Item 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS DISCLAIMER
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “anticipate,”
“suggest,” “estimate,” “plan,” “project,” “continue,” “ongoing,”
“potential,” “expect,” “predict,” “believe,” “intend,” “may,”
“will,” “should,” “could,” “would,” “proposal,” and similar expressions
are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could
cause our actual results to differ materially from those projected. These risks and uncertainties include, but are not limited
to the risks described in our Annual Report on Form 10-K including: the sufficiency of our security applications; our ability to
adapt to rapid technological change; our relationship with the Automated Clearing House network; the failure of our third-party
card processing providers or our bank sponsors to comply with the applicable requirements of Visa, MasterCard and Discover credit
card associations; our ability to comply with applicable requirements of the respective card networks; and our ability to comply
with federal and state regulation. These forward-looking statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect
any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement
is based, except as required by law.
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements
and the notes thereto included in this report, and our annual report on Form 10-K for the fiscal year ended December 31, 2015,
filed with the Securities and Exchange Commission on March 30, 2016, including the audited consolidated financial statements and
the notes contained therein.
Overview
We provide integrated electronic payment processing services to merchants and businesses, including all types
of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based processing services. We also operate
an online payment processing service, under the domain name www.billx.com system, which allows consumers to process online payments
to pay any other individual, including family and friends. Through our recently acquired business Akimbo, under the domain name
www.akimbocard.com, we offer Visa prepaid cards to consumers for use as a tool to stay on budget, manage allowances and share money
with family and friends. The Akimbo MasterCard program became live on our processing platform in early April 2015. The Akimbo Visa
card program was decommissioned of all services on May 30, 2015 and the card customers were transitioned to the Akimbo MasterCard
card program. Since then we have further developed our Akimbo platform to include Akimbo Now for businesses, Akimbo Gift for consumers
and support for Apple Pay™. We introduced a new PIN-less debit product, that allows merchants to debit and credit accounts
in real-time in October 2016.
We reported a net loss of $953,259 for
the nine months ended September 30, 2016 and net income of $1,016,088 for year ended December 31, 2015. Third quarter 2016 credit
card processing volumes decreased 2% compared to the same time period in 2015. Credit card dollars processed during the third quarter
of 2016 decreased 9% compared to the same time period in 2015. Electronic check transaction (ACH) volumes during third quarter
of 2016 were down 15% over the same time period in 2015, but increased 8% compared to the second quarter of 2016. Returned check
transactions processed during the third quarter of 2016 were down 24% over the same time period in 2015, but increased 22% compared
to the prior quarter. Total dollars processed for the third quarter of 2016 exceeded $759.3 million, representing the highest quarterly
total dollars processed to date for 2016.
Due to our strong sales pipeline and new product introduction, we
believe the downward trend in transactions processed will reverse in the fourth quarter of 2016 and early 2017. We also expect
to see an increase in the number of enrolled merchant customers, for whom we provide processing for credit and debit card transactions,
and we expect to add new clients from our sales pipeline, which we believe will create increased transaction volumes. We believe
we will return to profitability we experienced in years 2015 and 2014 in the foreseeable future, but it is possible that we will
not regain profitability. We may incur future operating losses. To regain and sustain profitability, we must, among other things,
grow and maintain our customer base, implement a successful marketing strategy, continue to maintain and upgrade our technology
and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and
motivate qualified personnel, and respond to unforeseen industry developments and other factors. We believe that our success will
depend in large part on our ability to (a) manage our operating expenses, (b) add quality customers to our client base, (c) meet
evolving customer requirements and (d) adapt to technological changes in an emerging market. Accordingly, we intend to focus on
customer acquisition activities and outsource some of our processing services to third parties to allow us to maintain an efficient
operating infrastructure and expand our operations without significantly increasing our fixed operating expenses.
Critical Accounting Policies
General
Our management’s discussion and analysis of financial condition
and results of operations is based upon our interim condensed consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to the reported amounts of revenues
and expenses, bad debt, investments, intangible assets, income taxes, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from these estimates under different assumptions or conditions. We consider the
following accounting policies to be critical because the nature of the estimates or assumptions is material due to the levels of
subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change or
because the impact of the estimates and assumptions on financial condition or operating performance is material.
Revenue Recognition
Revenue consists primarily of fees generated through the electronic
processing of payment transactions and related services, and is recognized as revenue during the period the transactions are processed
or when the related services are performed. Merchants may be charged for these processing services at a bundled rate based on a
percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain
merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees
for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of
credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of
amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations (Visa, MasterCard and Discover).
Revenue also includes any up-front fees for the work involved in implementing the basic functionality required to provide electronic
payment processing services to a customer. Revenue from such implementation fees is recognized over the term of the related service
contract. Sales taxes billed are reported directly as a liability to the taxing authority, and are not included in revenue.
Reserve for Processing Losses
If, due to insolvency or bankruptcy of one of our merchant customers,
or for any other reason, we are not able to collect amounts from our credit card, ACH or prepaid customers that have been properly
"charged back" by the customer, or if a prepaid cardholder incurs a negative balance, we must bear the credit risk for
the full amount of the transaction. We may require cash deposits and other types of collateral from certain merchants to minimize
any such risk. In addition, we utilize a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card
merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering
other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant
relationship with its consumers and our relationship with our prepaid card holders. This reserve amount is subject to the risk
that actual losses may be greater than our estimates. We have not incurred any significant processing losses to date. Estimates
for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At
September 30, 2016 our reserve for processing losses was $212,018 and $248,868 at December 31, 2015.
We experienced a computer malfunction in our ACH processing engine
on August 26, 2016 that resulted in overfunding to accounts of some of our merchants’ customers of $236,850. We believe that
we will be able to recover a portion, or all of the funds, from the customers that have not yet returned the funds. For those amounts
we cannot recover from customers, we may request that our merchants reimburse us, as we are entitled under our merchant processing
agreements for computer malfunctions. We do not expect similar processing losses in the immediate future. However, we have decided
to fund the reserve with $200,000 in the event we are unable to recover all, or a portion, of the funds.
Settlement Processing Assets and Obligations
Settlement processing assets and obligations
represent intermediary balances arising in our settlement process for merchants. Funds settlement refers to the process of transferring
funds for sales and credits between card issuers and merchants. For transactions processed on our systems, we use our internal
network to provide funding instructions to financial institutions that in turn fund the merchants.
Restricted Cash
Restricted cash includes certain funds collected from our merchants that serve as collateral to minimize contingent
liabilities associated with any losses that may occur under our agreement with the merchant. The funds may be used to offset any
returned items or chargebacks to us and to indemnify us against third-party claims and any expenses that may be created by the
customer as a result of any claim or fine. We may require the customer security deposit based on estimated transaction volumes,
amounts and chargebacks and may revise the deposit based on periodic review of the same items. Repayment of the deposit to the
customer is generally within 90 to 180 days beyond the date the last item is processed by us on behalf of the customer. The customer
security deposit does not accrue interest to the benefit of the customer.
Bad Debts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability or failure of our customers to make required payments. We determine the allowance for doubtful accounts
based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical
pattern of collections and financial condition of the customer. Past losses incurred by us due to bad debts have been within our
expectations. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to
make contractual payments, additional allowances might be required. Estimates for bad debt losses are variable based on the volume
of transactions processed and could increase or decrease accordingly. At September 30, 2016 and December 31, 2015, our allowance
for doubtful accounts was $29,503 and $35,033, respectively.
Valuation of Long-Lived and Intangible
Assets
We assess the impairment of long-lived and intangible assets periodically,
or at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors considered important, which could trigger an impairment review, include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall
business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible
assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair
value. No impairment losses were recorded in 2015 or during the nine months ended September 30, 2016. Management is not aware of
any impairment changes that may currently be required; however, we cannot predict the occurrence of events that might adversely
affect the reported values in the future.
Income Taxes
Deferred tax assets and liabilities are
recorded based on the difference between financial reporting and tax bases of assets and liabilities and are measured by the enacted
tax rates and laws that are expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed
with the presumption that they will be realizable in future periods when taxable income is generated. Predicting the ability to
realize these assets in future periods requires a great deal of judgment by management. U.S. generally accepted accounting principles
prescribe a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income
tax benefits that meet the “more likely than not” recognition threshold should be recognized. Goodwill is amortized
over 15 years for tax purposes.
At December 31, 2015, we had available net operating loss carryforwards
of approximately $39.7 million, which expire beginning in the year 2020. Approximately $0.1 million of the total net operating
loss is subject to an IRS Section 382 limitation from 1999. However, we cannot predict with reasonable certainty that all of the
available net operating loss carryforwards will be realized in future periods. Accordingly, we recorded a valuation allowance of
$12.2 million. As of December 31, 2015 we recognized net deferred tax assets of $1.6 million. The Company reviewed the assessment
of the deferred tax asset and valuation allowance for the period ended September 30, 2016 and will reevaluate the assessment on
December 31, 2016.
Management is not aware of any tax positions
that would have a significant impact on our financial position.
Results of Operations
Our revenues are principally derived from
providing integrated electronic payment services to merchants and businesses, including credit and debit card-based processing
services and transaction processing via the Automated Clearing House, or ACH, network and the program management and processing
of prepaid debit cards. We also operate an online payment processing service for consumers under the domain name www.billx.com
and sell this service as a private-label application to resellers.
Revenues
Revenues for the quarter ended September 30, 2016 decreased 14% to $3,067,335, as compared to $3,550,463 for the
quarter ended September 30, 2015. Revenues for the nine months ended September 30, 2016 decreased 14% to $9,186,027, as compared
to $10,717,679 for the nine months ended September 30, 2015. The decrease for the quarter and nine months ended September 30, 2016,
as compared to the same periods in the prior year, was due to the decreases in the volume of ACH processing transactions, and return
transactions processed.
Cost of Services
Cost of services includes the cost of personnel
dedicated to the creation and maintenance of connections to third-party payment processors and the fees paid to such third-party
providers for electronic payment processing services. Through our contractual relationships with our payment processors and sponsoring
banks, we are able to process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers.
We pay volume-based fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks,
and pay fees for other transactions such as returns, notices of change to bank accounts and file transmission.
Cost of services decreased 10% to $2,101,850 for the quarter ended September 30, 2016, as compared to $2,336,270
for the same period in the prior year. Cost of services decreased 12% to $6,291,072 for the nine months ended September 30, 2016,
as compared to $7,138,450 for the same period in the prior year. The decrease for the quarter and the nine months ended September
30, 2016, as compared to the same periods in the prior year, was due to the decrease in the volume of ACH processing transactions,
and return transactions processed.
Stock-based Compensation
Stock-based compensation expenses were $264,154 and $338,488 for
the quarters ended September 30, 2016 and September 30, 2015, respectively. Stock-based compensation expenses were $835,590 and
$965,544 for the nine months ended September 30, 2016 and September 30, 2015, respectively. The decrease in stock-based compensation
expense is due to shares that vested in December 2015, and during the nine months ended September 30, 2016 that we no longer have
to amortize.
Cancellation of stock-based compensation expense (income) was ($44,875) and $0 for the quarters ended September 30,
2016 and September 30, 2015, respectively and ($44,875) and ($163,936) of income for the nine months ended September 30, 2016 and
September 30, 2015, respectively. These amounts represent non-vested stock-based awards to former employees or directors that were
expensed in prior periods that were cancelled during the respective three and nine month periods.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses increased 44% to $1,095,344 for the quarter ended September
30, 2016, as compared to $758,573 for the same period in the prior year. The increase in other selling, general and administrative
expenses for the quarter ended September 30, 2016, as compared to the same period in the prior year, represented increases to the
reserve for merchant processing losses for $200,000 and to salaries of approximately $171,000, and an a reduction of contract labor
of approximately $27,000.
Other selling, general and administrative expenses increased 48%
to $2,505,233 from $1,695,415 for the nine months ended September 30, 2016 and September 30, 2015, respectively. The increase in
other selling, general and administrative expenses for the nine months ended September 30, 2016, as compared to the same period
in the prior year, represented increases to the reserve for merchant processing losses for $200,000 and to salaries and benefits
of approximately $606,000.
Depreciation and Amortization
Depreciation and amortization totaled $225,759 for the quarter ended
September 30, 2016, compared to depreciation and amortization of $93,800 for the same period in 2015. Depreciation and amortization
totaled $675,536 for the nine months ended September 30, 2016, compared to depreciation of $272,320 for the same period in the
prior year. The increases are primarily due to a change in the useful life for $2,585,385 of software acquired from Akimbo from
10 years to 5 years in the quarter ended December 31, 2015.
Other Income (Expense)
Other income was $25,274 and $169,938 for the quarter and nine months ended September 30, 2016 compared to income
of $110,697 and $116,645 for the quarter and nine months ended September 30, 2015, respectively. The decrease for the quarter,
as compared to the same period in the prior year was due to a one-time reversal of expense accrual of $91,598 because the statute
of limitations had expired during the quarter ended September 30, 2015. The increase for the nine months ended September 30, 2016
as compared to the same period in the prior year is primarily due to the settlement of a legal case in our favor resulting in $97,493.
Interest income was $25,754 and $20,097, for the quarters ended
September 30, 2016 and September 30, 2015, respectively. The increase in interest for the quarter, as compared to the same period
in the prior year, was primarily due to the increase in interest earned on higher cash balances.
Interest income was $72,739 and $58,455, for the nine months ended September 30, 2016 and September 30, 2015, respectively.
The increase in interest for the nine months, as compared to the same period in the prior year was primarily due to the increase
in interest earned on higher cash balances.
We reported a net loss of $565,957 and $953,259 for the quarter and nine months ended September 30, 2016,
as compared to net income of $117,780 and $851,246 for the same periods in the prior year.
Liquidity and Capital Resources
At September 30, 2016, we had $4,293,590 of cash and cash equivalents,
as compared to $4,059,606 of cash and cash equivalents at December 31, 2015. The increase in cash for the nine months ended September
30, 2015 was primarily due to cash generated from operations. Beginning with December 31, 2015 we separated Restricted cash and
Settlement processing assets and obligations from Cash and cash equivalents. We have reclassified the 2015 balance sheet to the
same format so that the presentation is consistent with the 2016 presentation.
We reported a net loss of $953,259 for the first three quarters
of 2016 and net income of $1,016,088 for the year ended December 31, 2015 and at September 30, 2016 we have an accumulated deficit
of $50,008,263. Additionally, we reported working capital of $4,495,982 and $3,872,190 at September 30, 2016 and December 31,
2015, respectively.
Net cash provided by operating activities was $585,581 and $1,721,646
for the nine months ended September 30, 2016 and 2015, respectively. The decrease in net cash provided by operating activities
for the nine months ended September 30, 2016 as compared to the same period in the prior year was attributable to a net loss compared
to net income in the same period last year.
Net cash used by investing activities was $351,597 for the nine
months ended September 30, 2016, as compared to net cash used by investing activities of $726,476 for the same period in the prior
year; the decrease in net cash used for investing activities was primarily due to lower capitalization of expenses incurred for
the development of software upgrades for internal use. Net cash used by financing activities was $0 for the nine months ended September
30, 2016 and $26,541 for the nine months ended September 30, 2015. The decrease in cash used for financing activities was due to
fewer repurchases of treasury shares.
Off-Balance Sheet Transactions
We currently have no off-balance sheet arrangements that have or
are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.