed of warrant.

The Group also has convertible loans from two shareholders of $8.97 million at 31 December 2012 (including accrued interest) (2011: $8.44 million), which are convertible into shares at 66.248 pence at any time before the repayment date of 1 February 2014. Further information regarding these liabilities is set out in Note 31 of the Group's financial statements.

Total current liabilities have increased to $192.1 million at 31 December 2012, up from $144.0 million at the end of 2011.  The balance includes $110.2 million (2011: $97.7 million) of 'due to members' balances being held in FSA regulated Optimal Payments Ltd (formerly Neteller (UK) Ltd), the increase being a direct result of the increase in the number of active members in 2012 and corresponding member deposits.  The increase in total current liabilities is also explained by the vendor liability of $15.4 million moving from non-current to current liabilities and an increase in merchant cash included in Cash with an equal and opposite liability included in trade and other payables - again as a result of increased NETBANX revenues.

Non-current liabilities have fallen from $31.3 million to $9.4 million at year end as the vendor loans moved to current liabilities and $7.7 million of the loans were converted into equity.

Off Balance Sheet Arrangements

As of 31 December 2012, 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. 

 

 

Consolidated Statement of Financial Position

as at 31 December 2012





2012

2011


$

$

ASSETS



Current assets



    Cash and cash equivalents

82,174,380

57,955,755

    Restricted Neteller merchant cash (Note 5)

5,423,016

2,832,669

    Qualifying Liquid Assets held for Neteller Members (Note 6)

118,091,419

106,091,569

    Receivable from Netbanx Merchants (Note 7)

795,927

607,910

    Trade and other receivables

5,207,292

2,909,581

    Prepaid expenses and deposits

7,475,533

2,343,991


219,167,567

172,741,475

Non-current assets



    Property, plant & equipment (Note 8)

8,867,059

9,335,655

    Intangible assets (Note 9)

28,034,227

32,845,374

    Goodwill (Note 10)

30,492,122

30,492,122


286,560,975

245,414,626




LIABILITIES



Current Liabilities



    Trade and other payables (Note 11)

58,764,033

40,045,462

    Payable to Neteller Members (Note 6)

110,247,835

97,740,500

    Neteller loyalty program liability (Note 12)

949,233

-

    Taxes payable (Note 14)

4,261,668

2,236,807

    Holdback payable (Note 31)

-

1,666,667

    Contingent consideration (Note 31)

16,870,899

1,466,958

    Provision for losses on Netbanx merchant accounts (Note 13)

793,414

485,414

    Obligations under capital lease

216,958

315,380


192,104,040

143,957,188

Non Current Liabilities



    Shareholder loans (Note 31)

8,972,416

8,440,000

    Contingent consideration (Note 31)

-

22,900,000

    Obligations under capital lease

422,290

-


201,498,746

175,297,188







SHAREHOLDERS' EQUITY



    Share capital (Note 15)

42,329

40,744

    Share premium

65,612,241

55,665,194

    Capital redemption reserve

147

147

    Equity reserve on share option issuance

14,525,006

10,593,730

    Translation reserve (Note 16)

(960,744)

(841,439)

    Retained earnings

5,843,250

4,659,062


85,062,229

70,117,438


286,560,975

245,414,626

 

 

 

Consolidated Statement of Comprehensive Income

for the Year ended 31 December 2012


 

2012

$

 

2011

                                         $

 

 

Revenue



    Straight Through Processing fees

138,873,499

86,838,010

    Stored Value fees

38,823,903

40,016,458

Investment income

1,375,553

1,117,332


179,072,955

127,971,800

Cost of Sales



    Straight Through Processing expenses

80,982,773

47,868,803

    Stored Value expenses

8,440,830

5,998,817


89,423,603

53,867,620




Gross profit (note 17)

89,649,352

74,104,180




Non Fee Expenses



 

Salaries and employee expenses

36,141,584

32,163,221

 

Technology and software

12,975,258

11,293,728

 

Premises and office costs

7,643,291

6,459,014

 

Professional fees

2,920,369

2,246,123

 

Marketing and promotions (Note 18)

3,752,157

2,988,834

 

Travel and entertainment

2,149,928

2,067,786

 

Bank charges

434,807

438,513

 

Impairment charge (Note 9)

-

21,283,646

 

Depreciation and amortisation (Note 19)

11,776,429

16,740,402

 

Acquisition costs

-

616,272

 

Restructuring costs (Note 20)

730,850

1,620,360

 

Foreign exchange gain

(712,175)

(1,285,534)

 

Other expenses (Note 33)

6,391,461

2,155,619




Results from operating activities

5,445,393

(24,683,804)



Finance costs (Note 31)

1,800,162

1,540,000




Profit / (loss) for the year before tax

3,645,231

(26,223,804)




Income tax expense / (recovery) (Note 14)

2,461,043

(27,399)




Profit / (loss) for the year after tax

1,184,188

(26,196,405)

 

Other comprehensive income

    Foreign currency translation differences for





    foreign operations, net of income tax

(119,305)

(752,572)

 

Total comprehensive profit / (loss) for the year

1,064,883

(26,948,977)

 

 

Basic profit / (loss) per share (Note 21)

    $0.01

($0.21)

 




 

Fully diluted profit / (loss) per share (Note 21)

$0.01

($0.21)


 

The Directors consider that all results derive from continuing activities.

 


Consolidated Statement of Changes in Equity
for the Year ended 31 December 2012
  

 
SHARE CAPITAL – ORDINARY SHARES (Note 12)
$
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 2011
 
21,725
 
18,000
 
39,725
 
50,554,492
 
9,586,371
 
(88,867)
 
147
 
30,855,467
 
90,947,335
 
 
 
 
 
 
 
 
 
 
Loss for the year
-    
-     
-    
-     
-    
-     
-     
(26,196,405)    
(26,196,405)
 
 
 
 
 
 
 
 
 
 
Foreign currency translation differences
 
-    
 
-     
 
-    
 
-     
 
-    
 
(752,572)    
 
-     
 
-    
 
(752,572)
 
Total comprehensive loss
 
-    
 
-     
 
-    
 
-     
 
           - 
 
(752,572)     
 
-     
 
 (26,196,405)   
 
(26,948,977)
 
Transactions with owners of the Company, recognised directly in equity
 
Contributions by and distributions to owners of the Company
 
 
 
 
 
 
 
 
 
Share option expense
(Note 23)
 
-    
 
-     
 
-    
 
-     
   ­
      1,007,359
 
-     
 
-     
 
-    
 
1,007,359
 
Issue of shares
 
600
 
  
 
600
 
2,611,121
 
 
 
 
 
2,611,721
 
 
 
 
 
 
 
 
 
 
Shares issued on
 
 
 
 
 
 
 
 
 
Acquisition of assets (note 31)
419
 
419
2,499,581
 
 
 
 
2,500,000
 
 
 
 
 
 
 
 
 
 
Balance as at 31 December 2011
 
22,744
 
18,000
 
40,744
 
55,665,194
 
10,593,730
 
(841,439)
 
147
 
4,659,062
 
70,117,438
 
 
 
 
 
 
 
 
 
 
Balance as at
1 January 2012
 
22,744
 
18,000
 
40,744
 
55,665,194
 
10,593,730
 
(841,439)
 
147
 
4,659,062
 
70,117,438
 
 
 
 
 
 
 
 
 
 
Profit for the year
-    
-     
-    
-     
-    
-     
-     
1,184,188    
1,184,188    
 
 
 
 
 
 
 
 
 
 
Foreign currency translation differences
 
-    
 
-     
 
-    
 
-     
 
-    
 
(119,305)     
 
-     
 
-    
 
(119,305)
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
-    
 
-     
 
-    
 
-     
 
           - 
 
(119,305)     
 
-     
 
 1,184,188    
 
1,064,883
 
Transactions with owners of the Company, recognised directly in equity
 
Contributions by and distributions to owners of the Company
 
 
 
 
 
 
 
 
 
Share option expense
(Note 23)
 
 
 
 
 
3,931,276
 
 
 
 
3,931,276
 
Issue of shares
 
1,585    
 
-     
 
1,585    
 
9,947,047     
     
 
-     
 
-     
 
-    
 
9,948,632
 
 
 
 
 
 
 
 
 
 
Balance as at 31 December 2012
 
24,329
 
18,000
 
42,329
 
65,612,241
 
14,525,006
 
(960,744)
 
147
 
5,8430,250
 
85,062,229

 

 

Consolidated Statement of Cash Flows

for the Year ended 31 December 2012

 

 

 

 


 

2012

 

2011


$

$

OPERATING ACTIVITIES



 

Profit / (loss) before tax

3,645,231

(26,223,804)

 

Adjustments for:



 

Depreciation and amortisation (Note 19)

12,272,202

16,740,402

 

Unrealised foreign exchange (gain)/loss

(2,585,709)

4,691,654

 

Share option expense  (Note 23)

3,931,276

1,007,358

 

Accrued interest

1,800,162

1,540,000

 

Impairment loss (Note 9)

-

21,283,646

 

Asset disposal (Note 8 & 9)

778,023

4,236

 

Operating cash flows before movements in working capital

19,841,185

19,043,492

 

(Increase)/decrease in receivable from Netbanx Merchants

(188,017)

39,090

 

Increase in trade and other receivables

(2,297,711)

(1,927,305)

 

Increase in prepaid expenses and deposits

(5,131,542)

(496,338)

 

Increase in trade and other payables

18,891,958

19,174,668

 

Increase in Neteller loyalty program liability

949,233

-

 

Increase in Provision for losses on Netbanx merchant accounts

308,000

485,414

 

Cash generated by operations

32,373,106

36,319,021

 

Taxes (paid) / recovered

(931,955)

424,035

 

Net cash generated by operating activities

31,441,151

36,743,056

 




 

INVESTING ACTIVITIES



 

Increase in payable to Neteller Members

12,507,335

1,510,287

 

Purchase of property, plant & equipment, goodwill and intangible assets

(6,466,530)

(39,555,493)

 

Increase in restricted Neteller cash accounts

(2,590,347)

(538,775)

 

(Increase)/decrease in Qualifying Liquid Assets held for Neteller Members

(11,999,849)

935,373

 

Net cash consumed by investing activities

(8,549,391)

(37,648,608)

 




 

FINANCING ACTIVITIES



 

Equity issuance

1,184,826

2,611,721

 

Shares issued on acquisition (Note 31)

-

2,500,000

 

Shareholder loans (Note 31)

-

8,000,000

 

Holdback on acquisition paid

(1,666,667)

-

 

Repayment of obligations under capital lease

(301,009)

-

 

Net cash generated by financing activities

(782,850)

13,111, 721

 




 

INCREASE IN CASH AND CASH EQUIVALENTS

DURING THE PERIOD

22,108,910

12,206,169

 

NET EFFECT OF FOREIGN EXCHANGE ON

  CASH AND CASH EQUIVALENTS

2,412,322

 

(4,688,848)

 

TRANSLATION OF FOREIGN OPERATIONS

(302,607)

(677,611)

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

57,955,755

51,116,045

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

82,174,380

57,955,755

 

 

 

Notes to Consolidated Financial Statements for the Year ended 31 December 2012

 

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 "Basis of consolidation" in note 4 and "Subsidiaries" in note 25.

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

At 31 December 2012, the Group had 387 employees (2011: 387 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 principally for internet Merchants.  Optimal Payments Limited (formerly NETELLER (UK) Ltd), a wholly-owned subsidiary of Optimal Payments Plc, is authorised by the Financial Services Authority under the Electronic Money Regulations 2011 (FRN:900015) for the issuing of electronic money and payment instruments. Neteller Operations Limited is licensed by the Financial Supervision Commission of the Isle of Man (Ref. 1357) to carry on money transmission services.

 

3.             BASIS OF PREPARATION

 

Statement of compliance

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

The consolidated financial statements were authorised for issue by the Board of Directors on 18 March 2013. 

Basis of measurement

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

 

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 amortization, impairment testing of long-lived assets, share based payments and income taxes.  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.

 

Functional and presentation currency

These consolidated financial statements are expressed in United States dollars, which is the functional currency of the Company.

 

Changes in accounting policies

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.

Business combinations

For acquisitions, 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;

·      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 recognized 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.

 

4.             SIGNIFICANT ACCOUNTING POLICIES

 

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:

 

Basis 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, Optimal Payments Limited, NetBanx Limited, 1155259 Alberta Limited, NT Services Building Corporation, Cardload Incorporated, NetBX Technologies Incorporated, NetBX Services Incorporated, NBX Merchant Services Incorporated, NBX Checkout Incorporated, NBX Merchant Services Corporation 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.

 

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 to five years.

Website and platform development costs are recorded at cost and amortised over their estimated useful life using the declining-balance method at 30%.  The new NETELLER Stored Value platform went live in 2010 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 is depreciated 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 the Statement of Comprehensive Income.  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 impairment tests at least annually or whenever events or changes in circumstances indicate that the goodwill and intangible assets that have indefinite useful lives or are not yet in use carrying values 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 Statement of Comprehensive Income 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 the Statement of Comprehensive Income 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 or as a charge per transaction 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.

The Company renders services to various subsidiaries within the Group including Franchise Rights and Platform Service Fees. Revenue from rendering of services is recognised in profit or loss at the time the services are rendered.

 

Leases

(i) Leased assets

Assets held by the Group under leases which transfer to the Group substantially all of the risks and rewards of ownership are classified as finance leases. On initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Assets held under other leases are classified as operating leases and are not recognised in the Group's statement of financial position.

(ii) Lease payments

Payments made under operating leases are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease.

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

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 differencesarising on the retranslation of non-monetary items carried at fair value are included in the Statement of Comprehensive Income 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.

                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. Equity-settled share options are measured at fair value at the date of grant. In valuing equity-settled share options, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions).

The fair value determined at the grant date of the share option is expensed over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award (the vesting date). The cumulative expense recognised for equity-settled share options at each reporting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest (or in the case of a market condition, be treated as vesting). The movement in cumulative expense since the previous reporting date is recognised in the income statement, with a corresponding entry in equity.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market vesting condition or a non-vesting condition, which are treated as vesting irrespective of whether or not the condition is satisfied, provided that all other non-market vesting conditions are satisfied.

Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified. An additional expense is recognised over the remainder of the new vesting period for the incremental fair value of the modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the income statement for the award is expensed immediately. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement.

Offsetting

Financial assets and liabilities are set off and the net amount presented in the Statement of Financial Position 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.

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 2013, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these standards early. None of these is expected to have a significant effect on the consolidated annual financial statements of the Group except as noted below.

 

(a) IFRS 9 Financial Instruments (2010), IFRS 9 Financial Instruments (2009)

IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. IFRS 9 (2010) introduces additions relating to financial liabilities. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets and hedge accounting.

 

5.             RESTRICTED NETELLER MERCHANT CASH

 

The Group maintains bank accounts with the Group's principal bankers which are segregated from operating funds and which contain funds held on behalf of Merchants, representing pooled Merchant funds.  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 Statement of Financial Position as Restricted Neteller Merchant Cash.

At 31 December 2012, the Group had the following balances:

 


As at 31

December 2012

$

As at 31

December 2011

$

Segregated account funds

73,158,346

55,794,392

Payable to Neteller Merchants

(67,735,330)

(52,961,723)

Restricted Neteller Merchant Cash

5,423,016

2,832,669

 

 

6.             RESTRICTED NETELLER MEMBER CASH

 

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 Optimal Payments Limited (formerly Neteller (UK) Ltd), which is an FSA regulated entity.  Effective 1 December 2010, all non-European Member balances were transferred to Optimal Payments Ltd.

The Group had the following balances:


As at 31

December 2012

$

As at 31

December 2011

$




Qualifying Liquid Assets held for Neteller Members

118,091,419

106,091,569

Payable to Neteller Members

(110,247,835)

(97,740,500)

Restricted Neteller Member Cash

7,843,584

8,351,069

 

 

7.             RECEIVABLE FROM NETBANX MERCHANTS

 

                The Group had the following balances:

               

As at 31

December 2012

$

As at 31

December 2011

$




Receivable from  NetBanx Merchants & Neteller Members

 

3,778,662

 

2,343,278

Provision for doubtful accounts

 (2,982,735)

(1,735,368)

 

Receivable from NetBanx Merchants

 

795,927

 

607,910

 

Receivable from NetBanx 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.  During the year, a provision of $1,247,367 (2011 - $563,701) was recorded in the Cost of Sales, including 100% of the receivable from Neteller Members amounting to $2,653,932 (2011 - $1,570,002).

 

8.             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 2010

1,793,486

2,339,140

9,449,716

16,959,315

714,690

31,256,347

Additions

7,644

459,606

1,705,984

1,552,571

270,670

3,996,475

Disposals

-

-

(112,165)

-

-

(112,165)

Exchange difference

(38,334)

(45,230)

(117,007)

(164,585)

(7,691)

(372,847)

As at 31 December 2011

1,762,796

        2,753,516 

10,926,528

18,347,301

977,669

34,767,810








As at 31 December 2011

1,762,796 

        2,753,516 

10,926,528

18,347,301

977,669

34,767,810

Additions

-

8,110

1,616,729

2,087,573

16,510

3,728,922

Disposals

(1,651,508)

(1,076,329)

(1,313,413)

-

-

(4,041,250)

Exchange difference

74,632

79,267

245,110

555,735

22,254

976,998

As at 31 December 2012

185,920

1,764,564

11,474,954

20,990,609

1,016,433

35,432,480








Accumulated depreciation







As at 31 December 2010

985,988

1,531,537

5,080,929

14,093,734

244,733

21,936,921

Charge for the year

164,697

236,734

1,420,831

1,895,981

88,125

3,806,368

Disposals

-

-

(13,226)

-

-

(13,226)

Exchange Difference

(31,321)

(28,697)

(78,676)

(156,393)

(2,821)

(297,908)

As at 31 December 2011

1,119,364

1,739,574

6,409,858

15,833,322

330,037

25,432,155








As at 31 December 2011

1,119,364

1,739,574

6,409,858

15,833,322

330,037

25,432,155

Charge for the year

119,878

304,382

1,292,548

1,793,839

88,563

3,599,210

Disposals

(1,161,969)

(857,948)

(1,240,208)

-

-

(3,260,125)

Exchange Difference

55,895

52,784

179,384

497,068

9,050

794,181

As at 31 December 2012

133,168

1,238,792

6,641,582

18,124,229

427,650

26,565,421

 

 







Net book value







As at 31 December 2011

643,432

1,013,942

4,516,670

2,513,979

647,632

9,335,655

Net book value







As at 31 December 2012

52,752

525,772

4,833,372

2,866,380

588,783

8,867,059

 

9.             INTANGIBLE ASSETS

 

The Group had the following balances:

 


INTELLECTUAL PROPERTY

$

WEBSITE AND PLATFORM DEVELOPMENT

$

TOTAL

 $

Cost




As at 31 December 2010

6,799,081

42,355,958

49,155,039

Additions

23,279,637

6,821,386

30,101,023

Disposals

-

(5,798)

(5,798)

Impairment

-

(32,934,745)

(32,934,745)

Exchange difference

(168)

-

(168)

As at 31 December 2011

30,078,550

16,236,801

46,315,351

Additions

61,749

3,799,612

3,861,361

Exchange difference

483

-

483

As at 31 December 2012

30,140,782

20,036,413

50,177,195

Accumulated amortisation



As at 31 December 2010

6,726,972

5,460,217

12,187,189

Charge for the year

4,322,525

8,611,509

12,934,034

Impairment

-

(11,651,099)

(11,651,099)

Exchange difference

(147)

-

(147)

As at 31 December 2011

11,049,350

2,420,627

13,469,977

Charge for the year

4,806,590

3,866,401

8,672,991

As at 31 December 2012

15,855,940

6,287,028

22,142,968

Net book value




As at 31 December 2011

19,029,200

13,816,174

32,845,374

Net book value




As at 31 December 2012

14,284,842

13,749,385

28,034,227

 

 

Impairment Analysis

In the previous year, the Board believed that, an impairment charge of $21.3 million was required on the NETELLER platform included in the website and platform development costs based on value-in-use calculations. Those calculations use cash flow projections based on actual operating results.  A pre-tax discount rate of 12% was used in discounting the projected cash flows, while a terminal growth of 2.93% was assumed each year and revealed the cash-generating unit's carrying amount exceeded its recoverable amount.  The NETELLER platform's cash flow projections were impacted by continued margin pressure, regulatory changes, and modest budgeted growth.

The Board have determined that there has not been any indication of such an impairment required in the current year.

 

10.          GOODWILL

 

The Group had the following balances

 


GROUP

$

Cost

Balance at 1 January 2011

-

Arising on acquisition

30,492,122

Balance at 31 December 2011

30,492,122

Additions during the year

-

Balance at 31 December 2012

30,492,122



Carrying amount


As at 31 December 2012

30,492,122

Carrying amount


As at 31 December 2011

30,492,122

 

The Group performs goodwill asset impairment tests at least annually or whenever events or changes in circumstances indicate that the goodwill carrying value for a business unit might not be recoverable.  The recoverable amount is defined as the higher of fair value less costs to sell and value in use.

Key assumptions used in the calculation of recoverable amounts are discount rates and EBITDA growth rate. The values assigned to the key assumptions represented management's assessment of future trends in the e-commerce industry impacting the Netbanx straight-through processing business and were based on both external and internal sources (historical data). The key assumptions were as follows, and reflect a weighted average of this CGU comprising the respective operating divisions: 

 

 

 

 

Weighted average (in percent)

Year ended

 31 December

2012

 $

Year ended

31 December

2011

 $

Discount rate

8%

10%

Terminal value growth rate

1.35%

1.35%

Budgeted EBITDA growth rate (average 5 years)

5%

5%

 

The discount rate was an estimate based on past experience and the expected average weighted average cost of capital.

Five years of cash flows were included in the discounted cash flow model. A long-term growth rate into perpetuity was determined based on management's estimate of the long-term compound annual growth rate in EBITDA, which management believed was consistent with the assumption that a market participant would make.  Budgeted EBITDA was based on expectation of future outcomes taking into account past experiences.

 

11.          TRADE AND OTHER PAYABLES

 

The Group had the following balances:

 


As at 31

December

 2012

 $

As at 31

December

2011

$

NetBanx Merchant processing liabilities

37,491,317

25,027,880

Accounts payable

5,571,676

3,697,733

Accrued liabilities

14,088,942

9,921,036

Payroll liabilities

1,612,098

1,398,813


58,764,033

40,045,462

 

NetBanx Merchant processing liabilities arise from the operations of the NetBanx division totaling $37,491,317 (2011: $25,027,880).  In addition, included in cash and cash equivalents is an equivalent transient cash balance that relates to Merchant transactions processed via the straight-through processing operations.  The 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 NetBanx Merchant liabilities. 

 

12.          LOYALTY PROGRAM

 

The Group launched the NETELLER Reward Points Program (the "Program") in February 2012. The Program allows members to earn points on their transactions in the NETELLER eWallet accounts. Members can redeem these points for merchandise, cash exchange, and other NETELLER provided services.

When points are earned by Members, the Group establishes a liability for future redemptions by multiplying the number of points issued by the estimated cost per point. The actual cost of merchandise redemptions is applied against this liability.  The expense has been included in Marketing and promotions.

The estimated cost per point is determined based on many factors, primarily related to expected future redemption patterns and associated costs. The Group monitors, on an ongoing basis, trends in redemption rates and net cost per point redeemed. Adjustments to the estimated cost per point are made based upon expected future Program activities.

Any variance in the cost per point is recognised in marketing and promotions expenses in the Group's consolidated Statement of Comprehensive Income. The liability account is adjusted based on the outstanding balance of points issued on a monthly basis. The Company continues to evaluate and revise certain assumptions used to calculate the Program liability, based on redemption experience and expected future activities.

 

13.          PROVISION FOR LOSSES ON MERCHANT ACCOUNTS

 

In certain cases, transactions may be charged back to merchants, which mean the transaction amount is refunded to the consumer and, in certain instances, charged to the merchant. If the merchant has insufficient funds, the Group must bear the credit risk for the full amount of the transaction. Management evaluates the risk for such transactions and estimates the loss for the disputed transactions based primarily on historical experience and other relevant factors. A provision is maintained for merchant losses in order to absorb charge backs and other losses for merchant transactions that have been previously processed and on which revenue has been recorded. Management analyses and regularly reviews the adequacy of its provision for merchant losses. The provision for merchant losses comprises specifically identifiable provisions for merchant transactions for which losses can be estimated based on historical experience.

The net charge for the provision for merchant losses is included under the caption Straight Through Processing expenses in the statement of comprehensive income.  At 31 December 2012, the balance was $793,414 (2011: $485,414).

 

14.          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 loss shown per the Statement of Comprehensive Income as follows:

 

 

 

Tax recognised in profit / (loss)

Year ended

 31 December

2012

 $

Year ended

31 December

2011

 $

Current tax



  Current year

286,861

21,918

  Adjustment for prior years

2,798,148

95,884


3,085,009

117,802

 

 

Deferred tax



  Current year

(506,765)

(145,201)

  Adjustment for prior years

(117,201)

-


(623,966)

(145,201)

Total tax expense / (recovery)

2,461,043

(27,399)

 

Reconciliation of effective tax rate



Current year's expense as a % of profit before tax

33%

0.1%

Adjustment from prior years

(36%)

0.4%

Effect of different tax rates

of subsidiaries operating in other jurisdictions

3%

(0.5%)

Isle of Man corporate tax rate

0%

0%

 

At 31 December 2012, foreign taxes of $4,261,668 (2011: $2,236,807) were outstanding. 

A provision for taxation of $2,798,148 has been made in the current year, bringing the total liability recognised in the accounts to $4,765,557 in relation to Canadian withholding taxes which are deemed to have arisen on the relocation of assets to the Isle of Man from Canada in the 2004 and 2005 taxation years. Following a seven year investigation, the Canadian Revenue Agency (CRA) claim that additional withholding taxes are payable by the Group. Management has provided in full for the amount it believes it is likely to be required to pay in respect of such withholding taxes and interest.

 

15.          SHARE CAPITAL

 


As at 31

December 2012

As at 31

December 2011


£

£

Authorised:



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

(At 31 December 2011: 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 2011: 1,000,000 deferred shares £0.01 per share)

10,000

10,000




Issued and fully paid

$

$

136,278,701 ordinary shares of £0.0001 per share

(At 31 December 2011: 126,312,376 ordinary shares of £0.0001 per share)

 

24,329

 

22,744




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

(At 31 December 2011: 1,000,000 deferred shares of £0.01 per share)

18,000

18,000




Total share capital

42,329

40,744

 

In the year ended 31 December 2012, the Group issued 9,966,325 ordinary shares for a total value of $1,585.

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.

 

16.          TRANSLATION RESERVE

 


As at 31

December 2012

$

As at 31

December 2011

$

Balance at beginning of year

(841,439)

(88,867)

Arising on translation of foreign operations

(119,305)

(752,572)

Balance at end of year

(960,744)

(841,439)

 

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.

 

17.          SEGMENTED REPORTING

 

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

NETELLER: fees are generated on transactions between Members and Merchants using the NETELLER e-wallet and Net+ prepaid cards.

NetBanx: fees are generated through the NetBanx and NetBanx Asia straight-through processing platforms where customers send money directly to Merchants.

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

 

Segmented reporting for the year ended 31 December 2012:


NETELLER

$

NETBANX

$

TOTAL

 $





Revenue

38,823,903

138,873,499

177,697,402

Variable costs




   Processing costs

7,385,167

80,646,695

88,031,862

   Bad debt

1,055,663

336,079

1,391,742

Total variable costs

8,440,830

80,982,774

89,423,604

Variable margin

30,383,073

57,890,725

88,273,798





Variable margin percentage

78%

42%

50%

                 

 

Segmented reporting for the year ended 31 December 2011:

 


NETELLER

$

NETBANX

$

TOTAL

 $





Revenue

40,016,458

86,838,010

126,854,468

Variable costs




   Processing costs

4,410,699

47,783,180

52,193,879

   Bad debt

1,588,118

85,623

1,673,741

Total variable costs

5,998,817

47,868,803

53,867,620

Variable margin

34,017,641

38,969,207

72,986,848





Variable margin percentage

85%

45%

58%

 

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 2012, variable costs for NETELLER and NetBanx were 22% (2011: 15%) and 58% (2011: 55%) of revenue respectively.

Net assets have not been presented in the segmented information since significant assets and resources throughout the Group serve both reporting segments and would not reasonably be allocable between the two.

Major Merchants

The Group has one Merchant who represents 33.6% (2011: 20.5%) of total fee revenue across all reportable segments and geographies.  The majority of this revenue comes from Asia. 

 

18.          MARKETING AND PROMOTIONS

 

Total marketing and promotions including advertising costs for the year were $3,752,157 (2011: $2,988,834).  These consisted of targeted NETELLER Loyalty Program costs, VIP rebates, fee rebates to Merchants, advertising and tradeshows.

 

19.          DEPRECIATION AND AMORTISATION

 

               


GROUP

COMPANY


Year ended

 31 December

 2012

$

Year ended

31 December

 2011

$

Year ended

 31 December

 2012

$

Year ended

31 December

 2011

$

Depreciation of tangible assets (Note 7)

3,599,210

3,806,368

1,258,663

Amortisation of intangible assets (Note 8)

8,672,992

12,934,034

5,058,701

9,742,723


12,272,202

16,740,402

6,054,880

11,001,386

 

During the year, $495,773 of Investment Tax Credits (ITCs) received were recorded against depreciation and amortisation expense since the assets giving rise to the ITCs were fully amortised.

 

20.          RESTRUCTURING COSTS

 

The Group incurred restructuring costs relating the reorganisation of its cost structure.  Severance was paid to employees as a result of operational changes to the Group's business in order to streamline operations and remain competitive in challenging markets.

 

The Group incurred the following costs:


Year ended

 31 December

2012

 $

Year ended

31 December

2011

 $

Severance and retention payments

730,850

1,439,402

Professional and legal fees and expenses

-

85,240

Lease impairment costs

-

88,288

Other restructuring costs

-

7,430


730,850

1,620,360

 

 

21.          PROFIT / (LOSS) PER SHARE FROM CONTINUING OPERATIONS

 

The calculation of the basic and diluted profit / (loss) per share is based on the following data:

 

 

Year ended

31 December

2012

Year ended

31 December         2011

 

$

$

Profit / (loss)


 

Profit  / (loss) for the purposes of basic and diluted earnings per share being net profit / (loss) attributable to equity share holders of the parent

1,184,188

(26,196,405)




Number of shares



Weighted average number of ordinary shares for the purpose of basic loss per share



128,658,926

125,865,095

Effect of dilutive potential ordinary shares due to employee share options

 

 

7,450,417

 

435,740

Weighted average number of ordinary shares for the purpose of diluted earnings / (loss) per share

 

136,109,343

 

126,300,835

 

Earnings/ (loss) per share

Basic earnings / (loss) per share

$0.01

$(0.21)

Fully diluted earnings / (loss) per share

$0.01

$(0.21)

 

The average market value of the Company's shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.

 

22.          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

 2011

As at

31 December

2011


$

$

Within one year

1,352,375

1,126,364

In the second to fifth years inclusive

2,889,941

1,361,579

After five years

217,395

46,617

 

Operating lease payments represent rentals payable by the Group for certain of its office properties.  Current leases have a remaining average life of 2.25 years.  The lease payments recognised in expense for the year are $1,126,364 (2011: $1,611,054).

 

23.          SHARE BASED PAYMENTS

 

The Company adopted the unapproved share option plan 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 ("ESOS"), 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 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. The exercise price is determined by the Board of Directors of the Company, and shall not be less than the average quoted market price of the Company shares on the three days prior to the date of grant. Subject to the discretion of the Board share options are forfeited if the employee leaves the Group before the options vest. The ESOS options granted in December 2011 vest on the third anniversary of the date of grant and lapse a further six months after vesting.

Changes in the number of ESOS options outstanding are detailed in the table below:

Equity-settled share option plan

 


31 December 2012 Weighted Average Exercise Price

£

Year ended 31 December 2012

Options

31 December 2011 Weighted Average Exercise Price

£

Year ended 31 December 2011   Options

Outstanding at the beginning of the year

0.53

1,449,266

0.63

4,165,524

Granted during the year

0.57

1,173,200

-

-

Forfeited during the year

0.56

(109,267)

0.54

(438,950)

Exercised during the year

0.53

(1,440,599)

0.53

(91,665)

Expired during the year

-

-

0.73

(2,185,643)

Outstanding at the end of the year

0.57

1,072,600

0.53

1,449,226

Exercisable at the end of the year

-

-

0.53

1,449,266

 

The ESOS options outstanding at the end of the period had an exercise price of £0.5667 and a weighted average remaining contractual life of 2.44 years (31 December 2011: 0.93 years).

The weighted average share price of ESOS options exercised in 2012 based on the date of exercise was £0.93.

The options granted under the 2011 ESOS were valued using a Black Scholes model. The following inputs were assumed for options outstanding at 31 December 2012:

 

 

YEAR ENDED 31

 DECEMBER 2012

YEAR ENDED 31

DECEMBER 2011




Weighted average exercise price

£0.57

£0.50

Expected volatility

42.9%

56%

Expected life

3.25 years

3.5 years

Risk free interest rate

0.55%

0.5%

Expected dividends

-

-

Employee exit rate

7%

7%

 

Expected volatility was determined by calculating the historical volatility of the Company's share price over a period commensurate with the expected term of the options ending on the date of grant. The weighted average fair value of options granted in 2012 was £0.19 per share.

Long Term Incentive Plan

The Company adopted the Long Term Incentive Plan ("LTIP") which took effect from 1 January 2010. On 27 January 2012, certain executives of the Group were granted 3,064,746 LTIP options to acquire ordinary shares in the Company with an exercise price of £0.0001 per share. A further 383,770 supplementary options were granted later in the period. These LTIP options vest in one tranche based on future performance related to EBITDA targets for the financial year ending on 31 December 2012 and subject to continued employment over the remaining vesting period. Vested options lapse on the tenth anniversary of the date of grant.

Changes in the number of LTIP options outstanding are detailed in the table below:


31 December 2012 Weighted Average Exercise Price

£

Year ended 31 December 2012

Options

31 December 2011 Weighted Average Exercise Price

£

Year ended 31 December 2011   Options

Outstanding at the beginning of the year

0.0001

3,564,991

0.0001

3,155,940

Granted during the year

0.0001

3,448,516

0.0001

3,289,700

Forfeited during the year

0.0001

(94,915)

0.0001

(1,939,936)

Exercised during the year

0.0001

(37,500)

0.0001

(940,713)

Expired during the year

-

-

-

-

Outstanding at the end of the year

0.0001

6,881,092

0.0001

3,564,991

Exercisable at the end of the year

0.0001

55,231

-

-

 

The LTIP options outstanding at the end of the period had an exercise price of £0.0001 and a weighted average remaining contractual life of 8.7 years (31 December 2011: 9.2 years).

The weighted average share price of LTIP options exercised in 2012 based on the date of exercise was £0.67.

Due to the nominal exercise price of the LTIP options and that option holders are entitled to receive a benefit by reference to the value of dividends that would have been paid on vested shares during the vesting period, the options granted under the 2011 ESOS were valued based on the share price at the date of grant (£0.62 per share).

The Company recognised total expenses of $3,931,276 (2011: $1,007,359) related to the equity-settled share-based payments transactions in 2012.

 

24.          FINANCIAL INSTRUMENTS

 

Financial instruments consist of cash and cash equivalents, restricted NETELLER Merchant cash, qualifying liquid assets held for NETELLER Members, receivable from merchants, trade and other receivables, payable to NETELLER Members, and trade and other payables.  All financial instruments are classified as held for trading except for accounts receivable and accounts payable which are classified as loans and receivables.

 

i)              Fair values

 

The fair values of cash and cash equivalents, restricted NETELLER Merchant cash, Qualifying Liquid Assets held for NETELLER Members, receivable from Merchants, trade and other receivables, payable to NETELLER 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.  The maximum credit exposure within the Group is $6,003,219.

 

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 NETELLER 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.  A 1% increase in interest rates offered would result in an increase of $2,353,124 of interest income while a 1% decrease would result in a reduction to interest income in the amount of $1,359,781.

 

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).  Due to the significant amount of balances held in various currencies, the potential impact of a 1% change in exchange rates is not quantifiable.

 

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.

 

v)             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 5 for further details).  Management controls and monitors the Group's cash flow on a regular basis, including forecasting future cash flows. 

 

vii)           Risk management assets and liabilities

 

Risks are identified, evaluated and mitigated through a combination of a "top down" approach driven by both the Audit Committee and Board of Directors.  These are aggregated into a Risk Management framework where the risks are prioritised and assigned to the executive for monitoring and risk mitigation.  The Group Internal Audit function undertakes regular reviews of the controls that are in place to mitigate risk. The Group enters into financial instruments through forward currency contracts that fix the net asset or liability position for significant currencies held on the Statement of Financial Position.

 

viii)          Capital disclosure

 

The Group's capital structure is comprised of shareholders' equity plus shareholder loans and contingent consideration as required to fund the asset acquisition.  The Group's objective when managing its capital structure is to finance internally generated growth and maintain financial flexibility including access to capital markets.  To manage its capital structure the Group may adjust capital spending, issue new shares, or acquire short-term financing.

 

ix)            Capital risk management

 

The Group manages its capital to ensure that the entities in the Group will be able to continue as a going concern, while maximising the return to stakeholders through optimisation of the debt and equity balance.  The capital structure of the Group consists of debt, which includes the borrowings as disclosed in note 29, and equity attributable to owners of the parent, comprising reserves and retained earnings as disclosed.  The board reviews the capital structure and as part of this review, considers the cost of capital and the risks associated with each class of capital. In addition the board of directors considers the liquidity and solvency of the Group on an ongoing basis. The Group's capital structure remains unchanged since 2011.  There has been no change to how the Group manages as capital, the strategy for capital maintenance from 2011.

 

25.          SUBSIDIARIES

 

Details of the Company's principal subsidiaries as at 31 December 2012 are as follows:

 

NAME OF SUBSIDIARY

PLACE OF INCORPORATION AND OPERATION

PROPORTION OF OWNERSHIP INTEREST

PROPORTION OF VOTING POWER HELD

PRINCIPAL ACTIVITY

Optimal Payments Limited (formerly Neteller (UK) Ltd.)

United Kingdom

100%

100%

Authorised e-money issuer

NetBanx Limited

United Kingdom

100%

100%

Full service payment processing

Optimal Payments Services Limited

United Kingdom

100%

100%

Dormant 

Netinvest Limited

United Kingdom

100%

100%

Holding company

Netpro Limited

United Kingdom

100%

100%

Dormant

Optimal Payments (UK) Limited

United Kingdom

100%

100%

Sales and administration services

NT Services Limited

Canada

91%

100%

Employment and administration

NT Services Building Corporation

Canada

100%

100%

Property leasing company

1155259 Alberta Limited

Canada

100%

100%

Financing

Cardload Incorporated

Canada

100%

100%

Dormant

NBX Checkout Inc

Canada

100%

100%

Canadian sales company

NETBX Services Inc

Canada

100%

100%

Canadian support company

NETBX Technologies Inc

Canada

100%

100%

Canadian technology/development company

NBX Merchant Services Inc

Canada

100%

100%

Canadian sales company

NBX Merchant Services Corporation

United States

100%

100%

US sales company

Neteller Operations Limited

Isle of Man

100%

100%

Licensed to carry on money transmission services

Net Group Holdings Limited

Isle of Man

100%

100%

Holding company

NetAdmin Limited

Isle of Man

100%

100%

Employment & administration

Net ID Limited

Isle of Man

100%

100%

Identification verification

NetB Limited

Isle of Man

100%

100%

Dormant

Netbanx BV Limited

Netherlands

100%

100%

Holding company

Charter Access Limited

Hong Kong

100%

100%

Wound-Up 9 January 2013

Greenscroft Limited

Isle of Man

100%

100%

Dissolved 31 December 2012

Jade Enterprises Limited

Isle of Man

100%

100%

Dissolved 31 December 2012

Lime Enterprises Limited

Isle of  Man

100%

100%

Dissolved 31 December 2012

 

 

26.          INTERCOMPANY BALANCES

 

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


Year ended

31 December

2012

$

Year ended

 31 December

2011

 $

Receivable from subsidiaries



Receivable from Optimal Payments Ltd.

(formerly NETELLER (UK) Ltd.)

 

23,236,746

 

20,688,001

Receivable from NetBanx Limited

10,282,719

5,448,411

Receivable from 1155259 Alberta Limited

164,959

164,651

Receivable from NetAdmin Limited

35,111

91,466

Receivable from Net ID Limited

321,335

62,620

Receivable from Optimal Payments (UK) Ltd

4,409,470

1,953,029

Receivable from NBX Merchant Services Inc.

11,029,415

3,457,240

Receivable from NBX Merchant Services Corporation

5,015,951

5,000,000

Receivable from NBX Checkout Inc.

9,443

-

Receivable from NETBX Services Inc.

1,011,910

-

Receivable from NETBX Technologies Inc.

276,179

232,422


55,793,238

37,097,840

Investment in subsidiaries



Investment in Optimal Payments Ltd.

(formerly NETELLER (UK) Ltd.)

 

29,295,275

 

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

-

-

Investment in 1155259 Alberta Limited

67,001

67,001


37,798,010

11,933,153

Due to subsidiaries



Due to NT Services Limited

24,948,669

4,377,687

Due to Neteller Operations Ltd.

50,807,283

25,370,290

Due to NetBanx Technologies Inc.

6,950,466

2,588,705


82,706,418

32,336,682

 

 



 

 

27.          INTERCOMPANY TRANSACTIONS

 

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

A portion of the Stored Value franchise 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.  Up until the current year, the Company held trust account funds and balances owing to Merchants 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.  The franchise fees charged to Neteller Operations Ltd. amounted to $20,613,331 (2011 - $21,030,255).

The administrative and platform service fees as noted in the Company financial statements are paid entirely to subsidiaries of the Company.

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 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 income statement.

 

28.          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 2012

$

Amounts owed to related parties 2012

$

Purchase of goods and services in 2011

$

Amounts owed to related parties 2011

$






9185-2780 Quebec Inc.

0

1,800,000

3,485,804

3,266,958

 

On 1 April 2011, 9185-2780 Quebec Inc which was owned by a related party, Martin Leroux, a shareholder of the Group sold certain merchant contracts to the Company at fair market value.  The balance payable will be settled in shares based on the lesser of £0.626990 per share or the closing price on the day before the business day of settlement.  The settlement will be completed in two separate instalments.  The first balance owing in the amount of $1,466,958 in equivalent shares was granted based on performance conditions satisfied in 2011 and a total of 1,474,466 shares were issued during the year. The second balance owing in the amount of $1,800,000 will be payable when established 2012 performance conditions are satisfied.  The balance is included in Contingent Consideration.

 

29.          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 2012, 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.

 

30.          EBITDA

               

EBITDA is defined as results of operating activities before depreciation and amortisation and exceptional non-recurring 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 as adopted by the EU. 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 2012

$

Year ended 31 December 2011

$

Income / (loss) before provision for income taxes

3,645,233

(26,223,804)




  Depreciation and amortisation (note 19)

11,776,429

16,740,402

  Supplementary management bonus (note 31)

5,619,795

3,000,000

  Share option expense (note 23)

3,931,276

1,007,359

  Interest on loans  (note 31)

1,800,162

1,540,000

  Restructuring costs (note 20)

730,850

1,620,360

  Loss on disposal of assets (note 8 and 9)

778,023

4,236

  Foreign exchange gain

(712,175)

(1,285,534)

  Legal costs relating to US exit

(6,357)

(50,757)

  Impairment charge (note 9)

-

21,283,646

  Gain on wind-up of subsidiary

-

(797,860)

  Acquisition costs

-

616,272

EBITDA

27,563,236

17,454,320

 

31.          ASSET ACQUISITION

 

On 1 February 2011, the Group purchased certain assets of Optimal Payments Inc. ("OP Inc"), a world class international provider of cardholder-not-present Straight Through Processing ("STP") payment solutions.  The assets purchased included computer equipment, furniture & fixtures, leasehold improvements, merchant relationships, intellectual property, non-compete agreements, brand name, and intermediaries relationships.  Lease obligations were assumed with respect to certain assets acquired.

The purchase of OP Inc. represented a major transformational step for the Group and enabled the Group to enhance its end-to-end STP for Merchants, diversify the Group's business from Stored Value to STP, and to establish a meaningful presence in the North America market. 

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

On completion of the 2011 asset acquisition of the Optimal Payments business, the Group entered into a loan agreement with the selling shareholders ('Vendors') for $20.0 million in cash plus accrued interest which becomes payable on or about April 2013, subject to any deductions for price adjustments or indemnity claims under the acquisition agreement (the "Loan").

On completion, the Group also entered into a warrant agreement with the Vendors pursuant to which the Vendors have the right to convert the Loan into ordinary shares during prescribed exercise periods which end on or around April 2013 at a premium of 6% to the issue price of the Consideration Shares of 59.15 pence up to a total subscription price of US$ 10.0 million plus interest, and at a premium of 12% to the issue price of the Consideration Shares of 59.15 pence up to a total subscription price of a further US$ 10.0 million plus interest. The rights under the warrant agreement may only be exercised, however, to the extent that the amount of the applicable subscription price has not been reduced due to the failure to meet certain performance conditions or due to indemnity claims or other adjustments under the acquisition agreement. Both the Consideration Shares and any ordinary shares issued as a result of exercise of the warrants will be subject to orderly market provisions for a period of 12 months and 3 months respectively from the date of their issue to the Vendors.

On 7 November 2012 certain of the Vendors, 4526457 Canada Inc. and 7759991 Canada Inc., representing 33.78% and 9.97% of the Loan respectively, gave notice to the Group that they wished to convert their portion of the Loan (amounting to $7,287,132 including accrued interest) into Ordinary Shares pursuant to the warrant agreement.  As a result, on 7 November 2012 the Company issued 5,415,424 Ordinary Shares to 4526457 Canada Inc. and 1,598,336 Ordinary Shares to 7759991 Canada Inc., totalling 7,013,760 Ordinary Shares, representing 75% of their respective interests in the Loan.

Subsequent to the end of the 2012 fiscal year, another of the Vendors, 897032 Alberta Inc., representing 33.78% of the Loan, gave notice to the Group that it wished to convert its portion of the Loan (amounting to $7,710,661 including accrued interest) into Ordinary Shares pursuant to the warrant agreement.  As a result, on February 28, 2013 the Company issued 5,585,793 Ordinary Shares to 897032 Alberta Inc. representing 75% of its respective interest in the Loan.

Following the above conversions, $7,360,237 in cash plus accrued interest will become payable under the Loan to the Vendors no later than 15 April 2013. The Group has included the maximum amount payable as part of the consideration which represents the fair value at the acquisition.

Supplementary 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 acquired business and applies to the 2011 and 2012 fiscal years.  The bonus payable for fiscal year 2011 performance was $3,000,000. The bonus payable for fiscal year 2012 performance was $5,619,795.

Cash held back on sale

The asset purchase agreement included $2,500,000 of cash held back on sale.  During the year the remaining outstanding balance of $1,666,667 was repaid.

Shareholder loans

Two shareholders, Aurum Nominees Ltd and IIU Nominees Ltd, loaned the Company a total of $8,000,000 to help finance the purchase of assets from Optimal Payments Inc. The loans have a 6% interest rate, are unsecured and due for repayment on 31 January 2014.  For 2012 $532,416 (2011 - $440,000) of interest has been accrued. The loans are convertible, in part or in full, at a price of £0.66248 at any point prior to the repayment date.

 

32.          AUDITOR REMUNERATION

 

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

 


Year ended

31 December

2012

$

Year ended

31 December

2011

$

Audit services



Statutory audit

470,000

463,000




Non-audit services



Tax and other advisory services

0

63,000

Total

470,000

526,000

 

 

33.          OTHER EXPENSES

 

Management includes certain balances in other as identified below: 

 

 

 

Year ended

31 December

2012

$

Year ended

31 December

2011

$

  Supplementary management bonus (note 31)

5,619,795

3,000,000

  Loss on disposal of assets (note 8 and 9)

778,023

4,236

  Gain on wind-up of subsidiary

-

(797,860)

  Legal costs relating to US exit

(6,357)

(50,757)

Other Expenses

6,391,461

2,155,619

 


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