Prospectus Supplement No. 1

(To Prospectus dated July 11, 2017)

Filed Pursuant to Rule 424(b)3

Registration No. 333-212859

 

   

 

QPAGOS

 

16,136,274 Shares of Common Stock

 

This prospectus supplement amends and supplements our prospectus, dated July 11, 2017 (the “Prospectus”), relating to the offering of up to 16,136,274 shares (the “Shares”) of our common stock, par value $0.0001 per share, of which (i) 9,917,074 are shares of common stock; and (ii) 6,219,200 are shares of common stock issuable upon exercise of warrants having an exercise price of $.625 per share (the “Warrants”), which warrants were assumed by us in the Merger that we consummated in May 2016 (the “Merger”) and were originally issued in the December 2015 private placement conducted by our subsidiary, Qpagos Corporation (the “2015 Offering”) (of which 1,435,200 were issued to Paulson Investment Company, LLC (the “Placement Agent”).

 

Our common stock is traded on the OTCQB, under the symbol “QPAG.” The closing price of our stock on August 18, 2017 was $0.14.

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and, as such, have elected to comply with certain reduced public company reporting requirements.  See “Prospectus Summary—Implications of Being an Emerging Growth Company” in the Prospectus.

 

This prospectus supplement is being filed to include the information set forth in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed on August 17, 2017, which is set forth below.

 

This prospectus supplement should be read in conjunction with the Prospectus. This prospectus supplement updates, amends and supplements the information included or incorporated by reference in the Prospectus. If there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.

 

Investing in our securities involves a high degree of risk. We have also received an opinion from our independent auditors which raises substantial doubt about our ability to continue as a going concern. See “ Risk Factors ” beginning on page 5 of the Prospectus for more information regarding the risks relating to an investment in our securities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus or the prospectus to which it relates is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The date of this Prospectus Supplement No. 1 is August 21, 2017

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10 – Q

 

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2017

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 333-192877   

 

QPAGOS

(Exact name of registrant as specified in its charter)

 

Nevada 33-1230229
(State or other jurisdiction of incorporation or
organization) 		(I.R.S. Employer Identification Number)

 

Paseo del la Reforma 404 Piso 15 PH
Col. Juarez, Del. Cuauhtemoc
Mexico, D.F. C.P. 06600  

(Address of principal executive offices including zip code)

 

+52 (55)-110-110

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer ☐   Smaller reporting company ☒
(Do not check if smaller reporting company)     Emerging growth company ☒

 

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

 

Number of shares outstanding of the issuer’s common stock as of the latest practicable date: 55,511,143 shares of common stock, $0.0001 par value per share as of August 14, 2017.  

 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report Form 10-Q, including but not limited to, the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward-looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

NOTE REGARDING COMPANY REFERENCES

 

Throughout this Quarterly Report on Form 10-Q, “QPAGOS,” the “Company,” “we,” “us” and “our” refer to QPAGOS and its direct and indirect subsidiaries, Qpagos Corporation, Qpagos S.A.P.I. de C.V. and Redpag S.A.P.I de C.V.

 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

 

Index

 

  Page
PART I. FINANCIAL INFORMATION  
Item 1. Condensed Consolidated Financial Statements (unaudited) F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risks 6
Item 4. Controls and Procedures 7
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 8
Item 1A. Risk Factors 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 9
Item 3. Defaults Upon Senior Securities 11
Item 4. Mine Safety Disclosures 11
Item 5. Other Information 11
Item 6. Exhibits 11

 

 

 

Item 1.

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

 

TABLE OF CONTENTS

 

June 30, 2017

 

Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 F-2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2017 and 2016, (as restated) (unaudited) F-3
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) as of January 1, 2017 to June 30, 2017, (unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016, (as restated) (unaudited) F-5
Notes to the unaudited Condensed Consolidated Financial Statements F-6–F-27

 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

             
    June 30,     December 31,  
    2017     2016  
    (Unaudited)        
Assets            
             
Current Assets                
Cash   $ 11,197     $ 46,286  
Accounts receivable, net     78,464       79,943  
Inventory     309,043       350,273  
Recoverable IVA taxes and credits     246,649       353,780  
Other current assets     387,139       279,878  
Total Current Assets     1,032,492       1,110,160  
                 
Non-Current Assets                
Plant and equipment, net     188,487       231,328  
Intangibles, net     146,917       168,417  
Investment     3,000       3,000  
Other assets     7,581       9,847  
Total Non-Current Assets     345,985       412,592  
Total Assets   $ 1,378,477     $ 1,522,752  
                 
Liabilities and Stockholders’ (Deficit) Equity                
                 
Current Liabilities                
Accounts payable   $ 276,062     $ 320,487  
Notes payable     100,000       526,750  
Convertible debt, net of unamortized discount of $1,045,675 and $75,000, respectively     375,665       1,180  
Derivative liability     899,014       113,074  
IVA and other taxes payable     6,876       166,108  
Advances from customers     183,232       132,133  
Total Current Liabilities     1,840,849       1,259,732  
                 
Total Liabilities     1,840,849       1,259,732  
                 
Stockholders’ (Deficit) Equity                
Preferred stock, $0.0001 par value, 25,000,000 shares authorized and 0 shares issued and outstanding as of June 30, 2017 and December 31, 2016.     —       —  
Common stock, $0.0001 par value; 100,000,000 shares authorized, 55,511,143 and 55,454,000 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively.     5,551       5,545  
Additional paid-in-capital     8,776,770       8,284,522  
Accumulated deficit     (9,686,511 )     (8,757,197 )
Accumulated other comprehensive income     441,818       730,150  
Total stockholder’s equity - controlling interest     (462,372 )     263,020  
Non-controlling interest     —       —  
Total Stockholders’ (Deficit) Equity     (462,372 )     263,020  
Total Liabilities and Stockholders’ (Deficit) Equity   $ 1,378,477     $ 1,522,752  

 

See notes to the unaudited condensed consolidated financial statements

 

 F - 2

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    Three     Three     Six     Six  
    Months Ended     Months Ended     Months Ended     Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2017     2016     2017     2016  
                         
Net Revenue   $ 1,017,158     $ 626,416     $ 1,944,468     $ 1,256,350  
                                 
Cost of Goods Sold     1,004,901       607,237       1,858,353       1,226,158  
                                 
Gross Profit     12,257       19,179       86,115       30,192  
                                 
General and administrative     489,879       615,502       947,465       3,309,204  
Depreciation and amortization     21,681       17,210       38,473       34,449  
Total Expense     511,560       632,712       985,938       3,343,653  
                                 
Loss from Operations     (499,303 )     (613,533 )     (899,823 )     (3,313,461 )
                                 
Other (expense) income     (7,683 )     1,016       (7,583 )     4,015  
Interest expense, net     (330,107 )     (2,992 )     (471,707 )     (5,984 )
Derivative liability movements     366,242               118,472          
Foreign currency gain (loss)     97,475       (145,827 )     331,327       (114,843 )
Loss before Provision for Income Taxes     (373,376 )     (761,336 )     (929,314 )     (3,430,273 )
                                 
Provision for Income Taxes     —       —       —       —  
                                 
Net Loss     (373,376 )     (761,336 )     (929,314 )     (3,430,273 )
                                 
Net loss attributable to non-controlling interest     —       —       —       —  
                                 
Net Loss Attributable to Controlling Interest   $ (373,376 )   $ (761,336 )   $ (929,314 )   $ (3,430,273 )
                                 
Net Loss Per Share - Basic and Diluted   $ (0.01 )   $ (0.01 )   $ (0.02 )   $ (0.06 )
                                 
Weighted Average Number of Shares Outstanding - Basic and Diluted     55,465,303       52,762,601       55,459,683       53,660,993  
                                 
Other Comprehensive (Loss) Gain                                
Foreign currency translation adjustment     (59,251 )     66,678       (288,332 )     113,453  
                                 
Total Comprehensive loss     (432,627 )     (694,658 )     (1,217,646 )     (3,316,820 )
                                 
Comprehensive loss attributable to non-controlling interest     —       —       —       —  
                                 
Comprehensive Loss Attributable to Controlling Interest   $ (432,627 )   $ (694,658 )   $ (1,217,646 )   $ (3,316,820 )

 

See notes to the unaudited condensed consolidated financial statements

 

 F - 3

 

   

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE PERIOD JANUARY 1, 2017 TO JUNE 30, 2017 (Unaudited)

 

    Common Stock     Additional
Paid-in 		    Accumulated     Accumulated
Other Comprehensive 		    Total
Stockholders’ Equity (Deficit) Controlling 		    Non-Controlling     Total
Stockholders’
Equity 		 
    Shares     Amount     Capital     Deficit     Income     Interest     Interest     (Deficit)  
Balance as of December 31, 2016     55,454,000       5,545       8,284,522       (8,757,197 )     730,150       263,020       —       263,020  
                                                                 
Conversion of debt to equity     57,143       6       18,280       —       —       18,286       —       18,286  
                                                                 
Fair market value of warrants issued and beneficial conversion feature of convertible debt issued     —       —       473,968       —       —       473,968       —       473,968  
                                                                 
Translation adjustment     —       —       —       —       (288,332 )     (288,332 )     —       (288,332 )
                                                                 
Net loss for the six months ended June 30, 2017     —       —       —       (929,314 )      —       (929,314 )     —       (929,314 )
                                                                 
Balance as of June 30, 2017     55,511,143     $ 5,551     $ 8,776,770     $ (9,686,511 )   $ 441,818     $ (462,372 )   $ —     $ (462,372 )

 

See notes to unaudited condensed consolidated financial statements

 

 F - 4

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Six     Six  
    Months Ended     Months Ended  
    June 30,     June 30,  
    2017     2016  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss attributable to the company   $ (929,314 )   $ (3,430,273 )
Less: loss attributable to non-controlling interest     —       —  
Net loss     (929,314 )     (3,430,273 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation expense     35,295       31,737  
Amortization expense     21,500       21,500  
Derivative liability movements     (118,472 )     —  
Amortization of debt discount     411,298       —  
Loss on conversion of debt to equity     6,730       —  
Equity based compensation charge     —       144,000  
Shares issued for services     —       2,032,274  
Non- cash investment in affiliates     —       (3,000 )
                 
Changes in Assets and Liabilities                
Accounts receivable     1,479       (145,592 )
Inventory     41,230       160,126  
Recoverable IVA taxes and credits     107,131       75,813  
Other current assets     (107,261 )     33,298  
Other assets     2,266       (419 )
Accounts payable and accrued expenses     (44,425 )     94,783  
IVA and other taxes payable     (159,232 )     (103,849 )
Advances from customers     51,100       68,357  
Interest accruals     29,873       5,987  
CASH USED IN OPERATING ACTIVITIES     (650,802 )     (1,015,258 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of property and equipment     —       (453 )
NET CASH USED IN INVESTING ACTIVITIES     —       (453 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds on common stock issued     —       225,000  
Proceeds from short term notes and convertible notes     973,500       —  
Repayment of convertible notes     (77,000 )     —  
NET CASH PROVIDED BY FINANCING ACTIVITIES     896,500       225,000  
                 
Effect of exchange rate changes on cash and cash equivalents     (280,787 )     92,159  
                 
NET DECREASE IN CASH     (35,089 )     (698,552 )
CASH AT BEGINNING OF PERIOD     46,286       833,612  
CASH AT END OF PERIOD   $ 11,197     $ 135,060  
                 
CASH PAID FOR INTEREST AND TAXES:                
Cash paid for income taxes   $ —     $ —  
Cash paid for interest   $ 32,470     $ —  
NON CASH INVESTING AND FINANCING ACTIVITIES                
Notes payable, including interest thereon converted to convertible notes payable   $ (592,623 )   $ —  
Convertible notes payable arising from conversion of notes payable   $ 592,623     $ —  
Conversion of convertible debt to equity   $ 18,286     $ —  

 

See notes to the unaudited condensed consolidated financial statements

 

 F - 5

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1 ORGANIZATION AND DESCRIPTION OF BUSINESS

 

  a) Organization

 

On May 12, 2016, QPAGOS (formerly known as Asiya Pearls, Inc.), a Nevada corporation (“QPAGOS”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Qpagos Corporation, a Delaware corporation (“Qpagos Corporation”), and Qpagos Merge, Inc., a Delaware corporation and wholly owned subsidiary of QPAGOS (“Merger Sub”). Pursuant to the Merger Agreement, on May 12, 2016, the merger was consummated and Qpagos Corporation and Merger Sub merged (the “Merger”), with Qpagos Corporation continuing as the surviving corporation of the Merger.

 

Pursuant to the Merger Agreement, upon consummation of the Merger, each share of Qpagos Corporation’s capital stock issued and outstanding immediately prior to the Merger was converted into the right to receive two shares of QPAGOS common stock, par value $0.0001 per share (the “Common Stock”). Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, QPAGOS assumed all of Qpagos Corporation’s warrants issued and outstanding immediately prior to the Merger, which are now exercisable for approximately 6,219,200 shares of Common Stock, respectively. Prior to and as a condition to the closing of the Merger, the then-current QPAGOS stockholder of 5,000,000 shares of Common Stock agreed to return to QPAGOS 4,975,000 shares of Common Stock held by such holder to QPAGOS and the then-current QPAGOS stockholder retained an aggregate of 25,000 shares of Common Stock and the other stockholders of QPAGOS retained 5,000,000 shares of Common Stock. Therefore, immediately following the Merger, Qpagos Corporation’s former stockholders held 49,929,000 shares of QPAGOS common stock which represented approximately 91% of the outstanding Common Stock.

 

The Merger is being treated as a reverse acquisition of QPAGOS, a public shell company, for financial accounting and reporting purposes. As such, Qpagos Corporation is treated as the acquirer for accounting and financial reporting purposes while QPAGOS is treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that are reflected in this Quarterly Report on Form 10-Q and that will be reflected in the Company’s future financial statements filed with the United States Securities and Exchange Commission (“SEC”) will be those of Qpagos Corporation, and the Company’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of Qpagos Corporation.

 

Qpagos Corporation was incorporated on May 1, 2015 under the laws of Delaware under the name Qpagos Corporation as the holding company for two 99.99% owned operating subsidiaries, Qpagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V. Each of these entities were incorporated in November 2013 in Mexico.

 

Qpagos, S.A.P.I. de C.V. was formed to process payment transactions for service providers it contracts with, and Redpag Electrónicos S.A.P.I. de C.V. was formed to deploy and operate kiosks as a distributor.

 

On May 27, 2016, Asiya changed its name to QPAGOS. QPAGOS and its direct and indirect subsidiaries Qpagos Corporation, Qpagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V., will be referred to hereafter as “the Company”.

 

On June 1, 2016, the board of directors changed the Company’s fiscal year end from October 31 to December 31.

 

  b) Description of the business

 

QPAGOS, through its indirect subsidiaries Qpagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V., provides physical and virtual payment services to the Mexican market. The Company provides an integrated network of kiosks, terminals and payment channels that enable consumers in Mexico to deposit cash, convert it into a digital form and remit the funds to any merchant in our network quickly and securely. The Company helps consumers and merchants connect more efficiently in markets and consumer segments, such as Mexico, that are largely cash-based and lack convenient alternatives for consumers to pay for goods and services in physical, online and mobile environments. For example, the Company’s licensed technology can be used to pay bills, add minutes to mobile phones, purchase transportation tickets, shop online or at a retail store, buy digital services or send money to a friend or relative.

 

 F - 6

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES

 

  a) Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these unaudited condensed financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary, for a fair presentation of those financial statements. The results of operations and cash flows for the three and six months ended June 30, 2017 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements of QPAGOS for the year ended December 31, 2016, included in the current report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2017.

 

All amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.

 

  b) Principles of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary and its indirect subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in these consolidated financial statements are as follows:

 

QPAGOS – Parent Company

Qpagos Corporation – 100% owned

Qpagos, S.A.P.I de C.V., a Mexican entity (99.996% owned)

Redpag Electrónicos, S.A.P.I. de C.V., a Mexican entity (99.990% owned)

 

  c) Mexican Operations

 

The financial statements of the Company’s Mexican operations are measured using local currencies as their functional currencies.

 

The Company translates the assets and liabilities of its Mexican subsidiaries at the exchange rates in effect at year end and the results of operations at the average rate throughout the year. The translation adjustments are recorded directly as a separate component of stockholders’ equity, while transaction gains (losses) are included in net income (loss). All sales to customers are in Mexico.

 

  d) Use of Estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, which are evaluated on an ongoing basis, that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to: the estimated useful lives for plant and equipment, the fair value of warrants and stock options granted for services or compensation, estimates of the probability and potential magnitude of contingent liabilities, derivative liabilities, the valuation allowance for deferred tax assets due to continuing operating losses, those related to revenue recognition and the allowance for doubtful accounts.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could change in the near-term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.

 

 F - 7

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  e) Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur.

 

The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

  f) Fair Value of Financial Instruments

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash, accounts receivable, other current assets, other assets, accounts payable, accrued liabilities, and notes payable, approximate fair value due to the relatively short period to maturity for these instruments. The Company did not identify any other assets or liabilities that are required to be presented on the balance sheets at fair value in accordance with the accounting guidance.

 

ASC 825-10 “Financial Instruments ” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

  g) Risks and Uncertainties

 

The Company’s operations will be subject to significant risk and uncertainties including financial, operational, regulatory and other risks associated, including the potential risk of business failure. The recent global economic crisis has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These conditions not only limit the Company’s access to capital, but also make it difficult for its customers, vendors and the Company to accurately forecast and plan future business activities.

 

The Company’s operations are carried out in Mexico. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in Mexico and by the general state of that economy. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

 

 F - 8

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  h) Recent Accounting Pronouncements

 

In May 2017, the FASB issued Accounting Standards Update No. (“ASU’’) 2017-09, Compensation – Stock Compensation, an amendment to Topic 718. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. 2. An entity should account for the effects of a modification unless all the following are met:

 

1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.

2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.

3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

 

The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. The amendments in this Update are effective for all entities for annual periods beginning after December 15, 2017. Early adoption is permitted and should be applied prospectively to an award modified on or after the adoption date. The amendments proposed in this ASU are not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-10, service concession Arrangements, an amendment to Topic 853. Topic 853 provides guidance for operating entities when they enter into a service concession arrangement with a public-sector grantor who both:

 

1. Controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price

2. Controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.

 

In a service concession arrangement within the scope of Topic 853, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment. An operating entity should refer to other Topics to account for various aspects of a service concession arrangement. For example, an operating entity should account for revenue relating to construction, upgrade, or operation services in accordance with Topic 605, Revenue Recognition, or Topic 606, Revenue from Contracts with Customers.

 

The amendments in this Update apply to the accounting by operating entities for service concession arrangements within the scope of Topic 853. These updates are effective when the Company adopts the updates to Topic 606. The amendments proposed in this ASU are not expected to have an impact on the Company’s consolidated financial statements.

 

Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

 

  i) Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. At June 30, 2017 and December 31, 2016, respectively, the Company had no cash equivalents.

 

The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution in the United States. The balance at times may exceed federally insured limits. At June 30, 2017 and December 31, 2016, cash balances in the United States did not exceed the federally insured limit.

 

 F - 9

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  j) Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues, which may impact the collectability of these receivables or reserve estimates. Revisions to the allowance for doubtful accounts estimates are recorded as an adjustment to bad debt expense. Receivables deemed uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. There were no recoveries during the six months ended June 30, 2017.

 

  k) Cost Method Investments

 

Investee companies not accounted for under the consolidation or the equity method are accounted for under the cost method of accounting. Under this method, the Company’s share of earnings or losses of such investee companies is not included in the condensed consolidated balance sheet or statement of comprehensive loss. However, impairment charges are recognized in the condensed consolidated statement of comprehensive loss. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded. There is no impairment of investment at June 30, 2017 and December 31, 2016.

 

  l) Inventory

 

The Company primarily values inventories at the lower of cost or market applied on a first-in, first-out basis. The Company identifies and writes down its excess and obsolete inventories to net realizable value based on usage forecasts, order volume and inventory aging. With the development of new products, the Company also rationalizes its product offerings and will write-down discontinued product to the lower of cost or net realizable value.

 

  m) Advances received from customers

 

Other than the sale of kiosks to customers, the provision of services through our kiosks is conducted on a cash basis. Customers are required to deposit cash with the Company to meet anticipated demand for services provided through kiosks either owned or operated by them. The services provided through the customer owned or operated kiosks are deducted from the deposits held on their behalf, the Company requires that these deposits be replenished as and when the services are provided.

 

  n) Revenue Recognition

 

The Company’s revenue recognition policy is consistent with the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605, Revenue Recognition (ASC 605). In general, the Company records revenue when it is realized, or realizable and earned. The Company considers revenue to be realized, or realizable and earned when, persuasive evidence of an arrangement exists, the products or services have been approved by the customer after delivery and/or installation acceptance or performance of services; the sales price is fixed or determinable within the contract; and collectability is reasonably assured.

 

The Company has the following sources of revenue which is recognized on the basis described below.

 

  ● Revenue from the sale of services .

 

Prepaid services are acquired from providers and is sold to end-users through kiosks that the Company owns or kiosks that are owned by third parties. The Company recognizes the revenue on the sale of these services when the end-user deposits funds into the terminal and the prepaid service is delivered to the end-user. The revenue is recognized at the gross value, including margin, of the prepaid service to the Company, net of any value-added tax which is collected on behalf of the Mexican Revenue Authorities.

 

 F - 10

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  n) Revenue Recognition (continued)

 

  ● Payment processing provided to end-users

 

The Company provides a secure means for end-users to pay for certain services, such as utilities through our kiosks. The Company earns either a fixed per-transaction fee or a fixed percentage of the service sold. The Company acts as a collection agent and recognizes the payment processing fee, net of any value-added taxes collected on behalf of the Mexican Revenue Authorities, when the funds are deposited into the kiosk and the customer has settled his liability or has acquired a prepaid service.

 

  ● Revenue from the sale of kiosks.

 

The Company imports, assembles and sell kiosks that are used to generate the revenues discussed above. Revenue is recognized on the full value of the kiosks sold, net of any valued added taxation collected on behalf of the Mexican Revenue Authorities, when the customer takes delivery of the kiosk and all the risks and rewards of ownership are passed to the customer.

 

The Company does not enter into any leasing of kiosks arrangements with customers and the Company does not generate any revenues from merchants who access its terminals as yet.

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

Fixed Assets

 

The Company reclassified certain kiosk assets used in the production of income, previously recorded in inventory as fixed assets and applied an appropriate depreciation policy to these kiosks.

 

The restated Unaudited Condensed Consolidated Balance Sheet as of June 30, 2016 and the related Consolidated Statements of Operations and Comprehensive loss and the Statement of Cash Flows for the three and six months ended June 30, 2016, is presented below:

 

 F - 11

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS

CONDENSED CONSOLIDATED BALANCE SHEET

June 30, 2016

 

    As                    
    Previously                 As  
    Reported     Adjustments     Notes     Restated  
    (Unaudited)                   (Unaudited)  
Assets                              
Current Assets                              
Cash   $ 135,060                   $ 135,060  
Accounts receivable     387,667                     387,667  
Inventory     508,441       (244,483 )   (A)       263,958  
Recoverable IVA taxes and credits     342,084                     342,084  
Other current assets     24,745                     24,745  
Total Current Assets     1,397,997       (244,483 )           1,153,514  
                               
Non-Current Assets                              
Plant and equipment, net     53,800       196,166     (A)       249,966  
Intangibles, net     189,917                     189,917  
Investment     3,000                     3,000  
Other assets     12,131                     12,131  
Total Non-Current Assets     258,848       196,166             455,014  
Total Assets   $ 1,656,845     $ (48,317 )         $ 1,608,528  
                               
Liabilities and Stockholders’ Equity                              
                               
Current Liabilities                              
Accounts payable   $ 142,185                   $ 142,185  
Notes payable     109,307                     109,307  
IVA and other taxes payable     88,195                     88,195  
Advances from customers     70,342                     70,342  
Total Current Liabilities     410,029       —             410,029  
                               
Total Liabilities     410,029       —             410,029  
                               
Stockholders’ Equity                              
Common stock, $0.0001 par value; 100,000,000 shares authorized, 55,254,000 shares issued and outstanding as of June 30, 2016.     5,526                     5,526  
Additional paid-in-capital     8,134,541                     8,134,541  
Accumulated deficit     (7,405,415 )     (56,176 )           (7,461,591 )
Accumulated other comprehensive income     512,164       7,859             520,023  
Total stockholder’s equity - controlling interest     1,246,816       (48,317 )           1,198,499  
Non-controlling interest     —       —             —  
Total Stockholders’ Equity     1,246,816       (48,317 )           1,198,499  
Total Liabilities and Stockholders’ Equity   $ 1,656,845     $ (48,317 )         $ 1,608,528  

 

 F - 12

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

Three Months Ended June 30, 2016

 

    As                    
    Previously                 As  
    Reported     Adjustments     Notes     Restated  
Revenues                              
Sales of services   $ 595,317     $             $ 595,317  
Kiosk sales     18,351                     18,351  
Payment processing fees     12,602                     12,602  
Other     146                     146  
      626,416       —             626,416  
Cost of Goods Sold                              
Sales of services     581,314                     581,314  
Kiosk sales     10,311                     10,311  
Depreciation - kiosks             9,590     (A)       9,590  
Other     6,022                     6,022  
      597,647       9,590             607,237  
                               
Gross Profit     28,769       (9,590 )           19,179  
                               
General and administrative     615,936       (434 )   (A)       615,502  
Depreciation and amortization     19,345       (2,135 )   (A)       17,210  
Total Expense     635,281       (2,569 )           632,712  
                               
Loss from Operations     (606,512 )     (7,021 )           (613,533 )
                               
Other income     1,016                     1,016  
Interest expense, net     (2,992 )                   (2,992 )
Foreign currency loss     (145,827 )                   (145,827 )
                               
Loss before Provision for Income Taxes     (754,315 )     (7,021 )           (761,336 )
Provision for Income Taxes     —       —             —  
                               
Net Loss     (754,315 )     (7,021 )           (761,336 )
Net loss attributable to non-controlling interest     —                     —  
                               
Net Loss Attributable to Controlling Interest   $ (754,315 )   $ (7,021 )         $ (761,336 )
                               
Net Loss Per Share - Basic and Diluted   $ (0.01 )   $ 0.00           $ (0.01 )
                               
Weighted Average Number of Shares Outstanding - Basic and Diluted     52,762,601       52,762,601             52,762,601  
                               
Other Comprehensive Income                              
Foreign currency translation adjustment     49,176       17,502             66,678  
                               
Total Comprehensive loss     (705,139 )     10,481             (694,658 )
Comprehensive loss attributable to non-controlling interest     —       —             —  
                               
Comprehensive Loss Attributable to Controlling Interest   $ (705,139 )   $ 10,481           $ (694,658 )

 

 F - 13

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Six Months Ended June 30, 2016

 

    As                    
    Previously                 As  
    Reported     Adjustments     Notes     Restated  
Revenues                              
Sales of services   $ 1,093,301     $             $ 1,093,301  
Kiosk sales     149,323                     149,323  
Payment processing fee     13,580                     13,580  
Other     146                     146  
      1,256,350       —             1,256,350  
Cost of Goods Sold                              
Sales of services     1,065,200                     1,065,200  
Kiosk sales     123,668                     123,668  
Depreciation - kiosks     —       19,222     (A)       19,222  
Other     18,068                     18,068  
      1,206,936       19,222             1,226,158  
                               
Gross Profit     49,414       (19,222 )           30,192  
                               
General and administrative     3,309,638       (434 )   (A)       3,309,204  
Depreciation and amortization     38,690       (4,241 )   (A)       34,449  
Total Expense     3,348,328       (4,675 )           3,343,653  
                               
Loss from Operations     (3,298,914 )     (14,547 )           (3,313,461 )
                               
Other income     4,015                     4,015  
Interest expense, net     (5,984 )                   (5,984 )
Foreign currency loss     (114,843 )                   (114,843 )
                               
Loss before Provision for Income Taxes     (3,415,726 )     (14,547 )           (3,430,273 )
Provision for Income Taxes     —       —             —  
                               
Net Loss     (3,415,726 )     (14,547 )           (3,430,273 )
Net loss attributable to non-controlling interest     —                     —  
                               
Net Loss Attributable to Controlling Interest   $ (3,415,726 )   $ (14,547 )         $ (3,430,273 )
                               
Net Loss Per Share - Basic and Diluted   $ (0.06 )   $ 0.00           $ (0.06 )
                               
Weighted Average Number of Shares Outstanding - Basic and Diluted     53,660,993       53,660,993             53,660,993  
                               
Other Comprehensive Income                              
Foreign currency translation adjustment     92,158       21,295             113,453  
                               
Total Comprehensive loss     (3,323,568 )     6,748             (3,316,820 )
Comprehensive loss attributable to non-controlling interest     —       —             —  
                               
Comprehensive Loss Attributable to Controlling Interest   $ (3,323,568 )   $ 6,748           $ (3,316,820 )

 

 F - 14

 

   

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS

CONSOLIDATED STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2016

 

    As                    
    Previously                 As  
    Reported     Adjustments     Notes     Restated  
CASH FLOWS FROM OPERATING ACTIVITIES:                              
Net loss attributable to the company   $ (3,415,726 )   $ (14,547 )   (A)     $ (3,430,273 )
Less: loss attributable to non-controlling interest     —                     —  
Net loss     (3,415,726 )     (14,547 )           (3,430,273 )
Adjustment to reconcile net loss to net cash used in operating activities:                              
Depreciation expense     17,190       14,547     (A)       31,737  
Amortization expense     21,500                     21,500  
Equity based compensation charge     144,000                     144,000  
Shares issued for services     2,032,274                     2,032,274  
Non- cash investment in affiliates     (3,000 )                   (3,000 )
Other foreign currency movements     —       (21,295 )   (A)       (21,295 )
Changes in Assets and Liabilities                              
Accounts receivable     (145,592 )                   (145,592 )
Inventory     160,126                     160,126  
Recoverable IVA taxes and credits     75,813                     75,813  
Other current assets     33,298                     33,298  
Other assets     (419 )                   (419 )
Accounts payable and accrued expenses     94,783                     94,783  
IVA and other taxes payable     (103,849 )                   (103,849 )
Advances from customers     68,357                     68,357  
Interest accruals     5,987                     5,987  
CASH USED IN OPERATING ACTIVITIES     (1,015,258 )     (21,295 )           (1,036,553 )
                               
CASH FLOWS FROM INVESTING ACTIVITIES:                              
Purchase of property and equipment     (453 )                   (453 )
NET CASH USED IN INVESTING ACTIVITIES     (453 )     —             (453 )
                               
CASH FLOWS FROM FINANCING ACTIVITIES:                              
Proceeds on common stock issued     225,000                     225,000  
Proceeds from loans payable     —                     —  
NET CASH PROVIDED BY FINANCING ACTIVITIES     225,000       —             225,000  
                               
Effect of exchange rate changes on cash and cash equivalents     92,158       21,295             113,453  
                               
NET DECREASE IN CASH     (698,552 )                   (698,552 )
CASH AT BEGINNING OF PERIOD     833,612                     833,612  
CASH AT END OF PERIOD   $ 135,060     $ —           $ 135,060  
                               
CASH PAID FOR INTEREST AND TAXES:                              
Cash paid for income taxes   $ —     $ —           $ —  
Cash paid for interest   $ —     $ —           $ —  

 

 F - 15

 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED VONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

NOTES

 

A. To correct an error in classifying kiosks acquired in 2015 as inventory and available for sale, to property and equipment, along with the recording of related accumulated depreciation and depreciation expense.

 

4 GOING CONCERN

 

These financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred a loss since inception resulting in an accumulated deficit of $9,686,511 as of June 30, 2017 and has not generated sufficient revenue to cover its operating expenditure, raising substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. In addition to operational expenses, as the Company executes its business plan, additional capital resources will be required. The Company will need to raise capital in the near term in order to continue operating and executing its business plan. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company’s plan is to expand its market penetration by deploying more kiosks through various channels, thereby increasing revenues. In addition, the Company intends to raise additional equity or loan funds to meet its short term working capital needs. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

5 INVENTORY

 

Inventory consisted of the following:

  

    June 30,
2017 		    December 31, 
2016 		 
             
Kiosks and accessories   $ 309,043     $ 350,273  
    $ 309,043     $ 350,273  

 

6 PLANT AND EQUIPMENT

 

Plant and Equipment consisted of the following:

 

    June 30,
2017 		    December 31,
2016 		 
             
Kiosks   $ 269,591     $ 269,810  
Computer equipment     79,751       69,577  
Office equipment     10,809       9,430  
Leasehold improvement     9,389       8,192  
Total cost     369,540       357,009  
Less: accumulated depreciation and amortization     (181,053 )     (125,681 )
Plant and equipment, net   $ 188,487     $ 231,328  

 

Depreciation expense totaled $20,286 and $15,614 for the three months ended June 30, 2017 and 2016, respectively, and $35,295 and $31,737 for the six months ended June 30, 2017 and 2016, respectively.

 

 

 F - 16

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

7 INTANGIBLES

 

License

 

Localization and implementation of the different software and technology modules is supported through a Localization Agreement. Under this agreement, at a cost of $215,000, the licensor allocated engineering and programming resources to the Company. The cost is being amortized over 5 years.

 

On May 1, 2015, Qpagos Corporation entered into a renewable ten-year license with the Licensor for the non-exclusive right to license technology to provide payment services. Subsequently, on November 1, 2015, the Company and the Licensor concluded an additional amendment to the License Agreement by which the Licensor agreed to the exclusivity to the Mexican market subject to the payment of $20,000 per year payable in quarterly installments, the first two such installments payable December 1, 2015. The agreement may be terminated early by the Licensor if Qpagos Corporation fails to comply with its terms and conditions.

 

Intangibles consisted of the following:

 

    June 30,
2017 		    December 31,
2016 		 
             
Software Localization Agreement   $ 215,000     $ 215,000  
                 
Total cost     215,000       215,000  
Less: accumulated amortization     (68,083 )     (46,583 )
Intangibles, net   $ 146,917     $ 168,417  

 

Amortization expense was $10,750 and $10,750 for the three months ended June 30, 2017 and 2016, respectively and $21,500 and $21,500 for the six months ended June 30, 2017 and 2016, respectively. 

 

8 NOTES PAYABLE

 

Notes payable consisted of the following:

 

    Interest     Maturity     June 30,     December 31,  
Description   Rate     Date     2017     2016  
                         
YP Holdings LLC   12%   December 31, 2015     $ —     $ 151,353  
Strategic IR   Undetermined to 10%    

January 1, 2017 to
undetermined

      100,000       146,575  
Gibbs International Holdings   15%   June 13, 2017       —       50,986  
Cobbolo Limited   10%   May 30, 2017       —       101,466  
Joseph W and Patricia G Abrams   15%   June 13, 2017       —       25,534  
Delinvest Commercial LTD   15%   June 29, 2017       —       50,836  
                             
Total notes payable               $ 100,000     $ 526,750  

 

Interest expense totaled $(8,484) and $2,992 for the three months ended June 30, 2017 and 2016, respecrtively, and $10,206 and $5,984 for the six months ended June 30, 2017 and 2016, respectively. 

 

YP Holdings, LLC

On September 21, 2015, Qpagos Corporation borrowed $100,000 from YP Holdings LLC (“YP”), pursuant to an unsecured loan agreement. The unpaid balance and any accrued interest was due on December 31, 2015. The loan bears interest at a rate of 12%. On May 26, 2017, the Company re-negotiated the loan with YP Holdings and exchanged the note with a convertible note in the Company, refer to note 9 below.

 

 F - 17

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

8 NOTES PAYABLE (continued)

 

Strategic IR

Effective October 14, 2016 the Company executed an unsecured promissory note for $50,000, for an advance that took place on September 29, 2016, which matured on February 13, 2017, bearing interest at 10% per annum. The maturity date of this loan was extended to May 19, 2017 and further extended to June 29, 2017 by the execution of Extension Agreements.

 

On June 29, 2017, the note, principal amount of $50,000 and accrued interest thereon of $3,740 was exchanged for a convertible note, refer to note 9 below.

 

On May 12, 2017, the Company executed an unsecured promissory note for $20,000 with an investor, bearing interest at 10% per annum payable on June 11, 2017. Effective June 11, 2017, the note, principal amount of $20,000 and accrued interest thereon of $164 was exchanged for a convertible note, refer note to 9 below.

 

On May 19, 2017, the Company executed a Secured Grid Note for advances totaling $110,000 which took place between December 12, 2016 and March 6, 2017, bearing interest at 10% per annum maturing on May 30, 2017 or earlier upon acceleration by Strategic IR. The Company entered into an extension agreement with Strategic IR extending the maturity date of the note to June 29, 2017.

 

On June 29, 2017, the note, principal amount of $110,000 and accrued interest thereon of $5,535 was exchanged for a convertible note, refer to note 9 below.

 

On June 27, 2017, Strategic IR advanced the Company $100,000, the terms of this advance are currently being negotiated, the loan currently has no maturity date and is interest free.

 

Gibbs International Holdings

Effective October 20, 2016, the Company executed an unsecured promissory note for $50,000 with an investor, bearing interest at 10% per annum payable on February 19, 2017. On February 19, 2017, the Company executed an amended and restated promissory note extending the maturity date to June 19, 2017 and increasing the interest rate to 15% per annum.

 

Effective June 19, 2017, the note, principal amount of $50,000 and accrued interest thereon of $2,494 was exchanged for a convertible note, refer note to 9 below.

 

Cobbolo Limited

Between October 21, 2016 and November 25, 2016, the Company executed unsecured promissory notes totaling $100,000 with an investor, bearing interest at 10% per annum maturing between February 17, 2017 and March 25, 2017. The maturity date of these notes has been extended to May 30, 2017 and further extended to June 29, 2017.

 

On June 29, 2017, the notes; i) principal amount of $50,000 and accrued interest thereon of $3,438; and ii) principal amount of $50,000 and accrued interest thereon of $2,959, were exchanged for two convertible notes, refer to note 9 below.

 

Joseph W and Patricia G Abrams

Effective October 14, 2016, the Company executed an unsecured promissory note for $25,000 with an investor, bearing interest at 10% per annum payable on February 13, 2017. On February 13, 2017, the Company executed an amended and restated promissory note extending the maturity date to June 13, 2017 and increasing the interest rate to 15% per annum.

 

On June 13, 2017, the note, principal amount of $25,000 and accrued interest thereon of $1,247 was exchanged for a convertible note, refer to note 9 below.

  

Delinvest Commercial, LTD

Effective October 31, 2016, the Company executed an unsecured promissory note for $50,000 with an investor, bearing interest at 10% per annum payable on March 1, 2017. On March 1, 2017, the Company executed an amended and restated promissory note extending the maturity date to June 29, 2017 and increasing the interest rate to 15% per annum.

 

On June 29, 2017, the note, principal amount of $50,000 and accrued interest thereon of $4,123 was exchanged for a convertible note, refer to note 9 below.

 

Viktoria Akhmetova

On May 12, 2017, the Company executed an unsecured promissory note for $20,000 with an investor, bearing interest at 10% per annum payable on June 11, 2017.

 

Effective June 11, 2017, the note, principal amount of $20,000 and accrued interest thereon of $164 was exchanged for a convertible note, refer to note 9 below.

 

 F - 18

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

9 CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consists of the following:

                                         
Description     Interest rate     Maturity Date   Principal     Accrued interest     Unamortized debt discount     June 30, 2017 Balance, net     December 31, 2016 Balance, net  
                                         
Power Up Lending Group     8%     September 30, 2017   $ —     $ —     $ —     $ —       $ 1,180  
      8%     November 30, 2017     53,000       1,498       (28,755 )     25,743       —  
      8%     February 10, 2018     33,000       477       (25,515 )     7,962       —  
                                                     
Labrys Fund, LP     8%     July 27, 2017     105,000       3,544       (15,663 )     92,881       —  
                                                     
JSJ Investments, Inc.     8%     November 6, 2017     200,000       6,312       (94,505 )     111,807       —  
                                                     
Vista Capital Investment, LLC     8%     March 9, 2018     100,000       2,477       (69,041 )     33,436       —  
                                                     
Crossover Capital Fund II, LLC     8%     January 6, 2018     100,000       1,863       (69,091 )     32,772       —  
                                                     
GS Capital Partners, LLC     8%     May 22, 2018     75,000       641       (66,986 )     8,655       —  
      8%     June 16, 2018     112,500       345       (108,185 )     4,660       —  
                                                     
YP Holdings, LLC     8%     May 26, 2018     133,321       —       (105,629 )     27,692       —  
                                                     
Delinvest Commercial, LTD     12%     December 16, 2017     20,000       72       (17,666 )     2,406       —  
      12%     December 26, 2017     54,123       18       (53,823 )     318       —  
                                                     
Viktoria Akhmetova     12%     December 8, 2017     20,164       126       (15,332 )     4,958       —  
                                                     
Strategic IR     12%     December 8, 2017     10,000       69       (8,833 )     1,236       —  
      12%     December 8, 2017     20,164       126       (18,036 )     2,254       —  
      12%     December 26, 2017     53,740       18       (53,441 )     317       —  
      12%     December 26, 2017     115,535       38       (114,893 )     680       —  
                                                     
Joseph W and Patricia G Abrams     12%     December 10, 2017     26,247       147       (16,640 )     9,754       —  
                                                     
Gibbs International Holdings     12%     December 16, 2017     52,494       190       (49,286 )     3,398       —  
                                                     
Roman Shefer     12%     December 24, 2017     10,000       10       (5,900 )     4,110       —  
                                                     
Cobbolo Limited     12%     December 26, 2017     53,438       18       (53,142 )     314       —  
      12%     December 26, 2017     52,959       17       (52,664 )     312       —  
                                                     
Total convertible notes payable               $ 1,400,685     $ 18,006     $ (1,043,026 )     $ 375,665     $ 1,180  

 

Interest expense, together with amortized debt discount totaled $449,861 and $0 for the six months ended June 30, 2017 and 2016, respectively.

 

The 12% convertible notes, above have a fixed conversion price of $0.20 per common share and certain investors who met a minimum investment requirement of $30,000 were issued three-year warrants convertible into common shares at a conversion price of; i) $0.20 per share if the convertible notes are converted prior to maturity date; and ii) $0.30 per share if the convertible notes are not converted prior to maturity date. These convertible notes have a beneficial conversion feature and attached warrants valued using a Black-Scholes valuation model, refer note 11 c) below, the value of the beneficial conversion feature of the notes were determined based on fair market price of the common stock at the date of the issuance of the note, the difference between the fair market value of the common stock and the conversion price was recorded as a debt discount with a corresponding credit to additional paid in capital.

 

The value of the warrants, determined using Black-Scholes, was calculated as a percentage of the total proceeds raised and was recorded as a debt discount with a corresponding credit to additional paid in capital.

 

The total value of the beneficial conversion feature and warrant value recorded as a debt discount during the six months ended June 30, 2017 was $473,968. 

 

 F - 19

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

9 CONVERTIBLE NOTES PAYABLE (continued)

 

Power Up Lending Group Ltd.

 On December 28, 2016, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $77,000 to Power Up Lending Group Ltd. The note had a maturity date of September 30, 2017 and a coupon of eight percent per annum. The Company has the right to prepay the note, provided it makes a payment to the purchaser as set forth in the note within 180 days of its issue date. The note provided that its outstanding principal amount was convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 58% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion.

 

On June 27, 2017, the Company prepaid this note for a total of $107,005, including accrued interest thereon and an early settlement penalty of 35% of the principal outstanding.

 

On February 21, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000 to Power Up Lending Group Ltd. The note has a maturity date of November 30, 2017 and a coupon of eight percent per annum. The Company has the right to prepay the note, provided it makes a payment to the Purchaser as set forth in the note within 180 days of its issue date. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at June 30, 2017 was $25,743, net of unamortized discount of $28,755.

 

On April 25, 2017, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $33,000 to Power Up Lending Group Ltd. The note has a maturity date of February 10, 2018 and the Company has agreed to pay interest on the unpaid principal balance of the note at the rate of eight percent per annum from the date on which the note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the note in terms of agreement. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 60% of the average lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at June 30, 2017 was $7,962, net of unamortized discount of $25,515.

 

Labrys Fund, LP

On January 27, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $105,000 to Labrys Fund, LP. The note had a maturity date of July 27, 2017 and a coupon of eight percent per annum. In connection with the issuance of the note, the Company was required to issue 150,000 shares of common stock as a commitment fee valued at $66,000. The shares were returnable to the Company if no Event of Default has occurred prior to the date the note is fully repaid. Management had determined that it is probable that the Company would meet the conditions under the note and therefore it more likely than not that the Company would not be in Default as defined in the note. As a result, management has concluded that it was probable that the shares would be returned and therefore the value of the 150,000 shares was not recorded.

 

The Company had the right to prepay the note within 180 days of its Issue Date. After the 180 days, the Company had no right to prepayment. The outstanding principal amount of the note was convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at June 30, 2017 was $92,881, net of unamortized discount of $15,663.

 

 F - 20

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

9 CONVERTIBLE NOTES PAYABLE (continued)

 

JSJ Investments Inc.

On February 6, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $200,000 to JSJ Investments Inc. The note has a maturity date of November 6, 2017 and a coupon of eight percent per annum. The Company has the right to prepay the note within 180 days of its issue date. After the 180 days, the Company has no right to prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at June 30, 2017 was $111,807, net of unamortized discount of $94,505.

 

Vista Capital Investments, LLC

On March 9, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $100,000 to Vista Capital Investments, LLC. The note has a maturity date of March 9, 2018 and a coupon of eight percent per annum. The Company has the right to prepay the note, provided it makes a payment to the Purchaser as set forth in the note through the maturity date. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 150 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the last two lowest trading bid prices during the fifteen trading days prior to conversion. The balance of the note plus accrued interest at June 30, 2017 was $33,436, net of unamortized discount of $69,041.

 

Crossover Capital Fund II, LLC

On April 6, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $100,000 to Crossover Capital Fund II, LLC. The note has a maturity date of January 6, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the two (2) lowest trading bid prices during the previous fifteen (15) trading days to the date of conversion. The balance of the note plus accrued interest at June 30, 2017 was $32,772, net of unamortized discount of $69,091.

 

GS Capital Partners, LLC

On May 22, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $75,000 to GS Capital Partners, LLC. The note has a maturity date of May 22, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 62% of lowest trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at June 30, 2017 was $8,655, net of unamortized discount of $66,986.

 

On June 16, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $112,500 to GS Capital Partners, LLC. The note has a maturity date of June 16, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 62% of lowest trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at June 30, 2017 was $4,660, net of unamortized discount of $108,185.

 

 F - 21

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

9 CONVERTIBLE NOTES PAYABLE (continued)

 

YP Holdings, LLC

YP Holdings forgave $19,553 of accrued interest on a note with a principal amount of $100,000 (refer note 8 above), with the remaining accrued interest of $43,759 and was issued in lieu thereof a convertible note with a principal amount of $143,759, bearing interest at 8% per annum, maturing on May 26, 2018. The Company has the right to prepay the note within 180 days of its issue date. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Note holder during the period beginning on the date that is 180 days following the Issue Date. The note is convertible into shares of the Company’s common stock, at a conversion price equal to 70% of the average of the lowest three closing bid prices of the Company’s common stock for the ten prior trading days.

 

On June 12, 2017, YP Holdings converted a total of $11,556 of the principal and interest of the convertible note outstanding into 57,143 common shares of the Company at a net issue price of $0.202 per share. As of June 30, 2017, the Company has a principal balance of $133,321 and an unamortized discount balance of $105,629.

 

Delinvest Commercial, LTD.

On June 19, 2017, the Company issued Delinvest Commercial a convertible promissory note in the aggregate principal amount of $20,000. The note bears interest at 12% per annum and matures on December 16, 2017. The note is convertible into common shares at a conversion price of $.20 per share.

 

On June 29, 2017, the Company exchanged a Delinvest Commercial note with a principal amount of $50,000, together with accrued interest thereon of $4,123, totaling $54,123, for a convertible note, principal amount of $54,123, bearing interest at 12% per annum and maturing on December 26, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

In connection with the convertible notes above, the Company issued warrants to purchase 370,616 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

Viktoria Akhmetova

On June 11, 2017, the Company exchanged a note issued to Viktoria Akhmetova, with a principal amount of $20,000, together with accrued interest thereon of $164, totaling $20,164, for a convertible note, principal amount of $20,164, bearing interest at 12% per annum and maturing on December 8, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

Strategic IR

On June 11, 2017, the Company issued a convertible promissory note in the aggregate principal amount of $10,000. The note bears interest at 12% per annum and matures on December 16, 2017. The note is convertible into common shares at a conversion price of $.20 per share.

 

On June 11, 2017, the Company exchanged a note issued to Strategic IR note with a principal amount of $20,000, together with accrued interest thereon of $164, totaling $20,164, for a convertible note, principal amount of $20,164, bearing interest at 12% per annum and maturing on December 8, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

On June 29, 2017, the Company exchanged a note issued to Strategic IR note with a principal amount of $50,000, together with accrued interest thereon of $3,740, totaling $53,740, for a convertible note, principal amount of $53,740, bearing interest at 12% per annum and maturing on December 26, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

On June 29, 2017, the Company exchanged a note issued to Strategic IR grid note with a principal amount of $110,000, together with accrued interest thereon of $5,535, totaling $115,535, for a convertible note, principal amount of $115,535, bearing interest at 12% per annum and maturing on December 26, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

In connection with the convertible notes above, the Company issued warrants to purchase 997,195 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

 F - 22

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

9 CONVERTIBLE NOTES PAYABLE (continued)

 

Joseph W and Patricia G Abrams

Effective June 13, 2017, the Company exchanged a note issued to Joseph W and Patricia G Abrams with a principal amount of $25,000, together with accrued interest thereon of $1,247, totaling $26,147, for a convertible note, principal amount of $26,147, bearing interest at 12% per annum and maturing on December 10, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

Gibbs International Holdings

Effective June 19, 2017, the Company exchanged a note issued to Gibbs International Holdings with a principal amount of $50,000, together with accrued interest thereon of $2,494, totaling $52,494, for a convertible note, principal amount of $52,494, bearing interest at 12% per annum and maturing on December 16, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

In connection with the Convertible note above, the Company issued a warrant to purchase 262,468 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

Roman Shefer

On June 27, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $10,000. The note bears interest at 12% per annum and matures on December 16, 2017. The note is convertible into common shares at a conversion price of $.20 per share.

 

Cobbolo Limited

On June 29, 2017, the Company exchanged a note issued to Cobbolo Limited with a principal amount of $50,000, together with accrued interest thereon of $3,438, totaling $53,438, for a convertible note, principal amount of $53,438, bearing interest at 12% per annum and maturing on December 26, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

On June 29, 2017, the Company exchanged a note issued to Cobbolo Limited with a principal amount of $50,000, together with accrued interest thereon of $2,959, totaling $52,959, for a convertible note, principal amount of $52,959, bearing interest at 12% per annum and maturing on December 26, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share.

 

In connection with the Convertible notes above, the Company issued a warrant to purchase 531,987 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

10 DERIVATIVE LIABILITY

 

Certain of the short-term convertible notes disclosed in note 9 above, have variable priced conversion rights with no fixed floor price and will re-price dependent on the share price performance over varying periods of time. This gives rise to a derivative financial liability, which was initially valued at inception of the convertible notes using a Black-Scholes valuation model. The value of this derivative financial liability was re-assessed at June 30, 2017 and 2016, and $118,472 and $0 was credited to the statement of operations and comprehensive loss, respectively. The value of the derivative liability will be re-assessed at each financial reporting period, with any movement thereon recorded in the statement of operations in the period in which it is incurred.

 

The following assumptions were used in the Black-Scholes valuation model:

 

    Six Months Ended       Year ended  
    June 30,     December 31,  
    2017     2016  
Conversion price   $    0.11 to 0.29     $ 0.22 to 0.23  
Risk free interest rate        1.05 to 1.21 %     0.85 %
Expected life of derivative liability     9 to 12 months       9 months  
expected volatility of underlying stock     134.1 to 152.2 %     133.0 %
Expected dividend rate     0 %     0 %

 

 F - 23

 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

10 DERIVATIVE LIABILITY (continued)

 

The movement in derivative liability is as follows:

 

    June 30, 2017     December 31, 2016  
             
Opening balance   $ 113,074     $ —  
Derivative financial liability arising from convertible note     904,412       77,000  
Fair value adjustment to derivative liability     (118,472 )     36,074  
    $ 899,014     $ 113,074  

 

11 STOCKHOLDERS’ EQUITY

 

a) Common Stock

 

The Company has 100,000,000 common shares with a par value of $0.0001 each authorized, has issued and outstanding 55,511,143 shares of common stock as of June 30, 2017 and 55,454,000 as of December 31, 2016.

 

On June 12, 2017, a convertible note holder converted debt and accrued interest thereon, totaling $11,556 into 57,143 common shares, valued at $18,286 resulting in a loss on conversion of $6,730.

 

The Company has recorded an expense of $0 and $144,000 for the six months ended June 30, 2017 and 2016, respectively, relating to restricted stock awards, which were fully vested in April 2016.

 

  b) Preferred Stock

 

The Company has authorized 25,000,000 shares of preferred stock with a par value of $0.0001 authorized, no preferred stock is issued and outstanding as of June 30, 2017.

 

  c) Warrants

 

In connection with the Merger, outstanding Qpagos Corporation warrants were assumed by QPAGOS and converted to QPAGOS warrants at a ratio of two QPAGOS warrants for each Qpagos Corporation warrant issued.

 

During the period June 2015 to December 2015, pursuant to the private placement agreement and individual Securities Purchase Agreements entered into, new, qualified investors, acquired 4,784,000 (2,392,000 pre-merger) common units of the Company at a price of $0.625 ($1.25 pre-merger) per unit, each unit consisting of one share of Common Stock and a five year warrant exercisable for one share of common stock at an exercise price of $0.625 ($1.25 pre-merger) per share.

  

The placement agent was also issued, in terms of a placement agent agreement, five year warrants to purchase 717,600 (358,800 pre-QPAGOS Merger) units at $0.625 ($1.25 pre-QPAGOS Merger)) per unit, each consisting of one share of Common stock and an additional five year warrant exercisable for one shares of Common Stock at an exercise price of $0.625 ($1.25 pre-QPAGOS Merger)) per share, giving a total of 1,435,200 (717,600 pre-QPAGOS Merger) warrants to purchase common shares at an exercise price of $0.625 ($1.25 pre-QPAGOS Merger)) per share if all placement agent warrants are exercised.

 

During the period June 8, 2017 to June 29, 2017, the Company issued warrants to the 12% convertible note holders, disclosed in note 9 above, to acquire 2,162,266 shares of common stock at a variable exercise price of; i) $0.20 per share if the convertible notes underlying the warrant issue are converted to common stock prior to maturity date; or ii) $0.30 per share if the convertible notes underlying the warrants are not converted to common stock prior to the maturity date. These warrants were issued to investors who had invested a cumulative minimum of $30,000 in convertible notes prior to June 30, 2017. The convertible debt offering remains open until August 31, 2017.

 

The Warrants were valued using a Black-Scholes valuation model and the proceeds received from the convertible notes were allocated based on the percentage of the value of the warrants to the total value of the debt securities in this offering, resulting in a total debt discount of $473,968. 

 

 F - 24

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

11 STOCKHOLDERS’ EQUITY (continued)

  

  c) Warrants (continued)

 

The following assumptions were used in the Black-Scholes valuation model:

 

          Six Months Ended  
          June 30,  
          2017  
Exercise price           $ 0.20  
Risk free interest rate             1.50 to 1.8 %
Expected life of derivative liability             9 to 12 months  
expected volatility of underlying stock             160.7 to 161.6 %
Expected dividend rate             0 %

 

A summary of the Company’s warrant activity for the period January 1, 2016 to June 30, 2017, is as follows:

 

    No. of shares     Exercise price per share     Weighted average exercise price  
                   
Outstanding January 1, 2016     6,219,200     $ 0.625     $ 0.63  
Granted     —       —       —  
Forfeited/cancelled     —       —       —  
Exercised     —       —       —  
Outstanding December 31, 2016     6,219,200     $ 0.625       0.63  
Granted     2,162,266       0.20       0.20  
Forfeited/cancelled     —       —       —  
Exercised     —       —       —  
Outstanding June 30, 2017     8,381,466       $0.20 to $0.625     $ 0.52  

 

The warrants outstanding and exercisable at June 30, 2017 are as follows:

 

      Warrants outstanding     Warrants exercisable  
Exercise price     No. of shares     Weighted average remaining years     Weighted average exercise price     No. of shares     Weighted average exercise price  
                                 
$ 0.625       6,219,200       3.26               6,219,200          
$ 0.20       2,162,266       3.00               2,162,266          
                                             
          8,381,466       3.19     $ 0.52       8,381,466     $ 0.52  

 

The warrants outstanding have an intrinsic value of $259,472 and $0 as of June 30, 2017 and December 31, 2016, respectively.

 

 F - 25

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

12 REVENUE

 

Revenue is derived from the following sources:

 

    Three     Three     Six     Six  
    Months
Ended 		    Months
Ended 		    Months
Ended 		    Months
Ended 		 
    June 30,     June 30,     June 30,     June 30,  
    2017     2016     2017     2016  
                         
Sales of services   $ 995,976     $ 595,317     $ 1,797,668     $ 1,093,301  
Payment processing fees     7,334       12,602       17,394       13,580  
Kiosk sales     —       18,351       113,921       149,323  
Other     13,848       146       15,485       146  
    $ 1,017,158       626,416     $ 1,944,468     $ 1,256,350  

 

13 EQUITY BASED COMPENSATION

 

Equity based compensation is made up of the following:

 

    Six
Months Ended
June 30,
2017 		    Six
Months Ended
June 30,
2016 		 
             
Stock issued for services rendered   $ —     $ 2,032,274  
    $ —     $ 2,032,274  

 

14 NET LOSS PER SHARE

 

Basic loss per share is based on the weighted-average number of common shares outstanding during each period. Diluted loss per share is based on basic shares as determined above plus common stock equivalents. The computation of diluted net loss per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share. For the six months ended June 30, 2017 and 2016, all unvested restricted stock awards and warrants, were excluded from the computation of diluted net loss per share. Dilutive shares which could exist pursuant to the exercise of outstanding stock instruments and which were not included in the calculation because their affect would have been anti-dilutive are as follows:

 

    Six
Months Ended
June 30,
2017
(Shares) 		    Six
Months Ended
June 30,
2016
(Shares) 		 
             
Convertible debt   7,398,202      —  
Warrants     8,381,466       6,219,200  
     

15,779,668

      6,219,200  

 

15 COMMITMENTS AND CONTINGENCIES

 

The Company operates from an office facility in Mexico. The office is leased under a three (3) year non-cancellable operating lease, which ends on December 16, 2019. The lease calls for monthly rental payment, including maintenance, of $3,262, as adjusted for exchange rate changes. The Company also leases space on a month-to-month basis for its data servers at a monthly rate of $1,926. In addition, Qpagos leases warehouse space on a month-to-month basis for $1,239 per month.

 

The future minimum lease installments under the office facility lease agreement as of June 30, 2017 are $19,573 for the remainder of 2017 and $39,146 for each year 2018 and 2019, subject to exchange rate fluctuations.

 

 F - 26

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

16 SUBSEQUENT EVENTS

 

On July 10, 2017, the Company entered into a Convertible Promissory Note in the aggregate principal amount of $83,000. The Note has a maturity date of April 20, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the Note, provided it makes a pre-payment penalty as specified in the Note. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Holder into shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) at a conversion price equal to 58% of the average of the three (3) lowest trading bid prices during the previous ten (10) trading days to the date of conversion.

 

On July 26, 2017, the Company received a further advance of $109,165 from Strategic IR, the terms of this advance have not been determined as yet. The proceeds received from Strategic IR were used to repay the convertible note advanced by Labrys Fund, LP on July 26, 2017. The 150,000 shares of common stock issued to Labrys Fund as a commitment fee for the convertible loan advanced have been returned to the Company and have been cancelled.

 

Other than disclosed above, in accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2017 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements.

 

 F - 27

 

 

Item 2.

 

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by our audited annual financial statements and the related notes thereto, each of which appear on Form 10-K filed with the SEC on April 17, 2017. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “Forward-Looking Statements” in this Quarterly Report on Form 10-Q. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the disclosure under the heading “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q. The Management Discussion and Analysis of Financial Condition and Results of Operations below is based upon only the financial performance of Qpagos.

 

Overview and Financial Condition

 

We are a provider of next generation physical and virtual payment services that we introduced to the Mexican market in the third quarter of 2014.

 

We provide an integrated network of kiosks, terminals and payment channels that enable consumers to deposit cash, convert it into a digital form and remit the funds to any merchant in our network quickly and securely. We help consumers and merchants connect more efficiently in markets and consumer segments, such as Mexico, that are largely cash-based and lack convenient alternatives for consumers to pay for goods and services in physical, online and mobile environments. For example, we license technology that can be used to pay bills, add minutes to mobile phones, purchase transportation tickets, shop online, buy digital services or send money to a friend or relative.

 

Our current focus is on Mexico which remains a cash-dominated society for retail consumer payments with approximately 80% of the value of personal payments exchanged in cash (Bank of Mexico). The penetration of electronic payment services, such as credit and debit cards and point of sale terminals, significantly lags behind more developed economies. We believe that opportunities for our services in Mexico are vast. With over 107 million mobile subscribers in Mexico, 85% of which are under prepaid plans, mobile top-up alone, was a $12 billion business in 2014 as reported by PwC Telecom in Mexico 2015, America Móvil 4Q’15. We believe that there is opportunity for growth in the Mexican market and have expanded our service providers beyond the mobile telephone operators to service providers of electricity, transportation, utilities, municipal services and taxes, consumer credit installments, insurance premiums, and many more. Altogether as of the second quarter of 2017 our platform had integrated over 160 such services.

 

Our primary strategy in Mexico to date has been the attraction of service providers as well as the deployment of kiosks through Redpag Electrónicos S.A.P.I. de C.V., our kiosk management subsidiary. During the six months ended June 30, 2017, Qpagos Corporation generated net revenues of $1,944,468 from our operations in Mexico. Our primary sources of revenue are sales of prepaid services and payment processing fees. We also generate revenue from non-payment services such as kiosk sales. Qpagos Corporation currently has in excess of 160 service providers integrated into its payment gateway, which includes all mobile phone providers in Mexico as well as most utility companies, financial services, entertainment venues and others. As of June 30, 2017, we have deployed over 307 kiosks and terminals, and we service an additional 440 kiosks of an independent distributor. Our kiosks and terminals can be found at convenience stores, next to metro stations, retail stores, airport terminals, education centers, and malls in major urban centers, as well as many small and rural towns.

 

Management Discussion and Analysis of financial condition

 

The discussion and analysis of our financial condition and results of operations is based upon the unaudited condensed consolidated financial statements as of June 30, 2017 and 2016, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis, we review our estimates and assumptions. The estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions.

 

Results of Operations for the Three Months Ended June 30, 2017 and June 30, 2016

 

Net revenue

 

Net revenues in our Mexican operations were $1,017,158 and $626,416 for the three months ended June 30, 2017 and 2016 respectively, an increase of $390,742 or 62.4%. Our primary revenue generating operations are based in Mexico and our functional currency is the Mexican Peso. Our revenue in Mexican Pesos increased to MXN 18,874,012 from MXN 11,338,341 for the three months ended June 30, 2017 and 2016, respectively, an increase of MXN 7,535,671 or 66.5%. The increase in revenue in MXN terms is primarily due to an increase in the volume of prepaid airtime sold, directly attributable to the increased deployment of kiosks during prior periods, and we also increased the number of our customers over the prior comparable period. The average US$ exchange rate has strengthened against the MXN over the prior comparable period, from $18.1003 to $18.5556 or 2.5%, which results in a lower revenue growth in US $ terms of $25,054.

 

1

 

 

Cost of goods sold

 

Cost of goods sold in our Mexican operations were $1,004,901 and $607,237 for the three months ended June 30, 2017 and 2016, respectively, an increase of $397,664 or 65.5%. Our cost of sales from our Mexican operations, in Mexican Pesos increased to MXN 18,646,580 from MXN 10,991,164 for the three months ended June 30, 2017 and 2016, respectively, an increase of MXN 7,655,416 or 69.7%. The increase in cost of sales in MXN terms is primarily due to the increase in the volume of prepaid airtime sold which is directly attributable to the increased deployment of kiosks and its wholesale business during the prior periods. Cost of goods consists primarily of services acquired from third parties, such as prepaid air time and the cost of the kiosks and any retrofitted components. Also included in cost of sales is depreciation related to those kiosks that are used in the production of income. Depreciation expenses was $9,354 and $9,590, for the three months ended June 30, 2017 and 2016, respectively, a decrease of $236. The average US $ exchange rate has strengthened against the MXN over the prior period, from $18.1003 to $18.5556 or 2.5%, which results in a lower cost of sales in US $ terms of $25,280.

 

Gross profit

 

Gross profit in our Mexican operations was $12,257 and $19,179 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $6,922 or 36.1%. The components of gross profit are as follows:

 

  ● Gross profit on sales of services was $11,254 and $14,003, for the three months ended June 30, 2017 and 2016, respectively, a decrease of $2,749 or 19.6%. The decrease in gross profit is primarily due to the mix of revenues, we earn lower margins on airtime sold through third party owned kiosks as opposed to kiosks that we own and operate.
  ● Gross profit on kiosk sales was $0 and $8,040 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $8,040.  We did not sell any kiosks during the current quarter.
  ● Gross (loss) profit on other revenue was $10,357 and $6,727 for the three months ended June 30, 2017 and 2016, respectively, an increase of $3,630 or 54.0%. The decrease is due to an increase in commission earned from our vendors offset by an increase in ad-hoc maintenance expenditures incurred on operating kiosks.
  ● Included in gross profit is depreciation related to those kiosks that are used in the production of income.  Depreciation expenses was $9,354 and $9,590, for the three months ended June 30, 2017 and 2016, respectively, a decrease of $236.

 

Total expenses

 

Total expenses were $511,560 and $632,712 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $121,152 or 19.1%. We incur operating expenditure both in Mexico and in the US, where we maintain a corporate office and incur certain expenditure on consultants, licensing and public reporting activities.

 

Total expenses consisted primarily of the following:

 

  a. General and administrative expenditure was $489,879 and $615,502 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $125,623 or 20.4%. The general and administrative expenditure is analyzed for both Mexican and US operations as follows:

 

  i.

The general and administrative expenditure in Mexico decreased to MXN 3,472,451 ($187,137) from MXN 5,856,338 ($323,549) for the three months June 30, 2017 and 2016, respectively, a decrease of MXN 2,383,887 ($136,412) or 40.7%. The decrease is primarily due to lower marketing and related expenses of approximately MXN 161,000; a reduction in importation and logistics costs of approximately MXN 314,000; a decrease in consulting expenses of approximately MXN 1,525,000 and various other cost reductions of approximately MXN 384,000.

 

2

 

 

  ii.

The general administrative expenses incurred in the US, during the three months ended June 30, 2017 and 2016 was $302,742 and $291,951, respectively, an increase of $10,791 or 3.7%, primarily made up as follows:

 

  ● Consulting fees of $210,942 and $130,049 for the three months ended June 30, 2017 and 2016, respectively, an increase of $80,893 or 62.2%, primarily due to management fees, previously paid out of Mexico now paid out of the US of $60,000, an increase in IT consulting fee of $17,893 over the prior period due to the number of IT consultants working on Qpagos system maintenance.
  ● Legal expenditure of $33,904 and $44,455 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $10,551 or 23.7%, primarily due to the amount of legal activity conducted on the prior period reverse merger transactions.
  ● Debt raising fees of $24,500 incurred on funds raised through the issuance of convertible notes.
  ● Audit fees of $17,367 and $57,500 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $40,133 or 69.8%, primarily due to the level of audit activity in the prior period as we prepared to go public and the effort required for the reverse merger transaction which took place.

 

Other (expense) income

 

Other (expense) income was $(7,683) and $1,016 for the three months ended June 30, 2017 and 2016, respectively. Other expense included a charge of $6,730 on the conversion of debt to equity at below fair market value during the current period.

 

Interest expense, net

 

Interest expense was $330,107 and $2,992 for the three months ended June 30, 2017 and 2016, an increase of $327,115. The increase consists primarily of an increase in interest incurred on convertible notes of $42,790 and the amortization of debt discount of $297,736 related to convertible notes issued during the current period and the end of the prior year, offset by a reduction in interest incurred on notes outstanding of $13,411 due to the partial forgiveness of penalty interest on the YP Holdings note.

 

Derivative liability movements

 

Derivative liability movements were $366,242 and $0 for the three months ended June 30, 2017. The derivative liability arose due to the issuance of convertible securities with variable conversion prices and no floor conversion price. The credit during the current period represents the improvement of our share price over the price at the date of issuance of our debt securities and the consequent mark-to-market of the derivative liability as of June 30, 2017. There was no derivative liability as of June 30, 2016.

 

Foreign currency gain (loss)

 

The foreign currency gain (loss) was $97,475 and $(145,827) for the three months ended June 30, 2017 and 2016, respectively, an increase of $243,302. The increase is primarily due to foreign currency gains on other US$ denominated liabilities, such as intercompany balances due to a weakening of the US $ exchange rate between the period March 31, 2017 to June 30, 2017 as compared to a strengthening of the US $ exchange rate between the period March 31, 2016 and June 30, 2016.

 

Net loss

 

We incurred a net loss of $373,376 and $761,336, for the three months ended June 30, 2017 and 2016, respectively, a decrease of $387,960 or 50.9%, primarily due to the decrease in operating expenses, the credit movement in the derivative liability and the foreign currency gain, offset by the additional interest expense, as discussed above.

 

Results of Operations for the Six Months Ended June 30, 2017 and June 30, 2016

 

Net revenue

 

Net revenues in our Mexican operations were $1,944,468 and $1,256,350 for the six months ended June 30, 2017 and 2016 respectively, an increase of $688,118 or 54.8%. Our primary revenue generating operations are based in Mexico and our functional currency is the Mexican Peso. Our revenue in Mexican Pesos increased to MXN 36,822,655 from MXN 22,689,495 for the six months ended June 30, 2017 and 2016, respectively, an increase of MXN 14,133,160 or 62.3%. The increase in revenue in MXN terms is primarily due to an increase in the volume of prepaid airtime sold, directly attributable to the increased deployment of kiosks during prior periods, and we also increased the number of our customers over the prior comparable period. The average US$ exchange rate has strengthened against the MXN over the prior comparable period, from $18.0600 to $18.2876 or 1.2%, which results in a lower revenue growth in US $ terms of $94,439.

 

3

 

 

Cost of goods sold

 

Cost of goods sold in our Mexican operations were $1,858,353 and $1,226,158 for the six months ended June 30, 2017 and 2016, respectively, an increase of $632,195 or 51.6%. The Company’s cost of sales from its Mexican operations in Mexican Pesos increased to MXN 35,165,654 from MXN 22,143,882 for the six months ended June 30, 2017 and 2016, respectively, an increase of MXN 13,021,772 or 58.8%. The increase in cost of sales in MXN terms is primarily due to the increase in the volume of prepaid airtime sold which is directly attributable to the increased deployment of kiosks and its wholesale business during prior periods. Cost of goods consists primarily of services acquired from third parties, such as prepaid air time and the cost of the kiosks and any retrofitted components. Also included in cost of sales is depreciation related to those kiosks that are used in the production of income. Depreciation expenses was $18,322 and $19,222, for the six months ended June 30, 2017 and 2016, respectively, a decrease of $900. The average US $ exchange rate has strengthened against the MXN over the prior period, from $18.0600 to $18.2876 or 1.2%, which results in a lower cost of sales in US $ terms of $88,804.

 

Gross profit

 

Gross profit was $86,115 and $30,192 for the six months ended June 30, 2017 and 2016, respectively, an increase of $55,923 or 185.2%. The components of gross profit are as follows:

 

  ● Gross profit on sales of services was $38,748 and $28,103, for the six months ended June 30, 2017 and 2016, respectively, an increase of $10,645 or 37.9%. The increase in gross profit is primarily due to an increase in volume of transactions, however our gross margins are declining due to the mix of our business shifting more towards third party owned kiosks as opposed to company owned kiosks on which we earn a higher gross margin.
  ● Gross profit on kiosk sales was $58,818 and $25,655 for the six months ended June 30, 2017 and 2016, respectively, an increase of $33,163 or 129.3%. The increase is primarily attributable to the sale of 30 kiosks in January 2017.
  ● Gross profit (loss) on other revenue was $6,871 and $(4,342) for the six months ended June 30, 2017 and 2016, respectively, an increase of $11,213. The improvement is due to a slight increase in commission earned from our vendors offset by a decrease in ad-hoc maintenance expenditures incurred on operating kiosks.
  ● Included in gross profit is depreciation related to those kiosks that are used in the production of income.  Depreciation expenses was $18,322 and $19,222, for the six months ended June 30, 2017 and 2016, respectively, a decrease of $900.

 

Total expenses

 

Total expenses were $985,938 and $3,343,653 for the six months ended June 30, 2017 and 2016, respectively, a decrease of $2,357,715 or 70.5%. We incur operating expenditure both in Mexico and in the US, where we maintain a corporate office and incur certain expenditure on consultants, licensing and public reporting activities.

 

Total expenses consisted primarily of the following:

 

  a. General and administrative expenditure was $947,465 and $3,309,204 for the six months ended June 30, 2017 and 2016, respectively, a decrease of $2,361,739 or 71.4%. QPAGOS has operations in Mexico and a US holding company presence which incurs some expenditure.

 

  i. The general and administrative expenditure in Mexico decreased to MXN 7,491,417 ($394,775) from MXN 12,311,286 ($681,767) for the six months June 30, 2017 and 2016, respectively, a decrease of MXN4,819,869 ($286,992) or 39.2%. The decrease is primarily due to lower marketing and related expenses of approximately MXN 344,000; a reduction in non-recurring IT expenses of approximately MXN 222,000; a reduction in importation and logistics costs of approximately MXN 694,000; a decrease in consulting expenses of approximately MXN 2,920,000; and miscellaneous cost reductions of approximately $639,000.

 

4

 

 

  ii. The general administrative expenses incurred in the US, during the six months ended June 30, 2017, amounted to $552,691, and $2,627,436, respectively, primarily made up as follows:

 

  ● Stock based compensation of $0 and $2,032,275 for the six months ended June 30, 2017 and 2016, respectively, a decrease of $2,032,275 or 100%, due to share based compensation paid to management consultants in the prior year.
  ● Consulting fees of $385,091 and $253,205 for the six months ended June 30, 2017 and 2016, respectively, an increase of $131,886 or 52.1%, primarily due to management fees, previously paid out of Mexico now paid out of the US of $123,796, and an increase in IT consulting fee of $11,841 over the prior period due to the number of IT consultants working on Qpagos system maintenance.
  ● Legal expenditure of $60,449 and $55,489 for the six months ended June 30, 2017 and 2016, respectively, an increase of $4,960 or 8.9%, primarily due to the amount of legal activity conducted on the prior period reverse merger transactions.
  ● Debt raising fees of $47,500 incurred on funds raised through the issuance of convertible notes.
  ● Audit fees of $17,367 and $89,000 for the six months ended June 30, 2017 and 2016, respectively, a decrease of $71,633 or 80.4%, primarily due to the level of audit activity in the prior period as we prepared to go public and the effort required for the reverse merger transaction.

 

Other (expense) income

 

Other (expense) income was $(7,583) and $4,015 for the six months ended June 30, 2017 and 2016, respectively, other expense included a charge of $6,730 on the conversion of debt to equity at below fair market value during the current period.

 

Interest expense, net

 

Interest expense was $471,707 and $5,984 for the six months ended June 30, 2017 and 2016, respectively, an increase of $465,723. The increase consists primarily of an increase in interest incurred on convertible notes of $49,005 and the amortization of debt discount of $411,298 related to convertible notes issued during the current period and the end of the prior year, offset by a reduction in interest incurred on notes outstanding of $13,338 due to the partial forgiveness of penalty interest on the YP Holdings note.

 

Derivative liability movements

 

Derivative liability movements were $118,472 and $0 for the six months ended June 30, 2017. The derivative liability arose due to the issuance of convertible securities with variable conversion prices and no floor conversion price. The credit during the current period represents the net improvement of our share price over the price at the date of issuance of our debt securities and the consequent mark-to-market of the derivative liability as of June 30, 2017. There was no derivative liability as of June 30, 2016.

 

Foreign currency gain (loss)

 

The foreign currency gain (loss) was $331,327 and $(114,843) for the six months ended June 30, 2017 and 2016, respectively, an increase of $446,170. The increase is primarily due to foreign currency gains on other US$ denominated liabilities, such as intercompany balances due to a weakening of the US $ exchange rate between the period December 31, 2016 to June 30, 2017 as compared to a strengthening of the US $ exchange rate between the period December 31, 2015 and June 30, 2016.

 

Net loss 

 

We incurred a net loss of $929,314 and $3,430,273, for the six months ended June 30, 2017 and 2016, respectively, a decrease of $2,500,959 or 72.9%, primarily due to the decrease in operating expenses, specifically the stock based compensation to consultants of $2,032,750, the credit movement in the derivative liability and the foreign currency gain, offset by the additional interest expense, as discussed above.

 

Liquidity and Capital Resources

 

To date, our primary sources of cash have been funds raised from the sale of its securities and the issuance of debt as well as revenue derived from operations.

 

We incurred an accumulated deficit of $9,686,511 through June 30, 2017 and incurred negative cash flow from operations of $650,802 for the six months ended June 30, 2017. We have spent, and need to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development effort and will be required to raise additional funding.

 

5

 

 

We will need to generate additional revenue from operations and/or obtain additional financing to pursue our business strategy, repay our outstanding note obligations and take advantage of business opportunities that may arise. To meet our financing needs, we are considering multiple alternatives, including, but not limited to, additional equity financings and, debt financings and/or funding from partnerships. There can be no assurance that we will be able to complete any such transactions on acceptable terms or otherwise ad may have to significantly curtail our operations.

 

At June 30, 2017, we had cash of $11,197 and a negative working capital of $808,357. We believe that the current cash balances together with revenue anticipated to be generated from operations will not be sufficient to meet our current working capital needs and as mentioned above, we will seek further funding from either equity issues or further debt funding, should we not be successful, we may have to curtail our operations significantly.

 

We utilized cash of $650,802 and $1,015,258 in operating activities for the six months ended June 30, 2017 and 2016, respectively, a decrease of $364,456 or 35.9%. The decrease is primarily due to a favorable movement of $659,367 between cash operating expenditure before working capital changes and an adverse movement in working capital flows of $(266,341) as compared to the prior comparable period.

 

We had minimal investment in property and equipment of $0 and $453 for the six months ended June 30, 2017 and 2016.

 

We funded our operations by utilizing our cash balances and raising an additional $973,500 through debt issuances. We repaid a convertible note of $77,000 for gross proceeds of $107,005, including interest and early settlement penalty on June 27, 2017.

 

Subsequent to June 30, 2017 we raised the following funds:

 

  ● On July 10, 2017, we entered into a Convertible Promissory Note in the aggregate principal amount of $83,000. The Note has a maturity date of April 20, 2018 and a coupon of eight percent (8%) per annum.

 

  ● On July 26, 2017, we received a further advance of $109,165 from Strategic IR, however, the terms of this advance have not as yet been determined. The proceeds received from Strategic IR were used to repay the convertible note advanced by Labrys Fund, LP on July 26, 2017.

 

We have minimal commitments which include the office facility lease agreement with a future commitment as of June 30, 2017 of $19,573 for the remainder of 2017 and $39,146 for each year 2018 and 2019, subject to exchange rate changes.

 

We entered into an additional ten-year licensing agreement with the Licensor on May 1, 2015, whereby we are committed to pay an annual license fee in quarterly installments of $5,000 ($20,000 per annum) to the Licensor for an exclusive license for the Mexican market of certain revenue payment services.

 

Our primary financial commitments as of the date hereof are payments owed under the License Agreement. The minimum commitments due under the license agreement is summarized as follows:

 

    Amount  
       
2017     20,100  
2018     20,100  
2019     20,100  
2020     20,100  
2021 and thereafter     97,167  
    $ 177,567  

 

Off Balance Sheet Arrangements

 

None

 

Item 3. Quantitative and Qualitative Disclosures About Market Risks

 

None.

 

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Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that due to a lack of segregation of duties and insufficient controls over review and accounting for certain complex transactions, that the Company’s disclosure controls and procedures as of June 30, 2017 were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The Company intends to retain additional individuals to remedy the ineffective controls. We have begun to take actions that we believe will substantially remediate the material weaknesses identified. In response to the identification of our material weaknesses, we are in the process of expanding our finance and accounting staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.

 

(b) Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Item 1A. Risk Factors

  

The following information and updates should be read in conjunction with the information disclosed in Part 1, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on April 17, 2017 (the “2016 Annual Report”). Except as disclosed below, there have been no material changes from the risk factors and uncertainties disclosed in our 2016 Annual Report.

 

Risks Relating to Our Business and Industry

 

We may continue to generate operating losses and experience negative cash flows and it is uncertain whether we will achieve profitability.

 

For the six months ended June 30, 2017, we incurred a net loss of $929,314. We have an accumulated deficit of $9,686,511 through June 30, 2017. We expect to continue to incur operating losses until such time, if ever, as we are able to achieve sufficient levels of revenue from operations. There can be no assurance that we will ever generate significant sales or achieve profitability. Accordingly, the extent of future losses and the time required to achieve profitability, if ever, cannot be predicted at this point.

 

We also expect to experience negative cash flows for the foreseeable future as we fund our operating losses. As a result, we will need to generate significant revenues or raise additional financing in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability would likely negatively impact the value of our securities and financing activities.

 

To date we have not successfully generated sufficient revenue to pay our operating expenses and have relied on proceeds for recent note issuances to pay the deficiency.

 

As of the date hereof, we have outstanding debt in the principal amount of $1,500,685 owed to 13 investors pursuant to the terms of various notes that we issued. To date, we have not generated sufficient revenue to pay the balances owed under the notes and provide sufficient working capital to run our business. The outstanding principal amount of the notes (if any) is convertible at any time and from time to time at the election of the holder after certain periods of time into shares of our common stock at discounts to the market price of our common stock. In addition, upon the occurrence and during the continuation of an Event of Default (as defined in the notes), the notes each will become immediately due and payable and we have agreed to pay additional default interest rates. In addition, certain notes also provide for piggyback registration rights under certain circumstances, the payment of liquidated damages for failure to comply with such provisions, and anti-dilution protection for issuances or deemed issuances of securities below the conversion price. Upon conversion of these notes, our current shareholders will suffer dilution, which could be significant.

 

If we cannot establish profitable operations, we will need to raise additional capital to fully implement our business plan, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment.

 

Achieving and sustaining profitability will require us to increase our revenues and manage our operating and administrative expenses. We cannot guarantee that we will be successful in achieving profitability. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations and in order to fully implement our business plan. To date, we and our subsidiaries have raised an aggregate of $7,459,426 from the sale of debt and equity securities. We estimate that we will need approximately $3,000,000 in order to implement our current business plan. If we do not generate such revenue from operations, we may be forced to limit our expansion. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders, may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving profitability, and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our operations, which could result in the loss to investors of their investment in our securities.

 

8

 

 

We are subject to fluctuations in currency exchange rates.

 

We are exposed to currency risks. Our financial statements are expressed in U.S. dollars, while our revenues and expenses are in Mexican pesos. Accordingly, our results of operations and assets and liabilities are exposed to fluctuations in exchange rates between the U.S. dollar and the Mexican peso. In addition, changes in currency exchange rates also affect the carrying value of assets on the balance sheet, which may result in a decline in the dollar amount of our total assets on the balance sheet. During the year ended December 31, 2016, we incurred a foreign currency loss of ($357,855) attributable to the deterioration of the Mexican Peso against the US Dollar. However, during the six months ended June 30, 2017, we had a foreign currency gain of $331,327 compared to a foreign currency loss of $(114,843) for the six months ended June 30, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for the six months ended June 30, 2017

 

Other than as set forth below or as previously disclosed in our filings with the Securities and Exchange Commission, we did not sell any equity securities during the quarter ended June 30, 2017 in transactions that were not registered under the Securities Act.

 

On June 19, 2017, we issued to one investor a convertible note in the principal amount of $52,494, convertible at a conversion price of $0.20 per share together with a warrant to purchase 262,468 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity in exchange for a note in the principal amount of $50,000 together with accrued interest thereon. The shares were issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange.  

 

On June 11, 2017, we issued to one investor (i) a 12% convertible note in the principal amount of $20,000 that converts to common stock at a conversion price of $0.20 per share together with a warrant to purchase 100,000 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity. The 12% $20,000 note was issued in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, the recipient of securities in the transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions and the recipient was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act.

 

On June 11, 2017, we issued to one investor a 12% convertible note in the principal amount of $20,164, convertible at a conversion price of $0.20 per share. The convertible note was issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange.  

 

On June 11, 2017, we issued to one investor (i) a 12% note in the principal amount of $10,000 that converts to common stock at a conversion price of $0.20 per share and matures on December 16, 2017 and (ii) a convertible note in the principal amount of $20,164, convertible at a conversion price of $0.20 per share together with a warrant to purchase 150,822 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity in exchange for a note in the principal amount of $20,000 together with accrued interest thereon. The convertible note was issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange. The $10,000 note was issued in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, the recipient of securities in the transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions and the recipient was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act.

 

9

 

 

On June 12, 2017, we issued 57,143 shares of our common stock upon conversion of $11,556 in principal amount of a note outstanding. The shares were issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange. 

 

Effective June 13, 2017, we issued to one investor a convertible note in the principal amount of $26,247, convertible at a conversion price of $0.20 per share in exchange for a note in the principal amount of $25,000 together with accrued interest thereon. The convertible note was issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange.  

  

On June 27, 2017, we issued to one investor a 12% note in the principal amount of $10,000 that converts to common stock at a conversion price of $0.20 per share and matures on December 16, 2017. The 12% $10,000 note was issued in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, the recipient of securities in the transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions and the recipient was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act. 

 

On June 29, 2017, we issued to one investor (i) a convertible note in the principal amount of $53,740, convertible at a conversion price of $0.20 per share together with a warrant to purchase 268,699 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity in exchange for a note in the principal amount of $50,000 together with accrued interest thereon and (ii) a convertible note in the principal amount of $115,535, convertible at a conversion price of $0.20 per share together with a warrant to purchase 577,674 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity in exchange for a note in the principal amount of $100,000 together with accrued interest thereon. The shares were issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange.  

 

On June 29, 2017, we issued to one investor (i) a convertible note in the principal amount of $52,959, convertible at a conversion price of $0.20 per share together with a warrant to purchase 264,795 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity in exchange for a note in the principal amount of $50,000 together with accrued interest thereon and (ii) a convertible note in the principal amount of $53,438, convertible at a conversion price of $0.20 per share together with a warrant to purchase 267,192 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity in exchange for a note in the principal amount of $50,000 together with accrued interest thereon. The notes and warrants were issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange.  

 

10

 

 

On June 29, 2017, we issued to one investor a convertible note in the principal amount of $54,123, convertible at a conversion price of $0.20 per share together with a warrant to purchase 270,616 shares of our common stock at an exercise price of $0.20 if the note is converted to common stock prior to its maturity or $0.30 if the note is not converted into common stock prior to its maturity in exchange for a note in the principal amount of $50,000 together with accrued interest thereon. The note and warrant were issued upon reliance of Section 3(a)(9) of the Securities Act as they were issued upon exchange of securities with existing security holders and no commission or other remuneration was paid or given in connection with the exchange.  

 

On May 26, 2017, we issued to one investor an 8% note in the principal amount of $143,759 maturing on May 26, 2018 convertible into shares of common stock at a conversion price equal to 70% of the average of the lowest three closing bid prices of our common stock for the ten prior trading days.   The issuance of the note was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions. The recipient of the securities was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act.

 

Item 3. Defaults upon senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

EXHIBIT INDEX

 

Exhibit    
Number   Description of Exhibit
4.1   Convertible Promissory Note (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May1, 2017 (File Number 000-55648)
     
10.1   Securities Purchase Agreement, dated April 25, 2017, by and between QPAGOS and Power Up Lending Group Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May1, 2017 (File Number 000-55648)
     
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and I5d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

11

 

 

SIGNATURES

 

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

 

  QPAGOS
   
Date: August 17, 2017 By: /s/ Gaston Pereira
  Gaston Pereira
  Chief Executive Officer
  (Principal Executive Officer)

 

  QPAGOS
   
Date: August 17, 2017 By: /s/ Mark Korb
  Mark Korb
  Chief Financial Officer
  (Principal Financial Officer)

 

12

 

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