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 that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements.
Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including
the risks described in our annual report on Form 10-K and other reports we file with the Securities and Exchange Commission. Although
we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date
on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report
to conform these statements to actual results or to changes in our expectations, except as required by law.
This discussion and analysis 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, 2016, filed April 6, 2017, 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, PINless
debit, prepaid card, 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 Akimbo, under the domain name www.akimbocard.com, we offer MasterCard prepaid cards to consumers for use as a
tool to stay on budget, manage allowances and share money with family and friends. We have further developed our Akimbo platform
to include Akimbo Now for businesses, Akimbo Gift for consumers and support for Apple Pay™.
We reported a net loss of $286,583 for
the first quarter of 2017 and a net loss of $1,196,642 for year ended December 31, 2016. Our credit card transaction processing
volume and credit card dollars processed in the first quarter of 2017 decreased 30% and 13%, respectively, over the same time period
in 2016. The significant decrease in transaction volume was due to the exit of a fast-food retailer.
ACH (eCheck) transaction volume during first quarter of 2017
decreased 13% from the first quarter of 2016. Returned check transactions processed during first quarter of 2017 were down 6% over
the same time period in 2016. Total dollars processed for the first quarter of 2017 exceeded $695 million.
Due to our strong sales pipeline, we believe
the downward trend in ACH transactions processed will reverse in the second half of 2017 and early 2018. 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. Our prepaid
credit card transactions should continue to grow and our recently implemented PINLess debit transactions should also continue to
grow. We believe we will continue to maintain positive cash flows from operations, but it is possible that we will not regain profitability
in 2017. 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) grow revenues, (b) effectively manage our operating expenses, (c) add quality customers to our client base, (d)
meet evolving customer requirements, (e) adapt to technological changes in an emerging market and (f) properly assimilate current
and future acquisitions of companies and or customer portfolios. 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 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, revenue 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.
For a summary of Critical Accounting Policies, please
refer to the Notes to Interim Consolidated Financial Statements, Note 1. Basis of Presentation.
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 for the quarter ended March
31, 2017 decreased 13% to $2,810,744 as compared to $3,228,631 for the quarter ended March 31, 2016. The decrease for the
quarter ended March 31, 2017, as compared to the same period in the prior year, was due to the decrease in the volume of ACH
processing, credit card and return transactions processed, as well as a loss of some customers. The revenue decrease was
somewhat offset by revenues from the new PINless debit product which was launched in October 2016 as well as debit card
processing fees.
Cost of services decreased 13% to $1,867,945
for the quarter ended March 31, 2017, as compared to $2,154,783 for the same period in the prior year. The decrease for the quarter
ended March 31, 2017, as compared to the same period in the prior year, was due to the decrease in the volume of ACH processing,
credit card, and return transactions processed.
Stock-based compensation expenses were
$207,920 and $287,689 for the quarters ended March 31, 2017 and March 31, 2016, respectively. The decreased stock-based compensation
expense is due to cancelled and fully amortized stock grants. Stock-based compensation expenses primarily represent the amortization
of deferred compensation expenses related to incentive stock awards granted to employees, executives and directors.
Other selling, general and administrative
expenses increased 36% to $828,272 for the quarter ended March 31, 2017, as compared to $608,349 for the same period in the prior
year. The increase in other selling, general and administrative expenses for the three months ended March 31, 2016, is generally
a result of higher salaries, higher investor relations and higher compliance costs.
Depreciation and amortization totaled
$228,545 for the quarter ended March 31, 2017, compared to depreciation and amortization of $224,223 for the same period in
the prior year.
Other income (expense), net were incomes
of $35,355 and $21,411 for the quarters ended March 31, 2017 and March 31, 2016, respectively. Interest income was $33,816 and
$22,011, for the quarters ended March 31, 2017 and March 31, 2016, 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.
We reported net loss of $286,583 for the
quarter ended March 31, 2017, as compared to net loss of $32,002 for the same period in the prior year.
Liquidity and Capital Resources
At March 31, 2017, we had $3,618,305 of
cash and cash equivalents, as compared to $4,120,738 of cash and cash equivalents at December 31, 2016. The decrease in cash for
the three months ended March 31, 2017 was primarily due to investment in capital projects and notes receivable issuances offset
by cash generated from operations.
We reported net loss of $286,583
for March 31, 2017 and a net loss of $1,196,642 for year ended December 31, 2016 and we have an accumulated deficit
of $50,538,224 at March 31, 2017. Additionally, we reported working capital of $4,402,254 and $4,522,151 at March 31, 2017 and
December 31, 2016, respectively.
Net cash provided by operating activities
was $238,583 and $472,239 for the three months ended March 31, 2017 and 2016, respectively. The decrease in net cash provided by
operating activities for the three months ended March 31, 2017 as compared to the same period in the prior year, was attributable
to a higher net loss.
Net cash used by investing activities was
($710,052) for the three months ended March 31, 2017, as compared to net cash used by investing activities of ($307,954) for the
same period in the prior year. The increase in net cash used for investing activities was primarily due to $500,000 loaned to Singular
Payments, LLC on March 7, 2017 and a higher level of capital expenditures. Net cash used by financing activities was $30,964 and
$0, respectively for the three months ended March 31, 2017 and March 31, 2016.
Off-Balance Sheet Arrangements
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.