Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                              | ** **                                                                                              |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                       | ** **                                                                                              |
| x                                                                                                                                                                                                | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                             | ** **                                                                                              |
| **For the quarterly period ended March 31, 2009**                                                                                                                                           |
| ** **                                                                                                                                                                                       |
| **or**                                                                                                                                                                                           |
| ** **                                                                                                                                                                                       |
| o                                                                                                                                                                                                | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**           |
|                                                                                                                                                                                             | ** **                                                                                              |
| **For the transition period from             to             ** |

 

**COMMISSION FILE NUMBER 000-25959**

 

**GOLDLEAFFINANCIAL SOLUTIONS, INC.**

(Exact name ofRegistrant as specified in its charter)

 

| **TENNESSEE**(State or other  jurisdiction of  incorporation or organization)                    | ** ** | **62-1453841**(I.R.S. Employer  Identification No.) |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| ** **                                                                                       | ** ** | ** **                                          |
| **350  TECHNOLOGY BLVD.; SUITE 200  NORCROSS, GEORGIA**(Address of  principal executive offices) | ** ** | **30071**(Zip Code)                                 |

 

**(678) 966-0844**

(Registrant’s telephonenumber, including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to the filing requirementsfor the past 90 days.  Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rul 405 of Regulation S-T (232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer; or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and smaller reporting company in Rule 12b-2 ofthe Exchange Act.

 
| Large accelerated filer o       |   | Accelerated filer o              |
|------------------------------------------------|--------|--------------------------------------------|
|                                           |   |                                       |
| Non-accelerated filer o              |   | Smaller reporting company x |
| (Do not check if a smaller  reporting company) |   |                                       |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act). Yes o  No x

 

On May 6, 2009,19,463,238 shares of the Registrant’s no par value Common Stock wereoutstanding.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION**                                                              |   |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |
| Item 1. Financial Statements                                                                         |   |
|                                                                                                      |   |
| Consolidated Balance Sheets                                                                               | 3      |
|                                                                                                      |   |
| Consolidated  Statements of Operations                                                                    | 4      |
|                                                                                                      |   |
| Consolidated  Statements of Cash Flows                                                                    | 5      |
|                                                                                                      |   |
| Notes to  Consolidated Financial Statements                                                               | 7      |
|                                                                                                      |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 13     |
|                                                                                                      |   |
| Item 4T.  Controls and Procedures                                                                    | 22     |
|                                                                                                      |   |
| **PART II – OTHER INFORMATION**                                                                 |   |
|                                                                                                      |   |
| Item 1A. Risk Factors                                                                                | 23     |
|                                                                                                      |   |
| Item 6. Exhibits                                                                                     | 24     |
|                                                                                                      |   |
| **SIGNATURES**                                                                                            |   |
|                                                                                                      |   |
| Ex-31.1 Section 302 Certification of  the CEO                                                        |   |
|                                                                                                      |   |
| Ex-31.2 Section 302 Certification of  the CFO                                                        |   |
|                                                                                                      |   |
| Ex-32.1 Section 906 Certification of  the CEO                                                        |   |
|                                                                                                      |   |
| Ex-32.2 Sections 906 Certification of  the CFO                                                       |   |

 

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**PART I – FINANCIALINFORMATION**

 

**GOLDLEAF FINANCIAL SOLUTIONS,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

 
| ** **                                                                                            | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                            | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                            |       |                    |       |                       |       |
| Current assets:                                                                                       |       |                    |       |                       |       |
| Cash and cash equivalents                                                                             |       | $                       | 2,653      |                       | $          | 5,292 |   |
| Restricted cash                                                                                       |       | 592                     |       | 1,312                      |       |
| Trade accounts receivable, net                                                                        |       | 8,388                   |       | 12,238                     |       |
| Inventory                                                                                             |       | 834                     |       | 1,159                      |       |
| Investment in direct financing leases                                                                 |       | 1,751                   |       | 1,755                      |       |
| Prepaids and other current assets                                                                     |       | 2,514                   |       | 2,063                      |       |
| Total current assets                                                                                  |       | 16,732                  |       | 23,819                     |       |
|                                                                                                  |       |                    |       |                       |       |
| Property and equipment, net                                                                           |       | 3,975                   |       | 4,313                      |       |
| Operating lease equipment, net                                                                        |       | 8                       |       | 11                         |       |
|                                                                                                  |       |                    |       |                       |       |
| Software development costs, net                                                                       |       | 7,844                   |       | 7,289                      |       |
| Investment in direct financing leases, net  of current portion                                        |       | 2,920                   |       | 2,907                      |       |
| Intangibles and other assets, net                                                                     |       | 32,026                  |       | 33,064                     |       |
| Goodwill                                                                                              |       | 24,468                  |       | 24,468                     |       |
| Total assets                                                                                          |       | $                       | 87,973     |                       | $          | 95,871 |   |
|                                                                                                  |       |                    |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                        |       |                    |       |                       |       |
| Current liabilities:                                                                                  |       |                    |       |                       |       |
| Revolving line of credit                                                                              |       | $                       | 36,900     |                       | $          | — |   |
| Accounts payable                                                                                      |       | 3,305                   |       | 3,298                      |       |
| Accrued liabilities                                                                                   |       | 3,077                   |       | 4,969                      |       |
| Deferred revenue                                                                                      |       | 11,124                  |       | 13,946                     |       |
| Customer deposits                                                                                     |       | 2,806                   |       | 3,526                      |       |
| Capital lease obligations                                                                             |       | 403                     |       | 403                        |       |
| Non-recourse lease note payable                                                                       |       | 1,448                   |       | 1,702                      |       |
| Current portion of long term debt                                                                     |       | 218                     |       | 216                        |       |
| Convertible notes payable                                                                             |       | 7,000                   |       | —                     |       |
| Other current liabilities                                                                             |       | 342                     |       | 405                        |       |
| Total current liabilities                                                                             |       | 66,623                  |       | 28,465                     |       |
|                                                                                                  |       |                    |       |                       |       |
| Revolving line of credit                                                                              |       | —                  |       | 37,500                     |       |
| Deferred revenue, net of current portion                                                              |       | 394                     |       | 480                        |       |
| Capital lease obligation, net of current  portion                                                     |       | 40                      |       | 141                        |       |
| Non-recourse lease note payable, net of  current portion                                              |       | 2,820                   |       | 2,583                      |       |
| Long term debt, net of current portion                                                                |       | 233                     |       | 289                        |       |
| Convertible notes payable                                                                             |       | —                  |       | 7,000                      |       |
| Deferred income taxes, net of current  portion                                                        |       | 3,527                   |       | 3,527                      |       |
| Other non-current liabilities                                                                         |       | 845                     |       | 690                        |       |
| Total liabilities                                                                                     |       | 74,482                  |       | 80,675                     |       |
|                                                                                                  |       |                    |       |                       |       |
| Commitments and contingencies                                                                         |       |                    |       |                       |       |
|                                                                                                  |       |                    |       |                       |       |
| Stockholders’ equity:                                                                            |       |                    |       |                       |       |
| Common stock, no par value; 100,000,000  shares authorized; shares issued and outstanding, 19,168,784 |       | —                  |       | —                     |       |
| Preferred stock, no par value; 20,000,000  shares authorized, no shares outstanding                   |       | —                  |       | —                     |       |
| Additional paid-in capital                                                                            |       | 73,711                  |       | 73,402                     |       |
| Accumulated deficit                                                                                   |       | (60,220                 | )          | (58,206                    | )          |
| Total stockholders’ equity                                                                       |       | 13,491                  |       | 15,196                     |       |
| Total liabilities and stockholders’ equity                                                       |       | $                       | 87,973     |                       | $          | 95,871 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**For the three months ended March 31, 2009 and 2008**

**(in thousands, except share data)**

** **
| ** **                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
|--------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                           | ** ** | **(unaudited)** | ** ** |
| Revenues:                            |       |            |       |     |       |
| Financial institution services       |       | $               | 15,037     |     | $          | 16,369 |   |
| Retail inventory management services |       | 1,612           |       | 1,977    |       |
| Other products and services          |       | 1,697           |       | 849      |       |
| Total revenues                       |       | 18,346          |       | 19,195   |       |
|                                 |       |            |       |     |       |
| Cost of Revenues:                    |       |            |       |     |       |
| Financial institution services       |       | 4,385           |       | 3,740    |       |
| Retail inventory management services |       | 211             |       | 230      |       |
| Other products and services          |       | 1,244           |       | 496      |       |
| Gross profit                         |       | 12,506          |       | 14,729   |       |
|                                 |       |            |       |     |       |
| Operating Expenses:                  |       |            |       |     |       |
| General and administrative           |       | 5,680           |       | 6,270    |       |
| Selling and marketing                |       | 4,823           |       | 5,383    |       |
| Research and development             |       | 2,150           |       | 1,855    |       |
| Amortization                         |       | 965             |       | 1,187    |       |
| Other operating expenses             |       | 333             |       | 17       |       |
| Total operating expenses             |       | 13,951          |       | 14,712   |       |
| Operating (loss) income              |       | (1,445          | )          | 17       |       |
|                                 |       |            |       |     |       |
| Interest expense, net                |       | 540             |       | 919      |       |
|                                 |       |            |       |     |       |
| Loss before income taxes             |       | (1,985          | )          | (902     | )          |
|                                 |       |            |       |     |       |
| Income tax provision (benefit)       |       | 29              |       | (389     | )          |
|                                 |       |            |       |     |       |
| Net loss                             |       | $               | (2,014     | )        | $          | (513 | ) |
|                                 |       |            |       |     |       |
| Loss per share:                      |       |            |       |     |       |
| Basic                                |       | $               | (0.11      | )        | $          | (0.03 | ) |
| Diluted                              |       | $               | (0.11      | )        | $          | (0.03 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**For the three months ended March 31, 2009 and 2008**

**(in thousands)**

 
| ** **                                                                                      | ** ** | **2009**        | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                      | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                                           |       |            |       |     |       |
| Net loss                                                                                        |       | $               | (2,014     | )        | $          | (513 | ) |
|                                                                                            |       |            |       |     |       |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities:      |       |            |       |     |       |
| Depreciation and amortization                                                                   |       | 1,840           |       | 2,214    |       |
| Depreciation on operating lease equipment                                                       |       | 3               |       | 3        |       |
| Deferred income taxes                                                                           |       | —          |       | (389     | )          |
| Amortization of debt issuance cost and  discount                                                |       | 54              |       | 44       |       |
| Stock compensation expense                                                                      |       | 309             |       | 167      |       |
| Amortization of lease income and initial  direct costs                                          |       | (124            | )          | (153     | )          |
| Loss (gain) on write-down or disposal of  property and equipment and software development costs |       | 6               |       | (5       | )          |
| Deferred gain on land sale                                                                      |       | (4              | )          | (4       | )          |
| Loss (gain) on sale of leased equipment                                                         |       | 2               |       | (8       | )          |
| Unrealized loss (gain) on interest rate  swap                                                   |       | (63             | )          | 234      |       |
| Gain on sale of core processing and  WinTELLER assets                                           |       | (25             | )          | —   |       |
| Changes in assets and liabilities:                                                              |       |            |       |     |       |
| Restricted cash and customer deposits                                                           |       | —          |       | 60       |       |
| Trade accounts receivable                                                                       |       | 3,850           |       | 158      |       |
| Inventory                                                                                       |       | 325             |       | (288     | )          |
| Prepaids and other current assets                                                               |       | (396            | )          | 623      |       |
| Other non-current assets                                                                        |       | 30              |       | 35       |       |
| Accounts payable                                                                                |       | 8               |       | 453      |       |
| Accrued liabilities                                                                             |       | (1,892          | )          | 1,483    |       |
| Deferred revenue                                                                                |       | (2,895          | )          | 962      |       |
| Other non-current liabilities                                                                   |       | 159             |       | (150     | )          |
| Net cash (used in) provided by operating  activities                                            |       | (827            | )          | 4,926    |       |
|                                                                                            |       |            |       |     |       |
| Cash flows from investing activities:                                                           |       |            |       |     |       |
| Acquisition of Alogent, net of cash  acquired                                                   |       | —          |       | (32,990  | )          |
| Acquisition of businesses, net of cash  acquired                                                |       | —          |       | (24      | )          |
| Proceeds from lease termination                                                                 |       | —          |       | 8        |       |
| Investment in direct financing leases                                                           |       | (160            | )          | (109     | )          |
| Lease receivables collected                                                                     |       | 273             |       | 398      |       |
| Additions to property and equipment                                                             |       | (153            | )          | (705     | )          |
| Software development costs                                                                      |       | (879            | )          | (755     | )          |
| Additions to intangibles and other assets                                                       |       | (121            | )          | (193     | )          |
| Net cash used in investing activities                                                           |       | (1,040          | )          | (34,370  | )          |
|                                                                                                 |            |                 |            |          |            |  |  |

 

-  Continued  -

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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** **

**GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

**For the three months ended March 31, 2009 and 2008**

**(in thousands)**

** **
| ** **                                                                                           | ** ** | **2009**        | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------|------------|
| ** **                                                                                           | ** ** | **(unaudited)** | ** ** |
| Cash flows from financing activities:                                                                |       |            |       |     |       |
| Proceeds from line of credit                                                                         |       | —          |       | 32,000   |       |
| Payments on line of credit                                                                           |       | (600            | )          | (1,000   | )          |
| Payments on capital lease obligation                                                                 |       | (101            | )          | (104     | )          |
| Proceeds from non-recourse lease note  payable                                                       |       | 483             |       | 388      |       |
| Payments of non-recourse lease note payable                                                          |       | (500            | )          | (513     | )          |
| Payment of long term debt                                                                            |       | (54             | )          | —   |       |
| Net cash (used in) provided by financing  activities                                                 |       | (772            | )          | 30,771   |       |
|                                                                                                 |       |            |       |     |       |
| Net change in cash and cash equivalents                                                              |       | (2,639          | )          | 1,327    |       |
|                                                                                                 |       |            |       |     |       |
| Cash and cash equivalents at the beginning  of period                                                |       | 5,292           |       | 2,648    |       |
| Cash and cash equivalents at the end of  period                                                      |       | $               | 2,653      |     | $          | 3,975 |   |
|                                                                                                 |       |            |       |     |       |
| Supplemental non-cash information:                                                                   |       |            |       |     |       |
| Issuance of additional 1,889,469 common  shares as purchase consideration in the Alogent acquisition |       | $               | —     |     | $          | 2,638 |   |
| Issuance of convertible note payable as  purchase consideration in the Alogent acquisition           |       | $               | —     |     | $          | 7,000 |   |
| Purchase of software licenses through  issuance of long-term debt                                    |       | $               | —     |     | $          | 462 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**GOLDLEAF FINANCIAL SOLUTIONS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.Organization and Basis of Presentation**

 

Goldleaf Financial Solutions, Inc.(“Goldleaf” or the “Company”) offers a strategic suite of integrated technologyand payment processing solutions to financial institutions of all sizes.Goldleaf’s products and services enable financial institutions to succeed in today’scompetitive market, solidify their trusted financial relationships, expandtheir presence, and improve profitability through the efficient use oftechnology.

 

We generate revenue from thefollowing three main sources:

 

·                  Financial institution services, whichinclude:

 

·                  Payment solutions, and

 

·                  Lending solutions

 

·                  Retail inventory management services;and

 

·                  Other products and services

 

The accompanying consolidatedfinancial statements are unaudited and include the accounts of GoldleafFinancial Solutions, Inc. and its wholly owned subsidiaries. Allintercompany transactions and accounts have been eliminated.  The Company operates in two reportablesegments, financial institution services and retail inventory management services.

 

In the opinion of management,all adjustments, normal and recurring in nature, necessary for the fairpresentation of the consolidated financial statements have been included.Additionally, certain amounts reported in prior periods have been reclassed toconform to current presentation.

 

Interim results are notnecessarily indicative of results for the full year.  The consolidated financial statements havebeen prepared in accordance with United States generally accepted accountingprinciples for interim financial reporting, and with the instructions of Form 10-Qand Article 10 of Regulation S-X and accordingly they do not include allthe information and footnotes required in the annual consolidated financialstatements and accompanying footnotes. These consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-K for the year ended December 31,2008.

 

Our significant accountingpolicies include revenue recognition, software development, income taxes,acquisition accounting, accounting for long-lived assets, intangibles assets,and goodwill.  Please refer to ourcritical accounting policies as described in our annual financial statements inour Annual Report on Form 10-K for the year ended December 31, 2008for a more detailed description of these accounting policies.

 

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**2. RecentAccounting Pronouncements**

 

In December 2007, the FASBissued SFAS No. 141 (revised 2007), *BusinessCombinations* (“SFAS 141(R)”), which replaces SFAS No. 141,*Business Combinations.*SFAS 141(R) generally retains the underlying concepts ofSFAS 141 because it requires all business combinations to be accounted forat fair value under the acquisition method of accounting, but it changes howthe acquisition method of accounting is applied in a number of significantaspects. Acquisition costs will be expensed as incurred; contingentconsideration will be recorded at fair value on the date of acquisition;restructuring costs associated with a business combination will be expensedsubsequent to the acquisition date; and changes in deferred tax asset valuationallowances and income tax uncertainties after the acquisition date will affectthe income tax provision. SFAS 141(R) is effective on a prospectivebasis for all of the Company’s business combinations with an acquisition dateon or after January 1, 2009, with the exception of the accounting forvaluation allowances on deferred taxes and acquired tax contingencies. Weadopted SFAS 141(R) and concluded it had no material impact on ourconsolidated financial statements.

 

In March 2008, the FASBissued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities (an amendment of FASB Statement No. 133)*(“SFAS 161”), which requires enhanced disclosures for derivative andhedging activities. SFAS 161 is effective for financial statements issuedfor fiscal years and interim periods beginning after November 15, 2008.Early application is encouraged. We adopted SFAS 161, which becameeffective January 1, 2009, and the required disclosures have been includedin Note 9. “Derivative”, to the consolidated financial statements.

 

In April 2008, the FASBissued Staff Position No. FAS 142-3, *TheDetermination of the Useful Life of Intangible Assets* (“FSP 142-3”),which amends the factors that should be considered in developing renewal orextension assumptions used to determine useful life of a recognized intangibleasset under SFAS No. 142, *Goodwill and OtherIntangible Assets*(“SFAS 142”). The intent is to improve theconsistency between the useful life of a recognized intangible asset under SFAS 142and the period of expected cash flows used to measure the fair value of theasset under SFAS 141(R), and other U.S. generally accepted accountingprinciples. We adopted FSP 142-3 and concluded it had no material impact on ourconsolidated financial statements.

 

In April 2009, the FASBissued Staff Position No. 107-1, *Interim Disclosures AboutFair Value of Financial Instruments*(“FSP 107-1”).  FSP 107-1 extends the disclosure requirementsof SFAS No. 107, *Disclosures about FairValue of Financial Instruments,* to interim financial statements ofpublicly traded companies.  FSP 107-1requires disclosures of the fair value of all financial instruments, with theexception of a few, that must be presented together with the carrying value ofthe financial instruments in a manner that clearly distinguishes between assetsand liabilities and indicates where the amounts are reported on the balancesheet.  It also requires disclosure onthe methods and significant assumptions used to estimate fair value.  FSP 107-1 will be effective in our interimreporting for the three months ended June 30, 2009.  We do not anticipate this pronouncement tohave a material effect on our consolidated financial statements.

 

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**3.Commitments and Contingencies**

 

*RevolvingLine of Credit and Long-Term Debt*

 

The Company is party to aSecond Amended and Restated Credit Agreement with Bank of America, N.A., WachoviaBank, N.A., and The People’s Bank of Winder, dated November 30, 2006,which was amended on January 17, 2008, December 24, 2008, and February 18,2009.  January 15, 2010 is thematurity date of this credit agreement.

 

The revolving line of credit isclassified as a current liability as of March 31, 2009, compared to a longterm liability as of December 31, 2008, as the maturity date of the creditagreement, which is January 15, 2010, causes this liability to be due inless than one year from the balance sheet date. The Company is currently in the process of working with its lendingpartners to refinance the existing credit facility under similar terms.  The refinancing is expected to be complete bythe end of the 2009 fiscal year.

 

The material terms of thesyndicated credit facility are as follows:

 

·                  the revolving loan commitment is$45.0 million;

 

·                  the limit on annual capitalexpenditures is $7.0 million;

 

·                  two additional applicable interestrates are included in the pricing grid, with a minimum level of LIBOR plus1.375%, 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 atthe option of the Company;

 

·                  the funded debt to EBITDA ratio (asdefined) is 3.0;

 

·                  the senior funded debt to EBITDAratio (as defined) is 3.0; and

 

·                  the Company is to maintain a fixedcharge coverage ratio (as defined) of not less than 2:1.

 

We borrowed $32.0 millionagainst the line of credit to fund the Alogent acquisition in January 2008.As of March 31, 2009 and December 31, 2008 we owed $36.9 million and$37.5 million, respectively, on the revolving line of credit. As of March 31,2009, we were in compliance with the restrictive financial and non-financialcovenants contained in the second amended and restated credit agreement.  At March 31, 2009, we had eligiblecapacity as defined to borrow $8.1 million under the second amended andrestated credit agreement.

 

On February 18, 2009, weamended the definition of EBITDA under the Credit Agreement so that the firstsentence of the definition was deleted in its entirety and replaced by thefollowing text:

 

“**EBITDA**” means, with respect to any Personfor any period, on a consolidated basis the sum of (a) net incomeavailable to common stockholders *plus*(b) to the extent deducted in arriving at net income, the sum of: (i) preferredstock dividends paid and preferred stock deemed distributions, (ii) incometax expense (less income tax benefit), (iii) interest expense, (iv) depreciationand amortization, (v) annual maintenance fees that will be required to beexcluded from deferred revenue and the profit and loss statement in accordancewith GAAP purchase accounting rules and (vi) any non-cash charges andexpenses, including goodwill impairment charges, *minus* (c) to the extent included in arriving at netincome, any (i) non-cash gains and (ii) gains as a result of paymentsin connection with the sale of the core data processing and teller systembusiness disposed of by Borrower including, without limitation, earn outpayments; *provided*, *however*, for calculation periods ending onor after December 31, 2008, to the extent otherwise included for suchcalculation period, EBITDA shall not include EBITDA from the core dataprocessing and teller system business disposed of by Borrower.

 

The Company executedconvertible notes of $7.0 million delivered to the Alogent shareholders onJanuary 17, 2008, having a 24 month term and a 7.0% annual interestrate payable quarterly in arrears. The principal under the notes isconvertible, at the option of the holder, into shares of our common stock at aconversion price of $4.50 per share.  These notes have a maturity date of January 17, 2010 and,therefore, are classified as a current liability as of March 31, 2009compared to a long-term liability as of December 31, 2008.

 

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*Legal Proceedings*

 

We are not currently a partyto, and none of our material properties is currently subject to, any materiallitigation other than routine litigation incidental to our business.

 

*Employment Agreements*

 

The Company has entered intoemployment agreements, severance agreements and change of control agreementswith certain executive officers and employees of the Company, most of which theCompany acquired through its various acquisitions. These agreements provide forcompensation to the individuals in the form of annual base salaries and,occasionally, bonuses. As of March 31, 2009, the Company had eightemployment agreements, four severance agreements, and seven change of controlagreements. The employment agreements provide for severance benefits, rangingup to 24 months, upon the occurrence of certain events, including a changein control, as defined in the individual agreements. The severance agreementsprovide for severance benefits ranging from two to six months, depending on thecircumstances under which the employee separates from the Company. The changein control agreements provide for severance benefits ranging from six to12 months if the individual’s employment terminates following a change ofcontrol.

 

*Earn out Agreements*

 

In our May 2007 asset purchase agreementwith Data Trade, we agreed to a twenty-four month earn out following the acquisitiondate based on EBITDA targets. In 2008 we paid $2.2 million of this earnout liability for the first twelve months of the earn out period. Theshareholders may be entitled to additional payments under this agreement, ifearned, based on the financial performance of the acquired business during theremaining twelve-month period ending April 30, 2009. The second payment ifearned would be due on August 15, 2009.

 

**4.Comprehensive Loss**

 

Comprehensive loss for thethree months ended March 31, 2009 and 2008 was, in each case, comprisedsolely of net loss.

 

**5. NetLoss per Share**

 

Basic income or loss per shareis computed by dividing net income or loss available to common stockholders bythe weighted average number of common shares outstanding during the year.Diluted income per share is computed by dividing net loss available to commonstockholders by the weighted average number of dilutive common and commonequivalent shares outstanding during the fiscal year, which includes theadditional dilution related to conversion of stock options as computed underthe treasury stock method.

 

The following table is areconciliation of the Company’s basic and diluted loss per share in accordancewith SFAS No. 128 (in thousands, except per share data):

 
| ** **                                 | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                       |       |                                  |       |   |   |
| Net loss                                   |       | $                                     | (2,014     | ) | $ | (513 | ) |
|                                       |       |                                  |       |   |   |
| Basic loss per share:                      |       |                                  |       |   |   |
| Weighted average common shares outstanding |       | 19,169                                |       | 18,816 |   |
| Basic loss per share                  |       | $                                     | (0.11      | ) | $ | (0.03 | ) |
| Diluted loss per share:                    |       |                                  |       |   |   |
| Weighted average common shares outstanding |       | 19,169                                |       | 18,816 |   |
| Dilutive common share equivalents          |       | —                                |       | — |   |
| Total diluted shares outstanding           |       | 19,169                                |       | 18,816 |   |
| Diluted loss per share                |       | $                                     | (0.11      | ) | $ | (0.03 | ) |

 

All employee stock options andcontingently issuable common shares were excluded from diluted loss per sharefor the three months ended March 31, 2009 and 2008 as the effect would beanti-dilutive.

 

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**6. IncomeTaxes**

 

The effective tax rates for thethree months ended March 31, 2009 and 2008 were (1.5%) and 43.2%,respectively.  For the three months endedMarch 31, 2009, tax expense consisted of federal and state income taxbenefit of approximately $0.7 million offset by foreign income tax expense of$27,000, and a valuation allowance of $0.7 million. The primary reason for thedifference between the effective tax rates period-over-period is due to theCompany’s valuation allowance that was recorded against deferred tax assets forthe three months ended March 31, 2009.

 

As of March 31, 2009 and December 31,2008, the Company believed that it is more likely than not that the Companywill not be able to generate sufficient taxable income in future years in orderto realize the deferred tax assets that are recorded, with certain exceptions.As such a valuation allowance of $5.4 million and $4.7 million hasbeen provided against the Company’s federal and state deferred tax assets as ofMarch 31, 2009 and December 31, 2008, respectively.

 

**7. StockCompensation**

 

As of March 31, 2009,there was $1.6 million of total forfeiture adjusted compensation cost relatedto unvested share-based compensation arrangements.  We expect to recognize this cost over aweighted-average period of approximately 2.0 years.

 

**8. FairValue Measurements**

 

Effective January 1, 2008,we adopted SFAS No. 157, *Fair ValueMeasurements* (“SFAS 157”), as it applies to our financialinstruments, and SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities—Including anamendment* of *FASB Statement No. 115*(“SFAS 159”).

 

SFAS 157 defines fairvalue, outlines a framework for measuring fair value, and details the requireddisclosures about fair value measurements. SFAS 159 permits companies toirrevocably choose to measure certain financial instruments and other items atfair value. SFAS 159 also establishes presentation and disclosurerequirements designed to facilitate comparison between entities that choose differentmeasurement attributes for similar types of assets and liabilities.

 

Under SFAS 157, fair valueis defined as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date in the principal or most advantageous market.SFAS 157 establishes a hierarchy in determining the fair value of an assetor liability. The fair value hierarchy has three levels of inputs, bothobservable and unobservable. Level 1 inputs include quoted market pricesin an active market for identical assets or liabilities. Level 2 inputsare market data, other than Level 1, that are observable either directlyor indirectly. Level 2 inputs include quoted market prices for similarassets or liabilities, quoted market prices in an inactive market, and otherobservable information that can be corroborated by market data. Level 3inputs are unobservable and corroborated by little or no market data. Exceptfor those assets and liabilities which are required by authoritative accountingguidance to be recorded at fair value in our consolidated balance sheets, wehave elected not to record any other assets or liabilities at fair value, aspermitted by SFAS 159.

 

The following table providesinformation on the assets and liabilities we measure at fair value on arecurring basis (in thousands).

 
| ** **                                                 | ** ** | **Carrying  amount in  consolidated  balance sheets** | ** ** | **Fair Value** | ** ** | **Fair value measurements using** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | ** **                                            | ** ** | ** **     | ** ** | **Level 1**                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                                       |       |                                                  |       |           |       |                              |       |   |   |   |   |
| Interest rate swap liability as of  March 31, 2009    |       | $                                                     | 342        |           | $          | 342                               |       | $ | — |   | $ | 342 |   | $ | — |   |
|                                                       |       |                                                  |       |           |       |                              |       |   |   |   |   |
| Interest rate swap liability as of  December 31, 2008 |       | $                                                     | 405        |           | $          | 405                               |       | $ | — |   | $ | 405 |   | $ | — |   |

 

We determined the fair value ofthe derivative instrument shown in the table above by using external brokerstatements which use widely accepted valuation techniques, including discountedcash flow analysis on the expected cash flows. The analysis reflects thecontractual terms of the derivatives, including the period to maturity, anduses observable market based inputs.

 

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**9.Derivative**

 

The Company does not enter intoderivatives or other financial instruments for trading or speculative purposes;however, in order to manage its exposure to interest rate risk from the Company’sexisting credit facility, on January 30, 2008 the Company entered into aninterest rate swap (the “Swap”) with a notional amount of $20.0 million,receiving a one month LIBOR interest rate while paying a fixed rate of 2.95%over the period beginning February 8, 2008 and ending November 30,2009. The effect of the Swap is to lock the LIBOR component interest rate on$20.0 million of one month floating rate LIBOR debt at 2.95%. As of March 31,2009 and December 31, 2008 the Swap had an estimated negative fair valueequal to $0.3 million and $0.4 million, respectively, as classified under othercurrent liabilities in the consolidated balance sheets. We recorded a $63,000unrealized gain and a $235,000 unrealized loss for the three months ended March 31,2009 and 2008, respectively, which was recorded in interest expense, net in theconsolidated statements of operations, in accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“SFAS 133”). The estimated fair value of the Swap mayrise and fall over the life of the Swap as market expectations of futurefloating LIBOR interest rates change in relation to the fixed rate of 2.95%.

 

This Swap agreement containsprovisions whereby if we default on our credit facility, we may also be deemedin default of our interest rate swap obligation.  The fair value of our swap is in a liabilityposition and totals approximately $0.3 million as of March 31, 2009.  This Swap agreement shares the samecollateral as that of our credit facility and no other collateral has beenposted against this obligation.  If wewere to default on our agreement, we may be required to settle our obligationat the amount that would approximate the then fair value of the derivative.

 

**10.Segment Information**

 

The Company operates in tworeportable segments: financial institution services and retail inventorymanagement services. The Company presents its segment reporting under SFAS No. 131,*Disclosures about Segments of an Enterpriseand Related Information.* Additionally, $1.5 million of thegoodwill originating from the Towne acquisition has been allocated to theretail inventory management services segment and is therefore included in thesegment’s total assets as of March 31, 2008.  The $1.5 million of goodwill originating fromthe Towne acquisition was included in the goodwill impairment recorded as of December 31,2008.

 

The following table summarizesthe financial information concerning the Company’s reportable segments for thethree months ended March 31, (in thousands):

 
| ** **                                             | ** ** | **Three months ended March 31, 2009** | ** ** | **Three months ended March 31, 2008**  | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **Financial  Institution  Services**       | ** ** | **Retail  Inventory  Management  Services** | ** ** | **Total** | ** ** | **Financial  Institution  Services** | ** ** | **Retail  Inventory  Management  Services** | ** ** | **Total** | ** ** |
|                                                   |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues                                               |       | $                                          | 16,734     |                                        | $          | 1,612 |   | $ | 18,346 |   | $ | 17,218 |   | $ | 1,977 |   | $ | 19,195 |   |
|                                                   |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Gross profit                                           |       | $                                          | 11,105     |                                        | $          | 1,401 |   | $ | 12,506 |   | $ | 12,982 |   | $ | 1,747 |   | $ | 14,729 |   |
|                                                   |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Assets                                                 |       | $                                          | 86,620     |                                        | $          | 1,353 |   | $ | 87,973 |   | $ | 132,300 |   | $ | 3,223 |   | $ | 135,523 |   |
|                                                   |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Total expenditures for additions to  long-lived assets |       | $                                          | 1,125      |                                        | $          | 28 |   | $ | 1,153 |   | $ | 1,631 |   | $ | 22 |   | $ | 1,653 |   |
|                                                   |       |                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Goodwill                                               |       | $                                          | 24,022     |                                        | $          | 446 |   | $ | 24,468 |   | $ | 54,776 |   | $ | 2,070 |   | $ | 56,846 |   |

 

Total gross profit by segmentreconciles to operating income as follows (in thousands):

 
| ** **               | ** ** | **Three months ended**  | ** ** | **Three months ended**  | ** ** |
|--------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
|                     |       |                    |       |                    |       |
| Gross profit             |       | $                       | 12,506     |                    | $          | 14,729 |   |
| Less: operating expenses |       | (13,951                 | )          | (14,712                 | )          |
| Operating income (loss)  |       | $                       | (1,445     | )                       | $          | 17 |   |

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

In this report, all referencesto “we”, “us”, “our”, the “Company” and “Goldleaf” refer to Goldleaf FinancialSolutions, Inc., a Tennessee corporation and its wholly ownedsubsidiaries.

 

**Forward-LookingStatements**

 

This report contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. Thesestatements relate to future economic performance, plans and objectives ofmanagement for future operations and projections of revenues and otherfinancial items that are based on the beliefs of our management, as well asassumptions made by, and information currently available to, our management.The words “expect,” “estimate,” “anticipate,” “believe,” and similarexpressions are intended to identify forward-looking statements. We makeforward-looking statements in Item 2 of Part I and in Item 1A of Part IIof this report. Some of the forward-looking statements relate to our intent,belief or expectations regarding our strategies and plans for operations andgrowth. Other forward-looking statements relate to trends affecting ourfinancial condition and results of operations and our anticipated capital needsand expenditures. These statements involve risks, uncertainties andassumptions, including industry and economic conditions, competition and otherfactors discussed in this and our other filings with the SEC. Theseforward-looking statements are not guarantees of future performance and involverisks and uncertainties, and actual results may differ materially from thosethat are anticipated in the forward-looking statements. Other forward-lookingstatements relate to trends affecting our financial condition and results ofoperations and our anticipated capital needs and expenditures. See Part I,Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2008, for a description of some of the important factors thatmay affect actual outcomes.

 

For these forward-lookingstatements, we claim the protection of the safe harbor for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.You should not place undue reliance on the forward-looking statements, whichspeak only as of the date of this report. All subsequent written and oralforward-looking statements attributable to us or any person acting on ourbehalf are expressly qualified in their entirety by the cautionary statements containedor referred to in this section. We undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**Overview**

 

Goldleaf Financial Solutions, Inc. offers a strategic suite ofintegrated technology and payment processing solutions to financialinstitutions of all sizes. Goldleaf’s products and services enable financialinstitutions to succeed in today’s competitive market, solidify their trustedfinancial relationships, expand their presence, and improve profitabilitythrough the efficient use of technology. In addition to the suite of solutionswe offer to financial institutions, we also offer products and services tosmall businesses. As of March 31, 2009, we have approximately 3,500financial institution relationships including 7 of the top 25 domestic banks asranked by assets and 3 of the top 4 U.K. banks as ranked by assets.

 

We generate revenue from thefollowing three main sources:

 

·                  Financial institution services, whichinclude:

 

·                  Payment solutions, and

 

·                  Lending solutions

 

·                  Retail inventory management services;and

 

·                  Other products and services

 

Prior to 2005, our business was primarily focused on providing lendingsolutions, such as accounts receivable financing solutions, and retailinventory management services. Since 2005, we have made a number of strategicacquisitions and sales designed to expand our payment solutions to meet thetechnology needs of our customers and expand into all four tiers of thefinancial institutions market. We define the four tiers as:

 

·                  Tier I—financial institutionswith assets greater than $50 billion;

 

·                  Tier II—financial institutionswith assets between $5 billion and $50 billion;

 

·                  Tier III—financial institutionswith assets between $1 billion and $5 billion; and

 

·                  Tier IV—Community Banks andCredit Unions—less than $1 billion in assets

 

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**Recent Developments**

 

On February 18, 2009, we amended the definition of EBITDA for thepurposes of our Credit Agreement so that the first sentence of the definitionwas deleted in its entirety and replaced by the following text:

 

“**EBITDA**” means, with respect to any Personfor any period, on a consolidated basis the sum of (a) net incomeavailable to common stockholders *plus*(b) to the extent deducted in arriving at net income, the sum of: (i) preferredstock dividends paid and preferred stock deemed distributions, (ii) incometax expense (less income tax benefit), (iii) interest expense, (iv) depreciationand amortization, (v) annual maintenance fees that will be required to beexcluded from deferred revenue and the profit and loss statement in accordancewith GAAP purchase accounting rules and (vi) any non-cash charges andexpenses, including goodwill impairment charges, *minus* (c) to the extent included in arriving at netincome, any (i) non-cash gains and (ii) gains as a result of paymentsin connection with the sale of the core data processing and teller systembusiness disposed of by Borrower including, without limitation, earn outpayments; *provided*, *however*, for calculation periods ending onor after December 31, 2008, to the extent otherwise included for suchcalculation period, EBITDA shall not include EBITDA from the core dataprocessing and teller system business disposed of by Borrower.

 

On December 31, 2008, we entered into an asset purchase agreementto sell all the assets comprising our core processing and teller softwareproducts.  We continued to manageactivities related to this sale.  Werecorded expenses related to the sale, such as severance and facilityrestructuring charges, for a Florida lease that extends to 2013, totalingapproximately $0.3 million during the three months ended March 31, 2009.

 

During the three months ended March 31,2009, the revolving line of credit was classified as a current liability as of March 31,2009, compared to a long term liability as of December 31, 2008, as thematurity date of the credit agreement, which is January 15, 2010, causesthis liability to be due in less than one year from the balance sheetdate.  The Company is currently in theprocess of working with its lending partners to refinance the existing creditfacility under similar terms.  Therefinancing is expected to be complete by the end of the 2009 fiscal year.

 

**Description of Revenues and Expenses**

 

We generate revenue from thefollowing three main sources:

 

·                  Financial institution services, whichinclude:

 

·                  Payment solutions, and

 

·                  Lending solutions

 

·                  Retail inventory management services;and

 

·                  Other products and services

 

***FinancialInstitution Services:***

 

***Payment Solutions:***

 

We offer a variety of payment technologysolutions to financial institutions and processors which help in theacquisition, automation, and processing of payments and deposits. Our solutionsprovide benefits in the transition of a deposit into an electronic payment andthe electronic processing of payments. These payment solutions consistprimarily of software and services which are delivered on either an in-house ora hosted basis. Revenue is generated from the deployment and use of thesevarious products through license fees, implementation services, softwaremaintenance fees, hosting fees, and per transaction fees.

 

***Deposit Automation and Remote Deposit***

 

We provide payment solutions which automatethe deposit process at financial institution branches, cash vaults, and ATMs. Oursolutions convert customer paper deposits to electronic deposits at theselocations, which reduce costs through truncation and automation improvingquality and customer service. We provide these solutions primarily on anin-house basis with the technology being deployed throughout the financialinstitution at any point of check presentment using a license, implementationservices, and software maintenance revenue model.

 

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We offer remote deposit solutions that enablea financial institution’s customers to make a check deposit from their ownoffices by converting the check payment directly into an electronic deposit.Benefits accrue to the business in convenience, reduced costs, cash position,and improved treasury operations. Additionally, benefits accrue to the financialinstitution in enhanced revenue, increased deposits, increased customersatisfaction, and reduced costs. A number of remote deposit solutions,including check and remittance, are sold either in-house or on a hosted basisin order to serve the different needs of various sized financial institutions.These financial institutions in turn deploy and sell these solutions to theirbusiness customers generating additional revenue for Goldleaf via additionallicenses and transaction fees.

 

***ACH Origination and Processing***

 

We offer a comprehensive system for theacquisition and processing of Automated Clearing House (“ACH”) transactions.Our ACH solutions provide financial institutions the ability to offer businesscustomers a web-based brandable tool for the acquisition of ACH transactions.Transactions can be manually created, imported from source data contained atthe business, or captured from original documents, such as converted checks. Wefurther provide financial institutions with the processing capacity to manageall facets of incoming and outgoing ACH files and of ACH processing, includingrisk tracking, fee calculations, rule compliance, and daily operations.While our solutions to acquire and process transactions can be usedindependently, many financial institutions use the two solutions together. OurACH solutions serve the needs of various sized financial institutions and canbe deployed using either a hosted or in-house model. Our ACH contracts aretypically five year contracts. We generate revenue from our ACH solution soldto banks via licenses, monthly per transaction fees, monthly hosting fees and maintenancefees.

 

***Item and Image Processing***

 

Increased technological development,regulatory changes, and changing banking practices have created a demand forfaster, more efficient electronic handling of bank documents, including checks.The need to reduce labor, research time, and the cost of postage has increasedthe demand for check imaging solutions. Check imaging involves creating digitalimages of paper checks. Images of insufficient checks, stop payments, and largedollar checks are presented online to bank operations staff for review.Financial institutions employ check imaging as part of their efforts to reduceoperating costs and provide enhanced banking services to their customers. Wegenerate revenue from license fees, implementation services, maintenance fees,and training.

 

Additionally, we provide a turnkey solutionfor check imaging activities that provides our customers the ability to offercheck imaging either on an in-house basis through the purchase of ourproprietary software solution or on an outsourced basis through our data centerwithout a large capital expenditure. Our systems deliver a suite of check imagingproducts, including front and back imaging on customer statements, clearing andsettlement, reconciliation, and automated exception processing. This systemallows bank employees and bank customers to retrieve imaged checks on personalcomputers to facilitate signature verification and improve research. We providethese services through our service bureau operations using third party softwaresystems. We also have the capability to provide these services through servicebureau operations. Item and image processing provided through a service bureau generatesrevenue through an initial fee and ongoing monthly per item fees.

 

***Data Conversion Services***

 

We provide digital to digital conversion andmigration services for document images, check images, data and computer reportswhich we output to laser disk. We generate revenue by charging a fee per volumecount of data to be converted.

 

***Website Design and Hosting***

 

Almost all financial institutions seek tohave a sophisticated and dynamic website. Our website design and hosting servicesfor financial institutions provides everything a financial institutiontypically desires. We do not host any confidential bank data on our servers. Wegenerate revenue from professional fees associated with the design and implementationof each website, monthly hosting fees for sites we host in our data center, andfor maintenance performed on those websites.

 

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***Lending Solutions:***

 

***Accounts Receivable Financing***

 

We offer financing programs to financialinstitutions to develop lasting, positive, and profitable relationships with smallto medium sized business customers through the financing of accountsreceivable. The program offers insight into the small business’s operation andcredit controls, while providing a favorable return to the financialinstitution. We have no credit risk exposure under this program. For thoseborrowers that do not meet the regulatory or credit criteria of the lender, weoffer alternative sources of financing through the LendingNetworkTM, a networkof specialty lenders. We generate revenue from license fees. Additionally wegenerate revenue mainly from two types of participation fees. We charge apercentage of the accounts receivables financed upon initial financing of the financialinstitutions customer’s accounts receivable. We also receive a participationfee of any ongoing financing of the accounts receivables.

 

***Leasing***

 

We offer a turnkey equipment leasing programto our financial institutions clients and their small business customers. Wehave no credit risk exposure for these leases. Our leases fall into twocategories: direct financing leases and operating leases. For thoseopportunities that may not fit a particular financial institution’s criteria,we offer a funding alternative through a third-party broker relationship. Wehave no credit risk for these leases. For direct financing leases, theinvestment in direct financing leases consists of the sum of the minimum leasepayments due during the remaining term of the lease and unguaranteed residualvalue of the leased asset. We record the difference between the sum and thecost of the leased assets as unearned revenue which is recognized as revenue overthe lease term. Operating leases are recognized as revenue at the time ofinvoicing.

 

***Retail InventoryManagement Services***

 

We offer retail management solutions such asinventory merchandising and forecasting to specialty retail stores. For manysmall retailers, their most critical success factor is inventory management.

 

We generate revenue from fees we chargeprimarily for providing inventory merchandising and forecasting information toretail stores and ancillary services related to these products.

 

***Other Products andServices***

 

We generate revenues from hardware sales ofscanner equipment and printers used with our financial institution servicessoftware. We also sell standard business forms used in our BusinessManager® program for our lending solutions along withgenerating revenue from statement rendering and mailing.

 

Our expenses consist of cost of revenues,general and administrative, selling and marketing, research and development,amortization, other operating expenses, interest, and taxes.  Our cost of revenues mainlyincludes salaries, software development amortization, hosting fees, third partyroyalty fees, and the cost of hardware. General and administrative expenses include corporate charges forexecutives, internal systems, human resources, finance, and legal.  Selling and marketing expenses includesalaries and commissions paid to our sales force, travel costs of the salesforce, recruiting for new sales and marketing personnel, marketing feesassociated with direct and telemarketing programs, and tradeshows.  We continue to incur expenses related toresearch and development as needed to meet our financial institution customer’sneeds and expectations in the market. Research and development expenses include the non-capitalizable directcosts associated with developing new versions of our software, as well as othersoftware development projects that, in accordance with GAAP, we do notcapitalize.  Amortization mainly consistsof acquired intangibles.

 

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**Results of Operations**

 

The following table sets forth, for the periods indicated, the dollarand percentage relationship of the identified consolidated statement ofoperations items to total revenues.

 
| ** **                           | ** ** | **For the three months ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Revenues:                            |       |                                     |       |   |   |   |   |   |   |
| Financial institution services       |       | $                                        | 15,037     |   | 82.0 | % | $ | 16,369 |   | 85.3 | % |
| Retail inventory management services |       | 1,612                                    |       | 8.8 |   | 1,977 |   | 10.3 |   |
| Other products and services          |       | 1,697                                    |       | 9.2 |   | 849 |   | 4.4 |   |
| Total revenues                       |       | 18,346                                   |       | 100.0 |   | 19,195 |   | 100.0 |   |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Cost of Revenues:                    |       |                                     |       |   |   |   |   |   |   |
| Financial institution services       |       | 4,385                                    |       | 23.9 |   | 3,740 |   | 19.5 |   |
| Retail inventory management services |       | 211                                      |       | 1.2 |   | 230 |   | 1.2 |   |
| Other products and services          |       | 1,244                                    |       | 6.8 |   | 496 |   | 2.6 |   |
| Gross profit                         |       | 12,506                                   |       | 68.1 |   | 14,729 |   | 76.7 |   |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Operating Expenses:                  |       |                                     |       |   |   |   |   |   |   |
| General and administrative           |       | 5,680                                    |       | 31.0 |   | 6,270 |   | 32.7 |   |
| Selling and marketing                |       | 4,823                                    |       | 26.3 |   | 5,383 |   | 28.0 |   |
| Research and development             |       | 2,150                                    |       | 11.7 |   | 1,855 |   | 9.7 |   |
| Amortization                         |       | 965                                      |       | 5.3 |   | 1,187 |   | 6.1 |   |
| Other operating expenses             |       | 333                                      |       | 1.8 |   | 17 |   | 0.1 |   |
| Total operating expenses             |       | 13,951                                   |       | 76.1 |   | 14,712 |   | 76.6 |   |
| Operating (loss) income              |       | (1,445                                   | )          | (8.0 | ) | 17 |   | 0.1 |   |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Interest expense, net                |       | 540                                      |       | 2.9 |   | 919 |   | 4.8 |   |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Loss before income taxes             |       | (1,985                                   | )          | (10.9 | ) | (902 | ) | (4.7 | ) |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Income tax provision (benefit)       |       | 29                                       |       | 0.2 |   | (389 | ) | (2.0 | ) |
|                                 |       |                                     |       |   |   |   |   |   |   |
| Net loss                             |       | $                                        | (2,014     | ) | (11.1 | )% | $ | (513 | ) | (2.7 | )% |

 

**Three Months Ended March 31, 2009Compared to Three Months Ended March 31, 2008**

 

Total revenues decreased 4.4%to $18.3 million for the three months ended March 31, 2009, comparedto $19.2 million for the three months ended March 31, 2008.

 

*FinancialInstitution Services Revenues -* Financial institutionservice revenues decreased $1.3 million, or 8.1%, to $15.0 millionfor the three months ended March 31, 2009, compared to $16.4 millionfor the three months ended March 31, 2008.   The decrease consists of a $2.1 milliondecrease in our lending solutions offset by a $0.8 increase in our paymentsolutions. The decrease of $2.1 million in our lending solutions is primarilyattributable to there being a lower amount of receivables being financed.  Our lending solutions business generatesrevenue from per transaction fees when our financial institution clientsfinance their customer’s receivables.

 

The $0.8 million increase inour payment solutions primarily consists of a $0.4 million decrease in our dataconversion solution, a $0.3 million decrease due to our sale of our core andteller software solutions in December 2008, offset by an increase of $1.2million in our enterprise payment solutions, and a $0.2 million increase in ourimaging solutions. The $0.4 million decrease in our data conversion solution isattributable to a decrease in the number of conversions completed during thethree months ended March 31, 2009 compared to the three months ended March 31,2008.    The $1.2 million increase in ourenterprise payment solutions is attributable to an increase in maintenance andprofessional services of $0.9 million and $0.6 million, respectively, offset bya decrease in license revenue of $0.3 million. Our imaging solutions increased $0.2 million mainly due to an increasein license revenue.

 

As a percentage of totalrevenues, financial institution service fees decreased to 82.0% during thethree months ended March 31, 2009 compared to 85.3% for the three monthsended March 31, 2008.

 

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*RetailInventory Management Services -* Retail inventory managementservices fees decreased 18.5% or $0.4 million to $1.6 million for thethree months ended March 31, 2009 as compared to $2.0 million for thethree months ended March 31, 2008. The decrease is a result of fewercustomers using our retail inventory management services in the three monthsended March 31, 2009 compared to the three months ended March 31,2008. As a percentage of total revenues, retail inventory management servicesfees accounted for 8.8% of total revenues for the three months ended March 31,2009 compared to 10.3% for the three months ended March 31, 2008.

 

*OtherProducts and Services -* Revenues from other productsand services increased approximately 100% to $1.6 million for the threemonths ended March 31, 2009 compared to $0.8 million for the threemonths ended March 31, 2008.  Theincrease is mainly a result of scanner sales related to our enterprise paymentsolutions. As a percentage of total revenues, other products and servicesaccounted for 9.2% of total revenues for the three months ended March 31,2009 compared to 4.4% for the three months ended March 31, 2008.

 

*Cost ofRevenues- financial institution service fees -*Cost ofrevenues related to financial institution service fees increased 17.3% to$4.4 million for the three months ended March 31, 2009 compared to$3.7 million for the three months ended March 31, 2008.  The increase is primarily due to increasedpersonnel as the revenue increased for these solutions. As a percentage oftotal revenues, cost of revenues for financial institution service feesincreased to 23.9% for the three months ended March 31, 2009 compared to19.5% for the three months ended March 31, 2008.

 

*Cost ofRevenues-retail inventory management services -* Costof revenues related to retail inventory management services decreased 8.3% to$211,000 for the three months ended March 31, 2009 compared to $230,000for the three months ended March 31, 2008, in comparison to the decreasein revenue from period to period.  As apercentage of total revenues, cost of sales for retail inventory managementservices remained consistent at 1.2% for both the three months ended March 31,2009 and 2008.

 

*Cost ofRevenues-other products and services -*Cost ofrevenues related to other products and services increased 150.8% to $1.2 millionfor the three months ended March 31, 2009 compared to $0.5 millionfor the three months ended March 31, 2008. The increase is mainly due tothe scanner hardware costs, as we purchased additional scanners to meetcustomer demands.  As a percentage oftotal revenues, cost of revenues for other products and services increased to6.8% for the three months ended March 31, 2009 compared to 2.6% for thethree months ended March 31, 2008.

 

*General andAdministrative* - General and administrative expenses decreased9.4% to $5.7 million for the three months ended March 31, 2009,compared to $6.3 million for the three months ended March 31, 2008.The decrease is mainly a result of decreased compensation costs and internalsystems costs.  As a percentage of totalrevenues, general and administrative expenses decreased to 31.0% for the threemonths ended March 31, 2009 compared to 32.7% for the three months ended March 31,2008.

 

*Selling andMarketing -* Selling and marketing expenses decreased10.4% to $4.8 million for the three months ended March 31, 2009,compared to $5.4 million for the three months ended March 31,2008.  The reduction is mainlyattributable to a reduction in salaries and commission for solutions thatexperienced a decline in revenue.  As apercentage of total revenues, selling and marketing expenses decreased to 26.3%for the three months ended March 31, 2009, compared to 28.0% for the threemonths ended March 31, 2008.

 

*Research andDevelopment -* Research and development expensesincreased 15.9% to $2.2 million for the three months ended March 31,2009, compared to $1.9 million for the three months ended March 31,2008.  The increase was primarily due toincreased internal systems costs on the development of software for our lendingsolutions.  As a percentage of totalrevenues, research and development expenses increased to 11.7% for the threemonths ended March 31, 2009, compared to 9.7% for three months ended March 31,2008.

 

*Amortization*- Amortization expenses decreased 18.7% to approximately $1.0 million forthe three months ended March 31, 2009, compared to $1.2 million forthe three months ended March 31, 2008. The decrease is primarily due to the reduction in acquired intangiblesrelated to the sale of our core processing and teller software business in December 2008.  As a percentage of total revenues,amortization expense decreased to 5.3% for the three months ended March 31,2009, compared to 6.1% for the three months ended March 31, 2008.

 

*OtherOperating Expenses -* Other operating expensesincreased to $333,000 for the three months ended March 31, 2009 ascompared to $17,000 for the three months ended March 31, 2008.  Other operating expenses, for the threemonths ended March 31, 2009, includes severance and facility restructuringcharges related to the core and teller systems business, which was sold in December 2008,of approximately $312,000.

 

*OperatingIncome (Loss) -* As a result of the above factors, ouroperating loss totaled $1,445,000 for the three months ended March 31,2009, compared to operating income of $17,000 for the three months ended March 31,2008.

 

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*InterestExpense, Net -* Interest expense, net decreased 41.3%to $0.5 million for the three months ended March 31, 2009, comparedto $0.9 million for the three months ended March 31, 2008. Thedecrease is primarily related to the decrease in the weighted average interestrate of approximately 3%.  As of March 31,2008, the balance of our revolving line of credit totaled $41.0 million as weused $33.0 million to acquire Alogent.  As of March 31, 2009 our revolving line of credit totaled $36.9million, which is a period-over-period reduction of $4.1 million.

 

*Income TaxProvision (Benefit) -* Income tax expense for the threemonths ended March 31, 2009 totaled $29,000, compared to income taxbenefit of $389,000 for the three months ended March 31, 2008.  The effective tax rates for the three monthsended March 31, 2009 and 2008 were (1.5%) and 43.2%, respectively.  For the three months ended March 31,2009, tax expense consisted of federal and state income tax benefit ofapproximately $0.7 million, offset by foreign income tax expense of $27,000,and a valuation allowance of $0.7 million. The primary reason for thedifference between the effective tax rates period-over-period is due to theCompany’s valuation allowance that was recorded against deferred tax assets forthe three months ended March 31, 2009. The Company believes that it is more likely than not that the Companywill not be able to generate sufficient taxable income in future years in orderto realize the deferred tax assets that are recorded, with certain exceptions.

 

**Liquidity and Capital Resources**

 

The following table sets forththe elements of our cash flow statement for the three months ended March 31,(in thousands):

 
| ** **                                           | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Net cash (used in) provided by operating  activities |       | $                                             | (827       | ) | $ | 4,926 |   |
| Net cash used in investing activities                |       | (1,040                                        | )          | (34,370 | ) |
| Net cash (used in) provided by financing  activities |       | (772                                          | )          | 30,771 |   |
| Net change in cash and cash equivalents              |       | $                                             | (2,639     | ) | $ | 1,327 |   |

 

***Cash from OperatingActivities***

 

Cash used in operations for thethree months ended March 31, 2009 was attributable to a net loss of$2.0 million adjusted for the noncash impact of depreciation andamortization expense of $1.8 million, stock compensation of$0.3 million,  $3.9 million fortrade accounts receivable, $0.3 million for inventory, and $0.2 millionfor other non-current liabilities. These amounts are partially offset by $0.1million of amortization of lease income and initial direct costs, $0.4 millionof prepaids and other current assets, $1.9 million of accrued liabilities, and$2.9 million of deferred revenue.

 

Cash provided by operations forthe three months ended March 31, 2008 was attributable to our net loss of$0.5 million adjusted for the noncash impact of depreciation and amortizationexpense of $2.2 million, stock compensation expense of $0.2 million,unrealized loss on interest rate swap of $0.2 million, $0.2 million for tradeaccounts receivable, $0.6 million for prepaids and other current assets, $0.5million for accounts payable, $1.5 million for accrued liabilities, and $0.9million for deferred revenue. These amounts are partially offset by deferredincome taxes of $0.4 million, amortization of lease income and initial directcosts of $0.2 million, inventory of $0.3 million, and other non-currentliabilities of $0.2 million.

 

***Cash from InvestingActivities***

 

Cash used in investingactivities totaled $1.0 million for the three months ended March 31,2009 and consisted primarily of additions to property and equipment of $0.1 million,software development costs of $0.9 million and additions to intangibles andother assets of $0.1 million. These cash uses were offset by $0.1 millionin net proceeds from our direct finance leases activities.

 

Cash used in investingactivities totaled $34.4 million for the three months ended March 31,2008 and consisted primarily of business acquisitions, purchases of propertyand equipment, and capitalization of software development costs. We used$33.0 million to purchase the assets of Alogent in January 2008.Additions to property and equipment totaled $0.7 million, software developmentcosts were $0.7 million and additions to intangibles and other assets were $0.2million.  These cash uses were offset by$0.3 million in net proceeds from our direct finance leases activities.

 

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***Cash from FinancingActivities***

 

During the three months ended March 31,2009, net cash used in financing activities was $0.7 million and wasattributable primarily to the repayment on our revolving line of credit of $0.6million. We received proceeds from non-recourse lease notes payables of$0.5 million offset by payment on non-recourse lease notes payables of$0.5 million, and capital lease obligations of $0.1 million.

 

During the three months ended March 31,2008, net cash provided by financing activities was $30.8 million and wasattributable primarily to borrowing of $32.0 million from our revolving line ofcredit of which we repaid $1.0 million. We received proceeds from non-recourselease notes payables of $0.4 million offset by payment on non-recourselease notes payables of $0.5 million, and capital lease obligations of$0.1 million.

 

***Analysis of Changesin Working Capital Deficit***

 

As of March 31, 2009, wehad a working capital deficit of approximately $49.9 million compared to aworking capital deficit of $4.6 million as of March 31, 2008. The decreasein working capital is primarily related to the maturity date of our revolvingline of credit on January 15, 2010 totaling $37 million and the maturitydate of the convertible notes on January 17, 2010 totaling $7million.  Other decreases are $2.6million in cash, $3.9 million of trade accounts receivables, and $0.3 millionof inventory.  These decreases wereoffset by prepaids and other current assets of $0.5 million, accruedliabilities of $1.9 million, deferred revenue of $2.8 million and non-recourselease notes payables of $0.3 million.

 

We believe that the existingcash available, future operating cash flows and our revolving line of creditwill be sufficient to meet our working capital, debt service, and capitalexpenditure requirements for the next twelve months. We are in compliance withall restrictive financial and non-financial covenants for the three monthsended March 31, 2009.  There can beno assurance that we will have sufficient cash flows to meet our obligations orthat we will remain in compliance with the covenants. Non-compliance with thesecovenants could have a material adverse effect on our operating and financialresults.

 

***Revolving Line of Credit***

 

We are party to a SecondAmended and Restated Credit Agreement with Bank of America, N.A., WachoviaBank, N.A., and The People’s Bank of Winder, dated November 30, 2006,which was amended on January 17, 2008, December 24, 2008, and February 18,2009.  January 15, 2010 is thematurity date of this credit agreement.

 

The material terms of thesyndicated credit facility are as follows:

 

·                  the revolving loan commitment is$45.0 million;

 

·                  the limit on annual capitalexpenditures is $7.0 million;

 

·                  two additional applicable interestrates are included in the pricing grid, with a minimum level of LIBOR plus1.375%, 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 atthe option of the Company;

 

·                  the funded debt to EBITDA ratio (asdefined) is 3.0;

 

·                  the senior funded debt to EBITDAratio (as defined) is 3.0; and

 

·                  the Company is to maintain a fixedcharge coverage ratio (as defined) of not less than 2:1.

 

We borrowed $32.0 millionagainst the line of credit to fund the Alogent acquisition in January 2008.As of March 31, 2009 and December 31, 2008 we owed $36.9 million and$37.5 million, respectively on the revolving line of credit. As of March 31,2009, we were in compliance with the restrictive financial and non-financialcovenants contained in the second amended and restated credit agreement.  At March 31, 2009, we had eligiblecapacity as defined to borrow $8.1 million under the second amended andrestated credit agreement.

 

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On February 18, 2009, weamended the definition of EBITDA for the purposes of the Credit Agreement sothat the first sentence of the definition was deleted in its entirety andreplaced by the following text:

 

“**EBITDA**” means, with respect to any Personfor any period, on a consolidated basis the sum of (a) net incomeavailable to common stockholders *plus*(b) to the extent deducted in arriving at net income, the sum of: (i) preferredstock dividends paid and preferred stock deemed distributions, (ii) incometax expense (less income tax benefit), (iii) interest expense, (iv) depreciationand amortization, (v) annual maintenance fees that will be required to beexcluded from deferred revenue and the profit and loss statement in accordancewith GAAP purchase accounting rules and (vi) any non-cash charges andexpenses, including goodwill impairment charges, *minus* (c) to the extent included in arriving at netincome, any (i) non-cash gains and (ii) gains as a result of paymentsin connection with the sale of the core data processing and teller systembusiness disposed of by Borrower including, without limitation, earn outpayments; *provided*, *however*, for calculation periods ending onor after December 31, 2008, to the extent otherwise included for suchcalculation period, EBITDA shall not include EBITDA from the core dataprocessing and teller system business disposed of by Borrower.

 

**Critical Accounting Policies**

 

We have based our discussionand analysis of financial condition, results of operations, and liquidity andcapital resources on our consolidated financial statements. The preparation ofthese consolidated financial statements in accordance with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the dates of the financial statements, and the reported amounts of revenuesand expenses during the reporting periods. Management evaluates its criticalaccounting policies and estimates on a periodic basis.

 

A “critical accounting policy”is one that is both important to the understanding of our financial conditionand results of operations and requires management’s most difficult, subjectiveor complex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.

 

Please refer to our AnnualReport on Form 10-K for the year ended December 31, 2008 for acomplete discussion of our critical accounting policies.

 

*Intangibles and Other Assets andGoodwill*

 

Goodwill consists of the excess of purchaseprice over the fair value of the identifiable assets and liabilities acquired.Intangible and other assets include identified intangibles, such as non-competeagreements, customer lists, trade names and trademarks, and technology acquiredin acquisitions. Also included in intangible and other assets are debt issuancecosts that are amortized using the effective interest method over therespective terms of the financial institution loans. As of March 31, 2009and 2008, the Company believes no impairment to the identifiable intangiblesand other assets existed.

 

On an annual basis, our goodwill is testedfor impairment or when events and circumstances indicate an impairment mayexist. In accordance with SFAS 142, *Goodwilland Other Intangible Assets*, we have determined that our reportingunits are the reportable segments based on our organizational structure and thefinancial information that is provided to and reviewed by management. Oursegments defined as reporting units include financial institution services (“FIS”)and retail inventory management services (“RMSA”).

 

Impairment testing of goodwill is performedin two steps. First, the carrying value of the reporting unit is compared tothe fair value of the reporting unit.  Todetermine fair value in step one; we utilize approaches which focus on ourability to produce income and the estimated consideration which we wouldreceive if there were to be a sale of the reporting units. Consideration isgiven to our discounted projected future cash flows, our market capitalization,and market multiples of comparable companies within the industry. If thecarrying value is less than the fair value, no goodwill impairment is recorded.However, should the carrying amount for the reporting unit exceed its fairvalue, then we proceed to the second step of the goodwill impairment testing.

 

The second step of the impairment test, usedto measure the amount of impairment loss, compares the implied fair value ofthe reporting unit goodwill with the carrying amount of that goodwill. If thecarrying amount of the reporting unit goodwill exceeds the implied fair valueof the goodwill, the impairment loss shall be recognized as an operatingexpense in an amount equal to that excess.

 

For the three months ended March 31,2009 and 2008, we concluded there were no factors that would require an interimimpairment goodwill test. We did conclude during our evaluation at December 31,2008 that we had impaired goodwill and we recorded non-cash charges of $36.5million and $1.6 million for our financial institution segment and our retailmanagement segment, respectively.

 

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Our annual impairment review and interimreview requires extensive use of accounting judgment and financial estimates,including projections about our business, our financial performance, and theperformance of the market and overall economy. Application of alternativeassumptions and definitions could produce significantly different results. Becauseof the significance of the judgments and estimation processes, it is likelythat materially different amounts could be recorded if we used differentassumptions or if the underlying circumstances were to change.

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2009 and as of the date of this report, we did nothave any off-balance sheet arrangements as defined by Item 303(a)(4) ofRegulation S-K.

 

**Item 4T. Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

Goldleaf, with the participationof our principal executive and financial officers, has evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rules 13a-15(e) and 15d-15(e) promulgated underthe Securities Exchange Act of 1934, as amended, as of March 31, 2009.Based on this evaluation, the principal executive and financial officers havedetermined that such disclosure controls and procedures are effective to ensurethat information required to be disclosed in our filings under the SecuritiesExchange Act of 1934 is recorded, processed, summarized, and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**Changes in Internal Control over FinancialReporting**

 

There has been no change in ourinternal control over financial reporting that has occurred during the quarterended March 31, 2009 that has materially affected, or is reasonably likelyto materially affect our internal control over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

**Item 1A. Risk Factors.**

 

There have been no material changes in the Risk Factors described inour Annual Report on Form 10-K for the year ended December 31,2008, other than as described below.

 

***Our secured indebtedness could adverselyaffect our business and limit our ability to effectively operate our business,and we may be unable to generate sufficient cash flow to satisfy our liquidityneeds.***

 

As of March 31, 2009, our outstanding secured indebtedness was$43.9 million, which matures in January 2010.  Our leverage could limit our ability toobtain additional financing to fund future working capital, expose us tointerest rate risk, require that a portion of our cash flow from operations bededicated to the payment of the principal of and interest on our debt, therebyreducing funds available for future operations or acquisitions, and potentiallylimit our ability to take advantage of significant business opportunities andto react to changes in market or industry conditions.

 

Our senior credit facility requires us to meet various covenants,including financial covenants, some of which are dependent upon the extent ofour leverage. We will depend primarily on operations to fund our expenses andto pay the principal and interest on our outstanding debt.  Our ability to meet our expenses, comply withour financial covenants and reduce our outstanding debt depends on our futureperformance, which could be affected by financial, business, economic,competitive, legislative, regulatory and other factors, many of which arebeyond our control.  If we are unable torefinance, extend or repay our senior debt by its maturity in January 2010,or sooner if we fail to comply with our various covenants, our lenders wouldhave the right to demand payment and exercise all remedies set forth in theirrespective agreements or they could require us to sell assets, raise capital orborrow additional funds, each of which would have a material adverse effect onour liquidity, financial condition, and the value of our common stock.  While we have been in discussions with ourlenders concerning the replacement of our senior secured credit facility andbased on those conversations we believe we should be able to refinance thecredit facility on substantially similar terms, there can be no assurance thatsuch replacement facility will be available at all or on terms that areacceptable to our company.

 

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**Item 6. Exhibits.**

 

The exhibits described in the following Index to Exhibits are filed aspart of this quarterly report on Form 10-Q.

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                       |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                             |
| 3.1         |       | 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        |       | Third  Amendment to Second Amended and Restated Credit Agreement dated  February 18, 2009 by and among the Company, Bank of America, N.A., The  Peoples Bank and Wachovia Bank, N.A.                                                                        |
|        |       |                                                                                                                                                                                                                                                             |
| 10.2        |       | Change  in Control Severance Agreement dated May 13, 2009 between the Company  and Daniel Owens                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                             |
| 31.1        |       | 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.                                                                                          |

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| ** **              | **Goldleaf Financial Solutions, Inc.**   |
|-------------------------|-----------------------------------------------|
|                    | (Registrant)                                  |
|                    |                                          |
| Date: May 14, 2009 | /s/ G. Lynn Boggs                             |
|                    | G. Lynn Boggs                                 |
|                    | Chief Executive Officer                       |
|                    | (Principal Executive Officer)                 |
|                    |                                          |
| Date: May 14, 2009 | /s/ Dan Owens                                 |
|                    | Daniel Owens                                  |
|                    | Chief Financial Officer                       |
|                    | (Principal Financial and Accounting  Officer) |

 

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