MULLEN AUTOMOTIVE INC. - Quarter Report: 2019 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________
Commission file number: 001-34887
Net Element, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
90-1025599 (I.R.S. Employer Identification No.) |
3363 NE 163rd Street, Suite 705 North Miami Beach, Florida (Address of principal executive offices) |
33160 (Zip Code) |
(305) 507-8808
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, par value $0.0001 per share |
NETE |
The Nasdaq Stock Market, LLC (Nasdaq Capital Market) |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Non-accelerated filer ☒
|
Accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of outstanding shares of common stock, $.0001 par value, of the registrant as of August 14, 2019 was 4,117,878.
Quarterly Report on Form 10-Q
Table of Contents
PART I — FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2019 |
December 31, 2018 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash |
$ | 840,170 | $ | 1,645,481 | ||||
Accounts receivable, net |
5,073,168 | 6,290,412 | ||||||
Prepaid expenses and other assets |
978,737 | 1,749,221 | ||||||
Total current assets, net |
6,892,075 | 9,685,114 | ||||||
Equipment, net |
16,205 | 25,335 | ||||||
Intangible assets, net |
6,237,789 | 6,441,743 | ||||||
Goodwill |
9,007,752 | 9,007,752 | ||||||
Operating lease right-of-use asset |
442,094 | - | ||||||
Other long term assets |
655,180 | 604,070 | ||||||
Total assets |
$ | 23,251,095 | $ | 25,764,014 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 5,274,782 | $ | 6,368,444 | ||||
Accrued expenses |
1,700,003 | 2,535,947 | ||||||
Deferred revenue |
449,451 | 1,495,849 | ||||||
Notes payable (current portion) |
224,364 | 433,448 | ||||||
Operating lease liability (current portion) |
61,108 | - | ||||||
Due to related party |
200,694 | 387,814 | ||||||
Total current liabilities |
7,910,402 | 11,221,502 | ||||||
Operating lease liability (net of current portion) |
380,986 | - | ||||||
Notes payable (net of current portion) |
7,074,978 | 5,946,046 | ||||||
Total liabilities |
15,366,366 | 17,167,548 | ||||||
STOCKHOLDERS' EQUITY |
||||||||
Series A Convertible Preferred stock ($.0001 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2019 and December 31, 2018) |
- | - | ||||||
Common stock ($.0001 par value, 100,000,000 shares authorized and 4,184,514 and 3,863,019 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively) |
410 | 386 | ||||||
Paid in capital |
185,267,054 | 183,246,232 | ||||||
Accumulated other comprehensive loss |
(2,252,261 | ) | (2,232,163 | ) | ||||
Accumulated deficit |
(174,950,546 | ) | (172,292,252 | ) | ||||
Non-controlling interest |
(179,928 | ) | (125,737 | ) | ||||
Total stockholders' equity |
7,884,729 | 8,596,466 | ||||||
Total liabilities and stockholders' equity |
$ | 23,251,095 | $ | 25,764,014 |
See Accompanying Notes to the Condensed Consolidated Unaudited Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2019 |
2018 |
2019 |
2018 |
|||||||||||||
Net revenues |
||||||||||||||||
Service fees |
$ | 16,487,311 | $ | 16,464,717 | $ | 31,534,494 | $ | 32,447,111 | ||||||||
Total Revenues |
16,487,311 | 16,464,717 | 31,534,494 | 32,447,111 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of service fees |
13,901,365 | 13,814,008 | 26,161,512 | 27,432,342 | ||||||||||||
Selling, general and administrative |
2,299,070 | 2,499,496 | 4,683,936 | 4,945,977 | ||||||||||||
Non-cash compensation |
2,005,840 | 22,500 | 2,020,847 | 104,511 | ||||||||||||
Bad debt expense |
143,190 | 877,898 | 482,498 | 999,171 | ||||||||||||
Depreciation and amortization |
747,347 | 662,525 | 1,598,567 | 1,366,063 | ||||||||||||
Total costs and operating expenses |
19,096,812 | 17,876,427 | 34,947,360 | 34,848,064 | ||||||||||||
Loss from operations |
(2,609,501 | ) | (1,411,710 | ) | (3,412,866 | ) | (2,400,953 | ) | ||||||||
Interest expense |
(252,582 | ) | (235,738 | ) | (497,635 | ) | (478,976 | ) | ||||||||
Other income |
1,284,411 | 674,236 | 1,198,018 | 323,423 | ||||||||||||
Net loss from continuing operations before income taxes |
(1,577,672 | ) | (973,212 | ) | (2,712,483 | ) | (2,556,506 | ) | ||||||||
Income taxes |
- | - | - | - | ||||||||||||
Net loss from continuing operations |
(1,577,672 | ) | (973,212 | ) | (2,712,483 | ) | (2,556,506 | ) | ||||||||
Net income attributable to the non-controlling interest |
40,225 | 69,481 | 54,191 | 41,929 | ||||||||||||
Net loss attributable to Net Element, Inc. stockholders |
(1,537,447 | ) | (903,731 | ) | (2,658,292 | ) | (2,514,577 | ) | ||||||||
Foreign currency translation |
(5,537 | ) | 29,662 | (20,099 | ) | 68,977 | ||||||||||
Comprehensive loss attributable to common stockholders |
$ | (1,542,984 | ) | $ | (874,069 | ) | $ | (2,678,391 | ) | $ | (2,445,600 | ) | ||||
Loss per share - basic and diluted |
$ | (0.37 | ) | $ | (0.23 | ) | $ | (0.66 | ) | $ | (0.65 | ) | ||||
Weighted average number of common shares outstanding - basic and diluted |
4,199,076 | 3,853,130 | 4,032,258 | 3,853,130 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, |
||||||||
2019 |
2018 |
|||||||
Cash flows from operating activities |
||||||||
Net loss attributable to Net Element, Inc. stockholders |
$ | (2,658,292 | ) | $ | (2,514,577 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Non-controlling interest |
(54,191 | ) | (41,929 | ) | ||||
Share based compensation |
2,020,847 | 104,511 | ||||||
Deferred revenue |
(1,046,398 | ) | 58,319 | |||||
Provision for bad debt |
(8,927 | ) | - | |||||
Depreciation and amortization |
1,598,567 | 1,366,063 | ||||||
Non cash interest |
21,711 | 35,196 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
1,165,261 | 571,405 | ||||||
Prepaid expenses and other assets |
668,646 | (352,703 | ) | |||||
Accounts payable and accrued expenses |
(2,305,202 | ) | (2,111,768 | ) | ||||
Net cash used in operating activities |
(597,978 | ) | (2,885,483 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchase of portfolios and client acquisition costs |
(1,210,278 | ) | (878,446 | ) | ||||
Purchase of equipment and changes in other assets |
(468,287 | ) | 9,898 | |||||
Net cash used in investing activities |
(1,678,565 | ) | (868,548 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from indebtedness | 1,116,500 | - | ||||||
Repayment of indebtedness |
(209,084 | ) | (1,038,665 | ) | ||||
Lease liability |
442,094 | - | ||||||
Related party advances |
166,561 | 34,927 | ||||||
Net cash provided by (used in) financing activities |
1,516,071 | (1,003,738 | ) | |||||
Effect of exchange rate changes on cash |
6,271 | 17,633 | ||||||
Net decrease in cash |
(754,201 | ) | (4,740,136 | ) | ||||
Cash and restricted cash at beginning of period |
2,249,551 | 11,733,271 | ||||||
Cash and restricted cash at end of period |
$ | 1,495,350 | $ | 6,993,135 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 475,924 | $ | 444,232 | ||||
Taxes |
$ | 103,841 | $ | 4,140 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying June 30, 2019 interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included in the condensed consolidated financial statements included herein. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the periods presented are not necessarily indicative of results to be expected for the full fiscal year or any other periods.
The condensed consolidated unaudited financial statements contained in this report include the accounts of Net Element, Inc., and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
NOTE 2. ORGANIZATION AND OPERATIONS
Net Element, Inc. (collectively with its subsidiaries, “Net Element”, “we”, “us”, “our” or the “Company”) is a financial technology-driven group specializing in payment acceptance and value-added solutions across multiple channels in the United States and selected international markets. We are differentiated by our proprietary technology which enables us to provide a broad suite of payment products and end-to-end transaction processing services. We operate in two reportable business operating segments: (i) North American Transaction Solutions, and (ii) International Transaction Solutions.
We are able to deliver our services across multiple points of access, or “multi-channel,” including brick and mortar locations, software integration, e-commerce, mobile operator billing, mobile and tablet-based solutions. In the United States, via our U.S. based subsidiaries, we generate revenues from transactional services and other payment technologies for small and medium-sized businesses. Through PayOnline, we provide transactional services, mobile payment transactions, online payment transactions and other payment technologies in emerging countries in the Eurasian Economic Community ("EAEC"), Europe and Asia.
Our transactional services business enables merchants to accept credit cards as well as other forms of payment, including debit cards, checks, gift cards, loyalty programs and alternative payment methods in traditional card-present or swipe transactions, as well as card-not-present transactions, such as those conducted over the phone or through the Internet or a mobile device. We market and sell our services through both independent sales groups (“ISGs”), which are non-employee, external sales organizations and other third-party resellers of our products and services, and directly to merchants through electronic media, telemarketing and other programs, including utilizing partnerships with other companies that market products and services to local and international merchants. We have agreements with several banks that sponsor us for membership in the Visa ®, MasterCard ®, American Express ®, and Discover ® card associations and settle card transactions for our merchants. These sponsoring banks include Citizens Bank, Esquire Bank, N.A. and Wells Fargo Bank, N.A. From time to time, we may enter into agreements with additional banks. We perform core functions for merchants such as application processing, underwriting, account set-up, risk management, fraud detection, merchant assistance and support, equipment deployment and chargeback services.
Our mobile solutions business, PayOnline, provides relationships and contracts with mobile operators that gives us the ability to offer our clients in-app, premium SMS (short message services, which is a text messaging service), Wireless Application Protocol (WAP)-click, one click and other carrier billing services. We also had marketed our own branded content as a separate line of business for our mobile commerce business from offices in Russia and Kazakhstan. In August 2017, we substantially reorganized this business, and combined its operations into PayOnline and TOT Group Russia. We are not generating revenues from new mobile content and we continue to explore partnership opportunities that can monetize our relationships and contracts with mobile operators. PayOnline provides flexible high- tech payment solutions to companies doing business on the Internet or in the mobile environment. PayOnline specializes in integration and customization of payment solutions for websites and mobile apps. In particular, PayOnline arranges payment on the website of any commercial organization, which increases the convenience of using the website and helps maximize the number of successful transactions. In addition, PayOnline is focused on providing online and mobile payment acceptance services to the travel industry through direct integration with leading Global Distribution Systems (“GDS”), which include Amadeus® and Sabre®. Key geographic regions that PayOnline serves include Eastern Europe, Central Asia, North America and Asia major sub regions. The PayOnline office is located in Russia.
Also part of our transactional services business, Aptito is a proprietary, cloud-based payments platform for the hospitality industry, which creates an online consumer experience in offline commerce environments via tablet, mobile and all other cloud-connected devices. Aptito’s easy to use point-of-sale (“POS”) system makes things easier by providing a comprehensive solution to the hospitality industry to help streamline management and operations. Orders placed tableside by customers directly speed up the ordering process and improve overall efficiency. Aptito's mobile POS system provides portability to the staff while performing all the same functions as a traditional POS system.
NOTE 3. LIQUIDITY
We expect to fund our operating cash needs for the next twelve months, including debt service requirements, operating expenses in the normal course of business, capital expenditures, and possible future acquisitions, with cash flow from our operating activities, potential sales of equity securities, and current and potential future borrowings.
The Company is continuing with its plan to further fund, grow and expand its payment processing operations through organic growth and acquisition of profitable residual buyouts.
To fund our operating cash needs, we may need to borrow additional capital from our current credit facilities or additional sales of equity securities. Further, we continue to investigate the capital markets for sources of funding, which could take the form of additional debt, the restructuring of our current debt, or additional equity financings. Historically, we have been successful to date in restructuring our current debt facilities with commercially acceptable terms that supports the continued operation of our business for the foreseeable future. However, we cannot be sure that any additional financing will be available when needed, or that, if available, financing will be obtained on terms favorable to us or our stockholders. As of June 30, 2019 we have approximately $10.1 million in available credit facilities for use in funding general working needs and potential acquisitions.
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company’s significant accounting policies are described below.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP and pursuant to the reporting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
These consolidated financial statements include the accounts of Net Element, Inc. and our subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash
We maintain our U.S. dollar-denominated cash in several non-interest bearing bank deposit accounts. All U.S. non-interest bearing transaction accounts are insured up to a maximum of $250,000 at FDIC insured institutions. The bank balances exceeded FDIC limits by approximately $283,000 and $600,000 at June 30, 2019 and December 31, 2018, respectively. We maintained approximately $41,000 and $74,000 in uninsured bank accounts in Russia and the Cayman Islands at June 30, 2019 and December 31, 2018, respectively.
Restricted Cash
Restricted cash represents funds held-on-deposit with processing banks pursuant to agreements to cover potential merchant losses. It is presented as other long-term assets on the accompanying consolidated balance sheets since the related agreements extend beyond the next twelve months. Following the adoption of ASU 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230), the Company includes restricted cash along with the cash balance for presentation in the consolidated statements of cash flows. The reconciliation between the consolidated balance sheet and the consolidated statement of cash flows is as follows:
June 30, 2019 |
December 31, 2018 |
|||||||
Cash on consolidated balance sheet |
$ | 840,170 | $ | 1,645,481 | ||||
Restricted cash |
655,180 | 604,070 | ||||||
Total cash and restricted cash |
$ | 1,495,350 | $ | 2,249,551 |
Accounts Receivable and Credit Policies
Accounts receivable consist primarily of uncollateralized credit card processing residual payments due from processing banks requiring payment within thirty days following the end of each month. Accounts receivable also include amounts due from the sales of our technology solutions to its customers. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, if necessary, which reflects management’s best estimate of the amounts that will not be collected. The allowance is estimated based on management’s knowledge of its customers, historical loss experience and existing economic conditions. Accounts receivable and the allowance are written-off when, in management’s opinion, all collection efforts have been exhausted.
Inventories
Inventories consist of POS equipment which we use to service both merchants and ISG's. Often, we will provide the equipment as an incentive for merchants and independent sales agents to enter into a merchant contracts with us. The term of these contracts has an average length of three years and the cost of the equipment plus any setup fees will be amortized over the contract period. If the merchants terminate their contract with us early, they are obligated to either return the equipment or pay for it.
Intangible Assets
Intangible assets acquired, either individually or with a group of other assets (but not those acquired in a business combination), are initially recognized and measured based on fair value. Goodwill acquired in business combinations is initially computed as the amount paid in excess of the fair value of the net assets acquired. We did not acquire any businesses during the year ended December 31, 2018 or the six months ended June 30, 2019.
The cost of internally developing, maintaining and restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity are recognized as an expense when incurred.
Intangible assets include acquired merchant relationships, recurring cash flow portfolios, referral agreements, trademarks, tradenames, website development costs and non-compete agreements. Merchant relationships represent the fair value of customer relationships purchased by us. Recurring cash flow portfolios give us the right to retain a greater share of the cash flow, in the form of paying less commissions to an independent sales agent, related to certain future transactions with the agent referred sales partners. Referral agreements represent the right to exclusively obtain referrals from a partner for their customers' credit card processing services.
We amortize definite lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are expected to be consumed or otherwise utilized. The estimated useful lives of our customer-related intangible assets approximate the expected distribution of cash flows on a straight-line basis from each asset. The useful lives of contract-based intangible assets are equal to the terms of the agreement.
Management evaluates the remaining useful lives and carrying values of long-lived assets, including definite lived intangible assets, at least annually, or when events and circumstances warrant such a review, to determine whether significant events or changes in circumstances indicate that a change in the useful life or impairment in value may have occurred. There were no impairment charges during the six months ended June 30, 2019 and June 30, 2018.
Goodwill
In accordance with ASC 350, Intangibles—Goodwill and Other, we test goodwill for impairment for each reporting unit on an annual basis, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value.
Our goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred. Such changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the business climate, and unforeseen competition.
We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit. Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of its reporting units, sustained decrease in its share price, and other relevant entity specific events. If the management determines on the basis of qualitative factors that the fair value of the reporting unit is more likely than not less than the carrying value, then we perform a quantitative test for that reporting unit. The fair value of each reporting unit is compared to the reporting unit’s carrying value, including goodwill. Subsequent to the adoption on January 1, 2017 of Accounting Standards Update (“ASU”) No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, if the fair value of a reporting unit is less than its carrying value, we recognize an impairment equal to the excess carrying value, not to exceed the total amount of goodwill allocated to that reporting unit.
At December 31, 2018, our management determined that an impairment charge of approximately $636,000 was necessary to reduce the goodwill relating to the acquisition of PayOnline. The impairment charge was primarily related to a decrease in International Transaction Solutions projected sales for 2019, which is the base year utilized for determining the discounted cash flows. We have not recognized an impairment charge to Goodwill for PayOnline during the six months ended June 30, 2019.
For a discussion of the estimate methodology and the significance of various inputs, please see the subheading below titled “Use of Estimates.”
Capitalized Customer Acquisition Costs, Net
Capitalized customer acquisition costs consist of up-front cash payments made to ISG’s for the establishment of new merchant relationships. Capitalized customer acquisition costs represent incremental, direct customer acquisition costs that are recoverable through gross margins associated with merchant contracts. The up-front cash payment to the ISG is based on the estimated gross margin for the first year of the merchant contract. The deferred customer acquisition cost asset is recorded at the time amounts are receivable but not yet earned and the capitalized acquisition costs are amortized on a straight-line basis over a period of approximately four years. These capitalized costs, net of amortization expense, are included in intangible assets on the accompanying consolidated balance sheets (See Note 5 – item labeled “Client Acquisition Costs”).
Accrued Residual Commissions
We record commissions as a cost of revenues in the accompanying consolidated statement of operations and comprehensive loss. We pay agent commissions to ISGs and independent sales agents based on the processing volume of the merchants enrolled. The commission obligations are based on varying percentages of the volume processed by us on behalf of the merchants. Percentages vary based on the program type and transaction volume of each merchant.
Fair Value Measurements
Our financial instruments consist primarily of cash, accounts receivables, accounts payables, and a note payable. The carrying values of these financial instruments are considered to be representative of their fair values due to the short-term nature of these instruments. The carrying amount of notes payable of approximately $7.3 million and $6.4 million at June 30, 2019 and December 31, 2018, respectively, approximates fair value because current borrowing rates do not materially differ from market rates for similar bank borrowings. The notes payable are classified as a Level 2 item within the fair value hierarchy.
We measure certain nonfinancial assets and liabilities at fair value on a nonrecurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-level fair value hierarchy to prioritize the inputs used to measure fair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted market prices in active markets for identical assets or liabilities as of the reporting date
Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3 — Unobservable inputs that are not corroborated by market data
These non-financial assets and liabilities include intangible assets and liabilities acquired in a business combination as well as impairment calculations, when necessary. The fair value of the assets acquired and liabilities assumed in connection with the PayOnline acquisition, were measured at fair value by us at the acquisition date. The fair values of our merchant portfolios are primarily based on Level 3 inputs and are generally estimated based upon independent appraisals that include discounted cash flow analyses based on our most recent cash flow projections, and, for years beyond the projection period, estimates based on assumed growth rates. Assumptions are also made regarding appropriate discount rates, perpetual growth rates, and capital expenditures, among others. In certain circumstances, the discounted cash flow analyses are corroborated by a market-based approach that utilizes comparable company public trading values, and, where available, values observed in private market transactions. The inputs used by management for the fair value measurements include significant unobservable inputs, and therefore, the fair value measurements employed are classified as Level 3. Goodwill impairment is primarily based on observable inputs using company specific information and is classified as Level 3.
Leases
Effective January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) which supersedes the lease accounting requirements in Accounting Standards Codification (ASC) 840, Leases (Topic 840). Please refer to Recent Accounting Pronouncements below for additional information on the adoption of Topic 842 and the impact upon adoption to the Company’s consolidated financial statements.
Under Topic 842, we applied a dual approach to all leases whereby we are a lessee and classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the Company. Lease classification is evaluated at the inception of the lease agreement. Regardless of classification, we record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Our lease, for the premises we occupy for the North American Transaction Solutions segment's U.S. headquarters, was classified as an operating lease as of January 1, 2019. Operating lease expense is recognized on a straight-line basis over the term of the lease.
We identify leases in our contracts if the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. We do not allocate lease consideration between lease and non-lease components and record a lease liability equal to the present value of the remaining fixed consideration under the lease. Any interest rate implicit in our leases are generally not readily determinable. Accordingly, we use our estimated incremental borrowing rate at the commencement date of the lease to determine the present value discount of the lease liability. We estimate the incremental borrowing rate for each lease based on an evaluation of our expected credit rating and the prevailing market rates for collateralized debt in a similar economic environment with similar payment terms and maturity dates commensurate with the term of the lease. The right-of-use asset for each lease is equal to the lease liability, adjusted for unamortized initial direct costs and lease incentives. We exclude options to extend or terminate leases from the calculation of the lease liability unless it is reasonably certain the option will be exercised.
Revenue Recognition and Deferred Revenue
We recognize revenue when all of the following criteria are met: (1) the parties to the contract have approved the contract and are committed to perform their respective obligations, (2) we can identify each party’s rights regarding the goods or services to be transferred, (3) we can identify the payment terms for the goods or services to be transferred, (4) the contract has commercial substance, and (5) it is probable that we will collect substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. We consider persuasive evidence of a sales arrangement to be the receipt of a billable transaction from aggregators, signed contract or the processing of a credit card transaction. Collectability is assessed based on a number of factors, including transaction history with the customer and the credit worthiness of the customer. If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue. Revenue consists primarily of fees generated through the electronic processing of payment transactions and related services and is recognized as revenue during the period the transactions are processed or when the related services are performed.
Our transactional processing fees are generated primarily from TOT Payments doing business as Unified Payments, which is our North American Transaction Solutions segment, PayOnline, which is our International Transaction Solutions segment, and Aptito, which is our point of sale solution for restaurants.
We work directly with payment card networks and banks so that our merchants do not need to manage the complex systems, rules, and requirements of the payments industry. We satisfy our performance obligations and therefore recognize the transactional processing service fees as revenue upon authorization of a transaction by the merchant’s customer’s bank.
The majority of our revenues is derived from volume-based payment processing fees ("discount fees”) and other related fixed transaction or service fees. Discount fees represent a percentage of the dollar amount of each credit or debit transaction processed. Discount fees are recognized at the time the merchants’ transactions are processed. Generally, where we have control over merchant pricing, merchant portability, credit risk and ultimate responsibility for the merchant relationship, revenues are reported at the time of sale on a gross basis equal to the full amount of the discount charged to the merchant. This amount includes interchange fees paid to card issuing banks and assessments paid to payment card networks pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants. Revenues generated from merchant portfolios where we do not have control over merchant pricing, liability for merchant losses or credit risk or rights of portability are reported net of interchange and other fees.
Revenues are also derived from a variety of fixed transaction or service fees, including authorization fees, convenience fees, statement fees, annual fees, and fees for other miscellaneous services, such as handling chargebacks. Revenues derived from service fees are recognized at the time the services are performed and there are no further performance obligations. Revenue from the sale of equipment is recognized upon transfer of ownership and delivery to the customer, after which there are no further performance obligations.
We primarily report revenues gross as a principal versus net as an agent. Although some of our processing agreements vary with respect to specific terms, the transactional processing service fees collected from merchants generally are recognized as revenue on a gross basis as we are the principal in the delivery of the managed payments solutions to the sellers. The gross fees we collect are intended to cover the interchange, assessments and other processing and non-processing fees which are included and are part of our gross margin.
We have primary responsibility for providing end-to-end payment processing services for our clients. Our clients contract us for all credit card processing services, including transaction authorization, settlement, dispute resolution, data/transmission security, risk management, reporting, technical support and other value-added services. We have concluded that we are the principal because we control the services before delivery to the merchant, and are primarily responsible for the delivery of the services, have discretion in setting prices charged to merchants, and responsible for losses. We also have pricing latitude and can provide services using several different network options.
Net Loss per Share
Basic net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares issuable upon exercise of common stock options or warrants. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would have an anti-dilutive effect.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize net deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We classify the liability for unrecognized tax benefits as current to the extent we anticipate payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized and recorded as necessary in the provision for income taxes. Our evaluation of uncertain tax positions was performed for the tax years ended December 31, 2012 and forward, the tax years which remain subject to examination at June 30, 2019.
Interchange, Network Fees and Other Cost of Services
Interchange and network fees consist primarily of fees that are directly related to discount fee revenue. These include interchange fees paid to issuers and assessment fees payable to card associations, which are a percentage of the processing volume we generate from Visa and Mastercard, AMEX, and Discover, as well as fees charged by card-issuing banks. Other costs of services include costs directly attributable to processing and bank sponsorship costs, which may not be based on a percentage of volume. These costs also include related costs such as residual payments to sales groups, which are based on a percentage of the net revenues generated from merchant referrals. In certain merchant processing bank relationships we are liable for chargebacks against a merchant equal to the volume of the transaction. Losses resulting from chargebacks against a merchant are included in other cost of services or as a bad debt expense, determined on the timing and nature of the specific transaction, on the accompanying consolidated statement of operations. We evaluate the risk for such transactions and our potential loss from chargebacks based primarily on historical experience and other relevant factors.
Foreign Currency Transactions
We are subject to exchange rate risk in our foreign operations in Russia, the functional currency of which is the Russian ruble, where we generate service fee revenues, interest income or expense, incur product development, engineering, website development, and selling, general and administrative costs and expenses. Our Russian subsidiaries pay a majority of their operating expenses in their local currencies, exposing us to exchange rate risk.
Use of Estimates
The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the reporting period. Such estimates include, but are not limited to, the value of purchase consideration paid and identifiable assets acquired and assumed in acquisitions, amortization of intangible assets, goodwill and asset impairment review, valuation reserves for accounts receivable, valuation of acquired or current merchant portfolios, incurred but not reported claims, revenue recognition for multiple element arrangements, loss reserves, assumptions used in the calculation of equity-based compensation and in the calculation of income taxes, and certain tax assets and liabilities, as well as, the related valuation allowances. Actual results could differ from those estimates.
Below is a summary of the Company’s critical accounting estimates for which the nature of management’s assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and for which the impact of the estimates and assumptions on financial condition or operating performance is material.
Goodwill
The Company tests goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment.
Significant estimates and assumptions are used in our goodwill impairment review and include the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Our assessment of qualitative factors involves significant judgments about expected future business performance, general market conditions, and regulatory changes. In a quantitative assessment, the fair value of each reporting unit is determined based largely on the present value of projected future cash flows, growth assumptions regarding discount rates, estimated growth rates and our future long-term business plans. Changes in any of these estimates or assumptions could materially affect the determination of fair value and the associated goodwill impairment charge for each reporting unit.
Recent Accounting Pronouncements
Adoption of ASU 2016-02, Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, “Leases (Topic 842)” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Effective January 1, 2019, we adopted Topic 842 using the modified retrospective transition method. Under this method, we applied Topic 842 to the lease for the premises we occupy for our North American Transaction Solutions segment's U.S. headquarters. There was no cumulative impact adjustment necessary with the adoption to our accumulated deficit on January 1, 2019. Our consolidated financial statements for periods ending after January 1, 2019 are presented in accordance with the requirements of Topic 842, while comparative prior period amounts have not been adjusted and continue to be reported in accordance with Topic 840. Please refer to "Leases" above for a description of our lease accounting policies upon the adoption on Topic 842.
We originally recorded an operating lease right-of-use asset and operating lease liability of approximately $471,000 for this lease which is in effect and had commenced prior to January 1, 2019, and has an original lease term of more than 12 months.
Recent accounting pronouncements not yet adopted
In January 2017, the FASB issued ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. This update simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update changed how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are within the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The guidance will become effective for us on January 1, 2020. Early adoption is permitted for periods beginning on or after January 1, 2019. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
NOTE 5. INTANGIBLE ASSETS
The Company had approximately $6.2 million and $6.4 million in intangible assets, net of amortization, at June 30, 2019 and December 31, 2018, respectively. Shown below are the details of the components that represent these balances.
Intangible assets consisted of the following as of June 30, 2019
Cost |
Accumulated Amortization |
Carrying Value |
Amortization Life and Method |
||||||||||
IP Software |
$ | 2,343,888 | $ | (2,207,648 | ) | $ | 136,240 |
3 years - straight-line |
|||||
Portfolios and Client Lists |
7,668,665 | (5,039,681 | ) | 2,628,984 |
4 years - straight-line |
||||||||
Client Acquisition Costs |
7,488,403 | (4,015,838 | ) | 3,472,565 |
4 years - straight-line |
||||||||
PCI Certification |
449,000 | (449,000 | ) | - |
3 years - straight-line |
||||||||
Trademarks |
703,586 | (703,586 | ) | - |
3 years - straight-line |
||||||||
Domain Names |
437,810 | (437,810 | ) | - |
3 years - straight-line |
||||||||
Total |
$ | 19,091,351 | $ | (12,853,562 | ) | $ | 6,237,789 |
Intangible assets consisted of the following as of December 31, 2018
Cost |
Accumulated Amortization |
Carrying Value |
Amortization Life and Method |
||||||||||
IP Software |
$ | 2,309,291 | $ | (2,139,891 | ) | $ | 169,400 |
3 years - straight-line |
|||||
Portfolios and Client Lists |
7,576,665 | (4,333,866 | ) | 3,242,799 |
4 years - straight-line |
||||||||
Client Acquisition Costs |
6,370,124 | (3,340,581 | ) | 3,029,544 |
4 years - straight-line |
||||||||
PCI Certification |
449,000 | (449,000 | ) | - |
3 years - straight-line |
||||||||
Trademarks |
703,586 | (703,586 | ) | - |
3 years - straight-line |
||||||||
Domain Names |
437,810 | (437,810 | ) | - |
3 years - straight-line |
||||||||
Total |
$ | 17,846,476 | $ | (11,404,732 | ) | $ | 6,441,743 |
Amortization expense for the intangible assets was approximately $649,000 and $654,000 for the three months June 30, 2019 and 2018, respectively. Amortization expense for the six months ended June 30, 2019 and 2018 was approximately $1.4 million and $1.3 million, respectively.
The following table presents the estimated aggregate future amortization expense of intangible assets:
2019 (remainder of year) |
$ | 754,893 | ||
2020 |
1,509,785 | |||
2021 |
1,509,785 | |||
2022 |
1,487,078 | |||
2023 |
976,248 | |||
Balance June 30, 2019 |
$ | 6,237,789 |
NOTE 6. ACCRUED EXPENSES
At June 30, 2019 and December 31, 2018, accrued expenses amounted to approximately $2.9 and $2.5 million, respectively. Accrued expenses represent expenses that are owed at the end of the period or are estimates of services provided that have not been billed by the provider or vendor. The following table reflect the balances outstanding as of June 30, 2019 and December 31, 2018.
June 30, 2019 |
December 31, 2018 |
|||||||
Accrued professional fees |
$ | 82,346 | $ | 174,915 | ||||
PayOnline accrual |
- | 1,126,273 | ||||||
Accrued interest |
117,482 | 108,202 | ||||||
Accrued bonus |
1,481,304 | 1,157,556 | ||||||
Accrued foreign taxes |
(43,920 | ) | (45,952 | ) | ||||
Other accrued expenses |
62,791 | 14,953 | ||||||
Total accrued expenses |
$ | 1,700,003 | $ | 2,535,947 |
On October 25, 2016, we entered into an amendment to the PayOnline acquisition agreement with the sellers, in which we agreed to assume $1,433,475 of certain refundable merchant deposit reserves, and accordingly, recorded the liability. The accrual for PayOnline at June 30, 2019 and December 31, 2018, respectively, consists of an obligation of approximately $1.1 million for refundable merchant reserves assumed pursuant to this amendment to the PayOnline acquisition agreement. At June 30, 2019, management determined that any potential future claims from these certain merchants for these reserves assumed with the Agreement are remote, and as such, has reversed the amounts which remained in accrued expenses and recognized other income of approximately $1.1 million on the accompanying statement of operations during the three months ended June 30, 2019.
Included in accrued bonus are non-discretionary compensation due to our Chairman and CEO, which was approximately $1.2 million and $566,000 at June 30, 2019 and December 31, 2018, respectively, and approximately $315,000 and $291,000 at June 30, 2019 and December 31, 2018, respectively, for discretionary performance bonuses due to certain employees.
Included in other accrued expenses at June 30, 2019 is an accrual approximating $100,000 in connection with a certain merchant loss that was under-reserved, which is offset by certain miscellaneous other expenses.
NOTE 7. NOTES PAYABLE
Notes payable consist of the following:
June 30, 2019 |
December 31, 2018 |
|||||||
RBL Capital Group, LLC |
$ | 7,419,684 | $ | 6,512,268 | ||||
Priority Payments Systems LLC |
- | - | ||||||
Subtotal |
7,419,684 | 6,512,268 | ||||||
Less: deferred loan costs |
(120,342 | ) | (132,774 | ) | ||||
Subtotal |
7,299,342 | 6,379,494 | ||||||
Less: current portion |
(224,364 | ) | (433,448 | ) | ||||
Long term debt |
$ | 7,074,978 | $ | 5,946,046 |
RBL Capital Group, LLC
On 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 (collectively, the “co-borrowers”), entered into a Loan and Security Agreement (“Credit Facility”) with RBL Capital Group, LLC (“RBL”), as lender (the “RBL Loan Agreement”). On May 2, 2016, we renewed our Credit Facility with RBL increasing the facility from $10 million to $15 million and extending the term through February 2019. This Credit Facility was further modified on March 20, 2018.
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.
Borrowings from the Credit Facility in the amounts of $3,315,000, $400,000 and $250,000 were previously converted into RBL term notes. Effective March 20, 2018, we entered into a single note with a principal balance of $4,544,087 with RBL to effectively refinance all previously issued outstanding RBL notes, including certain additional term notes entered into with RBL through August 2017. The refinanced and combined note provides for four (4) interest-only payments at 14.19%, with monthly interest and principal payments of $85,634 from August 2018 through July 2021, with a balloon payment of $3,170,967 in July 2021. The back-end fees from prior notes in the amount of $133,600 have been rolled into this note and also are due in July 2021.
On December 28, 2018, in connection with an addendum to that certain term loan made by TOT Group, Inc.in favor of RBL, the Credit Facility referred to above, we received funding of $2,131,500, bearing interest at an annual rate of 14%. On December 20, 2019 we were required to make one (1) payment of interest only for $18,804, followed by eleven (11) payments of interest only for $24,867. Effective January 20, 2020, we are required to make thirty-six (36) monthly payments, which includes principal and interest for $72,850, until December 20, 2022 the date this term loan matures.
On May 24, 2019, in connection with an addendum to that certain term loan made by TOT Group, Inc.in favor of RBL, the Credit Facility referred to above, we received funding of $1,116,500, bearing interest at an annual rate of 14%. On May 24th, 2019 we were required to make one (1) payment of interest only for $11,562, followed by eleven (11) payments of interest only for $13,025. Effective January 20, 2020, we are required to make thirty-six (36) monthly payments, which includes principal and interest for $38,159, until May 20, 2023 the date this term loan matures.
At June 30, 2019 we had approximately $7.6 million available under this Credit Facility. This Credit Facility is for general working capital purposes or to support the growth of the co-borrowers, subject to the terms and conditions, as defined.
Priority Payment Systems LLC
On May 18, 2017, we entered into a loan agreement and security agreement with Priority Payment Systems LLC (“PPS”) and issued a promissory note dated May 18, 2017. Pursuant to the loan agreement and the note, we then borrowed $2,000,000. The principal amount of the loan carries a floating interest rate of prime rate plus 6% per annum. The interest rate was 10.25% at December 31, 2018. The balance of any outstanding principal was paid in full during 2018.
Pursuant to the security agreement, any borrowings are secured by collateral consisting of accounts, cash or cash equivalents, residuals related to the merchants originated by us and processed by PPS. 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.
On June 27, 2017, we entered into an amendment to the loan agreement with PPS 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. |
The draw-down period was extended to coincide with the loan maturity date of May 20, 2021.
Scheduled notes payable principal repayment at June 30, 2019 is as follows:
2019 (remainder of year) |
$ | 224,364 | ||
2020 |
1,295,537 | |||
2021 |
4,503,078 | |||
2022 |
1,212,410 | |||
2023 |
184,295 | |||
Balance June 30, 2019 |
$ | 7,419,684 |
NOTE 8. CONCENTRATIONS
Our credit card processing revenues are from merchant customer transactions, which were processed primarily by two third-party processors (greater than 5%) and our own dedicated bank identification number ("BIN")/Interbank Card Association ("ICA") number during the three and six months ended June 30, 2019 and 2018.
During the six months ended June 30, 2019, we processed 49% of our total revenue with Priority Payment Systems, 35% from our own dedicated BIN/ICA with Esquire Bank, and 7% with First Data Corp. During the six months ended June 30, 2018, we processed 65% of our total revenue with Priority Payment Systems, 14% from our own dedicated BIN/ICA with Esquire Bank, and 5% from First Data Corp.
During the three months ended June 30, 2019, we processed 46% of our total revenue with Priority Payment Systems, 38% from our own dedicated BIN/ICA with Esquire Bank, and 8% with First Data Corp. During the three months ended June 30, 2018, we processed 60% of our total revenue with Priority Payment Systems, 17% from our own dedicated BIN/ICA with Esquire Bank, and 5% from First Data Corp.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Leases
North American Transaction Solutions
During May 2013, we entered into a lease agreement, for approximately 4,101 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. The lease was extended for a period of five years commencing August 1, 2017 and expiring July 31, 2022 with equal monthly base rent installments of $14,354 ($172,248 per year) plus sales tax.
Net Element Software, our subsidiary, currently leases 1,654 square feet of office space in Yekaterinburg, Russia, where we develop value added services, mobile applications, smart terminals applications, sales central ERP system development and marketing activities, at an annual rent of approximately $24,300.The lease term expired on June 1, 2019 and was renewed with indefinite terms.
International Transaction Solutions
PayOnline leased approximately 4,675 square feet of office space in Moscow, Russia at an annual rent of $84,457 which expired on September 30, 2018.This space was reduced to 3,385 square feet and renewed at an annual rent of approximately $56,000 expiring on August 31, 2019.
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 move to new facilities on acceptable terms.
The following table presents a reconciliation of the undiscounted future minimum lease payments, under the lease for the premises we occupy for our North American Transaction Solutions segment's U.S. headquarters, to the amounts reported as operating lease liabilities on the consolidated balance sheet as of June 30, 2019:
Operating Lease |
||||
Undiscounted future minimum lease payments: |
||||
2019 (remainder of year) |
$ | 86,124 | ||
2020 |
172,248 | |||
2021 |
172,248 | |||
2022 |
100,478 | |||
Total |
$ | 531,098 | ||
Amount representing imputed interest |
(89,004 | ) | ||
Total operating lease liability |
442,094 | |||
Current portion of operating lease liability |
(61,108 | ) | ||
Operating Lease Liability, non-current |
$ | 380,986 |
As of June 30, 2019 |
||||
Remaining term on Lease |
3.08 | |||
Incremental borrowing rate |
12 | % |
As of June 30, 2019, the future minimum lease payments under other operating leases, not subject to Topic 842, are approximately $113,000 for the remainder of the year.
Litigation, Claims, and Assessments
With respect to all legal, regulatory and governmental proceedings, and in accordance with ASC 450-20, Contingencies—Loss Contingencies, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, we record an accrual for the estimated amount of loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and we are able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, we disclose the estimate of the amount of possible loss or range of loss. However, management in some instances may be unable to estimate an amount of possible loss or range of loss based on the significant uncertainties involved in, or the preliminary nature of, the matter, and in these instances we will disclose the nature of the contingency and describe why we are unable to determine an estimate of possible loss or range of loss.
In addition, we are involved in ordinary course legal proceedings, which include all claims, lawsuits, investigations and proceedings, including unasserted claims, which are probable of being asserted, arising in the ordinary course of business and otherwise not described below. We have considered all such ordinary course legal proceedings in formulating our disclosures and assessments, which are not expected to have a material adverse effect on our consolidated financial statements.
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 125,000 shares of our stock. Aptito, LLC acquired Aptito.com, Inc. in exchange for, among other things, 125,000 shares (prior to adjustment for two one-for-ten reverse stock splits) of our stock. There has been disagreements among the Aptito.com, Inc. shareholders as to proper distribution of the 125,000 shares (prior to adjustment for two one-for-ten reverse stock splits). 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 (prior to adjustment for two one-for-ten reverse stock splits) should be distributed. Aptito.com, Inc. opposed the motion to interplead and filed counterclaims relative to Aptito, LLC for non-delivery of the 125,000 shares (prior to adjustment for two one-for-ten reverse stock splits).
On July 18, 2017, the Court granted Aptito LLC’s motion to interplead and also indicated that Aptito, LLC could not be held liable for any alleged damages relative to the purported non-delivery of the 125,000 shares after the interpleader action was filed on August 6, 2014.
In March 2018, a new Judge in the case ruled that Aptito.com, Inc. was entitled to receive 125,000 newly issued shares of our common stock, but indicated that he was not ruling that we were required to issue such shares. We plan to appeal this ruling, and our legal counsel is addressing the counterclaims filed by Aptito.com, Inc. in this matter.
In July 2018, our counsel was disqualified due to a conflict of interest. We engaged a new law firm to represent our ongoing interests in this case. Since that time, there have been multiple Motions and claims brought by Aptito.com, Inc., including the request for rescission of the asset purchase agreement that gave rise to the share issuance obligation. All of these Motions and claims are being vigorously defended.
A court ordered mediation conference was held on April 24, 2019 but the parties were unable to reach a settlement. On May 1, 2019 the Court denied Aptito.com, Inc.’s Motion for Summary Judgement and further hearings on a variety of Motions are scheduled in this matter.
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.
In 2018, we filed a motion to enforce the injunction and contempt orders against Zell. The court upheld the injunction and we continue to vigorously protect its interests. We are pursuing an action for damages sustained as a result of the defamation.
OVHA Patent Claim
On January 15, 2019, OVHA, Inc. filed a lawsuit in the District of Delaware against Unified Payments, LLC, an entity that is no longer operating. The lawsuit which is most likely intended against our subsidiary TOT Payments, LLC dba Unified Payments (“Unified”) alleges that Unified’s Mobile POS infringed upon a patent held by OVHA. The alleged infringing part of the POS equipment is produced by a 3rd party vendor. We have engaged Intellectual Property counsel to protect our interests in this matter. Our counsel informed OHVA’s counsel that Unified is being indemnified by the supplier of the accused hardware, CardFlight, which OHVA has sued separately. CardFlight’s litigation counsel has informed us that their settlement talks are ongoing and include the objective of having their proposed settlement cover Unified.
In May 2019, CardFlight reached an agreement with OVHA that covered all claims by OVHA against Unified Payments, LLC. OVHA filed a dismissal with Prejudice of their lawsuit and this matter has been fully resolved.
NOTE 10. RELATED PARTY TRANSACTIONS
During the three months ended June 30, 2019 and 2018, agent commissions resulting from merchant processing of approximately $18,000 were paid to Prime Portfolios, LLC, an entity owned by Oleg Firer, our Chairman and CEO, and Steven Wolberg, our Chief Legal Officer. In addition, key members of management owned companies received similar commissions and/or reimbursement for equipment purchased on the Company’s behalf, which amounted to approximately $195,000 and $128,000 for the three months ended June 30, 2019 and 2018, respectively.
During the six months ended June 30, 2019 and 2018, agent commissions resulting from merchant processing of approximately $36,000 were paid to Prime Portfolios, LLC, an entity owned by Oleg Firer, our Chairman and CEO, and Steven Wolberg, our Chief Legal Officer. In addition, key members of management owned companies received similar commissions and/or reimbursement for equipment purchased on the Company’s behalf, which amounted to approximately $365,000 and $235,000 for the six months ended June 30, 2019 and 2018, respectively.
At June 30, 2019 and December 31, 2018, we had accrued expenses of approximately $201,000 and $388,000, respectively, which consisted primarily of various travel, professional fees, and other expenses paid and charged for by our CEO on his personal credit cards. This is reflected as due to related party on the accompanying consolidated balance sheets.
NOTE 11. STOCKHOLDERS’ EQUITY
On October 5, 2017, we effected a one-for-ten reverse stock split of our common stock. Our condensed consolidated financial statements and disclosures reflect 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. On October 2, 2017, our shareholders approved a 300,000,000 decrease in our authorized common stock to 100,000,000.
The following table represents the change in our stockholders' equity for the three and six months ended June 30, 2019 and 2018:
Three and Six Months Ended June 30, 2018 |
||||||||||||||||||||||||||||||||
Common Stock |
Paid in |
Stock |
Comprehensive |
Non-controlling |
Accumulated |
Equity (Deficiency) |
||||||||||||||||||||||||||
Shares |
Amount |
Capital |
Subscription |
Income |
interest |
Deficit |
in Equity |
|||||||||||||||||||||||||
Balance December 31, 2017 |
3,853,100 | $ | 385.31 | $ | 183,119,222 | $ | (50,585 | ) | $ | (2,530,238 | ) | $ | (39,186 | ) | $ | (167,356,070 | ) | $ | 13,143,528 | |||||||||||||
Share based compensation |
2,733 | 0.74 | 82,010 | - | - | - | - | 82,011 | ||||||||||||||||||||||||
Shares issued for consulting services |
- | - | - | 50,585 | - | - | - | 50,585 | ||||||||||||||||||||||||
Net income (loss) |
- | - | - | - | - | 27,553 | (1,610,847 | ) | (1,583,294 | ) | ||||||||||||||||||||||
Comprehensive loss - foreign currency translation |
- | - | - | - | 39,315 | - | - | 39,315 | ||||||||||||||||||||||||
Balance March 31, 2018 |
3,855,833 | $ | 386.05 | $ | 183,201,232 | $ | - | $ | (2,490,923 | ) | $ | (11,633 | ) | $ | (168,966,917 | ) | $ | 11,732,145 | ||||||||||||||
Share based compensation |
2,980 | 0.30 | 22,500 | - | - | - | - | 22,500 | ||||||||||||||||||||||||
Net loss |
- | - | - | - | - | (69,481 | ) | (903,731 | ) | (973,212 | ) | |||||||||||||||||||||
Comprehensive loss - foreign currency translation |
- | - | - | - | 29,662 | - | - | 29,662 | ||||||||||||||||||||||||
Balance June 30, 2018 |
3,858,813 | $ | 386.35 | $ | 183,223,731 | $ | - | $ | (2,461,261 | ) | $ | (81,114 | ) | $ | (169,870,648 | ) | $ | 10,811,095 |
Three and Six Months Ended June 30, 2019 |
||||||||||||||||||||||||||||||||
Common Stock |
Paid in |
Stock |
Comprehensive |
Non-controlling |
Accumulated |
Equity (Deficiency) |
||||||||||||||||||||||||||
Shares |
Amount |
Capital |
Subscription |
Income |
interest |
Deficit |
in Equity |
|||||||||||||||||||||||||
Balance December 31, 2018 |
3,863,019 | $ | 386.30 | $ | 183,246,232 | $ | - | $ | (2,232,163 | ) | $ | (125,737 | ) | $ | (172,292,252 | ) | $ | 8,596,466 | ||||||||||||||
Share based compensation |
2,448 | 0.24 | 15,006 | - | - | - | - | 15,006 | ||||||||||||||||||||||||
Net loss |
- | - | - | - | - | (13,966 | ) | (1,120,847 | ) | (1,134,813 | ) | |||||||||||||||||||||
Comprehensive loss - foreign currency translation |
- | - | - | - | (14,561 | ) | - | - | (14,561 | ) | ||||||||||||||||||||||
Balance March 31, 2019 |
3,865,467 | $ | 386.55 | $ | 183,261,238 | $ | - | $ | (2,246,724 | ) | $ | (139,703 | ) | $ | (173,413,099 | ) | $ | 7,462,098 | ||||||||||||||
Share based compensation |
319,047 | 23.90 | 2,005,816 | - | - | - | - | 2,005,840 | ||||||||||||||||||||||||
Net loss |
- | - | - | - | - | (40,225 | ) | (1,537,447 | ) | (1,577,672 | ) | |||||||||||||||||||||
Comprehensive loss - foreign currency translation |
- | - | - | - | (5,537 | ) | - | - | (5,537 | ) | ||||||||||||||||||||||
Balance June 30, 2019 |
4,184,514 | $ | 410.45 | $ | 185,267,054 | $ | - | $ | (2,252,261 | ) | $ | (179,928 | ) | $ | (174,950,546 | ) | $ | 7,884,729 |
Equity Incentive Plan Activity
On December 5, 2013, our shareholders approved the Net Element International, Inc. 2013 Equity Incentive Plan (as amended to date, 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.
On November 27, 2018, our shareholders approved an amendment to the 2013 Plan to increase the number of shares of the Company’s common stock available for issuance by 178,900 shares resulting in the aggregate of 773,000 shares authorized for issuance under the 2013 Plan.
The maximum aggregate number of shares of common stock available for award under the 2013 Plan at June 30, 2019 and December 31, 2018 was 82,003 and 323,498, respectively. The 2013 Plan is administered by the compensation committee.
2013 Equity Incentive Plan - Shares and Stock Options
During the three months ended June 30, 2019 and 2018, we issued common stock pursuant to the 2013 Plan to the members of our Board of Directors and recorded a compensation charge of $15,000 and $22,500, respectively.
During the three months ended June 30, 2019 our Board of Directors approved and authorized the issuance of 22,000 shares of our common stock pursuant to the 2013 Plan to members of our Board of Directors and we recorded compensation expense of approximately $138,000. Also during the three months June 30, 2019, our Board of Directors approved and authorized the issuance of 214,507 shares of our common stock pursuant to the 2013 Plan which were allocated to certain named executives, certain employees, and certain consultants of the Company and we recorded compensation expense of approximately $1,349,000.
NOTE 12. WARRANTS AND OPTIONS
Options
At June 30, 2019 and December 31, 2018, we had fully vested options outstanding to purchase 314,218 and 234,218, respectively, of shares of common stock at exercise prices ranging from $3.27 to $134.00 per share.
Due to the high level of volatility in the stock price of our common stock, our management determined the grant date fair value of the options using the then quoted stock price at the grant date.
Warrants
At June 30, 2019 and December 31, 2018, we had warrants outstanding to purchase 728,583 shares of common stock. At June 30, 2019 the warrants had a weighted average exercise price of $6.18 per share purchased and a weighted average remaining contractual term of 3.50 years. At December 31, 2018, the warrants had a weighted average exercise price of $6.18 per share purchased and a weighted average remaining contractual term of 4.00 years.
Non-Incentive Plan Options
At June 30, 2019 and December 31, 2018, we had 323,498 non-incentive options outstanding with a weighted-average exercise price of $21.84. The non-incentive options have a remaining contract term of 1.42 years at June 30, 2019. These options were out of the money at June 30, 2019 and December 31, 2018 and had no intrinsic value.
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 condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q (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, 2018 (the "Annual Report") and in Part II, Item 1A of this Report.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
As used in this Report, unless the context otherwise indicates, the references to “we”, “us,” “our” or the “Company” refers to Net Element, Inc. and its consolidated subsidiaries, unless the context suggests otherwise.
This Report and other written or oral statements made from time to time by us may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can sometimes identify forward looking-statements by our use of the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “forecast,” “guidance” and similar expressions. Some of the statements we use in this report contain forward-looking statements concerning our business operations, economic performance and financial condition, including in particular: our business strategy and means to implement the strategy; measures of future results of operations, such as revenue, expenses, operating margins, and earnings per share; other operating metrics such as shares outstanding and capital expenditures; our success and timing in developing and introducing new products or services and expanding our business, including with respect to joint ventures; and the successful integration of future acquisitions.
Although we believe that the plans and expectations reflected in or suggested by our forward-looking statements are reasonable, those statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond our control, cannot be foreseen and reflect future business decisions that are subject to change. Accordingly, we cannot guarantee you that our plans and expectations will be achieved. Our actual results, including actual revenues, revenue growth rates and margins, other results of operations and shareholder values, could differ materially from those anticipated in our forward-looking statements as a result of known and unknown factors, many of which are beyond our ability to predict or control. These factors include, but are not limited to, those set forth in Part II, Item 1A - Risk Factors of this Report and in our Annual Report, those set forth elsewhere in this report and those set forth in our press releases, reports and other filings made with the SEC. These cautionary statements qualify all of our forward-looking statements, and you are cautioned not to place undue reliance on these forward-looking statements.
Our forward-looking statements speak only as of the date they are made and should not be relied upon as representing our plans and expectations as of any subsequent date. While we may elect to update or revise forward-looking statements at some time in the future, we specifically disclaim any obligation to publicly release the results of any revisions to our forward-looking statements.
Company Overview
Net Element is a global technology and value-added solutions group that supports electronic payments acceptance in a multi-channel environment including point-of- sale (POS), ecommerce and mobile devices. The Company operates two business segments as a provider of North American Transaction Solutions and International Transaction Solutions.
We offer a broad range of payment acceptance and transaction processing services that enable merchants of all sizes to accept and process over 100 different payment options in more than 120 currencies, including credit, debit, prepaid and alternative payments. We also provide merchants with value-added services and technologies including integrated payment technologies, POS solutions, fraud management, information solutions and analytical tools.
We are differentiated by our technology-centered value-added service offerings built around our payments ecosystem and our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe these capabilities provide several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include:
● |
Our ability to provide competitive products through use of proprietary technologies; |
● |
Our ability to provide in one package a range of services that traditionally had to be sourced from different vendors; |
● |
Our ability to provide a single agnostic on-boarding and merchant management platform to our indirect non-bank sales force ("Sales Partners"); |
● |
Our ability to provide management and optimization tools to our Sales Partners amongst multiple networks and platforms; |
● |
Our ability to serve customers with disparate operations in several geographies with technology solutions that enable them to manage their business as one enterprise; and |
● |
Our ability to capture and analyze data across the transaction processing value chain and use that data to provide value-added services that are differentiated from those offered by pure-play vendors that serve only one portion of the transaction processing value chain (such as only merchant acquiring or POS). |
We have operations and offices located within the United States (“U.S.”) (domestic) and outside of the U.S. (international) where sales, customer service and/or administrative personnel are based. Through U.S. based subsidiaries, we generate revenues from transactional services, valued-added payment services and technologies that we provide to SMBs. Through wholly owned subsidiaries, we focus on transactional services, mobile payment transactions, online payment transactions, value-added payment services and technologies in selected international markets.
Our business is characterized by transaction related fees, multi-year contracts, and a diverse client base, which allows us to grow alongside our clients. Our multi-year contracts allow us to achieve a high level of recurring revenues with the same clients. While the contracts typically do not specify fixed revenues to be realized thereunder, they do provide a framework for revenues to be generated based on volume of services provided during such contracts’ term.
Products and Services Information
Our broad suite of services spans the entire transaction processing value chain of commerce enabling services and technologies and includes a range of front-end customer-facing solutions, as well as back-end support services and account reconciliation. We deliver our value-added solutions from a suite of proprietary technology products, software, cloud-based applications, processing services, fraud management offerings, and customer support programs that we configure to meet our client’s individual needs.
Many of our payment solutions are technology-enabled in that they incorporate or are incorporated into innovative, technology-driven solutions, including enterprise software solutions, designed to enable merchants to better manage their businesses.
Integrated and Vertical Markets. Our integrated and vertical market solutions provide advanced payments technology that is deeply integrated into business enterprise software solutions either owned by us or by our partners. We grow our business when new merchants implement our enterprise software solutions and when new or existing merchants enable payments services through enterprise software solutions sold by us or by our partners. Our primary technology-enabled solutions include integrated and vertical markets, ecommerce and multi-channel solutions, each as described below:
● |
Unified Payments – doing business as Unified Payments, we provide businesses of all sizes and types throughout the United States with a wide range of fully- integrated payment acceptance solutions, value-added POS and business process management services; |
● |
PayOnline – through our subsidiary, PayOnline Systems (“PayOnline”), we provide a wide range of value-added online solutions in the selected international markets utilizing our fully-integrated, agnostic electronic commerce platform that simplifies complex enterprise online transaction processing challenges from payment acceptance and processing through risk prevention and payment security via point-to-point encryption and tokenization solutions; |
● |
Pay-Travel – integrated payment processing solutions to the travel industry, which includes integrations with various Global Distribution Systems (“GDS”) such as Amadeus®, Galileo®, Sabre®, additional geo filters and passenger name record (PNR) through Pay-Travel service offered by PayOnline; |
● |
Aptito POS Platform – an integrated POS platform developed on Apple’s® iOS and Android® mobile operating systems for the hospitality, retail, service and on the go industries. Our goal with Aptito is to create an easy to use POS and business management solution, which incorporates everything a small business needs to help streamline every-day management, operations and payment acceptance; |
● |
Restoactive – utilizing Aptito POS Platform architecture, we have developed and launched Restoactive, which seamlessly plugs into a current restaurant environment through integrations with some of the biggest POS and restaurant management platforms available on the market today; |
● |
Unified m-POS – mobile POS application makes accepting payments on the go easy and secure. Mobile application is EMV-compliant, accepts traditional and contactless transactions such as Apple Pay®. Unified m-POS application is available for download in Apple’s App Store and Google Play; |
● |
Zero Pay – zero-fee payment acceptance program for SMB merchants in the United States. Zero Pay program saves merchants costs involved in accepting credit and debit cards using mobile POS; |
● |
Netevia – our internally developed future-ready multi-channel payments and merchant management platform. Connecting and simplifying payments across sales channels through a single integration point, Netevia delivers end-to-end payment processing through easy-to-use APIs. The Netevia platform is the core of the company’s technology stack. |
|
● | Blade - our internally developed, proprietary, fully automated, artificial intelligence powered underwriting solution with predictive scoring. Built for underwriting and on-boarding of new merchants, reducing potential risks and decision-making time while improving the customer experience. | |
● | Cryptocurrency Acceptance - We are currently in the beta stage with some merchants in Europe currently utilizing our proprietary application on point terminals to effectuate cryptocurrency acceptance at the point-of-sale. | |
● | Netevia Mastercard for SMB - The Netevia Mastercard®, powered by Aliaswire’s patented technology, is part of a unique platform that combines efficient and low-cost payment processing with the ability to save money on credit and debit card payment acceptance fees. |
Our Mission and Vision
Our mission is to power global commerce and allow our clients to conduct business globally through a centralized solution. We believe that understanding consumer behavior and the needs of our merchants is the most effective and, ultimately, the most profitable means to accomplish our mission and create long-term value for all stakeholders.
We drive client growth through our in-depth knowledge of global transactional services and related value-added service offerings which separate us from the competition.
Our vision is to set the standard for multi-channel payments acceptance and value-added service offerings with focus on the creation of a unified global transaction acceptance ecosystem. We believe in disruptive emerging technologies and, as such, we have developed Netevia, our future-ready multi-channel payments platform to support development of value-added solutions designed for everyday commerce. Moving forward, we believe exciting projects and disruptive technologies like blockchain, IoT, biometric payments and artificial intelligence will provide us the opportunity to continue developing innovative payments solutions, which will provide value to our clients.
In order to achieve this vision, we seek to further develop single on-boarding, global transaction acceptance ecosystem. Manifesting this vision requires scaling our direct and indirect connectivity to multiple payment and mobile networks internationally. By implementing this vision, we believe that we will be able to provide centralized, global multi-channel transactional platform to our clients internationally.
Our Strategy
Our strategy is to capitalize on consumer appetite for digital payment methods, the perceived movement towards a cashless society. To continue to grow our business, our strategy is to focus on providing merchants with the ability to process a variety of electronic transactions across multiple channels. We seek to leverage the adoption of and transition to card, electronic and digital-based payments by expanding our market share through our distribution channels and services innovations. We also seek growth through strategic acquisitions to improve our offerings, scale and geography. We intend to continue to invest in and leverage our technology infrastructure and our people to increase our penetration in existing markets.
Key elements of our business strategy include:
● |
Continued investment in our core technology and new technology offerings; |
● |
Allocation of resources and expertise to grow in commerce and payments segments; |
● |
Grow and control distribution by adding new merchants and partners; |
● |
Leverage technology and operational advantages throughout our global footprint; |
● |
Expansion of our cardholder and subscriber customer base; |
● |
Continue to develop seamless multinational solutions for our clients; |
● |
Increase monetization while creating value for our clients; |
● |
Focus on continued improvement and operation excellence; and |
● |
Pursue potential domestic and international acquisitions of, investments in, and alliances with companies that have high growth potential, significant market presence or key technological capabilities. |
As part of our strategy, we entered into a memorandum of understanding during the third quarter of 2018 with Bank Sputnik (“Sputnik”), located in Russia, to launch a technology platform expected to provide a suite of frictionless payment acceptance services for financial institutions and value-added providers. This new payment processing center would integrate Sputnik’s expertise in enabling secure globally inter-operable financial transactions with our expertise in developing frictionless value-added payment acceptance services. In addition, this payment processing center was expected to accelerate the delivery of payment acceptance services in this market, combining banking services and bill payments in a multi-channel environment. This joint venture with Sputnik was subject to approval of the shareholders of Sputnik and the regulators in Russia. Sputnik’s shareholders approved the transaction; however Sputnik, did not obtain regulatory approval, as they declined below the required paid in capital reserves. PayOnline continues to be committed to the payment processing center business plan. Accordingly, PayOnline entered into an agreement with each of MOBI.Money CJSC (“MOBI.Money”), and VTB Bank, both financial institutions, as sponsoring and transaction clearing banks. This new arrangement received regulatory approval in Russia. During the first quarter of 2019, PayOnline has entered into a financial services agreement for transaction clearing services with MOBI.Money and amended its agreement with VTB Bank, allowing for greater scalability and sponsorship of PayOnline to Card Brands. Card Brands have initiated projects for registration of PayOnline as a third-party payment processor. Following successful registration, PayOnline plans to further implement direct integrations with international payment networks (“IPNs”). In order to achieve its business plan, PayOnline has identified several investors for financing a proposed venture. The executive team continues to work diligently to select the most capable financial partner for this venture.
With our existing infrastructure and supplier relationships, we believe that we can accommodate expected revenue growth. We believe that our available capacity and infrastructure will allow us to take advantage of operational efficiencies and increased margin as we grow our processing volume and expand to other geographical territories.
Market Overview
The financial technology and transaction processing industry is an integral part of today’s worldwide financial structure. The industry is continually evolving, driven in large part by technological advances. The benefits of card-based payments allow merchants to access a broader universe of consumers, enjoy faster settlement times and reduce transaction errors. By using credit or debit cards, consumers are able to make purchases more conveniently, whether in person, over the Internet, or by mail, fax or telephone, while gaining the benefit of loyalty programs, such as frequent flyer miles or cash back, which are increasingly being offered by credit or debit card issuers.
In addition, consumers are also beginning to use card-based and other electronic payment methods for purchases at an earlier age in life, and increasingly for small dollar amount purchases. Given these advantages of card-based payment systems to merchants and consumers, favorable demographic trends, and the resulting proliferation of credit and debit card usage, we believe businesses will increasingly seek to accept card-based payment systems in order to remain competitive.
We believe that cash transactions are becoming progressively obsolete. The proliferation of bankcards has made the acceptance of bankcard payments a virtual necessity for many businesses, regardless of size, in order to remain competitive. In addition, the advent and growth of e-commerce and crypto-currencies have marked a significant new trend in the way business is being conducted. E-commerce is dependent upon credit and debit cards, as well as other cashless payment processing methods.
The payment processing industry continues to evolve rapidly, based on the application of new technology and changing customer needs. We intend to continue to evolve with the market to provide the necessary technological advances to meet the ever-changing needs of our market place. Traditional players in the industry must quickly adapt to the changing environment or be left behind in the competitive landscape.
Business Segments
We operate two reportable business operating segments: (i) North American Transaction Solutions and (ii) International Transaction Solutions. Our segments are designed to establish lines of businesses that support our client base and further globalize our 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. The principal revenue stream for all segments comes from service and transaction related fees.
North American Transaction Solutions
North American Transaction Solutions is currently our largest segment, where through our subsidiary TOT Payments, LLC, doing business as Unified Payments, we provide businesses of all sizes and types with a wide range of fully-integrated payment acceptance solutions at the point of sale, including Merchant Acquiring, e-commerce, mobile commerce, POS and other business solutions. Our largest service in this segment is Merchant Acquiring, which facilitates the acceptance of cashless transactions at the POS, whether a retail transaction at a physical business location, a mobile commerce transaction through a mobile or tablet device, which includes m-POS acceptance, Android Pay™, Apple Pay™ and Samsung Pay or an electronic commerce transaction over the web. Geographical presence for this segment is North America.
International Transaction Solutions
Through our subsidiary, PayOnline, we provide a wide range of value-added online and mobile solutions utilizing our fully-integrated, platform agnostic electronic commerce offering that simplifies complex enterprise online transaction processing challenges from payment acceptance and processing through risk prevention and payment security via point-to-point encryption and tokenization solutions. Our proprietary SaaS suite of solutions for electronic and mobile commerce gateway and payment processing platform is compliant at Level 1 of PCI DSS, streamlines the order-to-cash process, improves electronic payment acceptance and reduces the scope of burden of PCI DSS compliance. PayOnline holds a potential leadership position in the Russian Federation as one of the largest independent Internet Payment Services Providers (“IPSP”) in the Russian Federation.
Segment Summary Information
The following tables present financial information of the Company’s reportable segments at and for the three and six months ended June 30, 2019 and 2018. The “corporate and eliminations” column includes corporate expenses and intercompany eliminations for consolidated purposes.
Three months ended June 30, 2019 |
North American Transaction Solutions |
International Transaction Solutions |
Corp Exp & Eliminations |
Total |
||||||||||||
Net revenues |
$ | 15,737,998 | $ | 749,313 | $ | - | $ | 16,487,311 | ||||||||
Cost of revenues |
13,444,074 | 457,291 | - | 13,901,365 | ||||||||||||
Gross Margin |
2,293,924 | 292,022 | - | 2,585,946 | ||||||||||||
Gross margin % |
15 | % | 39 | % | - | 16 | % | |||||||||
Selling, general and administrative |
669,730 | 248,213 | 1,381,127 | 2,299,070 | ||||||||||||
Non-cash compensation |
48,433 | - | 1,957,407 | 2,005,840 | ||||||||||||
Provision for bad debt |
141,827 | 1,363 | - | 143,190 | ||||||||||||
Depreciation and amortization |
738,117 | 9,230 | - | 747,347 | ||||||||||||
Interest expense (income), net |
252,582 | - | - | 252,582 | ||||||||||||
Other expense (income) |
295,939 | (1,164,554 | ) | (415,796 | ) | (1,284,411 | ) | |||||||||
Net (loss) income for segment |
$ | 147,296 | $ | 1,197,770 | (2,922,738 | ) | $ | (1,577,672 | ) | |||||||
Goodwill |
6,671,750 | 2,336,002 | - | 9,007,752 | ||||||||||||
Other segment assets |
13,888,723 | 354,620 | - | 14,243,343 | ||||||||||||
Total segment assets |
$ | 20,560,473 | $ | 2,690,622 | $ | - | $ | 23,251,095 |
Three months ended June 30, 2018 |
North American Transaction Solutions |
International Transaction Solutions |
Corp Exp & Eliminations |
Total |
||||||||||||
Net revenues |
$ | 14,419,129 | $ | 2,045,588 | $ | - | $ | 16,464,717 | ||||||||
Cost of revenues |
12,227,059 | 1,586,949 | - | 13,814,008 | ||||||||||||
Gross Margin |
2,192,070 | 458,639 | - | 2,650,709 | ||||||||||||
Gross margin % |
15 | % | 22 | % | - | 16 | % | |||||||||
Selling, general and administrative |
686,192 | 567,737 | 1,245,567 | 2,499,496 | ||||||||||||
Non-cash compensation |
- | - | 22,500 | 22,500 | ||||||||||||
Provision for bad debt |
879,766 | (1,868 | ) | - | 877,898 | |||||||||||
Depreciation and amortization |
420,224 | 242,301 | - | 662,525 | ||||||||||||
Interest expense (income), net |
235,738 | (9,117 | ) | 9,117 | 235,738 | |||||||||||
Other expense |
(667,757 | ) | 9,661 | (16,140 | ) | (674,236 | ) | |||||||||
Net (loss) income for segment |
$ | 637,907 | $ | (350,075 | ) | $ | (1,261,044 | ) | $ | (973,212 | ) | |||||
Goodwill |
6,671,750 | 2,972,002 | - | 9,643,752 | ||||||||||||
Other segment assets |
16,645,026 | 477,501 | - | 17,122,527 | ||||||||||||
Total segment assets |
$ | 23,316,776 | $ | 3,449,503 | $ | - | $ | 26,766,279 |
Six months ended June 30, 2019 |
North American Transaction Solutions |
International Transaction Solutions |
Corp Exp & Eliminations |
Total |
||||||||||||
Net revenues |
$ | 30,101,504 | $ | 1,432,990 | $ | - | $ | 31,534,494 | ||||||||
Cost of revenues |
25,212,812 | 948,700 | - | 26,161,512 | ||||||||||||
Gross Margin |
4,888,692 | 484,290 | - | 5,372,982 | ||||||||||||
Gross margin % |
16 | % | 34 | % | - | 17 | % | |||||||||
Selling, general and administrative |
1,286,166 | 521,618 | 2,876,152 | 4,683,936 | ||||||||||||
Non-cash compensation |
48,433 | - | 1,972,414 | 2,020,847 | ||||||||||||
Provision for bad debt |
491,147 | (8,649 | ) | - | 482,498 | |||||||||||
Depreciation and amortization |
1,580,658 | 17,909 | - | 1,598,567 | ||||||||||||
Interest expense (income), net |
497,635 | - | - | 497,635 | ||||||||||||
Other expense (income) |
295,939 | (1,177,160 | ) | (316,797 | ) | (1,198,018 | ) | |||||||||
Net (loss) income for segment |
$ | 688,714 | $ | 1,130,572 | (4,531,769 | ) | $ | (2,712,483 | ) | |||||||
Goodwill |
6,671,750 | 2,336,002 | - | 9,007,752 | ||||||||||||
Other segment assets |
13,888,723 | 354,620 | - | 14,243,343 | ||||||||||||
Total segment assets |
$ | 20,560,474 | $ | 2,690,622 | $ | - | $ | 23,251,096 |
Six months ended June 30, 2018 |
North American Transaction Solutions |
International Transaction Solutions |
Corp Exp & Eliminations |
Total |
||||||||||||
Net revenues |
$ | 28,385,746 | $ | 4,061,365 | $ | - | $ | 32,447,111 | ||||||||
Cost of revenues |
24,291,131 | 3,141,211 | - | 27,432,342 | ||||||||||||
Gross Margin |
4,094,615 | 920,154 | - | 5,014,769 | ||||||||||||
Gross margin % |
14 | % | 23 | % | - | 15 | % | |||||||||
Selling, general and administrative |
1,375,343 | 1,148,787 | 2,421,847 | 4,945,977 | ||||||||||||
Non-cash compensation |
- | - | 104,511 | 104,511 | ||||||||||||
Provision for bad debt |
1,001,040 | (1,869 | ) | - | 999,171 | |||||||||||
Depreciation and amortization |
867,310 | 498,753 | - | 1,366,063 | ||||||||||||
Interest expense (income), net |
478,976 | (16,809 | ) | 16,809 | 478,976 | |||||||||||
Other expense |
(667,757 | ) | 63,808 | 280,526 | (323,423 | ) | ||||||||||
Net (loss) income for segment |
$ | 1,039,703 | $ | (772,516 | ) | $ | (2,823,693 | ) | $ | (2,556,506 | ) | |||||
Goodwill |
6,671,750 | 2,972,002 | - | 9,643,752 | ||||||||||||
Other segment assets |
16,645,026 | 477,501 | - | 17,122,527 | ||||||||||||
Total segment assets |
$ | 23,316,776 | $ | 3,449,503 | $ | - | $ | 26,766,279 |
Results of Operations for the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
We reported a net loss attributable to common stockholders of approximately $1.5 million or $0.37 per share loss for the three months ended June 30, 2019 as compared to a net loss of approximately $900,000 or $0.23 per share loss for the three months ended June 30, 2018. The increase in net loss attributable to stockholders of approximately $600,000 million was primarily due to the issuance of non-cash compensation (shares and options) valued, at the date of grant, of approximately $2 million which was offset by an increase in other income as a result of the reversal of $1.1 million in accrued expenses during the three months ended June 30, 2019 as compared to the three months ended June 30, 2018.
The following table sets forth our sources of revenues, cost of revenues and the respective gross margins for the three months ended June 30, 2019 and 2018.
Three |
Three |
|||||||||||||||||||
Months Ended |
Months Ended |
Increase / |
||||||||||||||||||
Source of Revenues |
June 30, 2019 |
Mix |
June 30, 2018 |
Mix |
(Decrease) |
|||||||||||||||
North American Transaction Solutions |
$ | 15,737,998 | 95.5 | % | $ | 14,419,129 | 87.6 | % | $ | 1,318,869 | ||||||||||
International Transaction Solutions |
749,313 | 4.5 | % | 2,045,588 | 12.4 | % | (1,296,275 | ) | ||||||||||||
Total |
$ | 16,487,311 | 100.0 | % | $ | 16,464,717 | 100.0 | % | $ | 22,594 |
Three |
Three |
|||||||||||||||||||
Months Ended |
% of |
Months Ended |
% of |
Increase / |
||||||||||||||||
Cost of Revenues |
June 30, 2019 |
revenues |
June 30, 2018 |
revenues |
(Decrease) |
|||||||||||||||
North American Transaction Solutions |
$ | 13,444,074 | 85.4 | % | $ | 12,227,059 | 84.8 | % | $ | 1,217,015 | ||||||||||
International Transaction Solutions |
457,291 | 61.0 | % | 1,586,949 | 77.6 | % | (1,129,658 | ) | ||||||||||||
Total |
$ | 13,901,365 | 84.3 | % | $ | 13,814,008 | 83.9 | % | $ | 87,357 |
Three |
Three |
|||||||||||||||||||
Months Ended |
% of |
Months Ended |
% of |
Increase / |
||||||||||||||||
Gross Margin |
June 30, 2019 |
revenues |
June 30, 2018 |
revenues |
(Decrease) |
|||||||||||||||
North American Transaction Solutions |
$ | 2,293,924 | 14.6 | % | $ | 2,192,070 | 15.2 | % | $ | 101,854 | ||||||||||
International Transaction Solutions |
292,022 | 39.0 | % | 458,639 | 22.4 | % | (166,617 | ) | ||||||||||||
Total |
$ | 2,585,946 | 15.7 | % | $ | 2,650,709 | 16.1 | % | $ | (64,763 | ) |
Net revenues consist primarily of service fees from transaction processing. Net revenues were approximately $16.5 million for each of the three months ended June 30, 2019 and 2018. It should be noted that the dollar volume of transactions processed by our International segment has been showing improvement due to the boarding of a large merchant account in the beginning of the year where the integration was completed during the second quarter of this year. In June of 2019, the dollar volume processed increased 7% from the previous month. This trend significantly improved in the month of July of 2019, as the dollar volume processed increased 46% from the previous month. We believe that this trend will continue and improve the overall performance and strategic vision of our International segment.
Cost of revenues represents direct costs of generating revenues, including commissions, mobile operator fees, interchange expense, processing, and non-processing fees. Cost of revenues for the three months ended June 30, 2019 were approximately $13.9 million as compared to approximately $13.8 million for the three months ended June 30, 2018.
The gross margin for the three months ended June 30, 2019 was approximately $2.6 million, or 15.7%, as compared to approximately $2.7 million, or 16.1%, for the three months ended June 30, 2018. The primary reason for the decrease in the overall gross margin percentage was the result of North American Transaction Solutions fees associated with processing of transactions utilizing our self-designated BIN/ICA due to an increase in volume as compared to the prior comparable quarter.
Operating Expenses Analysis:
Operating expenses were approximately $5.2 million for the three months ended June 30, 2019, as compared to $4.1 million for three months ended June 30, 2018. Operating expenses for the three months ended June 30, 2019 primarily consisted of selling, general and administrative expenses of approximately $2.3 million, non-cash compensation of approximately $2.0 million, bad debt expense of approximately $0.1 million and depreciation and amortization of approximately $0.7 million. Operating expenses for the three months ended June 30, 2018, primarily consisted of selling, general and administrative expenses of approximately $2.5 million, bad debt expense of approximately $0.9 million, and depreciation and amortization expense of approximately $0.7 million.
The components of our selling, general and administrative expenses are reflected in the table below.
Selling, general and administrative expenses for the three months ended June 30, 2019 and 2018 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss, as follows:
Three months ended June 30, 2019 |
||||||||||||||||
Category |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
Salaries, benefits, taxes and contractor payments |
$ | 318,487 | $ | 95,231 | $ | 799,417 | $ | 1,213,135 | ||||||||
Professional fees |
133,316 | 72,497 | 345,723 | 551,536 | ||||||||||||
Rent |
- | 15,277 | 51,277 | 66,554 | ||||||||||||
Business development |
56,184 | 489 | 4,944 | 61,617 | ||||||||||||
Travel expense |
35,511 | 5,084 | 33,299 | 73,894 | ||||||||||||
Filing fees |
1,078 | - | 17,704 | 18,782 | ||||||||||||
Transaction gains |
- | (12,974 | ) | - | (12,974 | ) | ||||||||||
Office expenses |
83,122 | 4,147 | 12,990 | 100,259 | ||||||||||||
Communications expenses |
41,746 | 65,717 | 18,447 | 125,910 | ||||||||||||
Insurance expense |
- | - | 36,267 | 36,267 | ||||||||||||
Other expenses |
286 | 2,745 | 61,059 | 64,090 | ||||||||||||
Total |
$ | 669,730 | $ | 248,213 | $ | 1,381,127 | $ | 2,299,070 |
Three months ended June 30, 2018 |
||||||||||||||||
Category |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
Salaries, benefits, taxes and contractor payments |
$ | 377,541 | $ | 349,068 | $ | 569,863 | $ | 1,296,472 | ||||||||
Professional fees |
95,298 | 96,207 | 417,268 | 608,773 | ||||||||||||
Rent |
- | 24,058 | 45,987 | 70,045 | ||||||||||||
Business development |
32,378 | 916 | 1,252 | 34,546 | ||||||||||||
Travel expense |
43,782 | 5,194 | 40,211 | 89,187 | ||||||||||||
Filing fees |
- | - | 12,508 | 12,508 | ||||||||||||
Transaction losses |
- | 37,301 | - | 37,301 | ||||||||||||
Office expenses |
103,741 | 8,310 | 10,451 | 122,502 | ||||||||||||
Communications expenses |
33,927 | 41,999 | 24,211 | 100,137 | ||||||||||||
Insurance expense |
- | - | 34,247 | 34,247 | ||||||||||||
Other (income) expenses |
(475 | ) | 4,684 | 89,569 | 93,778 | |||||||||||
Total |
$ | 686,192 | $ | 567,737 | $ | 1,245,567 | $ | 2,499,496 |
Variance |
||||||||||||||||
Category |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
Salaries, benefits, taxes and contractor payments |
$ | (59,054 | ) | $ | (253,837 | ) | $ | 229,554 | $ | (83,337 | ) | |||||
Professional fees |
38,018 | (23,710 | ) | (71,545 | ) | (57,237 | ) | |||||||||
Rent |
- | (8,781 | ) | 5,290 | (3,491 | ) | ||||||||||
Business development |
23,806 | (427 | ) | 3,692 | 27,071 | |||||||||||
Travel expense |
(8,271 | ) | (110 | ) | (6,912 | ) | (15,293 | ) | ||||||||
Filing fees |
1,078 | - | 5,196 | 6,274 | ||||||||||||
Transaction gains |
- | (50,275 | ) | - | (50,275 | ) | ||||||||||
Office expenses |
(20,619 | ) | (4,163 | ) | 2,539 | (22,243 | ) | |||||||||
Communications expenses |
7,819 | 23,718 | (5,764 | ) | 25,773 | |||||||||||
Insurance expense |
- | - | 2,020 | 2,020 | ||||||||||||
Other (income) expenses |
761 | (1,939 | ) | (28,510 | ) | (29,688 | ) | |||||||||
Total |
$ | (16,462 | ) | $ | (319,524 | ) | $ | 135,560 | $ | (200,426 | ) |
Salaries, benefits, taxes and contractor payments remained relatively steady on a consolidated basis for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. This was primarily due to the Company’s continued monitoring of operations and labor costs necessary to maintain or increase revenues, including a reduction of the labor force in our International Transaction Solutions segment, which was partially offset by an increase in corporate expenses.
Segment |
Salaries and benefits for the three months ended June 30, 2019 |
Salaries and benefits for the three months ended June 30, 2018 |
Increase / (Decrease) |
|||||||||
North American Transaction Solutions |
$ | 318,487 | $ | 377,541 | $ | (59,054 | ) | |||||
International Transaction Solutions |
95,231 | 349,068 | (253,837 | ) | ||||||||
Corporate Expenses & Eliminations |
799,417 | 569,863 | 229,554 | |||||||||
Total |
$ | 1,213,135 | $ | 1,296,472 | $ | (83,337 | ) |
Professional fees were approximately $0.6 million for each of the three months ended June 30, 2019 and 2018.
Three months ended June 30, 2019 |
||||||||||||||||
Professional Fees |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
General Legal |
$ | 6,157 | $ | 18,177 | $ | 53,058 | $ | 77,392 | ||||||||
SEC Compliance Legal Fees |
- | - | 35,662 | 35,662 | ||||||||||||
Accounting and Auditing |
- | - | 97,500 | 97,500 | ||||||||||||
Tax Compliance and Planning |
- | - | 6,000 | 6,000 | ||||||||||||
Consulting |
127,159 | 54,320 | 153,503 | 334,982 | ||||||||||||
Total |
$ | 133,316 | $ | 72,497 | $ | 345,723 | $ | 551,536 |
Three months ended June 30, 2018 |
||||||||||||||||
Professional Fees |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
General Legal |
$ | 410 | $ | 9,979 | $ | 36,872 | $ | 47,261 | ||||||||
SEC Compliance Legal Fees |
- | - | 116,199 | 116,199 | ||||||||||||
Accounting and Auditing |
- | - | 97,500 | 97,500 | ||||||||||||
Tax Compliance and Planning |
- | - | 8,000 | 8,000 | ||||||||||||
Consulting |
94,888 | 86,228 | 158,697 | 339,813 | ||||||||||||
Total |
$ | 95,298 | $ | 96,207 | $ | 417,268 | $ | 608,773 |
Variance |
||||||||||||||||
Professional Fees |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Increase / (Decrease) |
||||||||||||
General Legal |
$ | 5,747 | $ | 8,198 | $ | 16,186 | $ | 30,131 | ||||||||
SEC Compliance Legal Fees |
- | - | (80,537 | ) | (80,537 | ) | ||||||||||
Accounting and Auditing |
- | - | - | - | ||||||||||||
Tax Compliance and Planning |
- | - | (2,000 | ) | (2,000 | ) | ||||||||||
Consulting |
32,271 | (31,908 | ) | (5,194 | ) | (4,831 | ) | |||||||||
Total |
$ | 38,018 | $ | (23,710 | ) | $ | (71,545 | ) | $ | (57,237 | ) |
All other operating expenses were relatively in line with the previous comparable quarter.
Other Income and Expenses Delineated in the Condensed Consolidated Statements of Operations and Comprehensive Loss:
Non-cash Compensation:
Non-cash compensation expense was approximately $2.0 million for the three months ended June 30, 2019 as compared to approximately $22,000 for the three months ended June 30, 2018. The increase in expense during the three months ended June 30, 2019 was associated with the non-cash compensation of shares and stock options issued to named executives, certain employees, and certain consultants in connection with equity incentive awards approved by the Board of Directors.
Bad Debt Expense Analysis:
We reflected a bad debt expense on the accompanying consolidated statements of operations, which represents uncollected fees of approximately $143,000 for the three months ended June 30, 2019, compared to bad debt expense, representing uncollected fees of approximately $878,000 for the three months ended June 30, 2018. The decrease of approximately $735,000 from the previous comparable period was primarily the result of the required closure of certain high-risk merchants from a third-party platform to our own designated BIN. This resulted in a write-off of accounts deemed uncollectible approximating $365,000. The remaining difference of approximately $370,000 was the result of recording the actual uncollectible amounts which were different than the estimates recorded in previous periods. For the three months ended June 30, 2019, total gross ACH rejects were approximately $277,000 of which $134,000 were subsequently collected. We were able to pass through to ISOs via a reduction in commissions, $51,000 from the total gross ACH rejects.
Depreciation and Amortization Expense:
Depreciation and amortization expense consists primarily of the amortization of merchant portfolios in connection with residual buyout arrangements and client acquisition costs. Depreciation and amortization expense was approximately $747,000 for the three months ended June 30, 2019 as compared to approximately $662,000 for the three months ended June 30, 2018. The increase is primarily attributable to the residual buyout arrangements acquired during 2018.
Interest Expense:
Interest expense for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 is as follows;
Funding Source |
Three months ended June 30, 2019 |
Three months ended June 30, 2018 |
Increase / (Decrease) |
|||||||||
MBF Notes |
$ | - | $ | 3,868 | $ | (3,868 | ) | |||||
RBL Notes |
237,963 | 161,264 | 76,699 | |||||||||
PPS Note |
- | 53,008 | (53,008 | ) | ||||||||
Other |
14,619 | 17,598 | (2,979 | ) | ||||||||
Total |
$ | 252,582 | $ | 235,738 | $ | 16,844 |
Total interest expense remained steady and relatively in line with the previous comparable quarter.
Other Income:
Other income increased from approximately $675,000 for the three months ended June 30, 2018 to approximately $1.3 million for the three months ended June 30, 2019, primarily due to the reversal of $1.1 million in accrued expenses relating to merchant reserves recorded in a previous year deemed not to be an obligation at June 30, 2019.
We reported a net loss attributable to common stockholders of approximately $2.7 million or $0.66 per share loss for the six months ended June 30, 2019 as compared to a net loss of approximately $2.5 million or $0.65 per share loss for the six months ended June 30, 2018. The increase in net loss attributable to stockholders was primarily due to the issuance of non-cash compensation (shares and options) valued, at the date of grant, at approximately $2 million during the six months ended June 30, 2019 which was partially offset by decreases of approximately $262,000 in selling, general and administrative expenses and approximately $517,000 in bad debt expenses, and the reversal of $1.1 million in accrued expenses relating to merchant reserves recorded in a previous year deemed not to be an obligation at June 30, 2019.
The following table sets forth our sources of revenues, cost of revenues and the respective gross margins for the six months ended June 30, 2019 and 2018.
Six |
Six |
|||||||||||||||||||
Months Ended |
Months Ended |
Increase / |
||||||||||||||||||
Source of Revenues |
June 30, 2019 |
Mix |
June 30, 2018 |
Mix |
(Decrease) |
|||||||||||||||
North American Transaction Solutions |
$ | 30,101,504 | 95.5 | % | $ | 28,385,746 | 87.5 | % | $ | 1,715,758 | ||||||||||
International Transaction Solutions |
1,432,990 | 4.5 | % | 4,061,365 | 12.5 | % | (2,628,375 | ) | ||||||||||||
Total |
$ | 31,534,494 | 100.0 | % | $ | 32,447,111 | 100.0 | % | $ | (912,617 | ) |
Six |
Six |
|||||||||||||||||||
Months Ended |
% of |
Months Ended |
% of |
Increase / |
||||||||||||||||
Cost of Revenues |
June 30, 2019 |
revenues |
June 30, 2018 |
revenues |
(Decrease) |
|||||||||||||||
North American Transaction Solutions |
$ | 25,212,812 | 83.8 | % | $ | 24,291,131 | 85.6 | % | $ | 921,681 | ||||||||||
International Transaction Solutions |
948,700 | 66.2 | % | 3,141,211 | 77.3 | % | (2,192,511 | ) | ||||||||||||
Total |
$ | 26,161,512 | 83.0 | % | $ | 27,432,342 | 84.5 | % | $ | (1,270,830 | ) |
Six |
Six |
|||||||||||||||||||
Months Ended |
% of |
Months Ended |
% of |
Increase / |
||||||||||||||||
Gross Margin |
June 30, 2019 |
revenues |
June 30, 2018 |
revenues |
(Decrease) |
|||||||||||||||
North American Transaction Solutions |
$ | 4,888,692 | 16.2 | % | $ | 4,094,615 | 14.4 | % | $ | 794,077 | ||||||||||
International Transaction Solutions |
484,290 | 33.8 | % | 920,154 | 22.7 | % | (435,864 | ) | ||||||||||||
Total |
$ | 5,372,982 | 17.0 | % | $ | 5,014,769 | 15.5 | % | $ | 358,213 |
Six months ended June 30, 2019 |
||||||||||||||||
Category |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
Salaries, benefits, taxes and contractor payments |
$ | 622,477 | $ | 276,022 | $ | 1,564,965 | $ | 2,463,464 | ||||||||
Professional fees |
274,346 | 127,962 | 847,383 | 1,249,691 | ||||||||||||
Rent |
- | 34,097 | 105,290 | 139,387 | ||||||||||||
Business development |
93,168 | 1,116 | 10,114 | 104,398 | ||||||||||||
Travel expense |
59,647 | 13,485 | 65,368 | 138,500 | ||||||||||||
Filing fees |
1,078 | - | 39,834 | 40,912 | ||||||||||||
Transaction gains |
- | (44,091 | ) | - | (44,091 | ) | ||||||||||
Office expenses |
158,181 | 10,025 | 26,314 | 194,520 | ||||||||||||
Communications expenses |
79,704 | 97,067 | 41,874 | 218,645 | ||||||||||||
Insurance expense |
- | - | 70,514 | 70,514 | ||||||||||||
Other expenses |
(2,435 | ) | 5,935 | 104,496 | 107,996 | |||||||||||
Total |
$ | 1,286,166 | $ | 521,618 | $ | 2,876,152 | $ | 4,683,936 |
Six months ended June 30, 2018 |
||||||||||||||||
Category |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
Salaries, benefits, taxes and contractor payments |
$ | 755,081 | $ | 734,495 | $ | 1,135,819 | $ | 2,625,395 | ||||||||
Professional fees |
209,135 | 189,965 | 776,780 | 1,175,880 | ||||||||||||
Rent |
- | 49,863 | 101,235 | 151,098 | ||||||||||||
Business development |
86,191 | 1,977 | 1,437 | 89,605 | ||||||||||||
Travel expense |
90,086 | 6,804 | 71,366 | 168,256 | ||||||||||||
Filing fees |
- | - | 23,943 | 23,943 | ||||||||||||
Transaction losses |
- | 52,917 | - | 52,917 | ||||||||||||
Office expenses |
186,240 | 19,190 | 22,247 | 227,677 | ||||||||||||
Communications expenses |
48,459 | 84,451 | 46,992 | 179,902 | ||||||||||||
Insurance expense |
- | - | 63,810 | 63,810 | ||||||||||||
Other expenses |
151 | 9,125 | 178,218 | 187,494 | ||||||||||||
Total |
$ | 1,375,343 | $ | 1,148,787 | $ | 2,421,847 | $ | 4,945,977 |
Variance |
||||||||||||||||
Category |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
Salaries, benefits, taxes and contractor payments |
$ | (132,604 | ) | $ | (458,473 | ) | $ | 429,146 | $ | (161,931 | ) | |||||
Professional fees |
65,211 | (62,003 | ) | 70,603 | 73,811 | |||||||||||
Rent |
- | (15,766 | ) | 4,055 | (11,711 | ) | ||||||||||
Business development |
6,977 | (861 | ) | 8,677 | 14,793 | |||||||||||
Travel expense |
(30,439 | ) | 6,681 | (5,998 | ) | (29,756 | ) | |||||||||
Filing fees |
1,078 | - | 15,891 | 16,969 | ||||||||||||
Transaction gains |
- | (97,008 | ) | - | (97,008 | ) | ||||||||||
Office expenses |
(28,059 | ) | (9,165 | ) | 4,067 | (33,157 | ) | |||||||||
Communications expenses |
31,245 | 12,616 | (5,118 | ) | 38,743 | |||||||||||
Insurance expense |
- | - | 6,704 | 6,704 | ||||||||||||
Other income |
(2,586 | ) | (3,190 | ) | (73,722 | ) | (79,498 | ) | ||||||||
Total |
$ | (89,177 | ) | $ | (627,169 | ) | $ | 454,305 | $ | (262,041 | ) |
Segment |
Salaries and benefits for the six months ended June 30, 2019 |
Salaries and benefits for the six months ended June 30, 2018 |
Increase / (Decrease) |
|||||||||
North American Transaction Solutions |
$ | 622,477 | $ | 755,081 | $ | (132,604 | ) | |||||
International Transaction Solutions |
276,022 | 734,495 | (458,473 | ) | ||||||||
Corporate Expenses & Eliminations |
1,564,965 | 1,135,819 | 429,146 | |||||||||
Total |
$ | 2,463,464 | $ | 2,625,395 | $ | (161,931 | ) |
Six months ended June 30, 2019 |
||||||||||||||||
Professional Fees |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
General Legal |
$ | 21,116 | $ | 21,633 | $ | 217,810 | $ | 260,559 | ||||||||
SEC Compliance Legal Fees |
- | - | 93,091 | 93,091 | ||||||||||||
Accounting and Auditing |
- | - | 195,000 | 195,000 | ||||||||||||
Tax Compliance and Planning |
- | - | 6,000 | 6,000 | ||||||||||||
Consulting |
253,230 | 106,329 | 335,482 | 695,041 | ||||||||||||
Total |
$ | 274,346 | $ | 127,962 | $ | 847,383 | $ | 1,249,691 |
Six months ended June 30, 2018 |
||||||||||||||||
Professional Fees |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Total |
||||||||||||
General Legal |
$ | 8,673 | $ | 22,080 | $ | 141,041 | $ | 171,794 | ||||||||
SEC Compliance Legal Fees |
- | - | 156,699 | 156,699 | ||||||||||||
Accounting and Auditing |
- | 8,120 | 195,000 | 203,120 | ||||||||||||
Tax Compliance and Planning |
- | - | 8,000 | 8,000 | ||||||||||||
Consulting |
200,462 | 159,765 | 276,040 | 636,267 | ||||||||||||
Total |
$ | 209,135 | $ | 189,965 | $ | 776,780 | $ | 1,175,880 |
Variance |
||||||||||||||||
Professional Fees |
North American Transaction Solutions |
International Transaction Solutions |
Corporate Expenses & Eliminations |
Increase / (Decrease) |
||||||||||||
General Legal |
$ | 12,443 | $ | (447 | ) | $ | 76,769 | $ | 88,765 | |||||||
SEC Compliance Legal Fees |
- | - | (63,608 | ) | (63,608 | ) | ||||||||||
Accounting and Auditing |
- | (8,120 | ) | - | (8,120 | ) | ||||||||||
Tax Compliance and Planning |
- | - | (2,000 | ) | (2,000 | ) | ||||||||||
Consulting |
52,768 | (53,436 | ) | 59,442 | 58,774 | |||||||||||
Total |
$ | 65,211 | $ | (62,003 | ) | $ | 70,603 | $ | 73,811 |
All other operating expenses were relatively in line with the previous comparable quarter.
Non-cash compensation expense was approximately $2.0 million for the six months ended June 30, 2019 as compared to approximately $100,000 for the six months ended June 30, 2018. The increase in expense was associated with the non-cash compensation of shares and stock options issued to named executives, certain employees, and certain consultants in connection with equity incentive awards approved by the Board of Directors.
We reflected a bad debt expense on the accompanying consolidated statements of operations, which represents uncollected fees of approximately $483,000 for the six months ended June 30, 2019, compared to approximately $1.0 million for the six months ended June 30, 2018. The decrease of approximately $517,000 from the previous comparable period was primarily the result of the required closure of certain high-risk merchants from a third-party platform to our own designated BIN. This resulted in a write-off of accounts deemed uncollectible approximating $365,000. The remaining difference of approximately $152,000 was the result of recording of the actual uncollectible amounts which were different than the estimates recorded in previous periods. For the six months ended June 30, 2019, total gross ACH rejects were approximately $916,000 of which $433,000 were subsequently collected. We were able to pass through to ISOs,via a reduction in commissions, $167,000 from the total gross ACH rejects.
Funding Source |
Six months ended June 30, 2019 |
Six months ended June 30, 2018 |
Increase / (Decrease) |
|||||||||
MBF Notes |
$ | - | $ | 10,359 | $ | (10,359 | ) | |||||
RBL Notes |
468,703 | 322,654 | 146,049 | |||||||||
PPS Note |
- | 113,867 | (113,867 | ) | ||||||||
Other |
28,932 | 32,096 | (3,164 | ) | ||||||||
Total |
$ | 497,635 | $ | 478,976 | $ | 18,659 |
Other income increased from approximately $323,000 for the six months ended June 30, 2018 to approximately $1.2 for the six months ended June 30, 2019, which was primarily due to us recognizing other income of approximately $1.1 million relating to merchant reserves recorded in a previous year deemed not to be an obligation at June 30, 2019.
Liquidity and Capital Resources
Total assets at June 30, 2019 were approximately $23.3 million compared to approximately $25.8 million at December 31, 2018. The primary reasons for the net decrease in total assets was the result of cash utilized to fund operations and pay down notes payable, which was partially offset by our recording of the right-of-use asset for our North American Transactions U.S. headquarters operating facility as a result of our adoption of the new lease accounting standard.
At June 30, 2019, we had total current assets of approximately $6.9 million and approximately $9.7 million at December 31, 2018. The primary reason for the decrease in current assets was the utilization of cash on hand to fund operations and to pay expenses in the normal course of business.
We currently believe that we will require approximately $3.6 million to finance continuing operations over the next 12 months in the normal course of our current operations.
To fund our operating cash needs, we may need to borrow additional capital from our current credit facilities or additional sales of equity securities. The Company continues to investigate the capital markets for sources of funding, which could take the form of additional debt, the restructuring of our current debt, or additional equity financing. Historically, the Company has been successful in restructuring its current debt facilities with commercially acceptable terms that ensures the continued operation of its business for the foreseeable future. As of June 30, 2019, we have approximately $10.1 million in available credit facilities.
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.
The net loss attributable to Net Element, Inc. stockholders was approximately $1.5 million for the three months ended June 30, 2019 compared to approximately $900,000 million for the three months ended June 30, 2018.
The net loss attributable to Net Element, Inc. stockholders was approximately $2.7 million for the six months ended June 30, 2019 compared to approximately $2.5 million for the six months ended June 30, 2018.
Operating activities used approximately $600,000 of cash for the six months ended June 30, 2019 as compared to approximately $2.9 million of cash used for the six months ended June 30, 2018. Negative operating cash flow for the six months ended June 30, 2019 was primarily due to cash used in the normal course of business. Negative operating cash flow for the six months ended June 30, 2018 was primarily due to approximately $2.1 million used to reduce accounts payable and accrued expenses.
Investing activities used approximately $1.7 million in cash for the six months ended June 30, 2019 as compared to approximately $900,000 used in investing activities for the six months ended June 30, 2018. The increase in cash used in investing activities was primarily due to the recording of an operating lease right-of-use liability and client acquisition costs.
Financing activities provided approximately $1.5 million in cash for the six months ended June 30, 2019 as compared to approximately $1.0 million of cash used in financing activities for the six months ended June 30, 2018. Cash provided by financing activities for the six months ended June 30, 2019 was primarily the result of recording of an operating lease right-of-use asset and proceeds from a note with RBL Capital Group, LLC. Cash used in financing activities for the six months ending June 30, 2018 was primarily due to the repayment of indebtedness.
Off-balance sheet arrangements
At June 30, 2019, 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
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 our 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 Securities Exchange Act of 1934, as amended (the "Exchange Act")).
Disclosure controls and procedures are designed to provide reasonable, but not absolute, 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 Securities and Commission’s (the “Commission”) 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.
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not deemed effective due to the material weaknesses in our internal control over financial reporting (as defined in Rule 13a-15(f )and Rule 15d-15(f ) under the Exchange Act), as discussed in Item 9A. Controls and Procedures of the Company’s Form 10-K for the fiscal year ended December 31, 2018, under the heading “Management’s Report on Internal Control over Financial Reporting.”
Changes in Internal Control
As of June 30, 2019, the material weaknesses disclosed in our Form 10-K for the year ended December 31, 2018 have not yet been fully remediated; however, significant progress were made during 2018 in remediating certain material weaknesses. Several steps taken in improving and remediating internal controls over financial reporting have included retaining a financial reporting manager, the formation of a disclosure committee, as well as, formal education and training of our Board members. Remediation activities for our material weaknesses include:
● |
Risk Assessment. We are continuing the process of designing and implementing an improved enterprise wide risk management process that follows the COSO 2013 framework and one aspect of this process will focus on identifying and mitigating risks to our business that could have an impact on our internal control over financial reporting. Our process includes periodic updates of the enterprise risk universe through the consideration of current and historical risks, periodic input from executive management, and our domestic and international segment local management. Each time a new risk is identified, we will evaluate if any additional controls are required to mitigate risks to our internal control over financial reporting. Additionally, management is planning on sending a team to Russia during this quarter in an effort to fully understand, implement, train, and eventually test the internal controls relating to that segment’s internal control over financial reporting. |
We expect to remediate the material weaknesses noted above, and allocate appropriate resources to department heads in the course of the next twelve months.
Limitations on Effectiveness of Controls and Procedures
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
For a discussion of legal proceedings, Refer to Note 9. "Commitments and Contingencies” in the condensed consolidated unaudited financial statements contained in Part I, Item 1 of this Report, which section is incorporated by reference herein.
In addition to the information set forth in this Report, you should read and consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results of operation. The risks described in such report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to have a material adverse effect on our business, financial condition and/or future operating results.
Exhibit Number |
Exhibit Description |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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3.5 |
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3.6 |
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3.7 |
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith (furnished herewith with respect to Exhibit 32.1).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Net Element, Inc. | ||
Date: August 14, 2019 | By: | /s/ Oleg Firer |
Name: Oleg Firer | ||
Title: Chief Executive Officer (Principal Executive Officer) |
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By: | /s/ Jeffrey Ginsberg | |
Name: Jeffrey Ginsberg Title: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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