WASHINGTON, D.C. 20549
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§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
x
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.
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.
¨
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
The number of outstanding shares of common
stock, $.0001 par value, of the registrant as of August 11, 2017 was 1,900,039 after giving effect to the registrant's
one-for-ten reverse stock split effected October 5,
2017).
This Amendment No. 1 on Form 10-Q/A (this “Amendment No.
1”) amends and restates in its entirety the Quarterly Report on Form 10-Q of Net Element, Inc. (the “Company”) for
the quarter ended June 30, 2017 as originally filed with the Securities and Exchange Commission (the “Commission”)
on August 14, 2017 (the “Original Filing”).
This Amendment No. 1 amends the
Original Filing to reflect to the Company’s one-for-ten reverse stock split effected October 5, 2017 as if it had
occurred on January 1, 2016 (shares and per share amounts have been revised accordingly).
For ease of reference, revisions to the Original Filing have
been made to the following sections:
In addition, the Company’s
Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this filing in
connection with this Amendment No. 1 (Exhibits 31.1, 31.2 and 32.1), and the Company has provided its revised audited
consolidated financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibit 101.
Except as provided in this explanatory note, or as indicated
in the applicable disclosure, this Amendment No. 1 has not been updated to reflect other events occurring after the filing of the
Original Filing and does not modify or update information and disclosures in the Original Filing affected by subsequent events.
Accordingly, this Amendment No. 1 should be read in conjunction with our filings with the Commission subsequent to the date on
which we filed the Original Filing, together with any amendments to those filings.
Net Element, Inc. is a corporation organized
under the laws of the State of Delaware. As used in this Quarterly Report on Form 10-Q (this “Report”), unless the
context otherwise requires, the terms “Company,” “we,” “us” and “our” refer to
Net Element, Inc. and, as applicable, its majority-owned and consolidated subsidiaries. References in this Report to “PayOnline”
refer, collectively, to PayOnline System LLC, Innovative Payment Technologies LLC, Polimore Capital Limited and Brosword Holding.
This Report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Any statements contained in this Report that are not statements of historical fact may be deemed forward-looking
statements. Forward-looking statements generally are identified by the words “expects,” “anticipates,”
“believes,” “intends,” “estimates,” “aims,” “plans,” “may,”
“will,” “continue,” “seeks,” “should,” “believe,” “potential”
or the negative of such terms and similar expressions. Forward-looking statements are based on current plans, estimates and projections,
and therefore you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made,
and the Company undertakes no obligation to update any forward-looking statement in light of new information or future events,
except as expressly required by law. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult
to predict and are generally beyond the Company’s control. The Company cautions you that a number of important factors could
cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. These
factors include, among other factors:
If these or other risks and uncertainties
(including those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and
in Part II, Item 1A of this Report and the Company’s subsequent filings with the Commission) materialize, or if the assumptions
underlying any of these statements prove incorrect, the Company’s actual results may be materially different from those expressed
or implied by such statements. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances
or events after the date of this Report to reflect the occurrence of unanticipated events. You should, however, review the factors
and risks described in the reports we file from time-to-time with the Commission after the date of this Report.
World Wide Web addresses contained in this
Report are for explanatory purposes only and they (and the content contained therein) do not form a part of and are not incorporated
by reference into this Report.
PCI Certification
At June 30, 2017 and December 31,
2016, the net book value of our PCI certification was $130,956 and $205,790, respectively. For the three and six months ended
June 30, 2017 and 2016, amortization for this certification was $37,417 and $74,834, respectively.
Non-Compete Agreements
In connection with the Company’s
acquisition of Unified Payments, LLC in 2013, two key executives signed covenants not to compete. These covenants had a three-year
life and at June 30, 2017 and December 31, 2016, the net book value was zero.
NOTE 7. ACCRUED EXPENSES
At June 30, 2017 and December 31, 2016,
accrued expenses amounted to $4,437,601 and $5,518,823, respectively. Accrued expenses represent expenses that are owed at the
end of the period and have not been billed by the provider or are estimates of services provided. The following table details the
items comprising the balances outstanding at June 30, 2017 and December 31, 2016:
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Accrued professional fees
|
$
|
317,033
|
|
$
|
220,140
|
|
PayOnline accrual
|
|
2,509,256
|
|
|
3,784,451
|
|
Accrued interest
|
|
165,082
|
|
|
183,778
|
|
Accrued bonus
|
|
1,179,563
|
|
|
774,485
|
|
Accrued franchise taxes
|
|
-
|
|
|
180,000
|
|
Accrued foreign taxes
|
|
177,516
|
|
|
131,810
|
|
Short term loan advances
|
|
55,714
|
|
|
174,376
|
|
Other accrued expenses
|
|
33,437
|
|
|
69,783
|
|
|
$
|
4,437,601
|
|
$
|
5,518,823
|
|
The accrual for PayOnline at June 30, 2017
consists of a $1.1 million stock price guarantee obligation pursuant to a settlement agreement entered into in connection with
the PayOnline acquisition. Additionally, the accrual includes a $1.4 million obligation for refundable merchant reserves assumed
pursuant to an amendment to the PayOnline acquisition agreement. See Note 11 and Note 17 for additional information.
The accrual for PayOnline at December 31,
2016 consists of a $0.3 million earn-out accrual and a $2.0 million stock price guarantee obligation pursuant to a settlement agreement
entered into in connection with the PayOnline acquisition. Additionally, the accrual includes a $1.4 million obligation for refundable
merchant reserves assumed pursuant to an amendment to the PayOnline acquisition agreement.
Accrued bonuses are attributed to our TOT
Group subsidiaries resulting from a discretionary bonus accrual for $1,179,563 and $774,485 at June 30, 2017 and December 31, 2016,
respectively.
NOTE 8. SHORT TERM DEBT
At June 30, 2017 and December 31, 2016,
short term debt consists of $984,720 and $808,976, respectively in principal repayments due to RBL Capital Group, LLC.
NOTE 9. LONG TERM DEBT
Long term debt consists of the following:
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
RBL Capital Group, LLC
|
$
|
4,544,056
|
|
$
|
4,044,056
|
|
Priority Payments Systems LLC
|
|
2,498,792
|
|
|
-
|
|
MBF Merchant Capital, LLC
|
|
339,330
|
|
|
520,303
|
|
Subtotal
|
|
7,382,178
|
|
|
4,564,359
|
|
Less Deferred loan costs
|
|
(143,945
|
)
|
|
(139,601
|
)
|
Subtotal
|
|
7,238,233
|
|
|
4,424,758
|
|
Less Current portion
|
|
(984,720
|
)
|
|
(808,976
|
)
|
Long term debt
|
$
|
6,253,513
|
|
$
|
3,615,782
|
|
RBL Capital Group, LLC
Effective June 30, 2014, TOT Group, Inc.
and its subsidiaries as co-borrowers, TOT Payments, LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOT HPS, LLC and TOT New
Edge, LLC, entered into a Loan and Security Agreement with RBL Capital Group, LLC (“RBL”), as lender (the “RBL
Loan Agreement”). Pursuant to the original terms of the RBL Loan Agreement, we could borrow up to $10,000,000 from RBL during
the 18 month period from the closing of this credit facility. Prior to maturity of the loan, the principal amount of the borrowings
under the credit facility will carry a fixed interest rate of the higher of 13.90% per annum or the prime rate plus 10.65%. After
maturity of the loan, until all borrowings are paid in full, with respect to the advances under the credit facility, an additional
three percent per annum would be added to such interest rate, and for any other amounts, obligations or payments due to RBL, an
annual default rate not to exceed the lesser of (i) the prime rate plus 13% per annum and (ii) 18.635% per annum. As further described
below, borrowings from the line of credit in the amounts of $3,315,000, $400,000 and $250,000 were converted into term loans. On
May 2, 2016, we renewed our credit facility with RBL, increasing the facility from $10 million to $15 million and
extended the term through February 2018. At June 30, 2017 and December 31, 2016, we had $10,855,944 and $10,955,944 available under
our RBL credit line.
The co-borrowers’ obligations to
RBL pursuant to the RBL Loan Agreement are secured by a first priority security interest in all of the co-borrowers’ tangible
and intangible assets, including but not limited to their merchants, merchant contracts and proceeds thereof, and all right title
and interest in co-borrowers’ processing contracts, contract rights, and portfolio cash flows with all processors of the
co-borrowers.
On July 17, 2014, we entered into a
$3,315,000 term note with RBL. Net proceeds from the term note were used to repay a $3.0 million note previously due to MBF
Merchant Capital, LLC (“MBF”) in addition to approximately $239,000 for working capital. The term note required
interest only payments at 13.90% interest through January 2015 commencing on August 20, 2014 followed by monthly interest and
principal payments of $90,421 through January 2019. The promissory note balance reduced the amount available under our RBL
credit line. The note also provided for a 2% front end fee due at execution of the note and a 4% backend fee due at the final
payment of the note. During 2016, Crede CG III, Ltd. (“Crede”) purchased $1,849,481 of the principal balance of
this promissory note in various tranches. We exchanged and extinguished these promissory note tranches for 16,426 shares of
common stock during the second quarter of 2016, 99,203 shares of our common stock during the third quarter of 2016, and
19,608 shares during the fourth quarter of 2016. See “—Crede CG III, Ltd.” At December 20, 2016, the
remaining balance of the note was refinanced into another note and its balance was $0 at June 30, 2017 and December 31,
2016.
Effective February 10, 2015, we entered
into a $400,000 term note with RBL based on a draw down from the line of credit. The term note provided for interest-only payments
at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019 (maturity date), we were obligated to make
interest and principal payments of $10,911 per month. We paid $8,000 in costs related to this loan. This term note was purchased
by Crede, which was exchanged and extinguished for an aggregate of 21,928 shares of our common stock on June 9, 2016, June 23,
2016, and June 30, 2016. The balance of this note was $0 at June 30, 2017 and December 31, 2016.
Effective March 27, 2015, we entered into
a $250,000 term note with RBL based on the draw down from the line of credit. The term note provided for interest-only payments
at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019 (the note maturity date), we were obligated
to make interest and principal payments of $6,819 per month. We paid $5,000 in costs related to this term note. This term note
was purchased by Crede, which was exchanged and extinguished for an aggregate of 9,174 shares of our common stock on May 9, 2016.
The balance of this note was $0 at June 30, 2017 and December 31, 2016.
On May 4, 2016, we entered into a $250,000
term note with RBL. The term note provided for interest-only payments at 14.15% interest through October 20, 2016. From November
20, 2016 through October 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $6,850
per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% back end fee due
at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was
$0 at June 30, 2017 and December 31, 2016.
On May 20, 2016, we entered into a $400,000
term note with RBL. The term note provided for interest-only payments at 14.15% interest through November 20, 2015. From December
20, 2016 through November 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $10,961
per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% back end fee due
at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was
$0 at June 30, 2017 and December 31, 2016.
On June 23, 2016, we entered into a $190,000
term note with RBL. The term note provided for interest-only payments at 14.15% interest through December 20, 2016. From January
20, 2017 through December 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $5,206
per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% backend fee due
at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was
$0 at June 30, 2017 and December 31, 2016.
On July 15, 2016, we entered into a $350,000
term note with RBL. The term note provided for interest-only payments at 14.15% through January 20, 2017. From February 20, 2017
through January 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for
a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December
20, 2016, this note was refinanced into another term note and its balance was $0 at June 30, 2017 and December 31, 2016.
On August, 15, 2016, we entered into a
$400,000 term note with RBL. The term note provided for interest only payments at 14.15% through February 20, 2017. From March
20, 2017 through February 20, 2021, we were obligated to make interest and principal payments of $10,961. The term note also provided
for a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On
December 20, 2016, this note was refinanced into another term note and its balance was $0 at June 30, 2017 and December 31, 2016.
On September 15, 2016, we entered into
a $350,000 term note with RBL. The term note provided for interest only payments at 14.15% through March 20, 2017. From April 20,
2017 through March 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for
a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December
20, 2016, this note was refinanced into another term note and its balance was $0 at June 30, 2017 and December 31, 2016.
On November 7, 2016, we entered into a
$350,000 term note with RBL. The term note provided for interest only payments at 14.15% through May 20, 2017. From June 20, 2017
through May 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for a 2%
front end fee due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20,
2016, this note was refinanced into another term note and its balance was $0 at June 30, 2017 and December 31, 2016.
On December 15, 2016, we entered into a
$325,000 term note with RBL. The term note provided for interest only payments at 14.15% through June 20, 2017. From July 20, 2017
through June 20, 2021, we were obligated to make interest and principal payments of $8,906. The term note also provided for a 2%
front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December
20, 2016, this note was refinanced into another term note and its balance was $0 at June 30, 2017 and December 31, 2016.
On December 20, 2016, we entered into a
$4,044,055 term note with RBL. This note effectively refinanced all RBL notes described above. The term note provides for interest
only payments at 14.15% through May 20, 2017 of $47,686. From June 20, 2017 through May 20, 2021, we are obligated to make interest
and principal payments of $110,814. The term note also required a $20,000 front end refinancing fee upon execution of the loan
and a $104,600 back end fee due at the final payment on May 20, 2021. This note balance was zero at June 30, 2017 as it was refinanced
into the new refinancing note on June 1, 2017 as described below.
On March 30, 2017, we entered into a
$100,000 term note with RBL based on a draw down from the line of credit. The term note provides for interest-only payments
at 14.4% interest rate through May 20, 2017. From June 20, 2017 through May 20, 2021 (maturity date), we are obligated to
make interest and principal payments of $2,753 per month. We paid $2,000 in costs related to this term note at its inception
and another $4,000 of costs is due at the maturity of the note. This note balance was zero at June 30, 2017 as it was
refinanced into the new refinancing note on June 1, 2017 as described below.
On April 17, 2017, we entered into a
$400,000 term note with RBL based on a draw down from the line of credit. The term note provides for interest-only payments
at 14.4% through May 20, 2017 of $5,208. From June 20, 2017 through May 20, 2021 (maturity date), we are obligated to make
interest and principal payments of $11,011 per month. We paid $8,000 in costs related to this loan at its inception and
another $16,000 of costs is due at the maturity of the note. This note balance was zero at June 30, 2017 as it was refinanced
into the new refinancing note on June 1, 2017 as described below.
On April 26, 2017, we exchanged 10,235
shares of our common stock for $75,000 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an
average per share exchange price of $0.73. The exchange also settled current interest and loan fees of $4,500 and a non-cash exchange
premium of $9,951.
On April 26, 2017, the $4,044,056 term
note with RBL entered into on December 20, 2016 was revised to reflect the $75,000 exchange transaction mentioned above. As a result,
the note was updated to reflect a principal payment and interest payment of $108,759 on June 20, 2017.
On May 19, 2017, we entered into a
$75,000 term note with RBL based on a draw down from the line of credit. The term note provides for one interest only payment
of $947 on May 20, 2017 at a 14.4% interest rate, then 48 equal monthly payments of principal and interest of $2,065. This
note balance was zero at June 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below.
On May 24, 2017, we exchanged 23,058
shares of our common stock for $150,000 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on
an average per share exchange price of $0.65. The exchange also settled current interest and loan fees of and a
non-cash exchange premium of $23,156.
On May 26, 2017, we entered into a $150,000
term note with RBL based on a draw down from the line of credit. The term note provides for one interest only payment of $1,479
at a 14.4% interest rate, on June 20, 2017 then 48 equal monthly payments of principal and interest of $4,129. This note balance
was zero at June 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below.
On June 1, 2017 the $4,044,055
refinance note dated December 20, 2016 was updated to roll the above $150,000, $75,000, $400,000 and $100,000 term notes. The
note principal amount was $4,544,055 at June 30, 2017. The note provided for the interest rate of $14.19% per annum and
interest only payments from June 20, 2017 through September 20, 2017. For the next 48 months thereafter until the maturity
date on September 20, 2021, the note provides for $124,607 monthly payments of interest and principal.
Also see Note 17 for
activity that occurred after June 30, 2017.
MBF Merchant Capital, LLC
We issued the following notes payable to
MBF, which is owned by William Healy, a former member of our Board of Directors.
On March 28, 2016, we entered into a $75,000
promissory note with MBF. The promissory note provided for interest only payments at 14% through May 28, 2016. From June 28,
2016 through March 28, 2017, we were obligated to make interest and principal payments of $7,990. The promissory note also provided
for a 6% backend fee due at the final payment of the promissory note. As of June 30, 2017, and December 31, 2016, the balance of
the note was $0 and $23,420, respectively.
On April 19, 2016, we entered into a $300,000
promissory note with MBF. The promissory note provides for interest only payments at 15.5% through May 28, 2016. From June 28,
2016 through May 28, 2018, we are obligated to make interest and principal payments of $14,617. The promissory note also provides
for a 6% back end fee due at the final payment of the promissory note. At June 30, 2017 and December 31, 2016, the balance of the
note was $148,997 and $221,826, respectively.
On July 1, 2016, our subsidiary, TOT Group,
Inc., entered into a $353,500 promissory note with MBF. The promissory note provides for interest only payments at 15.5% through
June 28, 2016. From July 28, 2016 through June 28, 2018, we are obligated to make interest and principal payments of $17,224. The
promissory note also provides for a 1% front end fee and for a 6.6% back end fee due at the final payment of the promissory note.
At June 30, 2017 and December 31, 2016, the remaining balance of the note was $190,333 and $275,056, respectively.
Crede CG III, Ltd.
On May 2, 2016, we entered into a Master
Exchange Agreement with Crede (the “Master Exchange Agreement”), an entity that purchased a portion our previously
issued notes held by RBL described above. Pursuit to the Master Exchange Agreement, we have the right to request that Crede exchange
up to $3,965,000 of the RBL promissory notes for shares of our common stock. On March 3, 2017, we entered into an Amendment to
Master Exchange Agreement with Crede, which extended the expiration date of the Master Exchange Agreement from December 31, 2016
to August 31, 2017. Accordingly, this extends the time to which we have the right to request Crede to exchange RBL promissory notes
for shares of the Company’s common stock on the terms and conditions set forth in the Master Exchange Agreement.
For the three months ended June
30, 2017, we exchanged 33,323 shares of our common stock with Crede for an aggregate of $225,000 in RBL term notes. These
notes were purchased by Crede for an average per share exchange price of $6.80. The exchanges included a non-cash exchange
premium of $33,107. For the three months ended March 31, 2017 and 2016, we did not exchange any shares of our common stock
for RBL term notes. Also see Note 17 for activity that occurred after June 30, 2017.
For the year ended December 31,
2016, we exchanged 166,340 shares of our common stock with Crede for an aggregate of $2,499,481 of RBL promissory notes,
including the full exchange of the $400,000 promissory note (originally entered into February 10, 2015) and $250,000
promissory note (originally entered into March 27, 2015), and the partial exchange for $1,849,481 of the $3,315,000
promissory note (originally entered July 17, 2014). These notes were purchased by Crede for an average per share exchange
price of $16.80. The exchanges also settled current interest and loan fees of $302,294 and a non-cash exchange premium of
$487,064.
Priority Payment Systems LLC
Effective as of May 18, 2017, we entered into a loan agreement
and security agreement with Priority Payment Systems LLC and issued a promissory note dated May 18, 2017. Pursuant to the loan
agreement and the note, we borrowed $2,000,000. Prior to maturity of the loan, the principal amount of the loan will carry
a floating interest rate of prime rate plus 6% per annum. We may prepay the loan in whole or in part at any time. The loan is repayable
in monthly installments consisting of principal plus interest. The loan matures and becomes due and payable in full on May 20,
2019 to the extent not previously prepaid.
Pursuant to the security agreement, the loan is secured by collateral
consisting of accounts, cash or cash equivalents, residuals related to the merchants originated by us and processed by Priority
Payments Systems LLC. The loan agreement, the note and the security agreement contain customary representations, warranties, events
of default, remedies and affirmative and negative covenants, as well as the right of first refusal and the right related to the
merchants.
Effective as of May 17, 2017, we
entered into a corporate guaranty in favor of Priority Payments Systems LLC, pursuant to which we unconditionally guaranteed
the full and prompt payment of each present and future liability, debt and obligation under the loan agreement, the note, the
security agreement and other related documents.
On June 27, 2017, we entered into an amendment to the loan agreement
with Priority Payment Systems LLC pursuant to which:
|
(i)
|
The original term loan was modified into a multi -
draw loan with an increase of the borrowing limit
to $2,500,000 and;
|
|
(ii)
|
The loan maturity was extended to May 20, 2021.
|
Also see Note 17 for activity that occurred
after June 30, 2017.
Scheduled Debt Principal Repayment
Scheduled principal maturities on indebtedness
at June 30, 2017 is as follows:
2017 (6 months)
|
|
984,720
|
|
2018
|
|
2,404,409
|
|
2019
|
|
1,687,891
|
|
2020
|
|
1,247,229
|
|
2021
|
|
1,057,929
|
|
Balance June 30, 2017
|
$
|
7,382,178
|
|
Also see Note 17 for activity that occurred
after June 30, 2017.
NOTE 10. CONCENTRATIONS
The Company’s total revenue was $29,702,982
and $24,953,907 for the six months ended June 30, 2017 and 2016, respectively.
Of the $29,702,982 in revenues for the
six months ended June 30, 2017, $28,362,086 was derived from processing of Visa®, MasterCard®,
Discover® and American Express® card transactions and $1,340,896 was derived from providing mobile payment services branded
content during the six months ended June 30, 2017.
Total revenue was $24,953,907 for the six
months ended June 30, 2016, of which $21,481,528 was derived from processing of Visa®, MasterCard®,
Discover® and American Express® card transactions, and $3,472,379 that was derived from providing mobile payment services
branded content during the six months ended June 30, 2016.
The credit card processing revenues were
from merchant customer transactions, which were processed primarily by two third-party processors (greater than 5%) during the
six months ended June 30, 2017 and 2016. For the six months ended June 30, 2017 and 2016, the Company processed 75% and 66%, respectively,
of its total revenue with Priority Payment Systems, LLC and 5% and 7%, respectively, of its total revenue with Vantiv, Inc. (f/k/a
National Processing Company (NPC)).
Mobile electronic payment revenues were
derived from merchant customer transactions processed by mobile operators. For the six months ended June 30, 2017, no mobile operator
processed transactions that generated more than 5% our revenues. For the six months ended June 30, 2016, Beeline (OJSC Vimpelcom)
processed transactions that generated 10% of our revenues.
NOTE 11. COMMITMENTS AND CONTINGENCIES
PayOnline Acquisition Commitments
On May 20, 2015, our subsidiaries TOT Group
Europe, Ltd. and TOT Group Russia LLC, entered into an agreement with Maglenta Enterprises Inc. and Champfremont Holding Ltd. (together,
the “PayOnline Sellers”) to acquire all of the assets and liabilities that comprise PayOnline. PayOnline’s business
includes the operation of a protected payment processing system to accept bank card payments for goods and services.
Purchase consideration consisted of a combination
of $3.6 million in cash, and restricted common shares with a value of $3.6 million payable in five quarterly installments, and,
if applicable, additional earn-out payments in cash and restricted common shares based on a multiple of EBITDA and subject to certain
EBITDA target achievement in the applicable quarter. The PayOnline acquisition agreement set forth the determination of the value
of such shares based on the closing stock price on the date before each applicable payment date. The agreement called for a guarantee,
payable in cash, for decreases in the market value of the restricted common shares issued at 12 months from the date of the respective
issuances. On May 19, 2016, we recognized a charge in the amount of $2,162,861 for decreases in the market value of the restricted
common shares issued pursuant to the stock price guarantee.
On October 25, 2016, we entered into a
settlement agreement with the PayOnline Sellers relating to the stock price guarantee provision in the PayOnline acquisition agreement
pursuant to which we agreed to pay the PayOnline Sellers an aggregate of $2,288,667 plus 10% per annum interest accrued from May
20, 2016 in installments pursuant to the payment schedule set forth in the settlement agreement.
On October 25, 2016, we entered into
an amendment to the PayOnline acquisition agreement with the PayOnline Sellers, in which we agreed to assume $1,433,475 of
certain refundable merchant deposit reserves. These reserves are expected to be paid in a mix of cash and stock beginning in
2017. Also see Note 17 for activity that occurred after June 30, 2017.
On May 20, 2017, we entered into an
amendment to the PayOnline settlement agreement, which reflected the new terms under which the Company agreed to pay to the
PayOnline Sellers an aggregate of $1,792,071 plus $29,604 in interest in installments pursuant to a payment schedule set
forth in the amendment. For the three months ended June 30, 2017, we paid $1,000,000 under this payment schedule and the
remaining balance is scheduled to be paid in the third and fourth quarters of 2017. Also see Note 17 for activity that
occurred after June 30, 2017.
Leases
In May 2013, we entered into a lease
agreement for approximately 4,000 square feet of office space located at 3363 N.E. 163rd Street, Suites 705 through
707, North Miami Beach, Florida 33160. The term of the lease agreement was from May 1, 2013 through December 31, 2016,
with monthly rent increasing from $16,800 per month at inception to $19,448 per month (or $233,377 per year) for
the period from January 1, 2016 through December 31, 2016.
In September 2016, this lease was
extended for a period of five years commencing January 1, 2017 and expiring December 31, 2021 with monthly base rent
increasing each year from $20,421 per month beginning January 1, 2017 ($245,046 per year) to $24,821 per month beginning
January 1, 2021 ($297,855 per year). This lease was terminated effective as of August 9, 2017 and superseded by a new lease
we entered into on August 9, 2017. See Note 17. Subsequent Events and Part II, Item 5 of the Company’s Quarterly Report
on Form 10-Q for quarterly period ended June 30, 2017 for additional information.
Netlab Systems, LLC, through its
Russian representative office, effective June 1, 2017 executed a lease for 1,654 square feet of office space in
Yekaterinburg, Russia, where we conduct software development activities, at annual rent of approximately $24,000 (utilities
are included). The current lease term expires in June 1, 2018.
PayOnline Systems leases approximately
5,435 square feet of office space in Moscow, Russia at an annual rent of $153,623. The current lease term for 5,268 square
feet of this office space expires on July 15, 2018 and this lease has an auto-renewal feature. The remaining 167 square feet in
Moscow has an annual rent of $3,104 and the lease expires April 30, 2018. PayOnline also operates two regional offices. For the
first regional office, PayOnline leases approximately 275 square feet of office space in Ekaterinburg, Russia at annual rent of
$3,444. For the second regional office, PayOnline leases approximately 155 square feet of office space in Almaty, Russia at annual
rent of $1,536.
Net Element Russia leased approximately
2,033 square feet of office space in Moscow, Russia at annual rent of $73,960, as well as one corporate apartment at annual rent
of $22,600. The office space was utilized by both Net Element Russia and Digital Provider. The lease term for the office space
was through January 31, 2018, but we terminated this lease agreement early on May 31, 2017. The lease term for the corporate apartment
lapses on August 16, 2017. The corporate apartment lease was also terminated early on May 31, 2017. There was no cost for early
termination for both office and corporate apartment lease.
On May 12, 2017, Digital Provider leased
approximately 1,566 square feet of office space in Moscow, Russia at annual rent of $27,500. The current lease term for the office
space expires on April 11, 2018. This lease was terminated in early August 2017. See Note 17 for activity that occurred after June
30, 2017.
We believe that our current facilities
are suitable and adequate for our present purposes, and we anticipate that we will be able to extend our existing leases on terms
satisfactory to us or acquire new facilities on acceptable terms.
Litigation
Aptito.com, Inc.
On August 6, 2014, our subsidiary (Aptito,
LLC) filed a lawsuit against Aptito.com, Inc. and the shareholders of Aptito.com, Inc., in state court in the 11th Judicial
Circuit in and for Miami-Dade County. This is an interpleader action in regards to 12,500 shares of stock. Aptito, LLC acquired Aptito.com,
Inc. in exchange for, among other things, 12,500 shares of Net Element, Inc. stock. There has been disagreement among the Aptito.com,
Inc. shareholders as to proper distribution of the 12,500 shares. To avoid any liability in regards to improper distribution,
Aptito, LLC filed the interpleader action so as to allow the defendants to litigate amongst themselves as to how the shares
should be distributed. Aptito.com, Inc. opposed the motion to interplead and has filed counterclaims relative to Aptito, LLC
non-delivery of the 12,500 shares. On February 10, 2017, the Court held a hearing on Aptito.com, Inc.’s
motion to dismiss the complaint and Aptito, LLC and Net Element’s motion to dismiss Aptito.com, Inc.’s counterclaims.
The Court denied Aptito.com, Inc.’s motion to dismiss and granted Aptito, LLC and Net Element’s
motion to dismiss the counterclaims without prejudice.
On March 20, 2017, Aptito.com filed amended
counterclaims against Aptito, LLC as well as claims against us alleging amongst other matters, breach of contract and violations
of federal and state securities laws. Management believes that these counterclaims are without merit, and we and Aptito, LLC and
the Company have filed a motion to dismiss the claims and a motion for sanctions. Counsel is waiting for a hearing date for determination
on these matters.
A hearing on the motion to interplead
was heard in July 2017 and the Court granted Aptito, LLC’s motion to interplead. Aptito.com, Inc.
shareholders will now have to settle their internal dispute regarding this matter. Aptito, LLC
still has potential liability arising from an alleged delay in issuing the shares to Aptito.com, Inc. The
company is disputing this allegation.
Gene Zell
In June 2014, we, as plaintiff, commenced
an action in the Miami-Dade Circuit Court, Florida against Gene Zell for defamation of our Company and CEO and tortious interference
with our business relationships. In October 2014, the court granted a temporary injunction against Zell enjoining him from
posting any information about our Company and CEO on any website and enjoining him from contacting our business partners or investors.
Zell violated the Court Order and the Court granted a Motion imposing sanctions against Zell. We continue to seek enforcement
of the Court Order. On April 13, 2015, Zell filed a Motion to set aside the Court Order alleging he was unaware of the Court
Proceedings. The Court, on August 26, 2015, dismissed Zell’s Motion to dissolve the injunction. In March, 2017 the Court
dismissed another Motion brought by Zell to dissolve the injunction. Accordingly, the injunction order prohibiting Zell from making
further defamatory posts remains in place. The Company intends to protect its rights by ongoing enforcement of the injunction.
Other Legal Proceedings
We are involved in certain legal proceedings
and claims which arise in the ordinary course of business. In our opinion, based on consultations with outside counsel, the results
of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results
of operations, financial condition, or cash flows. As more information becomes available, if management should determine that an
unfavorable outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably
estimable, we will record a reserve for the claim in question. If and when we record such a reserve is recorded, it could be material
and could adversely impact our results of operations, financial condition, and cash flows.
NOTE 12. RELATED PARTY TRANSACTIONS
In 2016, we and our subsidiary, TOT Group,
Inc., entered into certain term loan notes with MBF. For additional information about such term loan notes, see “MBF Merchant
Capital, LLC” in Note 9. William Healy, a former member of our Board of Directors, is the sole member of MBF.
During the six months ended June 30, 2017
and 2016, agent commissions resulting from merchant processing of $44,152 and $0, respectively, were paid to Prime Portfolios,
LLC, an entity owned by Oleg Firer, our CEO, and Steven Wolberg, our Chief Legal Officer.
On March 1, 2017, we entered into a
promissory note with Star Capital Management, LLC, an entity which our CEO is the managing member, in the principal amount of
$348,083 (the “Note”). Pursuant to the Note, previously advanced funds of $290,954 plus interest
accrued through the date of the Note totaled $348,083. The Note provides for 18 monthly interest payments of $3,481
through September 30, 2018 followed by one interest and principle payment on October 1, 2018. The principal balance of the
Note outstanding bears interest at the rate of 12% per annum. In the event of any capital raise by us that is not in the
ordinary course of business and that results in funding in excess of $5 million (a “Liquidity Event”), the
maturity date will be accelerated to coincide with the closing date of such Liquidity Event. The balance of this loan at June
30, 2017 was $348,083 and is included in Due to related parties on our condensed consolidated
balance sheet.
NOTE 13. STOCKHOLDERS’ EQUITY
On May 25, 2016, and subsequently again
on October 5, 2017, we completed a one-for-ten reverse stock split of our common stock. Our consolidated financial statements
give retrospective effect for these changes in capital structure for all periods presented.
On June 12, 2015 and June 13, 2016,
our shareholders approved 100,000,000 increases in our authorized common stock to 300,000,000 and 400,000,000,
respectively.
Also see Note 3 regarding the
delisting notice from Nasdaq and our appeal.
Equity Incentive Plan Activity
On December 5, 2013, our shareholders approved
the Net Element International, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). Awards under the 2013 Plan may be
granted in any one or all of the following forms: (i) incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended; (ii) non-qualified stock options (unless otherwise indicated, references to “Options”
include both Incentive Stock Options and Non-Qualified Stock Options); (iii) stock appreciation rights, which may be awarded either
in tandem with Options or on a stand-alone basis; (iv) shares of common stock that are restricted; (v) units representing shares
of common stock; (vi) units that do not represent shares of common stock but which may be paid in the form of common stock; and
(vii) shares of common stock that are not subject to any conditions to vesting. The maximum aggregate number of shares of common
stock available for award under the 2013 Plan at June 30, 2017 and December 31, 2016 was 23,488 and 128,026, respectively. The
2013 Plan is administered by the compensation committee.
On February 28, 2017, the Compensation
Committee (the “Committee”) of our Board of Directors approved and authorized grants of the following equity awards
to our employees and consultants pursuant to the 2013 Plan, as amended:
|
(i)
|
45,105 qualified options
to acquire shares of our common stock (50% of such options vesting immediately and the balance 50% of such options vesting in
4 equal proportions quarterly after the grant date).
|
|
(ii)
|
62,668 restricted shares
of our common stock (50% of such shares vesting immediately and the balance 50% of such shares vesting in 4 equal proportions
quarterly after the grant date).
|
For the six months ended June 30, 2017,
we recorded $581,473 in non-cash compensation expense for vesting of stock and options for the above mentioned grants.
Other Stock Issuance
We accrued 2,841 shares to our
independent directors for payment of services during the second quarter of 2017. These shares were issued in August,
2017.
Agreement with ESOUSA Holdings
On July 6, 2016, we entered into a common
stock purchase agreement (“Purchase Agreement”), with ESOUSA Holdings, LLC, a New York limited liability company (“ESOUSA”),
which provides that ESOUSA is committed to purchase up to an aggregate of $10 million of our shares of common stock over the 30-month
term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, we paid shares of our common stock with
a value equivalent $200,000 as a commitment fee to ESOUSA and accordingly, on August 31, 2016, we issued 13,117 shares of our
common stock to ESOUSA based on the price of $15.25 per share.
We did not issue any shares of our common
stock to ESOUSA during the three months ended June 30, 2017.
NOTE 14. WARRANTS AND NON-INCENTIVE
PLAN OPTIONS
Warrants
In 2013, our predecessor entity (then known
as Cazador Acquisition Corporation Ltd.) issued warrants to purchase 89,400 shares (reverse split adjusted) of common
stock in connection with its private placement and initial public offering. At June 30, 2017 and December 31, 2016, we had warrants
outstanding to purchase 89,389 shares of common stock. At June 30, 2017, the warrants have a weighted average exercise price
of $750.00 per share purchased and a weighted average remaining contractual term of 0.25 years (0.75 years at December 31, 2016).
These warrants are “out-of-the-money” and have no intrinsic value at June 30, 2017 and December 31, 2016. The warrants
are exercisable only if a registration statement relating to the common shares issuable upon exercise of the warrants is effective
and current. These warrants expire on October 1, 2017.
Non-Incentive Plan Options
At June 30, 2017 and December 31, 2016,
we had 160,214 non-incentive options outstanding with a weighted average exercise price of $21.80 and a remaining contract term
of 3.42 and 3.92 years, respectively. These options were out of the money at June 30, 2017 and December 31, 2016 and had no intrinsic
value.
NOTE 15. INCOME TAXES
Our net deferred tax assets primarily are
comprised of net operating loss carryforwards (“NOLs”), and basis difference in goodwill and intangibles. These NOLs
total approximately $53.1 million and $46.9 million for federal, and approximately $13.0 million and $13.2 million for foreign
NOLs as of June 30, 2017 and June 30, 2016, respectively.
The timing and manner in which we will
be able to utilize our NOLs is limited by Section 382 of the Internal Revenue Code of 1986, as amended (IRC). IRC Section 382 imposes
limitations on a corporation’s ability to use its NOLs when it undergoes an “ownership change.” Generally, an
ownership change occurs if one or more shareholders, each of whom owns 5% or more in value of a corporation’s stock, increase
their percentage ownership, in the aggregate, by more than 50% over the lowest percentage of stock owned by such shareholders at
any time during the preceding three-year period. Because on June 10, 2014, we underwent an ownership change as defined by IRC Section
382, the limitation applies to us. The losses generated prior to the ownership change date (pre-change losses) are subject to the
Section 382 limitation. The pre-change losses may only become available to be utilized by us at the rate of $2.4 million per year.
Any unused losses can be carried forward, subject to their original carry forward limitation periods. In the year 2017, approximately
$2.4 million in the pre-change losses was released from the Section 382 loss limitation. We can still fully utilize the NOLs generated
after the change of the ownership, which was approximately $13.3 million. Thus, we expect the total of approximately $17.4 million
as of June 30, 2017 is available to offset future taxable income.
In order to fully utilize the net deferred
tax assets, we will need to generate sufficient taxable income in future years to utilize its NOLs prior to their expiration. ASC
Topic 740, “Income Taxes”, requires us to analyze all positive and negative evidence to determine if, based on the
weight of available evidence, we are more likely than not to realize the benefit of the net deferred tax assets. The recognition
of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates
of future earnings based on information currently available, current and anticipated customers, contracts and product introductions,
as well as historical operating results and certain tax planning strategies.
We have evaluated the available evidence
and the likelihood of realizing the benefit of our net deferred tax assets. From our evaluation, we have concluded that based on
the weight of available evidence, it is more likely than not that we will not realize any of the benefit of its net deferred tax
assets. Accordingly, at June 30, 2017, we maintain a full valuation allowance totaling approximately $24.6 million.
NOTE 16. SEGMENT INFORMATION
Our three reportable segments include:
(i) North American Transaction Solutions for electronic commerce, (ii) Mobile Solutions (primarily servicing the Russian Federation
and CIS) and (iii) Online Solutions. Management determines the reportable segments based on the internal reporting used by our
Chief Operating Decision Maker to evaluate performance and to assess where to allocate resources. During the three months ended
June 30, 2017 and 2016, the principal revenue stream for all segments came from services fees and branded content.
Factors management used to identify
the entity’s reportable segments
The Company’s reportable segments
are business units that offer different products and services in different geographies. The reportable segments are each managed
separately because they offer distinct products with different delivery and service processes.
North American Transaction Solutions
Our U.S. payment processing business segment
consists of the former Unified Payments business and Aptito. This segment operates primarily in North America. In March 2013, we
acquired all of the business assets of Unified Payments, a provider of comprehensive turnkey, payment processing solutions to small
and medium size business owners (merchants) and independent sales organizations across the United States.
In April 2013, we purchased 80% of Aptito,
a cloud based Software-as-a-Service (“SaaS”) restaurant management solution, which provides integrated POS, mPOS, Kiosk,
Digital Menus functionality to drive consumer engagement via Apple® iPad®-based POS, kiosk and all other cloud-connected
devices.
Mobile Solutions
Our Russian mobile and online payment processing
segment consists of Digital Provider, which operates primarily in the Russian Federation and CIS.
In June 2012, we formed our subsidiary,
OOO TOT Money, to develop a business in mobile commerce payment processing. TOT Money launched its initial operations in Russia
as a payment facilitator using SMS (short message services, which is a text messaging service) and MMS (multimedia message services)
for mobile phone subscribers in Russia. During 2015, we changed or business model, rebranded our name to Digital Provider and began
to offer branded content to subscribers.
See Note 17 for activity that occurred
after June 30, 2017.
Online Solutions
On May 20, 2015, we acquired the net assets
that comprise PayOnline, which includes a protected payment processing system to accept bank card payments for goods and services.
PayOnline primarily operates in Russia and CIS.
The accounting policies of the individual
transactions in the reportable segments are the same as those of the company, as described in Note 1. Transactions between reportable
segments are primarily conducted at market rates, resulting in segment profits or expenses that are eliminated for reporting consolidated
results.
Segment Summary Information
The following tables present financial
information of the Company’s reportable segments at June 30, 2017 and 2016. The “Corporate Expenses & Eliminations”
column includes all corporate expenses and intercompany eliminations for consolidated purposes.
Three Months Ended June 30, 2017
|
North America
Transaction
Solutions
|
|
Mobile
Solutions
|
|
Online
Solutions
|
|
Corporate
Expenses &
Eliminations
|
|
Total
|
|
Net revenues
|
$
|
13,612,782
|
|
$
|
518,398
|
|
$
|
2,009,861
|
|
$
|
-
|
|
$
|
16,141,041
|
|
Cost of revenues
|
|
11,472,508
|
|
|
502,742
|
|
|
1,343,142
|
|
|
-
|
|
|
13,318,392
|
|
Gross Margin
|
|
2,140,274
|
|
|
15,656
|
|
|
666,719
|
|
|
-
|
|
|
2,822,649
|
|
Gross margin %
|
|
16%
|
|
|
3%
|
|
|
33%
|
|
|
-
|
|
|
17%
|
|
General, administrative, and asset disposal
|
|
681,480
|
|
|
197,186
|
|
|
592,357
|
|
|
1,128,155
|
|
|
2,599,178
|
|
Non-cash compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
128,537
|
|
|
128,537
|
|
Provision for bad debt
|
|
669,051
|
|
|
196,556
|
|
|
27
|
|
|
229
|
|
|
865,863
|
|
Depreciation and amortization
|
|
332,351
|
|
|
607
|
|
|
236,841
|
|
|
3,219
|
|
|
573,018
|
|
Interest expense (income), net
|
|
246,804
|
|
|
(31,096
|
)
|
|
(8,272
|
)
|
|
114,616
|
|
|
322,052
|
|
Other expenses (income)
|
|
48,272
|
|
|
(3,289
|
)
|
|
(4,676
|
)
|
|
9,115
|
|
|
49,422
|
|
Net (loss) income for segment
|
$
|
162,316
|
|
$
|
(344,308
|
)
|
$
|
(149,558
|
)
|
$
|
(1,383,871
|
)
|
$
|
(1,715,421
|
)
|
Segment assets
|
|
18,556,547
|
|
|
1,944,098
|
|
|
4,531,170
|
|
|
(3,058,075
|
)
|
|
21,973,740
|
|
Three Months Ended June 30, 2016
|
North America
Transaction
Solutions
|
|
Mobile
Solutions
|
|
Online
Solutions
|
|
Corporate
Expenses &
Eliminations
|
|
Total
|
|
Net revenues
|
$
|
10,403,932
|
|
$
|
1,779,708
|
|
$
|
1,509,208
|
|
$
|
-
|
|
$
|
13,692,848
|
|
Cost of revenues
|
|
8,967,784
|
|
|
1,566,618
|
|
|
950,391
|
|
|
-
|
|
|
11,484,793
|
|
Gross Margin
|
|
1,436,148
|
|
|
213,090
|
|
|
558,817
|
|
|
-
|
|
|
2,208,055
|
|
Gross margin %
|
|
14%
|
|
|
12%
|
|
|
37%
|
|
|
-
|
|
|
17%
|
|
General, administrative, and asset disposal
|
|
610,608
|
|
|
(211,658
|
)
|
|
446,518
|
|
|
1,153,923
|
|
|
1,999,391
|
|
Non-cash compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,014,589
|
|
|
2,014,589
|
|
Provision for bad debt
|
|
125,109
|
|
|
111
|
|
|
18
|
|
|
-
|
|
|
125,238
|
|
Depreciation and amortization
|
|
330,217
|
|
|
4,768
|
|
|
490,698
|
|
|
18,852
|
|
|
844,535
|
|
Interest expense (income), net
|
|
138,792
|
|
|
-
|
|
|
-
|
|
|
300,184
|
|
|
438,976
|
|
Loss from stock value guarantee
|
|
|
|
|
|
|
|
|
|
|
2,162,861
|
|
|
2,162,861
|
|
Other expenses (income)
|
|
934
|
|
|
5,558
|
|
|
1,198
|
|
|
16
|
|
|
7,705
|
|
Net (loss) income for segment
|
$
|
230,488
|
|
$
|
414,311
|
|
$
|
(379,615
|
)
|
$
|
(5,650,425
|
)
|
$
|
(5,385,240
|
)
|
Segment assets
|
|
9,181,868
|
|
|
2,578,024
|
|
|
6,180,939
|
|
|
4,179,834
|
|
|
22,120,665
|
|
Six Months Ended June 30, 2017
|
North America
Transaction
Solutions
|
|
Mobile
Solutions
|
|
Online
Solutions
|
|
Corporate
Expenses &
Eliminations
|
|
Total
|
|
Net revenues
|
$
|
24,577,701
|
|
$
|
1,375,391
|
|
$
|
3,749,890
|
|
$
|
-
|
|
$
|
29,702,982
|
|
Cost of revenues
|
|
20,933,958
|
|
|
1,319,704
|
|
|
2,524,722
|
|
|
-
|
|
|
24,778,384
|
|
Gross Margin
|
|
3,643,743
|
|
|
55,687
|
|
|
1,225,168
|
|
|
-
|
|
|
4,924,598
|
|
Gross margin %
|
|
15%
|
|
|
4%
|
|
|
33%
|
|
|
-
|
|
|
17%
|
|
General, administrative, and asset disposal
|
|
1,436,616
|
|
|
321,390
|
|
|
1,141,964
|
|
|
2,530,368
|
|
|
5,430,338
|
|
Non-cash compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
724,941
|
|
|
724,941
|
|
Provision for bad debt
|
|
945,376
|
|
|
196,844
|
|
|
1,914
|
|
|
1,487
|
|
|
1,145,621
|
|
Depreciation and amortization
|
|
691,107
|
|
|
1,653
|
|
|
526,938
|
|
|
10,683
|
|
|
1,230,381
|
|
Interest expense (income), net
|
|
421,984
|
|
|
(59,537
|
)
|
|
(17,435
|
)
|
|
246,728
|
|
|
591,740
|
|
Other expenses (income)
|
|
48,272
|
|
|
(482
|
)
|
|
(1,723
|
)
|
|
9,129
|
|
|
55,196
|
|
Net (loss) income for segment
|
$
|
100,388
|
|
$
|
(404,181
|
)
|
$
|
(426,490
|
)
|
$
|
(3,523,336
|
)
|
$
|
(4,253,619
|
)
|
Segment assets
|
|
18,556,547
|
|
|
1,944,098
|
|
|
4,531,170
|
|
|
(3,058,075
|
)
|
|
21,973,740
|
|
Six Months Ended June 30, 2016
|
North America
Transaction
Solutions
|
|
Mobile
Solutions
|
|
Online
Solutions
|
|
Corporate
Expenses &
Eliminations
|
|
Total
|
|
Net revenues
|
$
|
18,256,581
|
|
$
|
3,773,211
|
|
$
|
2,924,115
|
|
$
|
-
|
|
|
24,953,907
|
|
Cost of revenues
|
|
15,620,817
|
|
|
3,381,206
|
|
|
1,868,011
|
|
|
-
|
|
|
20,870,034
|
|
Gross Margin
|
|
2,635,764
|
|
|
392,005
|
|
|
1,056,104
|
|
|
-
|
|
|
4,083,873
|
|
Gross margin %
|
|
14%
|
|
|
10%
|
|
|
36%
|
|
|
-
|
|
|
17%
|
|
General, administrative, and asset disposal
|
|
1,257,926
|
|
|
(128,950
|
)
|
|
781,042
|
|
|
2,177,606
|
|
|
4,087,624
|
|
Non-cash compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,375,573
|
|
|
2,375,573
|
|
Provision for bad debt
|
|
376,450
|
|
|
111
|
|
|
418
|
|
|
-
|
|
|
376,979
|
|
Depreciation and amortization
|
|
650,288
|
|
|
8,958
|
|
|
978,081
|
|
|
95,326
|
|
|
1,732,653
|
|
Interest expense (income), net
|
|
286,576
|
|
|
-
|
|
|
-
|
|
|
302,838
|
|
|
589,414
|
|
Loss from stock value guarantee
|
|
|
|
|
|
|
|
|
|
|
2,162,861
|
|
|
2,162,861
|
|
Other expenses (income)
|
|
934
|
|
|
10,594
|
|
|
18,062
|
|
|
15
|
|
|
29,604
|
|
Net (loss) income for segment
|
$
|
63,590
|
|
$
|
501,292
|
|
$
|
(721,499
|
)
|
$
|
(7,114,219
|
)
|
$
|
(7,270,835
|
)
|
Segment assets
|
|
9,181,868
|
|
|
2,578,024
|
|
|
6,180,939
|
|
|
4,179,834
|
|
|
22,120,665
|
|
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion should be read
and evaluated in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in this
Report and with the discussion under “Forward-Looking Statements” on page 2 at the beginning of this Report and the
Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in
Part II, Item 1A of this Report.
Results of Operations for the Three
Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016
We reported a net loss attributable to
stockholders of $1,640,340 or $0.93 per share, for the three months ended June 30, 2017 as compared to a net loss attributable
to stockholders of $5,346,448, or $4.59 per share, for the three months ended June 30, 2016. This resulted in a decrease in net
loss attributable to stockholders of $3,706,108 primarily due to an increase in revenues, decreases in loss from stock value guarantee,
non-cash compensation and interest, partially offset by increased general and administrative expenses.
Net revenues consist primarily of payment
processing fees. Net revenues were $16,141,041 for the three months ended June 30, 2017 as compared to $13,692,848 for the three
months ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American
Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $3,208,850
(or 31% increase) for the three months ended June 30, 2017 versus the three months ended June 30, 2016. Increases in our North
American Transaction Solutions segment revenue were primarily due to continued growth of merchants with emphasis on value-added
offerings. Our Online Solutions segment revenue increased $500,653 (or 33%), from $1,509,208 for the three months ended June 30,
2016 to $2,009,861 for the three months ended June 30, 2017 as we continue to board additional merchants. These improvements were
tempered by a $1,261,310 (or 71%) decrease in our Mobile Solutions segment, as we continue to experience increased competition,
decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered through our platform.
The following table sets forth our sources
of revenues, cost of revenues and gross margins for the three months ended June 30, 2017 and 2016:
Gross
Margin Analysis
|
Three
|
|
|
|
Three
|
|
|
|
|
|
|
Months Ended
|
|
|
|
Months Ended
|
|
|
|
Increase /
|
|
Source of Revenues
|
June 30, 2017
|
|
Mix
|
|
June 30, 2016
|
|
Mix
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
$
|
13,612,782
|
|
|
84%
|
|
$
|
10,403,932
|
|
|
76%
|
|
$
|
3,208,850
|
|
Mobile Solutions
|
|
518,398
|
|
|
3%
|
|
|
1,779,708
|
|
|
13%
|
|
|
(1,261,310
|
)
|
Online Solutions
|
|
2,009,861
|
|
|
13%
|
|
|
1,509,208
|
|
|
11%
|
|
|
500,653
|
|
Total
|
$
|
16,141,041
|
|
|
100%
|
|
$
|
13,692,848
|
|
|
100%
|
|
$
|
2,448,193
|
|
|
Three
|
|
|
|
Three
|
|
|
|
|
|
|
Months Ended
|
|
% of
|
|
Months Ended
|
|
% of
|
|
Increase /
|
|
Cost of Revenues
|
June 30, 2017
|
|
revenues
|
|
June 30, 2016
|
|
revenues
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
$
|
11,472,508
|
|
|
84%
|
|
$
|
8,967,784
|
|
|
86%
|
|
$
|
2,504,724
|
|
Mobile Solutions
|
|
502,742
|
|
|
97%
|
|
|
1,566,618
|
|
|
88%
|
|
|
(1,063,876
|
)
|
Online Solutions
|
|
1,343,142
|
|
|
67%
|
|
|
950,391
|
|
|
63%
|
|
|
392,751
|
|
Total
|
$
|
13,318,392
|
|
|
83%
|
|
$
|
11,484,793
|
|
|
84%
|
|
$
|
1,833,599
|
|
|
Three
|
|
|
|
Three
|
|
|
|
|
|
|
Months Ended
|
|
% of
|
|
Months Ended
|
|
% of
|
|
Increase /
|
|
Gross Margin
|
June 30, 2017
|
|
revenues
|
|
June 30, 2016
|
|
revenues
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
$
|
2,140,274
|
|
|
16%
|
|
$
|
1,436,148
|
|
|
14%
|
|
$
|
704,126
|
|
Mobile Solutions
|
|
15,656
|
|
|
3%
|
|
|
213,090
|
|
|
12%
|
|
|
(197,434
|
)
|
Online Solutions
|
|
666,719
|
|
|
33%
|
|
|
558,817
|
|
|
37%
|
|
|
107,902
|
|
Total
|
$
|
2,822,649
|
|
|
17%
|
|
$
|
2,208,055
|
|
|
16%
|
|
$
|
614,594
|
|
Cost of revenues represents direct costs
of generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing
fees. Cost of revenues for the three months ended June 30, 2017 were $13,318,392 as compared to $11,484,793 for the three months
ended June 30, 2016. The $1,833,599 increase in cost of revenues was primarily due to a $2,504,724 increase in our North American
Transaction Solutions segment due to an increase in sales volume. There was also a $392,751 increase in cost of revenues resulting
from our Online Solutions segment operations also primarily due the costs associated with boarding additional merchants. This was
offset by a $1,063,876 decrease in our Mobile Solutions segment cost of revenues, which resulted from the decrease in revenues
for our Mobile Solutions segment for the three months ended June 30, 2017.
Gross Margin or the three months ended
June 30, 2017 was $2,822,649, or 17% of net revenue, as compared to $2,208,055, or 16% of net revenue, for the three months ended
June 30, 2016. The $614,594 increase in gross margin was primarily due to increased volume of processing in North American Transaction
Solutions offset by a decrease of $197,434 in Mobile Solutions margin caused by a decrease in business.
Total operating expenses were $4,166,596
for the three months ended June 30, 2017, which consisted of general and administrative expenses of $2,599,178, non-cash compensation
expenses of $128,537, provision for bad debts of $865,863, and depreciation and amortization of $573,018. Total operating expenses
were $4,983,753 for the three months ended June 30, 2016, which consisted of general and administrative expenses of $1,999,391,
non-cash compensation expenses of $2,014,589, provision for bad debts of $125,238, and depreciation and amortization of $844,535.
The components of our general and administrative
expenses are discussed below.
General and administrative expenses for
the three months ended June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Condensed Consolidated
Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing
fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses required to run our business,
as follows:
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
464,134
|
|
|
$
|
126,516
|
|
|
$
|
234,950
|
|
|
$
|
547,219
|
|
|
$
|
1,372,819
|
|
Professional fees
|
|
|
82,888
|
|
|
|
19,768
|
|
|
|
258,535
|
|
|
|
299,536
|
|
|
|
660,727
|
|
Rent
|
|
|
-
|
|
|
|
12,121
|
|
|
|
40,624
|
|
|
|
83,334
|
|
|
|
136,079
|
|
Business development
|
|
|
986
|
|
|
|
14
|
|
|
|
8,768
|
|
|
|
915
|
|
|
|
10,683
|
|
Travel expense
|
|
|
75,646
|
|
|
|
1,729
|
|
|
|
4,165
|
|
|
|
38,391
|
|
|
|
119,931
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,508
|
|
|
|
8,508
|
|
Transaction (gains) losses
|
|
|
742
|
|
|
|
32,228
|
|
|
|
(9,508
|
)
|
|
|
1,303
|
|
|
|
24,765
|
|
Office expenses
|
|
|
45,956
|
|
|
|
3,313
|
|
|
|
24,214
|
|
|
|
16,058
|
|
|
|
89,541
|
|
Communications expenses
|
|
|
9,864
|
|
|
|
1,497
|
|
|
|
29,484
|
|
|
|
19,743
|
|
|
|
60,588
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,235
|
|
|
|
32,235
|
|
Other expenses
|
|
|
1,264
|
|
|
|
-
|
|
|
|
1,125
|
|
|
|
80,913
|
|
|
|
83,302
|
|
Total
|
|
$
|
681,480
|
|
|
$
|
197,186
|
|
|
$
|
592,357
|
|
|
$
|
1,128,155
|
|
|
$
|
2,599,178
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
415,135
|
|
|
$
|
108,772
|
|
|
$
|
142,663
|
|
|
$
|
510,482
|
|
|
$
|
1,177,052
|
|
Professional fees
|
|
|
89,268
|
|
|
|
1,243
|
|
|
|
217,513
|
|
|
|
369,299
|
|
|
|
677,323
|
|
Rent
|
|
|
-
|
|
|
|
832
|
|
|
|
36,282
|
|
|
|
97,949
|
|
|
|
135,063
|
|
Business development
|
|
|
12,186
|
|
|
|
-
|
|
|
|
40,118
|
|
|
|
4,056
|
|
|
|
56,360
|
|
Travel expense
|
|
|
49,784
|
|
|
|
3,220
|
|
|
|
7,048
|
|
|
|
29,017
|
|
|
|
89,069
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,896
|
|
|
|
42,896
|
|
Transaction (gains) losses
|
|
|
-
|
|
|
|
(328,350
|
)
|
|
|
(23,658
|
)
|
|
|
18,174
|
|
|
|
(333,834
|
)
|
Office expenses
|
|
|
27,148
|
|
|
|
2,127
|
|
|
|
14,774
|
|
|
|
22,723
|
|
|
|
66,772
|
|
Communications expenses
|
|
|
16,817
|
|
|
|
484
|
|
|
|
11,586
|
|
|
|
26,175
|
|
|
|
55,062
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,658
|
|
|
|
2,658
|
|
Other expenses
|
|
|
270
|
|
|
|
14
|
|
|
|
192
|
|
|
|
30,494
|
|
|
|
30,970
|
|
Total
|
|
$
|
610,608
|
|
|
$
|
(211,658
|
)
|
|
$
|
446,518
|
|
|
$
|
1,153,923
|
|
|
$
|
1,999,391
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
48,999
|
|
|
$
|
17,744
|
|
|
$
|
92,287
|
|
|
$
|
36,737
|
|
|
$
|
195,767
|
|
Professional fees
|
|
|
(6,380
|
)
|
|
|
18,525
|
|
|
|
41,022
|
|
|
|
(69,763
|
)
|
|
|
(16,596
|
)
|
Rent
|
|
|
-
|
|
|
|
11,289
|
|
|
|
4,342
|
|
|
|
(14,615
|
)
|
|
|
1,016
|
|
Business development
|
|
|
(11,200
|
)
|
|
|
14
|
|
|
|
(31,350
|
)
|
|
|
(3,141
|
)
|
|
|
(45,677
|
)
|
Travel expense
|
|
|
25,862
|
|
|
|
(1,491
|
)
|
|
|
(2,883
|
)
|
|
|
9,374
|
|
|
|
30,862
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,388
|
)
|
|
|
(34,388
|
)
|
Transaction (gains) losses
|
|
|
742
|
|
|
|
360,578
|
|
|
|
14,150
|
|
|
|
(16,871
|
)
|
|
|
358,599
|
|
Office expenses
|
|
|
18,808
|
|
|
|
1,186
|
|
|
|
9,440
|
|
|
|
(6,665
|
)
|
|
|
22,769
|
|
Communications expenses
|
|
|
(6,953
|
)
|
|
|
1,013
|
|
|
|
17,898
|
|
|
|
(6,432
|
)
|
|
|
5,526
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,577
|
|
|
|
29,577
|
|
Other expenses
|
|
|
994
|
|
|
|
(14
|
)
|
|
|
933
|
|
|
|
50,419
|
|
|
|
52,332
|
|
Total
|
|
$
|
70,872
|
|
|
$
|
408,844
|
|
|
$
|
145,839
|
|
|
$
|
(25,768
|
)
|
|
$
|
599,787
|
|
Salaries, benefits, taxes and contractor
payments were $1,372,819 for the three months ended June 30, 2017 as compared to $1,177,052 for the three months ended June 30,
2016.
Segment
|
|
Salaries and benefits for the three months ended
June 30, 2017
|
|
|
Salaries and benefits for the three months ended
June 30, 2016
|
|
|
Increase /
(Decrease)
|
|
North America Transaction Solutions
|
|
$
|
464,134
|
|
|
$
|
415,135
|
|
|
$
|
48,999
|
|
Mobile Solutions
|
|
|
126,516
|
|
|
|
108,772
|
|
|
|
17,744
|
|
Online Solutions
|
|
|
234,950
|
|
|
|
142,663
|
|
|
|
92,287
|
|
Corporate Expenses & Eliminations
|
|
|
547,219
|
|
|
|
510,482
|
|
|
|
36,737
|
|
Total
|
|
$
|
1,372,819
|
|
|
$
|
1,177,052
|
|
|
$
|
195,767
|
|
The increase in salaries of $195,767 was
due to the North American Transaction Solutions segment salaries increasing $48,999 due to an increase in headcount and sales incentives
for key employees. In addition, there were increases of $92,287 and $17,744, respectively, in our Online Solutions and Mobile Solutions
segments, which were primarily due to salary increases.
Professional fees were $660,727 for the
three months ended June 30, 2017 as compared to $677,323 for the three months ended June 30, 2016.
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
(20,000
|
)
|
|
$
|
-
|
|
|
$
|
3,245
|
|
|
$
|
24,702
|
|
|
$
|
7,947
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,035
|
|
|
|
79,035
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
5,215
|
|
|
|
97,500
|
|
|
|
102,715
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
|
|
500
|
|
Consulting
|
|
|
102,888
|
|
|
|
19,768
|
|
|
|
250,075
|
|
|
|
97,799
|
|
|
|
470,530
|
|
Total
|
|
$
|
82,888
|
|
|
$
|
19,768
|
|
|
$
|
258,535
|
|
|
$
|
299,536
|
|
|
$
|
660,727
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
5,226
|
|
|
$
|
12
|
|
|
$
|
2,507
|
|
|
$
|
43,949
|
|
|
$
|
51,694
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,750
|
|
|
|
43,750
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103,055
|
|
|
|
103,055
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,000
|
|
|
|
11,000
|
|
Consulting
|
|
|
84,042
|
|
|
|
1,231
|
|
|
|
215,006
|
|
|
|
167,545
|
|
|
|
467,824
|
|
Total
|
|
$
|
89,268
|
|
|
$
|
1,243
|
|
|
$
|
217,513
|
|
|
$
|
369,299
|
|
|
$
|
677,323
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Increase /
(Decrease)
|
|
General Legal
|
|
$
|
(25,226
|
)
|
|
$
|
(12
|
)
|
|
$
|
738
|
|
|
$
|
(19,247
|
)
|
|
$
|
(43,747
|
)
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,285
|
|
|
|
35,285
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
5,215
|
|
|
|
(5,555
|
)
|
|
|
(340
|
)
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,500
|
)
|
|
|
(10,500
|
)
|
Consulting
|
|
|
18,846
|
|
|
|
18,537
|
|
|
|
35,069
|
|
|
|
(69,746
|
)
|
|
|
2,706
|
|
Total
|
|
$
|
(6,380
|
)
|
|
$
|
18,525
|
|
|
$
|
41,022
|
|
|
$
|
(69,763
|
)
|
|
$
|
(16,596
|
)
|
Professional fees decreased by $16,596 mainly due to a decrease
in general legal fees offset by an increase in SEC compliance fees.
Non-cash compensation expense from share-based
compensation was $128,537 for the three months ended June 30, 2017, compared to $2,014,589 for the three months ended June 30,
2016. The majority of these expenses were for employee and consultant equity incentives for both periods.
We recorded bad debt expense of $865,863
for the three months ended June 30, 2017 as compared to $125,238 for the three months ended June 30, 2016. For the three months
ended June 30, 2017, we recorded a loss which was primarily comprised of $671,580 in ACH rejects and a $194,283 provision from
our Russian operations. Of the $671,580 of gross ACH rejects, $347,235 were passed through to independent sales organizations via
a reduction in commissions.
For the three months ended June 30, 2016,
we recorded a loss which was primarily comprised of $145,588 in ACH rejects offset by a $20,350 recovery from our Russian operations.
Of the $145,588 of ACH rejects, $93,812 were passed through to independent sales organizations via a reduction in commissions.
Depreciation and amortization expense consists
primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized
software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense
was $573,018 for the three months ended June 30, 2017 as compared to $844,535 for the three months ended June 30, 2016. The decrease
was due to the full amortization of certain software and merchant portfolio assets during 2016.
Interest expense was $322,052 for the three
months ended June 30, 2017 as compared to $438,976 for three months ended June 30, 2016, representing a decrease of $116,924 as
follows:
Funding Source
|
|
Three months
ended
June 30, 2017
|
|
|
Three months
ended
June 30, 2016
|
|
|
Increase /
(Decrease)
|
|
MBF Notes
|
|
$
|
15,516
|
|
|
$
|
28,450
|
|
|
$
|
(12,934
|
)
|
RBL Notes
|
|
|
220,128
|
|
|
|
110,342
|
|
|
|
109,786
|
|
Priority Payments Note
|
|
|
24,747
|
|
|
|
-
|
|
|
|
24,747
|
|
Crede CG III, LTD
|
|
|
-
|
|
|
|
297,435
|
|
|
|
(297,435
|
)
|
Other
|
|
|
61,661
|
|
|
|
2,749
|
|
|
|
58,912
|
|
Total
|
|
$
|
322,052
|
|
|
$
|
438,976
|
|
|
$
|
(116,924
|
)
|
Other interest expense for the three months
ended June 30, 2017 consisted primarily of $37,245 from the financing for the PayOnline Acquisition stock price guarantee and $10,443
resulting from the promissory note entered into on March 1, 2017 with Star Capital Management, LLC. (See Note 12. Related Party
Transactions). Additionally, Crede charges in 2016 for imputed interest did not occur during 2017.
The net income attributable to non-controlling
interests amounted to $75,081 for three months ended June 30, 2017 as compared to $38,792 for the three months ended June 30, 2016.
Results of Operations for the Six Months Ended June 30, 2017
Compared to the Six Months Ended June 30, 2016
We reported a net loss attributable to stockholders of $4,127,837,
or $2.41 per share, for the six months ended June 30, 2017 as compared to a net loss attributable to stockholders of $7,194,167,
or $6.28 per share, for the six months ended June 30, 2016. This resulted in a decrease in net loss attributable to stockholders
of $3,066,330 primarily due and increase in revenues and a decrease in the loss from stock value guarantee and a decrease in noncash
compensation expense.
Net revenues consist primarily of payment
processing fees. Net revenues were $29,702,982 for the six months ended June 30, 2017 as compared to $24,953,907 for the six months
ended June 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North American Transaction
Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of $6,321,120 (or 35%
increase) for the six months ended June 30, 2017 versus the six months ended June 30, 2016. Our Online Solutions segment revenue
increased $825,775 (or 28%), from $2,924,115 for the six months ended June 30, 2016 to $3,749,890 for the six months ended June
30, 2017, primarily due to the boarding of additional merchants. The increases in North American Transaction Solutions and Online
Solutions segments were offset by a $2,397,820 (or 64%) decrease in our Mobile Solutions segment, as we continue to
experience
increased competition, decreased margins, and liquidity constraints arising from capital needed to prepay for content delivered
through our platform.
The following table sets forth our sources of revenues, cost
of revenues and gross margins for the six months ended June 30, 2017 and 2016:
Gross Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
Six
|
|
|
|
Six
|
|
|
|
|
|
|
Months Ended
|
|
|
|
Months Ended
|
|
|
|
Increase /
|
|
Source of Revenues
|
June 30, 2017
|
|
Mix
|
|
June 30, 2016
|
|
Mix
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
$
|
24,577,701
|
|
|
83%
|
|
$
|
18,256,581
|
|
|
73%
|
|
$
|
6,321,120
|
|
Mobile Solutions
|
|
1,375,391
|
|
|
5%
|
|
|
3,773,211
|
|
|
15%
|
|
|
(2,397,820
|
)
|
Online Solutions
|
|
3,749,890
|
|
|
12%
|
|
|
2,924,115
|
|
|
12%
|
|
|
825,775
|
|
Total
|
$
|
29,702,982
|
|
|
100%
|
|
$
|
24,953,907
|
|
|
100%
|
|
$
|
4,749,075
|
|
|
Six
|
|
|
|
Six
|
|
|
|
|
|
|
Months Ended
|
|
% of
|
|
Months Ended
|
|
% of
|
|
Increase /
|
|
Cost of Revenues
|
June 30, 2017
|
|
revenues
|
|
June 30, 2016
|
|
revenues
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
$
|
20,933,958
|
|
|
85%
|
|
$
|
15,620,817
|
|
|
86%
|
|
$
|
5,313,141
|
|
Mobile Solutions
|
|
1,319,704
|
|
|
96%
|
|
|
3,381,206
|
|
|
90%
|
|
|
(2,061,502
|
)
|
Online Solutions
|
|
2,524,722
|
|
|
67%
|
|
|
1,868,011
|
|
|
64%
|
|
|
656,711
|
|
Total
|
$
|
24,778,384
|
|
|
83%
|
|
$
|
20,870,034
|
|
|
84%
|
|
$
|
3,908,350
|
|
|
Six
|
|
|
|
Six
|
|
|
|
|
|
|
Months Ended
|
|
% of
|
|
Months Ended
|
|
% of
|
|
Increase /
|
|
Gross Margin
|
June 30, 2017
|
|
revenues
|
|
June 30, 2016
|
|
revenues
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
$
|
3,643,743
|
|
|
15%
|
|
$
|
2,635,764
|
|
|
14%
|
|
$
|
1,007,979
|
|
Mobile Solutions
|
|
55,687
|
|
|
4%
|
|
|
392,005
|
|
|
10%
|
|
|
(336,318
|
)
|
Online Solutions
|
|
1,225,168
|
|
|
33%
|
|
|
1,056,104
|
|
|
36%
|
|
|
169,064
|
|
Total
|
$
|
4,924,598
|
|
|
17%
|
|
$
|
4,083,873
|
|
|
16%
|
|
$
|
840,725
|
|
Cost of revenues represents direct costs of generating revenues,
including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing fees. Cost of revenues
for the six months ended June 30, 2017 were $24,778,384 as compared to $20,870,034 for the six months ended June 30, 2016. The
increase in cost of revenues was primarily due to a $5,313,141 increase in our North American Transaction Solutions segment due
to increased sales volume. There was also a $656,711 increase in cost of revenues resulting from our Online Solutions segment operations
also primarily due to the boarding of more merchants. This was offset by a $2,061,502 decrease in our Mobile Solutions segment
cost of revenues, which resulted from the decrease in sales for our Mobile Solutions segment for the six months ended June 30,
2017.
Gross Margin for the six months ended
June 30, 2017 was $4,924,598, or 17% of net revenue, as compared to $4,083,873, or 16% of net revenue, for the six months
ended June 30, 2016. The $840,725 increase in gross margin was primarily due to the increased sales volume of processing and
business mix in our North American Transaction Solutions offset by a decrease of $336,318 in our Mobile Solutions margin
caused from a decrease in business.
Total operating expenses were $8,531,281 for the six months
ended June 30, 2017, which consisted of general and administrative expenses of $5,430,338, non-cash compensation expenses of $724,941,
provision for bad debts of $1,145,621, and depreciation and amortization of $1,230,381. Total operating expenses were $8,572,829
for the six months ended June 30, 2016, which consisted of general and administrative expenses of $4,087,624, non-cash compensation
expenses of $2,375,573, provision for bad debts of $376,979, and depreciation and amortization of $1,732,653.
The components of our general and administrative expenses are
discussed below.
General and administrative expenses for the six months ended
June 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Consolidated Statements of Operations and
Comprehensive Loss and include salaries and benefits, professional fees, rent, travel expense, filing fees, transaction gains,
office expenses, communication expense, insurance expense, and other expenses required to run our business, as follows:
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
944,750
|
|
|
$
|
250,334
|
|
|
$
|
456,705
|
|
|
$
|
1,388,739
|
|
|
$
|
3,040,528
|
|
Professional fees
|
|
|
250,964
|
|
|
|
44,839
|
|
|
|
483,877
|
|
|
|
554,737
|
|
|
|
1,334,417
|
|
Rent
|
|
|
-
|
|
|
|
27,288
|
|
|
|
80,092
|
|
|
|
181,763
|
|
|
|
289,143
|
|
Business development
|
|
|
2,809
|
|
|
|
977
|
|
|
|
17,788
|
|
|
|
2,496
|
|
|
|
24,070
|
|
Travel expense
|
|
|
112,148
|
|
|
|
6,826
|
|
|
|
5,336
|
|
|
|
90,918
|
|
|
|
215,228
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,934
|
|
|
|
14,934
|
|
Transaction (gains) losses
|
|
|
742
|
|
|
|
(17,096
|
)
|
|
|
(6,192
|
)
|
|
|
3,034
|
|
|
|
(19,512
|
)
|
Office expenses
|
|
|
98,602
|
|
|
|
6,025
|
|
|
|
41,511
|
|
|
|
91,501
|
|
|
|
237,639
|
|
Communications expenses
|
|
|
23,388
|
|
|
|
2,197
|
|
|
|
59,571
|
|
|
|
40,162
|
|
|
|
125,318
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,341
|
|
|
|
76,341
|
|
Other expenses
|
|
|
3,213
|
|
|
|
-
|
|
|
|
3,276
|
|
|
|
85,743
|
|
|
|
92,232
|
|
Total
|
|
$
|
1,436,616
|
|
|
$
|
321,390
|
|
|
$
|
1,141,964
|
|
|
$
|
2,530,368
|
|
|
$
|
5,430,338
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
808,581
|
|
|
$
|
235,937
|
|
|
$
|
255,436
|
|
|
$
|
1,056,044
|
|
|
$
|
2,355,998
|
|
Professional fees
|
|
|
222,506
|
|
|
|
2,548
|
|
|
|
301,255
|
|
|
|
675,401
|
|
|
|
1,201,710
|
|
Rent
|
|
|
-
|
|
|
|
2,318
|
|
|
|
68,374
|
|
|
|
200,615
|
|
|
|
271,307
|
|
Business development
|
|
|
20,956
|
|
|
|
-
|
|
|
|
64,791
|
|
|
|
4,648
|
|
|
|
90,395
|
|
Travel expense
|
|
|
91,095
|
|
|
|
7,095
|
|
|
|
9,986
|
|
|
|
37,902
|
|
|
|
146,078
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,395
|
|
|
|
59,395
|
|
Transaction (gains) losses
|
|
|
-
|
|
|
|
(383,813
|
)
|
|
|
39,105
|
|
|
|
25,840
|
|
|
|
(318,868
|
)
|
Office expenses
|
|
|
46,747
|
|
|
|
4,974
|
|
|
|
26,085
|
|
|
|
51,439
|
|
|
|
129,245
|
|
Communications expenses
|
|
|
46,978
|
|
|
|
1,056
|
|
|
|
15,677
|
|
|
|
49,309
|
|
|
|
113,020
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,784
|
|
|
|
5,784
|
|
Other expenses
|
|
|
21,063
|
|
|
|
935
|
|
|
|
333
|
|
|
|
11,229
|
|
|
|
33,560
|
|
Total
|
|
$
|
1,257,926
|
|
|
$
|
(128,950
|
)
|
|
$
|
781,042
|
|
|
$
|
2,177,606
|
|
|
$
|
4,087,624
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
136,169
|
|
|
$
|
14,397
|
|
|
$
|
201,269
|
|
|
$
|
332,695
|
|
|
$
|
684,530
|
|
Professional fees
|
|
|
28,458
|
|
|
|
42,291
|
|
|
|
182,622
|
|
|
|
(120,664
|
)
|
|
|
132,707
|
|
Rent
|
|
|
-
|
|
|
|
24,970
|
|
|
|
11,718
|
|
|
|
(18,852
|
)
|
|
|
17,836
|
|
Business development
|
|
|
(18,147
|
)
|
|
|
977
|
|
|
|
(47,003
|
)
|
|
|
(2,152
|
)
|
|
|
(66,325
|
)
|
Travel expense
|
|
|
21,053
|
|
|
|
(269
|
)
|
|
|
(4,650
|
)
|
|
|
53,016
|
|
|
|
69,150
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(44,461
|
)
|
|
|
(44,461
|
)
|
Transaction (gains) losses
|
|
|
742
|
|
|
|
366,717
|
|
|
|
(45,297
|
)
|
|
|
(22,806
|
)
|
|
|
299,356
|
|
Office expenses
|
|
|
51,855
|
|
|
|
1,051
|
|
|
|
15,426
|
|
|
|
40,062
|
|
|
|
108,394
|
|
Communications expenses
|
|
|
(23,590
|
)
|
|
|
1,141
|
|
|
|
43,894
|
|
|
|
(9,147
|
)
|
|
|
12,298
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,557
|
|
|
|
70,557
|
|
Other expenses
|
|
|
(17,850
|
)
|
|
|
(935
|
)
|
|
|
2,943
|
|
|
|
74,514
|
|
|
|
58,672
|
|
Total
|
|
$
|
178,690
|
|
|
$
|
450,340
|
|
|
$
|
360,922
|
|
|
$
|
352,762
|
|
|
$
|
1,342,714
|
|
Salaries, benefits, taxes and contractor
payments were $3,040,528 for the six months ended June 30, 2017 as compared to $2,355,998 for the six months ended June 30, 2016.
Segment
|
|
Salaries and benefits for the six months ended
June 30, 2017
|
|
|
Salaries and benefits for the six months ended
June 30, 2016
|
|
|
Increase /
(Decrease)
|
|
North America Transaction Solutions
|
|
$
|
944,750
|
|
|
$
|
808,581
|
|
|
$
|
136,169
|
|
Mobile Solutions
|
|
|
250,334
|
|
|
|
235,937
|
|
|
|
14,397
|
|
Online Solutions
|
|
|
456,705
|
|
|
|
255,436
|
|
|
|
201,269
|
|
Corporate Expenses & Eliminations
|
|
|
1,388,739
|
|
|
|
1,056,044
|
|
|
|
332,695
|
|
Total
|
|
$
|
3,040,528
|
|
|
$
|
2,355,998
|
|
|
$
|
684,530
|
|
The increase in salaries of $684,530
was due primarily to the increase of corporate expenses for a $300,000 discretionary bonus payable to our CEO and approved by
the Board of directors. The bonus is payable when cash flow of the business can support the payment. Additionally, North
American Transaction Solutions segment salaries increased $136,169 due to an increase in headcount and sales incentives for
key employees. There was also an increase of $201,269 and $14,397, respectively in our Online Solutions and Mobile Solutions
segments which were primarily due to increasing administrative payroll on PayOnline and unfavorable changes in foreign
currency exchange rates.
Professional fees were $1,334,417 for the six months ended June 30, 2017 as compared
to $1,201,710 for the six months ended June 30, 2016.
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America Transaction Solutions
|
|
|
Mobile Solutions
|
|
|
Online Solutions
|
|
|
Corporate Expenses & Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
22,599
|
|
|
$
|
-
|
|
|
$
|
3,958
|
|
|
$
|
58,228
|
|
|
$
|
84,785
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,785
|
|
|
|
102,785
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
14,433
|
|
|
|
210,282
|
|
|
|
224,715
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,400
|
|
|
|
15,400
|
|
Consulting
|
|
|
228,365
|
|
|
|
44,839
|
|
|
|
465,486
|
|
|
|
168,042
|
|
|
|
906,732
|
|
Total
|
|
$
|
250,964
|
|
|
$
|
44,839
|
|
|
$
|
483,877
|
|
|
$
|
554,737
|
|
|
$
|
1,334,417
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America Transaction Solutions
|
|
|
Mobile Solutions
|
|
|
Online Solutions
|
|
|
Corporate Expenses & Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
33,397
|
|
|
$
|
212
|
|
|
$
|
3,020
|
|
|
$
|
68,860
|
|
|
$
|
105,489
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,500
|
|
|
|
87,500
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
578
|
|
|
|
224,399
|
|
|
|
224,977
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,000
|
|
|
|
11,000
|
|
Consulting
|
|
|
189,109
|
|
|
|
2,336
|
|
|
|
297,657
|
|
|
|
283,642
|
|
|
|
772,744
|
|
Total
|
|
$
|
222,506
|
|
|
$
|
2,548
|
|
|
$
|
301,255
|
|
|
$
|
675,401
|
|
|
$
|
1,201,710
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America Transaction Solutions
|
|
|
Mobile Solutions
|
|
|
Online Solutions
|
|
|
Corporate Expenses & Eliminations
|
|
|
Increase / (Decrease)
|
|
General Legal
|
|
$
|
(10,798
|
)
|
|
$
|
(212
|
)
|
|
$
|
938
|
|
|
$
|
(10,632
|
)
|
|
$
|
(20,704
|
)
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,285
|
|
|
|
15,285
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
13,855
|
|
|
|
(14,117
|
)
|
|
|
(262
|
)
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,400
|
|
|
|
4,400
|
|
Consulting
|
|
|
39,256
|
|
|
|
42,503
|
|
|
|
167,829
|
|
|
|
(115,600
|
)
|
|
|
133,988
|
|
Total
|
|
$
|
28,458
|
|
|
$
|
42,291
|
|
|
$
|
182,622
|
|
|
$
|
(120,664
|
)
|
|
$
|
132,707
|
|
Professional fees increased by $132,707
mainly due to an increase in Online Solutions segment’s consulting fees of $167,828 offset by a decrease in general legal
expenses.
Non-cash compensation expense from share-based compensation
was $724,941 for the six months ended June 30, 2017, compared to $2,375,573 for the six months ended June 30, 2016. The majority
of these expenses were for employee and consultant incentives in both periods.
We recorded bad debt expense of $1,145,621
for the six months ended June 30, 2017 as compared to $376,979 for the six months ended June 30, 2016. For the six months ended
June 30, 2017, we recorded a loss which was primarily comprised of $958,523 in ACH rejects and a $196,551 provision from our Russian
operations. Of the $958,523 of ACH rejects, $511,881 were passed through to independent sales organizations that board their merchants
with us, offset by $9,453 of rejects obtained through collection procedures.
For the six months ended June 30, 2016,
we recorded a loss which was primarily comprised of $409,276 in ACH rejects offset by a $32,397 recovery from our Russian operations.
Of the $409,276 of ACH rejects, $168,333 were passed through as a reduction to commissions to independent sales organizations
that board their merchants with us.
Depreciation and amortization expense consists primarily of
the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs, capitalized software
expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization expense was $1,230,381
for the six months ended June 30, 2017 as compared to $1,732,653 for the six months ended June 30, 2016.
Interest expense was $591,740 for the six months ended June
30, 2017 as compared to $589,414 for six months ended June 30, 2016, representing an increase of $2,325 as follows:
Funding Source
|
|
Six months ended
June 30 , 2017
|
|
|
Six months ended
June 30, 2016
|
|
|
Increase /
(Decrease)
|
|
MBF Notes
|
|
$
|
34,329
|
|
|
$
|
28,450
|
|
|
$
|
5,879
|
|
RBL Notes
|
|
|
376,494
|
|
|
|
258,126
|
|
|
|
118,368
|
|
Priority Payments Note
|
|
|
24,747
|
|
|
|
-
|
|
|
|
24,747
|
|
Crede CG III, LTD
|
|
|
-
|
|
|
|
297,435
|
|
|
|
(297,435
|
)
|
Other
|
|
|
156,169
|
|
|
|
5,403
|
|
|
|
150,766
|
|
Total
|
|
$
|
591,740
|
|
|
$
|
589,414
|
|
|
$
|
2,325
|
|
Other interest costs primarily consisted of $82,377 resulting
from the stock price guarantee related to the PayOnline acquisition and $67,602 resulting from the promissory note entered into
on March 1, 2017 with Star Capital Management, LLC. See Note 12. Related Party Transactions.
The net income attributable to non-controlling interests amounted
to $125,782 for six months ended June 30, 2017 as compared to $76,668 for the six months ended June 30, 2016.
Liquidity and Capital Resources
Our total assets at June 30, 2017 were
$22.0 million compared to $23.0 million at December 31, 2016. The period over period change in total assets is primarily attributable
to a decrease in accounts receivables, due to collections of North American Transaction Solutions segment annual fees, a $0.2 million
decrease in other long-term assets due to a return of excess reserves held by North American Transaction Solutions segment processors,
offset by a $0.3 million increase in prepaid and other expenses primarily due to our Mobile Solutions segment providing advances
to partners.
At December 31, 2016, we had total current
assets of $9.2 million including $0.6 million of cash, $7.1 million of accounts receivable, and $1.5 million of prepaid expenses
and other assets. At June 30, 2017, we had total current assets of $8.5 million, including $1.3 million of cash, $6.0 million of
accounts receivable and $1.2 million of prepaid expenses.
We currently believe that we will require
an additional $4.8 million to finance continuing operations as currently conducted over the next 12 months. In addition, we have
a payment obligation of approximately $1.4 million associated with our PayOnline acquisition. These conditions raise substantial
doubt about our ability to continue as a going concern.
Additional funds may be raised through
debt financing and/or the issuance of equity securities, there being no assurance that any type of financing on terms satisfactory
to us will be available or otherwise occur. Debt financing must be repaid regardless of whether we generate revenues or cash flows
from operations and may be secured by substantially all of our assets. Any equity financing or debt financing that requires the
issuance of equity securities or warrants to the lender would cause the percentage ownership by our current stockholders to be
diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences or privileges
senior to those of existing stockholders. If such financings are not available when required or are not available on acceptable
terms, we may be unable to implement our business plans or take advantage of business opportunities, any of which could have a
material adverse effect on our business, financial condition, results of operations and/or prospects and may ultimately require
us to suspend or cease operations, which could cause investors to lose the entire amount of their investment.
The net loss attributable to Net Element,
Inc. stockholders was $4.1 million for the six months ended June 30, 2017 compared to $7.2 million for the six months ended June
30, 2016.
Operating activities used $2,703,954 of
cash for the six months ended June 30, 2017 as compared to $1,446,736 of cash used for the six months ended June 30, 2016. Negative
operating cash flow of $2,703,954 for the six months ended June 30, 2017 was primarily due to a net loss of $4,127,837 and a $1,845,161
decrease in accounts payable and accrued expenses, primarily the result of paying down amounts related to the PayOnline acquisition,
a $916,898 net decrease of deferred revenue primarily resulting from amortization of annual fees, offset by a $1,913,135 decrease
in accounts receivable.
For the six months ended June 30, 2017,
investing activities used $785,724 in cash primarily for client acquisition costs as compared to $955,560 of cash used primarily
to purchase portfolios and client acquisition costs for the six months ended June 30, 2016.
Financing activities provided $4,111,006
in cash for the six months ended June 30, 2017 as compared to $2,125,045 of cash provided from financing activities for the six
months ended June 30, 2016. Financing activities provided $4,111,006 for the six months ended June 30, 2017, primarily from the
sale of stock of $1,437,132 and proceeds and repayments from indebtedness, which netted $2,673,874. Financing activities provided
$2,125,045 in cash for the six months ended June 30, 2016 resulting from related party advances of $910,045 and proceeds from indebtedness
of $1,215,000.
We have Russian operations that transact
in foreign currencies including Russian Rubles, Euros, and Kazakhstan Tenges. The effect of exchange rate changes increased our
US Dollar-denominated cash balance by $31,316 for the six months ended June 30, 2017 as compared to a $94,905 decrease for the
six months ended June 30, 2016.
Off-balance sheet arrangements
At June 30, 2017, we did not have any off-balance
sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Our disclosure controls and procedures
are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules
and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by
this Report, our management conducted an evaluation, under the supervision and with the participation of our chief executive officer
and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) under the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were not effective because there are a limited number of personnel employed and we
cannot have an adequate segregation of duties, and due to the material weaknesses in our internal control over financial reporting
as discussed below under “Management’s Report on Internal Control Over Financial Reporting.” Accordingly, management
cannot provide reasonable assurance of achieving the desired control objective. Management works to mitigate these risks by being
personally involved in all substantive transactions and attempts to obtain verification of transactions and accounting policies
and treatments involving our operations, including those overseas. We are in the process of reviewing and, where necessary, modifying
controls and procedures throughout the Company, particularly in light of our recent acquisitions and the continued integration
of these businesses. We will continue to address deficiencies as resources permit.
Management’s Report on Internal
Control over Financial Reporting
Management of the Company is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under Exchange
Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets
of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.
We recognize that because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies and procedures may deteriorate.
Management of the Company conducted an
assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017, based on
the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO II Framework”). Based on management’s assessment in accordance with the criteria
in the COSO Framework, our management concluded that our internal control over financial reporting was not effective as of June
30, 2017.
Management is aware of the following material
weaknesses (a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected and corrected on a timely basis) in the Company’s internal control over financial reporting:
Control Environment
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Inadequate Policies and Procedures: Based on management’s review of key accounting policies and procedures, our management determined that such policies and procedures were inadequate as of June 30, 2017. Management identified certain policies and procedures as inadequate regarding the design of the control and formal written documentation.
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We do not have sufficient personnel or financial resources to provide adequate risk assessment functions.
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Changing Board of Directors and Key Employees: A changing organizational structure provided challenges to ensure a sound control environment with appropriate tone, authority, responsibilities, and high ethical values. Due to continued changes in board membership, board committee membership and senior management, we have not been able to provide adequate training to new board members and employees in order to establish adequate best practice procedures.
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Control Activities
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Testing of Internal Controls: The Company’s accounting staff is relatively small and the Company does not have the required infrastructure for meeting the demands of being a U.S. public company. As a result we have identified deficiencies in our internal controls within our key business processes, particularly with respect to the design of quarterly accounting, financial statement close, consolidation, and external financial reporting procedures. Management believes there are control procedures that are effective in implementation within our key business processes. However, certain of these processes could not be formally tested because of lack of design, inadequate documentation, and lack of financial resources.
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Information and Communication
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We did not have adequate written procedures, risk assessment processes or board of directors training at June 30, 2017. Our quarterly reporting process, particularly in Russia, requires additional controls and processes.
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Monitoring
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Internal Control Monitoring: As a result of our limited financial personnel and ineffective controls (both preventative and detective) management’s ability to monitor the design and operating effectiveness of our internal controls is limited. Accordingly, management’s ability to timely detect, prevent and remediate deficiencies and potential fraud risks is inadequate.
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These material weaknesses impede the ability
of management to adequately oversee our internal control over financial reporting on a consistent basis. Management intends to
continue focusing its remediation efforts in the near term on providing board and committee members with tools and COSO training
designing revised accounting and financial reporting policies and procedures that will help ensure that adequate internal controls
over financial reporting are met. Additionally, these revised procedures will be formally documented and procedures will focus
on transaction processing, period-end account analyses and providing for additional review and monitoring procedures and periodically
assess the need for additional accounting resources as the business develops and resources permit. Management also is committed
to taking further action and implementing enhancements or improvements as resources permit. We recognize that, due to the size
and stage of development of our foreign businesses, implementation of additional measures may take considerable time.
Notwithstanding the material weaknesses
discussed above, our management has concluded that the financial statements included in this Report fairly present in all material
respects our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted
accounting principles.
Except as specifically described above
in this Item 4, there was no change in our internal control over financial reporting during our second fiscal quarter of 2017 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.