Item 1. Financial Statements.
PAYMENT DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
3,226,451
|
|
|
$
|
4,120,738
|
|
Accounts receivable, net
|
882,103
|
|
|
907,750
|
|
Settlement processing assets
|
36,551,837
|
|
|
43,851,311
|
|
Prepaid expenses and other
|
228,739
|
|
|
142,029
|
|
Notes receivable
|
700,000
|
|
|
200,000
|
|
Current assets before restricted cash
|
41,589,130
|
|
|
49,221,828
|
|
Restricted cash
|
14,952,520
|
|
|
15,803,641
|
|
Total current assets
|
56,541,650
|
|
|
65,025,469
|
|
|
|
|
|
Property and equipment, net
|
2,418,688
|
|
|
2,494,510
|
|
|
|
|
|
Other assets:
|
|
|
|
Intangibles, net
|
91,329
|
|
|
172,899
|
|
Deferred tax asset
|
1,621,000
|
|
|
1,621,000
|
|
Other assets
|
223,375
|
|
|
200,808
|
|
Total other assets
|
1,935,704
|
|
|
1,994,707
|
|
|
|
|
|
Total assets
|
$
|
60,896,042
|
|
|
$
|
69,514,686
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
135,680
|
|
|
$
|
145,044
|
|
Accrued expenses
|
733,417
|
|
|
703,322
|
|
Settlement processing obligations
|
36,551,837
|
|
|
43,851,311
|
|
Current liabilities before restricted cash
|
37,420,934
|
|
|
44,699,677
|
|
Restricted cash
|
14,952,520
|
|
|
15,803,641
|
|
Total current liabilities
|
52,373,454
|
|
|
60,503,318
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares authorized; -0- shares outstanding at June 30, 2017 (unaudited) and December 31, 2016, respectively
|
—
|
|
|
—
|
|
Common stock, $0.001 par value, 200,000,000 shares authorized; 12,460,932 and 12,392,288 issued, and 11,790,558 and 11,795,939 outstanding at June 30, 2017 (unaudited) and December 31, 2016, respectively
|
181,886
|
|
|
181,818
|
|
Additional paid-in capital
|
63,970,168
|
|
|
63,881,365
|
|
Treasury stock, at cost; 670,374 and 596,349 shares at June 30, 2017 (unaudited) and December 31, 2016, respectively
|
(827,088
|
)
|
|
(718,149
|
)
|
Deferred compensation
|
(3,729,817
|
)
|
|
(4,082,025
|
)
|
Accumulated deficit
|
(51,072,561
|
)
|
|
(50,251,641
|
)
|
Total stockholders’ equity
|
8,522,588
|
|
|
9,011,368
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
$
|
60,896,042
|
|
|
$
|
69,514,686
|
|
See notes to condensed interim consolidated financial statements.
PAYMENT DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
2,550,441
|
|
|
$
|
2,890,060
|
|
|
$
|
5,361,185
|
|
|
$
|
6,118,691
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Cost of services
|
1,854,406
|
|
|
2,034,439
|
|
|
3,722,351
|
|
|
4,189,222
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
Stock-based compensation
|
217,759
|
|
|
283,747
|
|
|
425,679
|
|
|
571,436
|
|
Other expenses
|
799,740
|
|
|
801,540
|
|
|
1,628,012
|
|
|
1,409,889
|
|
Depreciation and amortization
|
227,273
|
|
|
225,554
|
|
|
455,818
|
|
|
449,777
|
|
Total operating expenses
|
3,099,178
|
|
|
3,345,280
|
|
|
6,231,860
|
|
|
6,620,324
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
(548,737
|
)
|
|
(455,220
|
)
|
|
(870,675
|
)
|
|
(501,633
|
)
|
|
|
|
|
|
|
|
|
Other income and (expense):
|
|
|
|
|
|
|
|
Interest income
|
38,730
|
|
|
24,974
|
|
|
72,546
|
|
|
46,985
|
|
Other income (expense)
|
(2,653
|
)
|
|
98,279
|
|
|
(1,114
|
)
|
|
97,679
|
|
Total other income and (expense), net
|
36,077
|
|
|
123,253
|
|
|
71,432
|
|
|
144,664
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
(512,660
|
)
|
|
(331,967
|
)
|
|
(799,243
|
)
|
|
(356,969
|
)
|
Income taxes
|
21,677
|
|
|
23,334
|
|
|
21,677
|
|
|
30,334
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(534,337
|
)
|
|
$
|
(355,301
|
)
|
|
$
|
(820,920
|
)
|
|
$
|
(387,303
|
)
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
Diluted earnings per common share:
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
8,471,494
|
|
|
7,738,759
|
|
|
8,478,339
|
|
|
7,729,003
|
|
Diluted
|
8,471,494
|
|
|
7,738,759
|
|
|
8,478,339
|
|
|
7,729,003
|
|
See notes to condensed interim consolidated financial statements.
PAYMENT DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
Net income (loss)
|
$
|
(820,920
|
)
|
|
$
|
(387,303
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
Depreciation
|
374,249
|
|
|
368,208
|
|
Amortization
|
81,569
|
|
|
81,569
|
|
Non-cash stock based compensation
|
425,679
|
|
|
571,436
|
|
Issuance of stock to consultant
|
15,400
|
|
|
34,300
|
|
Changes in current assets and current liabilities:
|
|
|
|
Accounts receivable
|
25,647
|
|
|
65,148
|
|
Prepaid expenses and other
|
(86,710
|
)
|
|
(68,298
|
)
|
Other assets
|
(22,567
|
)
|
|
551
|
|
Accounts payable and accrued expenses
|
20,731
|
|
|
(41,325
|
)
|
Deferred revenue
|
—
|
|
|
33,000
|
|
Net cash provided by operating activities:
|
13,078
|
|
|
657,286
|
|
|
|
|
|
Investing activities:
|
|
|
|
Purchases of property and equipment
|
(298,426
|
)
|
|
(138,487
|
)
|
Notes receivable
|
(500,000
|
)
|
|
(200,000
|
)
|
Net cash (used) by investing activities:
|
(798,426
|
)
|
|
(338,487
|
)
|
|
|
|
|
Financing activities:
|
|
|
|
Purchases of treasury stock
|
(108,939
|
)
|
|
—
|
|
Net cash (used) by financing activities:
|
(108,939
|
)
|
|
—
|
|
|
|
|
|
Change in cash and cash equivalents
|
(894,287
|
)
|
|
318,799
|
|
Cash and cash equivalents, beginning of period
|
4,120,738
|
|
|
4,059,606
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
$
|
3,226,451
|
|
|
$
|
4,378,405
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
—
|
|
|
—
|
|
Income taxes
|
$
|
21,677
|
|
|
62,184
|
|
See notes to condensed interim consolidated financial statements.
PAYMENT DATA SYSTEMS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Payment Data Systems, Inc. and its subsidiaries (the “Company”) have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company's financial position, results of operations and cash flows for such periods. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 2016
, as filed with the Securities and Exchange Commission on April 6, 2017. Results of operations for interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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.
Cash and Cash Equivalents
: Cash and cash equivalents includes cash and other money market instruments. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.
Allowance for Estimated Losses:
The Company maintains an allowance for estimated doubtful accounts resulting from the inability or failure of the Company’s customers to make required payments. The Company determines the allowance for estimated doubtful account losses 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 the Company due to bad debts have been within its expectations. If the financial conditions of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make contractual payments, additional allowances might be required. Estimates for doubtful account losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At
June 30, 2017
and
December 31, 2016
, the Company’s allowance for estimated doubtful accounts was
$26,556
and
$26,556
, respectively.
Accounting for Internal Use Software:
The Company capitalizes the costs associated with software being developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed-in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (iii) interest costs incurred, when material, while developing internal-use software. The Company ceases capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. In the six months ended
June 30, 2017
, the Company capitalized
$196,854
of such costs.
Valuation of Long-Lived and Intangible Assets:
The Company assesses 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 under performance 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 2016 or during the six months ended
June 30, 2017
. Management is not aware of any impairment changes that may currently be required; however, the Company cannot predict the occurrence of events that might adversely affect the reported values in the future.
Reserve for Processing Losses:
If, due to insolvency or bankruptcy of one of the Company’s merchant customers, or for any other reason, the Company is not able to collect amounts from its credit card, ACH or prepaid customers that have been properly "charged back" by the customer, or if a prepaid cardholder incurs a negative balance, the Company must bear the credit risk for the full amount of the transaction. The Company may require cash deposits and other types of collateral from certain merchants to minimize any such risk. In addition, the Company utilizes 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 the Company’s 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 the Company’s relationship with the Company’s prepaid card holders. This reserve amount is subject to the risk that actual losses may be greater than the Company’s estimates. The Company has 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
June 30, 2017
, the Company’s reserve for processing losses was
$172,832
and was unchanged from December 31, 2016.
New Accounting Pronouncement:
In May 2014, the Financial Accounting Standards Board (FASB) issued accounting standards update,
ASU 2014-09
,
“Revenue from Contracts with Customers (Topic 606)"
and a subsequent amendment to the standard in March 2016,
ASU 2016-08 “Revenue from Contracts with Customers, Principal versus Agent Consideration (Reporting Revenue Gross versus Net)
." The original standard provides guidance on recognizing revenue, including a five step model to determine when revenue recognition is appropriate. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment to the standard clarifies implementation guidance on principal versus agent considerations. Adoption of the new standards is effective for reporting periods beginning after December 15, 2017, with early adoption not permitted. The Company is currently reviewing gross versus net reporting pronouncements and evaluating the potential impact that the adoption of this standard will have on its financial position, results of operations, and related disclosures, and will adopt the provisions of this new standard in the first quarter of 2018.
In February 2016, the FASB issued, “
Leases (Topic 842),
” which is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee will be required to recognize on the balance sheet an asset (right to use) and a liability (lease obligation) for leases with terms of more than 12 months. Accounting by lessors will remain largely unchanged from current U.S. generally accepted accounting principles. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. Management does not expect that adopting this standard will have a significant impact on its financial statements and related disclosures.
Note 2. Notes Receivable
On February 2, 2016, the Company entered into a loan and security agreement with C2Go, Inc., a Nevada corporation, pursuant to which the Company agreed to loan a principal amount of
$200,000
to C2Go with an interest rate of
10%
per annum for a term of
18
months. C2Go’s obligations under the loan and security agreement are secured by a first lien on all assets of C2Go. The debt is senior, and any future debt incurred by C2Go must be subordinated to the debt of the loan and security agreement. Upon maturity of the debt, C2Go is required to issue to the Company
5%
of the issued and outstanding shares of common stock of C2Go as of the date of issuance, on a fully diluted basis, giving effect to any convertible securities, warrants, etc., such shares being validly issued, fully-paid and non-assessable shares for no additional consideration.
Upon an event of default the interest rate under the loan and security agreement will rise to
18%
per annum. The full principal of the note, plus accrued and unpaid interest, was due to be repaid on or before August 2, 2017. C2Go did not make any payment on that date. Pursuant to the Note, C2Go has until August 16, 2017 to cure the payment default. If C2Go does not make the payment at that time, the Company may choose to pursue its security interest in the Note, which was secured against C2Go's assets. The Company is in ongoing discussions with C2Go regarding the payment due on the note. C2Go has indicated there are ongoing discussions with an investor to raise money to cover the principal and the unpaid interest. Due to the uncertainty of the situation and “more likely than not” recognition threshold as of June 30, 2017, the Company has
not
recorded a loss reserve on the note receivable.
On March 7, 2017, the Company agreed to provide
$500,000
to Singular Payments, LLC, a Florida limited liability company, under a secured line of credit promissory note. Interest on the note does not accrue until the earlier of May 31, 2017, the date of closing and funding the Company’s proposed acquisition of Singular Payments or the termination of a non-binding letter of intent regarding the proposed acquisition, or until such mutually agreed upon extended date. Thereafter, interest will accrue at a rate of ten percent per annum. Upon an event of default, interest will accrue at the maximum lawful rate or
15%
per annum. The line of credit matures on November 1, 2019.
If the Singular Payments acquisition closes before interest accrues, any unpaid principal amount will be offset against the cash portion of the purchase price. If the acquisition does not close on or before interest accrues, any unpaid principal amount plus interest will have to be paid in
30
equal monthly installments. The note may be prepaid in whole or in part at any time and without a penalty.
The line of credit is secured by a security agreement of the same date granting a first security interest over all of Singular Payment’s property, inventory, proceeds, and intellectual property, among others, a membership interest pledge agreement over
100%
of all Singular Payments, LLC membership interests, and a personal guaranty agreement by Vaden Landers, the sole owner of Singular Payments.
The term of the line of credit and letter of intent were extended on May 30, 2017 (through August 1, 2017) and subsequently, on August 2, 2017 (through August 31, 2017). In addition, the loan was increased to
$600,000
on August 2, 2017. As of June 30, 2017, the Company has
not
recorded an allowance for credit losses on this note receivable.
Note 3. Accrued Expenses
Accrued expenses consisted of the following balances:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Accrued commissions
|
$
|
187,994
|
|
|
$
|
221,837
|
|
Reserve for merchant losses
|
172,832
|
|
|
172,832
|
|
Other accrued expenses
|
322,336
|
|
|
192,769
|
|
Accrued taxes
|
17,753
|
|
|
38,469
|
|
Accrued salaries
|
32,502
|
|
|
77,415
|
|
Total accrued expenses
|
$
|
733,417
|
|
|
$
|
703,322
|
|
Note 4. Net Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS differs from basic EPS due to the assumed conversion of potentially dilutive awards and options that were outstanding during the period. The following is a reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income (loss) for the three and six months ended
June 30, 2017
and
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share, net income (loss) available to common shareholders
|
|
$
|
(534,337
|
)
|
|
$
|
(355,301
|
)
|
|
$
|
(820,920
|
)
|
|
$
|
(387,303
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share, weighted average shares outstanding
|
|
8,471,494
|
|
|
7,738,759
|
|
|
8,478,339
|
|
|
7,729,003
|
|
Effect of dilutive securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Denominator for diluted earnings per share, adjust weighted average shares and assumed conversion
|
|
8,471,494
|
|
|
7,738,759
|
|
|
8,478,339
|
|
|
7,729,003
|
|
Basic earnings (loss) per common share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
Diluted earnings (loss) per common share and common share equivalent
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
The awards and options to purchase shares of common stock that were outstanding at
June 30, 2017
and
June 30, 2016
that were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive, are as follows:
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Anti-dilutive awards and options
|
3,352,831
|
|
|
4,325,711
|
|
Note 5. Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between financial reporting and tax basis 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.
The Company has recognized a deferred tax asset of
$1.6 million
and has recorded a valuation allowance of
$12.7 million
to reduce the other deferred tax assets. The Company reviews the assessment of the deferred tax asset and valuation allowance on an annual basis or more often when events indicate a change to the valuation allowance may be warranted.
At December 31, 2016, the Company had available net operating loss carryforwards of approximately
$40.2 million
, which expire beginning in the year 2020. Approximately
$0.1 million
of the total net operating loss carryforward is subject to an IRS Section 382 limitation from 1999.
Management is not aware of any tax positions that would have a significant impact on the Company’s financial position.
Note 6. Related Party Transactions
Nikole Killough
During the six months ended
June 30, 2017
and the year ended
December 31, 2016
, the Company purchased a total of
$0
and
$2,250
, respectively, of corporate imprinted sportswear and caps from Angry Pug Sportswear.
Nikole Killough and Louis Hoch, the Company’s President and Chief Executive Officer, are each
50%
owners of Angry Pug Sportswear.
Miguel Chapa
During the six months ended
June 30, 2017
and the year ended
December 31, 2016
, the Company received
$7,407
and
$51,500
, respectively, in revenue from Club Rio Maroc Bar, Lush Rooftop, and Nirvana Bar and Rock. Miguel Chapa, a member of the Company’s Board of Directors, is an owner in Club Rio Maroc Bar, Lush Rooftop, and Nirvana Bar and Rock. Louis Hoch, the Company’s President and Chief Executive Officer, is also a minority owner in Lush Rooftop.
Note 7. Legal Proceedings
On April 26, 2016, Michael McFarland, derivatively on behalf the Company, re-filed a class-action lawsuit in United States District Court, District of Nevada that had been previously filed and dismissed. The suit alleges breach of fiduciary duties and unjust enrichment by the Company’s Board of Directors and certain executive officers and directors in connection with excessive and unfair compensation paid or awarded during fiscal years 2013 and 2014. The lawsuit seeks disgorgement of excessive compensation as well as damages in an unspecified amount. In July 2016, the Company filed a motion to dismiss the case. In January 2017, the court granted a partial dismissal of the claims and suggested the plaintiffs re-file their petition. Subsequently, the Company re-filed a motion to dismiss the case. On May 18, 2017, the court held a hearing on the motion to dismiss. The court's decision is still pending.
The Company believes the claim is without merit and it is unlikely that a loss will be incurred; therefore, the Company has not accrued for a potential loss. However, the outcomes of the disputes are still uncertain and it is possible the Company may incur legal fees and losses in the future.
Aside from the lawsuit described above, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on the Company’s business, financial condition or results of operations.
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 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 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 $820,920 for the six months ended June 30, 2017 and a net loss of $387,303 for the six months ended June 30, 2016. Second quarter 2017 credit card processing (transaction) volumes processed were down 46% over the second quarter of 2016. Credit card dollars processed during the second quarter of 2017 decreased 5% compared to the same time period in 2016. The major reason for the decline was the exit of a large fast food retailer that was a low margin business.
ACH (eCheck) volumes during the second quarter of 2017 were down 15% over the same time period in 2016. Returned Check transactions processed during the second quarter of 2017 were down 12% over the same period in 2016. Total dollars processed for the second quarter of 2017 exceeded $613 million. The major reason for the decreases in ACH and returned check transactions was the sale of a customer portfolio. The same customer is building a new portfolio of customers and expects to recover the volume in the future.
Due to our strong sales pipeline, we believe the downward trend in ACH transactions processed will improve in the fourth quarter 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 PIN-less debit transactions should also grow.
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 to expand our operations without significantly increasing our fixed operating expenses.
Critical Accounting Policies
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.
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
Revenues
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
June 30, 2017
decreased 11.8% to
$2,550,441
, as compared to
$2,890,060
for the quarter ended
June 30, 2016
. Revenues for the six months ended
June 30, 2017
decreased 12.4% to
$5,361,185
, as compared to
$6,118,691
for the six months ended
June 30, 2016
. The decrease for the quarter and six months ended
June 30, 2017
, 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 primarily due to a customer selling a portion of their portfolio and starting the process to rebuild their portfolio.
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 8.8% to
$1,854,406
for the quarter ended
June 30, 2017
, as compared to
$2,034,439
for the same period in the prior year. Cost of services decreased 11.1% to
$3,722,351
for the six months ended
June 30, 2017
, as compared to
$4,189,222
for the same period in the prior year. The decrease for the quarter and six months ended
June 30, 2017
, as compared to the same periods in the prior year, was primarily due to the decrease in the volume of ACH processing transactions, and return transactions processed.
Stock-based Compensation
Stock-based compensation expenses were
$217,759
and
$283,747
for the quarters ended
June 30, 2017
and
June 30, 2016
, respectively. Stock-based compensation expenses were
$425,679
and
$571,436
for the six months ended
June 30, 2017
and
June 30, 2016
, respectively. The decrease in stock-based compensation expense is due to shares that vested or were canceled in
December 2016
that are fully amortized.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses decreased 0.2% to
$799,740
for the quarter ended
June 30, 2017
, as compared to
$801,540
for the same period in the prior year. Other selling, general and administrative expenses increased 15% to
$1,628,012
the six months ended
June 30, 2017
, as compared to
$1,409,889
for the same period in the prior year. The increase in other selling, general and administrative expenses for the six months ended
June 30, 2017
, as compared to the same period in the prior year, represented an increase in advertising, marketing, press releases and legal expenses.
Depreciation and Amortization
Depreciation and amortization totaled
$227,273
for the quarter ended
June 30, 2017
, compared to depreciation and amortization of
$225,554
for the same period in
2016
. Depreciation and amortization totaled
$455,818
for the six months ended
June 30, 2017
, compared to depreciation and amortization of
$449,777
for the same period in the prior year.
Other Income (Expense)
Other income (expense) netted income of
$36,077
and
$71,432
for the quarter and six months ended
June 30, 2017
compared to incomes of
$123,253
and
$144,664
for the quarter and six months ended
June 30, 2016
, respectively. The decrease in income for the quarter and six months, as compared to the same periods in the prior year is primarily due to the settlement of a legal case in
2016
in our favor resulting in $97,493 of other income.
Interest income was
$38,730
and
$24,974
, for the quarters ended
June 30, 2017
and
June 30, 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. Interest income was
$72,546
and
$46,985
, for the six months ended
June 30, 2017
and
June 30, 2016
, respectively. The increase in interest for the six 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
$534,337
and
$820,920
for the quarter and six months ended
June 30, 2017
, as compared to a net loss of $
355,301
and $
387,303
for the same periods in the prior year.
Liquidity and Capital Resources
At
June 30, 2017
, we had
$3,226,451
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 six months ended
June 30, 2017
was primarily due to a note receivable issued related to the potential Singular transaction and continued capital investments related to prepaid card technologies.
We reported a net loss of
$820,920
for the six months ended
June 30, 2017
and a net loss of
$387,303
for the six months ended June 30,
2016
. At June 30, 2017, we have an accumulated deficit of
$51,072,561
. Additionally, we have working capital of
$4,168,196
and
$4,522,151
at June 30,
2017
and
June 30, 2016
, respectively.
Net cash provided by operating activities was
$13,078
and
$657,286
for the six months ended
2017
and
2016
, respectively. The decrease in net cash provided by operating activities for the six months ended
June 30, 2017
as compared to the same period in the prior year was attributable to a higher net operating loss and lower revenues.
Net cash used by investing activities was
$798,426
for the six months ended
June 30, 2017
, as compared to net cash used by investing activities of
$338,487
for the same period in the prior year; the increase in net cash used for investing activities was due to increased software capitalization and the Singular Payment LLC note receivable. Net cash used by financing activities was
$108,939
for the six months ended
June 30, 2017
and
$0
for the six months ended
June 30, 2016
. The financing activities represented treasury stock purchases.
On February 2, 2016, we, through our wholly-owned subsidiary FiCentive, Inc., loaned C2Go, Inc. $200,000. The full principal of the note, plus accrued and unpaid interest, was due to be repaid on or before August 2, 2017. C2Go did not make any payment on that date. Pursuant to the Note, C2Go has until August 16, 2017 to cure the payment default. If C2Go does not make the payment at that time, we may choose to pursue our security interest in the Note, which was secured against C2Go's assets. We do not know at this time if we can recover sufficient funds from pursuing our security interest against C2Go to cover the full amount of principal, interest and collection costs. We are in ongoing discussions with C2Go regarding the payment due on the note. C2Go has indicated there are ongoing discussions with an investor to raise money to cover the principal and the unpaid interest. Due to the uncertainty of the situation and “more likely than not” recognition threshold as of June 30, 2017, we have not recorded a loss reserve on the note receivable.
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.