##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 Commission File Number: 000-25959
 Goldleaf Financial Solutions, Inc.
 (Exact name of registrant as specified in its charter)
 Tennessee
    
    62-1453841(State or other jurisdiction of incorporation or 
organization)
    
    (I.R.S. Employer Identification No.)350 Technology Blvd., Suite 200, Norcross, Georgia
    
    30071(Address of principal executive offices)
    
    (Zip Code)
 (678) 966-0844   (Registrants telephone number, including area code)
  þ o
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ  o þ
  Class
    
    Outstanding as of October 31, 2008Common Stock, no par value
    
    19,168,784 Shares




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##### 



GOLDLEAF FINANCIAL SOLUTIONS, INC.
Form 10-Q
For Quarter Ended September 30, 2008
INDEX
 Page No.Part I  Financial InformationItem 1 Financial StatementsConsolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations  Unaudited for the Three Months Ended September 30, 2008 and 2007
    
    
    4Consolidated Statements of Operations  Unaudited for the Nine Months Ended September 30, 2008 and 2007
    
    
    5Consolidated Statements of Cash Flows  Unaudited for the Nine Months Ended September 30, 2008 and 2007
    
    
    6Notes to Consolidated Financial Statements  Unaudited
    
    
    8Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4 Controls and Procedures
    
    
    24Part II  Other Information
    
    
    25Item 1A Risk Factors
    
    
25Item 6 Exhibits
    
    
26Signatures
    
    
    27EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    3,790
    
    
    $
    2,648Restricted cash
    
    
    2,037
    
    
    
    5,362Accounts receivable trade, net of allowance for doubtful accounts of $721 and
$604, respectively
    
    
    12,276
    
    
    
    6,918Inventory
    
    
    337
    
    
    
    237Deferred tax assets
    
    
    1,571
    
    
    
    1,443Investment in direct financing leases
    
    
    1,832
    
    
    
    1,736Prepaid and other current assets
    
    
    2,301
    
    
    
    1,774Total current assets
    
    
    24,144
    
    
    
    20,118Property and equipment, net
    
    
    4,709
    
    
    
    3,661Operating lease equipment, net
    
    
    14
    
    
    
    23Other Assets:Software development costs, net
    
    
    6,366
    
    
    
    4,725Deferred tax assets
    
    
    
    
    
    
    2,009Investment in direct financing leases, net of current portion
    
    
    3,128
    
    
    
    2,812Intangible and other assets, net
    
    
    35,472
    
    
    
    14,085Goodwill
    
    
    58,649
    
    
    
    34,217Total other assets
    
    
    103,615
    
    
    
    57,848Total assets
    
    $
    132,482
    
    
    $
    81,650Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    3,810
    
    
    $
    2,858Accrued liabilities
    
    
    5,483
    
    
    
    2,055Deferred revenue
    
    
    9,861
    
    
    
    4,867Customer deposits
    
    
    4,252
    
    
    
    5,307Current portion of capital lease obligations
    
    
    367
    
    
    
    414Current portion of non-recourse lease notes payable
    
    
    1,711
    
    
    
    1,638Current portion of long term debt
    
    
    166
    
    
    
    Total current liabilities
    
    
    25,650
    
    
    
    17,139Revolving line of credit
    
    
    39,000
    
    
    
    10,000Long term debt, net of current portion
    
    
    261
    
    
    
    Deferred revenue, net of current portion
    
    
    523
    
    
    
    949Capital lease obligations, net of current portion
    
    
    242
    
    
    
    544Deferred tax liability
    
    
    2,363
    
    
    
    Non-recourse lease notes payable, net of current portion
    
    
    2,819
    
    
    
    2,428Convertible notes payable
    
    
    7,000
    
    
    
    Other non-current liabilities
    
    
    349
    
    
    
    228Total liabilities
    
    
    78,207
    
    
    
    31,288Commitments and ContingenciesStockholders Equity:Common stock, no par value; 100,000,000 shares authorized; 19,168,784 and
17,279,315 shares issued and outstanding, respectively
    
    
    
    
    
    
    Preferred stock, no par value; 20,000,000 shares authorized, no shares outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    73,149
    
    
    
    69,764Accumulated deficit
    
    
    (18,874
    )
    
    
    (19,402
    )Total stockholders equity
    
    
    54,275
    
    
    
    50,362Total liabilities and stockholders equity
    
    $
    132,482
    
    
    $
    81,650
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
For the Three Months Ended September 30, 2008 and 2007
(in thousands, except per share data)
 2008
    
    
    2007Revenues:Financial institution services
    
    $
    19,554
    
    
    $
    11,560Retail inventory management services
    
    
    1,915
    
    
    
    2,040Other products and services
    
    
    779
    
    
    
    743Total revenues
    
    
    22,248
    
    
    
    14,343Cost of Revenues:Financial institution services
    
    
    5,066
    
    
    
    2,330Retail inventory management services
    
    
    223
    
    
    
    211Other products and services
    
    
    525
    
    
    
    516Gross profit
    
    
    16,434
    
    
    
    11,286Operating Expenses:General and administrative
    
    
    6,176
    
    
    
    5,272Selling and marketing
    
    
    5,165
    
    
    
    4,290Research and development
    
    
    1,494
    
    
    
    610Amortization
    
    
    1,428
    
    
    
    572Other operating expenses, net
    
    
    123
    
    
    
    13Total operating expenses
    
    
    14,386
    
    
    
    10,757Operating Income
    
    
    2,048
    
    
    
    529Interest Expense, Net
    
    
    725
    
    
    
    256Income Before Income Taxes
    
    
    1,323
    
    
    
    273Income tax provision
    
    
    603
    
    
    
    181Net Income
    
    $
    720
    
    
    $
    92Income Per Share:Basic
    
    $
    0.04
    
    
    $
    0.01Diluted
    
    $
    0.04
    
    
    $
    0.01Weighted Average Common Shares Outstanding:Basic
    
    
    19,169
    
    
    
    17,279Diluted
    
    
    19,169
    
    
    
    17,297
  4




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
For the Nine Months Ended September 30, 2008 and 2007
(in thousands, except per share data)
 2008
    
    
    2007Revenues:Financial institution services
    
    $
    53,813
    
    
    $
    33,240Retail inventory management services
    
    
    5,865
    
    
    
    6,158Other products and services
    
    
    2,254
    
    
    
    2,737Total revenues
    
    
    61,932
    
    
    
    42,135Cost of Revenues:Financial institution services
    
    
    13,042
    
    
    
    6,421Retail inventory management services
    
    
    670
    
    
    
    626Other products and services
    
    
    1,532
    
    
    
    1,986Gross profit
    
    
    46,688
    
    
    
    33,102Operating Expenses:General and administrative
    
    
    18,849
    
    
    
    15,774Selling and marketing
    
    
    15,575
    
    
    
    13,676Research and development
    
    
    5,001
    
    
    
    1,576Amortization
    
    
    4,023
    
    
    
    1,745Other operating expenses, net
    
    
    163
    
    
    
    27Total operating expenses
    
    
    43,611
    
    
    
    32,798Operating Income
    
    
    3,077
    
    
    
    304Interest Expense, Net
    
    
    2,106
    
    
    
    570Income (Loss) Before Income Taxes
    
    
    971
    
    
    
    (266
    )Income tax provision (benefit)
    
    
    443
    
    
    
    (82
    )Net Income (Loss)
    
    $
    528
    
    
    $
    (184
    )Income (Loss) Per Share:Basic
    
    $
    0.03
    
    
    $
    (0.01
    )Diluted
    
    $
    0.03
    
    
    $
    (0.01
    )Weighted Average Common Shares Outstanding:Basic
    
    
    19,051
    
    
    
    17,275Diluted
    
    
    19,051
    
    
    
    17,275
  5




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED
For the Nine Months Ended September 30, 2008 and 2007
(in thousands)
 2008
    
    
    2007Cash Flows From Operating Activities:Net income (loss)
    
    $
    528
    
    
    $
    (184
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,974
    
    
    
    3,347Depreciation on fixed assets under operating leases
    
    
    9
    
    
    
    25Deferred taxes
    
    
    393
    
    
    
    582Amortization of debt issuance costs and discount
    
    
    138
    
    
    
    90Acquired in process research and development charge
    
    
    435
    
    
    
    Stock compensation expense
    
    
    747
    
    
    
    116Deferred gain on land sale
    
    
    (7
    )
    
    
    (11
    )Loss on write-down or disposal of fixed assets
    
    
    150
    
    
    
    19Amortization of lease income and initial direct costs
    
    
    (418
    )
    
    
    (544
    )Gain on sale of leased equipment
    
    
    (8
    )
    
    
    (57
    )Changes in assets and liabilities, net of acquisitions:Restricted cash and customer deposits
    
    
    2,270
    
    
    
    Accounts receivable
    
    
    1,187
    
    
    
    (896
    )Prepaid and other current assets
    
    
    (188
    )
    
    
    (418
    )Other non-current assets
    
    
    
    
    
    
    (108
    )Inventory
    
    
    (100
    )
    
    
    42Accounts payable
    
    
    460
    
    
    
    (1,125
    )Accrued liabilities
    
    
    1,419
    
    
    
    (1,073
    )Deferred revenue
    
    
    (1,374
    )
    
    
    (48
    )Other non-current liabilities
    
    
    128
    
    
    
    290Net cash provided by operating activities
    
    
    11,743
    
    
    
    47Cash Flows From Investing Activities:Acquisition of businesses, net of cash acquired
    
    
    (32,999
    )
    
    
    (10,389
    )Payment to DataTrade shareholders
    
    
    (2,173
    )
    
    
    Investment in direct financing leases
    
    
    (416
    )
    
    
    (886
    )Lease receivables collected
    
    
    422
    
    
    
    2,811Proceeds from lease terminations
    
    
    8
    
    
    
    Additions to property and equipment
    
    
    (2,044
    )
    
    
    (1,741
    )Additions to intangibles and other assets
    
    
    (209
    )
    
    
    (12
    )Additions to software development costs
    
    
    (2,270
    )
    
    
    (1,635
    )Payments received on notes receivable
    
    
    
    
    
    
    20Net cash used in investing activities
    
    
    (39,681
    )
    
    
    (11,832
    )
  6




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GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED (Continued)
For the Nine Months Ended September 30, 2008 and 2007
(in thousands)
 2008
    
    
    2007Cash Flows From Financing Activities:Repayments on revolving line of credit
    
    $
    (4,500
    )
    
    $
    (1,000
    )Repayments on capital lease obligations
    
    
    (349
    )
    
    
    (262
    )Proceeds from revolving line of credit
    
    
    33,500
    
    
    
    8,500Repayments
of note payable and long term debt
    
    
    (35
    )
    
    
    (150
    )Repayments of non-recourse lease notes payable
    
    
    (1,421
    )
    
    
    (2,240
    )Proceeds from non-recourse lease notes payable
    
    
    1,885
    
    
    
    895Expenses related to secondary offering
    
    
    
    
    
    
    (47
    )Proceeds from exercise of employee stock options
    
    
    
    
    
    
    54Net cash provided by financing activities
    
    
    29,080
    
    
    
    5,750Net Change in Cash and Cash Equivalents
    
    
    1,142
    
    
    
    (6,035
    )Cash and Cash Equivalents at beginning of period
    
    
    2,648
    
    
    
    6,760Cash and Cash Equivalents at end of period
    
    $
    3,790
    
    
    $
    725Non-cash Investing and Financing Activities:Issuance of 1,889,469 common shares as purchase consideration in the Alogent acquisition
    
    $
    2,638
    
    
    $
    Issuance of convertible notes payable to Alogent shareholders
    
    $
    7,000
    
    
    $
    Purchase of software licenses through issuance of debt
    
    $
    462
    
    
    $
    
  7




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GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
 A. The Company
  B. Summary of Significant Accounting Policies
 Basis of Presentation
    Principles of Consolidation
   C. Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for
Income Taxes
   D. Reclassifications
  8




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GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
 E. Acquisitions
 Assets of DataTrade, LLC
  Alogent Corporation
 Business Combinations
 (in
thousands)
 Purchase Price:Cash
    
    $
    32,775Convertible notes payable
    
    
    7,000Common shares (1,889,469 shares valued at $1.40 per share)
    
    
    2,638Direct acquisition costs
    
    
    1,285Total purchase price
    
    $
    43,698Value assigned to assets and liabilities:Assets:Cash
    
    $
    1,061Accounts receivable/Unbilled accounts receivable
    
    
    6,545Current deferred tax asset
    
    
    515Prepaid and other current assets
    
    
    556Property and equipment
    
    
    183Non-current assets
    
    
    5Customer list (estimated life of ten years)
    
    
    7,740Acquired technology (estimated life of five years)
    
    
    11,240Trade names (estimated life of twenty years)
    
    
    5,300In process R&D (expensed)
    
    
    448Non-compete (estimated life of three years)
    
    
    680Goodwill
    
    
    22,234Liabilities:Accounts payable
    
    
    (492
    )Accrued liabilities
    
    
    (2,009
    )Deferred tax liability
    
    
    (4,366
    )Deferred revenue
    
    
    (5,942
    )Total net assets
    
    $
    43,698
  9




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GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
  Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Actual
    
    Pro Forma Combined
    
    Actual
    
    Pro Forma CombinedRevenue
    
    $
    22,248
    
    
    $
    20,285
    
    
    $
    63,237
    
    
    $
    57,169Net Income (Loss)
    
    $
    720
    
    
    $
    174
    
    
    $
    818
    
    
    $
    (1,367
    )Income (Loss) Per Share
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.07
    )
 F. Net Income (Loss) Per Share
   Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Net income (loss) available to common shareholders
    
    $
    720
    
    
    $
    92
    
    
    $
    528
    
    
    $
    (184
    )Weighted average common shares outstanding  basic
    
    
    19,169
    
    
    
    17,279
    
    
    
    19,051
    
    
    
    17,275Plus additional shares from common stock equivalent shares:Options
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    Diluted weighted average common shares outstanding
    
    
    19,169
    
    
    
    17,297
    
    
    
    19,051
    
    
    
    17,275
  G. Legal Proceedings
  10




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GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
 H. Segment Information
 Disclosures about
Segments of an Enterprise and Related Information.
  Three Months Ended September 30, 2008
    
    
    Three Months Ended September 30, 2007Retail
    
    
    
    
    
    
    
    
    
    
    RetailFinancial
    
    
    Inventory
    
    
    
    
    
    
    Financial
    
    
    InventoryInstitution
    
    
    Management
    
    
    
    
    
    
    Institution
    
    
    ManagementServices
    
    
    Services
    
    
    Total
    
    
    Services
    
    
    Services
    
    
    Total(in thousands)Revenues
    
    $
    20,333
    
    
    $
    1,915
    
    
    $
    22,248
    
    
    $
    12,303
    
    
    $
    2,040
    
    
    $
    14,343Gross Profit
    
    $
    14,741
    
    
    $
    1,693
    
    
    $
    16,434
    
    
    $
    9,457
    
    
    $
    1,829
    
    
    $
    11,286Total expenditures
for additions to
long-lived assets
    
    $
    1,355
    
    
    $
    28
    
    
    $
    1,383
    
    
    $
    808
    
    
    $
    
    
    
    $
    808
 Nine Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2007Retail
    
    
    
    
    
    
    
    
    
    
    RetailFinancial
    
    
    Inventory
    
    
    
    
    
    
    Financial
    
    
    InventoryInstitution
    
    
    Management
    
    
    
    
    
    
    Institution
    
    
    ManagementServices
    
    
    Services
    
    
    Total
    
    
    Services
    
    
    Services
    
    
    Total(in thousands)Revenues
    
    $
    56,066
    
    
    $
    5,866
    
    
    $
    61,932
    
    
    $
    35,977
    
    
    $
    6,158
    
    
    $
    42,135Gross Profit
    
    $
    41,491
    
    
    $
    5,197
    
    
    $
    46,688
    
    
    $
    27,570
    
    
    $
    5,532
    
    
    $
    33,102Total expenditures
for additions to
long-lived assets
    
    $
    4,457
    
    
    $
    66
    
    
    $
    4,523
    
    
    $
    3,376
    
    
    $
    12
    
    
    $
    3,388Assets
    
    $
    129,492
    
    
    $
    2,990
    
    
    $
    132,482
    
    
    $
    77,786
    
    
    $
    3,292
    
    
    $
    81,078Goodwill
    
    $
    56,579
    
    
    $
    2,070
    
    
    $
    58,649
    
    
    $
    30,561
    
    
    $
    2,070
    
    
    $
    32,631
  Three Months
    
    
    Nine MonthsEnded September 30
    
    
    Ended September 302008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Gross Profit
    
    $
    16,434
    
    
    $
    11,286
    
    
    $
    46,688
    
    
    $
    33,102Less: Operating Expenses
    
    
    14,386
    
    
    
    10,757
    
    
    
    43,611
    
    
    
    32,798Operating Income
    
    $
    2,048
    
    
    $
    529
    
    
    $
    3,077
    
    
    $
    304
 I. Goodwill
 Goodwill and Other Intangible Assets
  11




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GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
 J. Derivative Instrument
 Accounting for
Derivative Instruments and Hedging Activities
 K. Fair Value Measurements
 Fair Value Measurements The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment FASB Statement No. 115
   CarryingAmountin ConsolidatedBalance Sheet
    
    Fair Value
    
    Fair Value Measurements UsingSeptember 30, 2008
    
    September 30, 2008
    
    Level 1
    
    Level 2
    
    Level 3Interest rate swap asset
    
    $
    39,000
    
    
    $
    39,000
    
    
    $
    
    
    
    $
    39,000
    
    
    $
    
  L. Comprehensive Income (Loss)
  M. Debt and Commitments and Contingencies
  
    
    Corporate office space lease amendment, which was executed by the Company on January 16,
2008 to extend the term of the lease agreement at our corporate headquarters for 66 months
to commence on the effective date of May 1, 2008 and terminate on October 31, 2013. The
leased space was expanded from 14,522 square feet to 36,006 square feet. Thus, the
amendment resulted in an approximately $140,000 increase in rent expense over the next
twelve months.
    
    Convertible notes of $7.0 million were executed by the Company and delivered to the
Alogent shareholders on January 17, 2008, having a 24 month term and a 7.0% annual interest
rate payable quarterly in arrears. The principal under the notes is convertible, at the
option of the holder, into shares of our common stock at a conversion price of $4.50 per
share.
    
    An installment payment agreement for the purchase of internal use software licenses for
$462,000 was executed by the Company on March 21, 2008 having a 36 month term and a 3.037%
annual interest rate.
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GOLDLEAF FINANCIAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
   
    
    the revolving loan commitment is $45.0 million;
    
    the limit on annual capital expenditures is $7.0 million;
    
    two additional applicable interest rates were added to the pricing grid, with a minimum
level of LIBOR plus 1.375%, and maximum level of LIBOR plus 3% (or base rate plus 0.50%),
determined by the funded debt to EBITDA ratio (as defined); the rate used is at the option
of the Company;
    
    the funded debt to EBITDA ratio (as defined) is 4.2 with a graduated step-down through
2008 to 3.0 for 2009 and beyond;
    
    a senior funded debt to EBITDA ratio (as defined) was added, beginning at 3.5 with a
graduated step down to 3.0 for the fourth quarter of 2008 and beyond;
    
    the Company is to maintain a fixed charge coverage ratio (as defined) of not less than 2:0 to 1:00; and
    
    consent was given for the Alogent acquisition.
  N. Recent Accounting Pronouncements
 SFAS No. 157
  Effective Date of FASB
Statement No. 157
 Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active
 SFAS No. 159
  SFAS No. 141(R)
 Business Combinations
 SFAS No. 161
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
 13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Note Regarding Forward Looking Information
   Overview
  
    
    competition for deposits;
    
    the emergence of non-traditional competitors;
    
    the compression of margins on traditional products;
    
    the convergence of financial products into a single institution; and
    
    legislative changes accelerating the need for financial institutions
to offer a wider range of products and services to their customers.
    
    
    the assets of Community Banking Systems (CBS), which added check
imaging, report archival, and document imaging; and
    
    the assets of DataTrade, which added data conversion services, remote
deposit, report management, interactive voice response, and checkscan.
 14




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##### Table of Contents



Revenues
  
    
    financial institution services;
    
    retail inventory management services; and
    
    other products and services.
 Software Revenue Recognition Software
Revenue Recognition with Respect to Certain Transactions Accounting for
Performance of Construction-Type and Certain Production-Type Contracts Application of SOP 97-2 to Arrangements That Include the Right to
Use Software Stored on Another Entitys Hardware
 Financial Institution Services
  
    
    payment solutions;
    
    lending solutions; and
    
    data management and marketing solutions.
 Payment Solutions:
  Remote Deposit
 ACH Origination and Processing
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##### Table of Contents



Deposit Automation for Branch, Teller, Cash Vault, & ATM
 Item Processing & Image Exchange
 Lending Solutions :
 Accounts Receivable Financing
  Leasing
  Data Management and Marketing Solutions:
  Website Design and Hosting
 Document Imaging
 Data Conversion Services
 Report Management and Voice Response Services
 16




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##### Table of Contents



Retail Inventory Management Services
  Other Products and Services
 ®
 17




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##### Table of Contents



Results of Operations
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Financial institution services
    
    
    87.9
    %
    
    
    80.6
    %
    
    
    86.9
    %
    
    
    78.9
    %Retail inventory management services
    
    
    8.6
    
    
    
    14.2
    
    
    
    9.5
    
    
    
    14.6Other products and services
    
    
    3.5
    
    
    
    5.2
    
    
    
    3.6
    
    
    
    6.5Total Revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of Revenues:Financial institution services
    
    
    22.8
    
    
    
    16.2
    
    
    
    21.1
    
    
    
    15.2Retail inventory management services
    
    
    1.0
    
    
    
    1.5
    
    
    
    1.1
    
    
    
    1.5Other products and services
    
    
    2.3
    
    
    
    3.6
    
    
    
    2.4
    
    
    
    4.7Total Cost of Revenues
    
    
    26.1
    
    
    
    21.3
    
    
    
    24.6
    
    
    
    21.4Gross Profit
    
    
    73.9
    
    
    
    78.7
    
    
    
    75.4
    
    
    
    78.6Operating Expenses:General and administrative
    
    
    27.8
    
    
    
    36.8
    
    
    
    30.4
    
    
    
    37.4Selling and marketing
    
    
    23.2
    
    
    
    29.9
    
    
    
    25.1
    
    
    
    32.5Research and development
    
    
    6.7
    
    
    
    4.3
    
    
    
    8.1
    
    
    
    3.7Amortization
    
    
    6.4
    
    
    
    4.0
    
    
    
    6.5
    
    
    
    4.1Other operating
    
    
    0.6
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1Total Operating Expenses
    
    
    64.7
    
    
    
    75.1
    
    
    
    70.4
    
    
    
    77.8Operating Income
    
    
    9.2
    
    
    
    3.6
    
    
    
    5.0
    
    
    
    0.8Interest Expense, net
    
    
    3.3
    
    
    
    1.8
    
    
    
    3.4
    
    
    
    1.4Income (Loss) before Taxes
    
    
    5.9
    
    
    
    1.8
    
    
    
    1.6
    
    
    
    (0.6
    )Income Tax Provision (Benefit)
    
    
    2.7
    
    
    
    1.2
    
    
    
    0.7
    
    
    
    (0.2
    )Net Income (Loss)
    
    
    3.2
    %
    
    
    0.6
    %
    
    
    0.9
    %
    
    
    (0.4
    )%
 Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended
September 30, 2007
  Financial Institution Services.
 Retail Inventory Management Services.
 Other Products and Services.
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##### Table of Contents



Cost of Revenues  financial institution services.
 Cost of Revenues  retail inventory management services.
 Cost of Revenues  other products and services.
 General and Administrative.
 Selling and Marketing. ® ®
 Research and Development.
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##### Table of Contents



Amortization.
 Other Operating Expense, Net.
 Operating Income (Loss).
 Interest Expense, Net.
 Income Tax Provision (Benefit).
  Critical Accounting Policies
   Goodwill
 Goodwill and Other Intangible Assets.
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##### Table of Contents



Liquidity and Capital Resources
  Nine Months Ended September 30,(in thousands)2008
    
    2007Net cash provided by operating activities
    
    $
    11,743
    
    
    $
    47Net cash used in investing activities
    
    
    (39,681
    )
    
    
    (11,832
    )Net cash provided by financing activities
    
    
    29,080
    
    
    
    5,750
 Cash from Operating Activities
  Cash from Investing Activities
  Cash from Financing Activities
  Analysis of Changes in Working Capital
    Credit Agreement
  21




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##### Table of Contents




    
    the revolving loan commitment is $45.0 million;
    
    the limit on annual capital expenditures is $7.0 million;
    
    two additional applicable interest rates were added to the pricing
grid, with a minimum level of LIBOR plus 1.375%, and maximum level of
LIBOR plus 3% (or base rate plus 0.50%), determined by the funded debt
to EBITDA ratio (as defined); the rate used is at the option of the
Company;
    
    the funded debt to EBITDA ratio (as defined) is 4.2 with a graduated
step-down through 2008 to 3.0 for 2009 and beyond;
    
    a senior funded debt to EBITDA ratio (as defined) was added, beginning
at 3.5 with a graduated step down to 3.0 for the fourth quarter of
2008 and beyond;
    
    the Company is to maintain a fixed charge coverage ratio (as defined) of not less than 2:0 to 1:00; and
    
    consent was given for the Alogent acquisition.
   Off-Balance Sheet Arrangements
  22




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##### Table of Contents



Seasonality
  Inflation
  23




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Remediation of Material Weaknesses
  
    
    In December of 2007, we hired Dan Owens as Senior Vice President of Finance; Mr. Owens was named
Chief Financial Officer during the third quarter of 2008; Mr. Owens will oversee our efforts to
ensure the effectiveness of our financial reporting functions;
    
    We have hired two additional senior accounting staff and an internal tax professional, and we
retained the former Chief Financial Officer of Alogent as a vice-president of finance;
    
    We are enhancing review procedures in our financial reporting and income tax accounting functions;
    
    We are assessing our internal control structure and implementing new controls; and
    
    We have completed a comprehensive evaluation of our organizational structure and are continuing
to review our internal processes.
  24




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##### Table of Contents



Part II Other Information
 
 Item 1A. Risk Factors
  The operating environment for financial institutions has become increasingly difficult and, as we
depend heavily on this industry, this may adversely affect our business and operations.
  25




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##### Table of Contents



Item 6. Exhibits
  ExhibitNumber
    
    Description of Exhibit3.1
    
    Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 of Amendment No. 1 to the Companys
Registration Statement on Form S-1 (File No. 33375013) filed with
the SEC on May 3, 1999).3.1.1
    
    Charter Amendment dated August 9, 2001 (incorporated by reference
to Exhibit 3.3 of the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001).3.1.2
    
    Charter Amendment dated August 9, 2001 (incorporated by reference
to Exhibit 3.4 of the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001).3.1.3
    
    Charter Amendment dated January 16, 2004 (incorporated by
reference to Exhibit B of the Companys Definitive Proxy Statement
on Schedule 14A filed with the SEC on December 29, 2003).3.1.4
    
    Charter Amendment dated January 23, 2006 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form
8-K filed with the SEC on January 26, 2006).3.1.5
    
    Charter Amendment dated January 24, 2006 (incorporated by
reference to Exhibit 3.2 to the Companys Current Report on Form
8-K with the SEC on January 26, 2006).3.1.6
    
    Charter Amendment dated May 4, 2006 and effective May 5, 2006
(incorporated by reference to Exhibit 3.1 of the Companys Current
Report on Form 8-K filed with the SEC on May 10, 2006).3.1.7
    
    Charter Amendment dated September 8, 2006 (incorporated by
reference to Exhibit 3.1 of the Companys Current Report on Form
8-K filed with the SEC on September 8, 2006).3.2
    
    Second Amended and Restated Bylaws
of the Company (incorporated by
reference to Exhibit 3.2 of Amendment No. 1 to the Companys
Registration Statement on Form S-1 (File No. 333-722;75013) filed
with the SEC on May 3, 1999).3.2.1
    
    Bylaws Amendment dated January 20, 2004 (incorporated by reference
to Exhibit 3.2.1 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2003).3.2.2
    
    Amendment to Second Amended and Restated Bylaws Dated November 7,
2007 (incorporated by reference to Exhibit 3.1 to the Companys
Current Report on Form 8-K filed with the SEC on November 8,
2007).10.1
    
    Amended and Restated Change in Control Severance Pay Agreement between Goldleaf
Financial Solutions, Inc. and Dan Owens dated November 6, 200810.2
    
    Change in Control Severance Pay Agreement between Goldleaf
Financial Solutions, Inc. and Todd Shiver dated April 18, 200831.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief
Executive Officer.31.2
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief
Financial Officer.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief
Executive Officer.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief
Financial Officer.
 26




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##### Table of Contents



Signatures
  Goldleaf Financial Solutions, Inc.
(Registrant)Date: November 10, 2008
    By:
    /s/ G. Lynn BoggsG. Lynn BoggsChief Executive OfficerDate: November 10, 2008
    By:
    /s/ Dan OwensDan OwensChief Financial Officer 27