Planet Payment Inc.
Planet Payment Inc (Form: 10-Q, Received: 05/13/2013 17:17:26)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

OR

 

o          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 001-35699

 

PLANET PAYMENT, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

13-4084693

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

670 Long Beach Boulevard

Long Beach, New York

 

11561

(Address of Principal Executive Offices)

 

(Zip Code)

 

(516) 670-3200

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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

 

Large Accelerated Filer £

 

Accelerated Filer £

 

 

 

Non-Accelerated Filer x

 

Smaller Reporting Company £

(Do not check if smaller reporting company)

 

 

 

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

 

As of April 30, 2013 there were 53,719,297 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

Planet Payment, Inc.

Report on Form 10-Q

For the Quarterly Period Ended March 31, 2013

 

Table of Contents

 

 

 

Page

Part I.

Financial Information

2

 

 

 

Item 1.

Financial Statements

2

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012

2

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for three months ended March 31, 2013 and 2012 (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

Part II.

Other Information

28

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

Item 1A.

Risk Factors

28

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3.

Defaults Upon Senior Securities

52

 

 

 

Item 4.

Mine Safety Disclosures

52

 

 

 

Item 5.

Other Information

52

 

 

 

Item 6.

Exhibits

52

 

 

 

Signatures

 

54

 

Planet Payment®, PAY® and Pay in Your Currency® are registered trademarks of Planet Payment and our logo is an additional trademark of Planet Payment. All other service marks, trademarks and tradenames appearing in this report are the property of their respective owners.

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

Planet Payment, Inc. Condensed Consolidated Balance Sheets

 

 

 

As of March 31,

 

As of December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

5,237,140

 

$

6,002,457

 

Restricted cash

 

1,737,403

 

2,517,616

 

Accounts receivable, net of allowances of $0.1 million as of March 31, 2013 and $1.5 million December 31, 2012

 

5,364,010

 

5,585,815

 

Prepaid expenses and other assets

 

2,180,636

 

2,395,137

 

Total current assets

 

14,519,189

 

16,501,025

 

Other assets:

 

 

 

 

 

Restricted cash

 

669,406

 

669,406

 

Property and equipment, net

 

1,901,938

 

1,396,154

 

Software development costs, net

 

4,819,969

 

4,776,320

 

Intangible assets, net

 

3,057,554

 

3,289,590

 

Goodwill

 

337,159

 

347,599

 

Security deposits and other assets

 

460,644

 

338,408

 

Total other assets

 

11,246,670

 

10,817,477

 

Total assets

 

$

25,765,859

 

$

27,318,502

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

991,880

 

$

889,118

 

Accrued expenses

 

3,630,890

 

5,298,789

 

Due to merchants

 

1,715,819

 

2,546,140

 

Current portion of capital leases liability

 

354,086

 

337,588

 

Total current liabilities

 

6,692,675

 

9,071,635

 

Long-term liabilities:

 

 

 

 

 

Long-term portion of capital leases liability and other long-term liabilities

 

551,494

 

364,010

 

Total long-term liabilities

 

551,494

 

364,010

 

Total liabilities

 

7,244,169

 

9,435,645

 

Commitments and contingencies (Note 10)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock— 10,000,000 shares authorized as of March 31, 2013 and December 31, 2012, $0.01 par value: Series A— 2,243,750 issued and outstanding as of March 31, 2013 and December 31, 2012; $8,975,000 aggregate liquidation preference

 

22,438

 

22,438

 

Common stock—250,000,000 shares authorized as of March 31, 2013 and December 31, 2012, $0.01 par value, and 53,706,947 and 53,658,857 issued and outstanding as of March 31, 2013 and December 31, 2012, respectively

 

537,070

 

536,589

 

Additional paid-in capital

 

99,577,471

 

99,199,149

 

Accumulated other comprehensive (loss) gain

 

(73,961

)

37,925

 

Accumulated deficit

 

(81,541,328

)

(81,913,244

)

Total stockholders’ equity

 

18,521,690

 

17,882,857

 

Total liabilities and stockholders’ equity

 

$

25,765,859

 

$

27,318,502

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

Planet Payment, Inc. Condensed Consolidated Statements of Operations (unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Revenue:

 

 

 

 

 

Net revenue

 

$

12,086,063

 

$

11,680,936

 

Operating expenses:

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

Payment processing services fees

 

2,802,289

 

2,783,591

 

Processing and service costs

 

3,175,647

 

2,730,829

 

Total cost of revenue

 

5,977,936

 

5,514,420

 

Selling, general and administrative expenses

 

5,722,684

 

5,270,048

 

Total operating expenses

 

11,700,620

 

10,784,468

 

Income from operations

 

385,443

 

896,468

 

Other (expense) income:

 

 

 

 

 

Interest expense

 

(13,146

)

(14,220

)

Interest income

 

212

 

171

 

Total other expense, net

 

(12,934

)

(14,049

)

Income before provision for income taxes

 

372,509

 

882,419

 

Provision for income taxes

 

(593

)

(95,272

)

Net income

 

$

371,916

 

$

787,147

 

Basic net income per share applicable to common stockholders

 

$

0.01

 

$

0.01

 

Diluted net income per share applicable to common stockholders

 

$

0.01

 

$

0.01

 

Weighted average common stock outstanding (basic)

 

52,779,130

 

51,782,902

 

Weighted average common stock outstanding (diluted)

 

54,806,026

 

54,259,500

 

 

The accompanying notes are an integral part of these financial statements

 

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Planet Payment, Inc. Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income

 

$

371,916

 

$

787,147

 

Foreign currency translation adjustment

 

(111,886

)

13,473

 

Total comprehensive income

 

$

260,030

 

$

800,620

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

Planet Payment, Inc. Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

371,916

 

$

787,147

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

Stock option expense

 

258,929

 

224,392

 

Depreciation and amortization expense

 

735,606

 

620,620

 

Provision for doubtful accounts

 

160,893

 

26,711

 

Loss on disposal of equipment

 

2,950

 

 

Changes in operating assets and liabilities

 

 

 

 

 

Decrease (increase) in settlement assets

 

780,213

 

(164,716

)

Decrease in accounts receivables, prepaid expenses and other current assets

 

143,279

 

414,406

 

Increase in security deposits and other assets

 

(90,102

)

(4,146

)

Decrease in accounts payable, accrued expenses and other long-term liabilities

 

(1,590,373

)

(612,054

)

(Decrease) increase in due to merchants

 

(830,321

)

205,391

 

Other

 

(19,876

)

13,068

 

Net cash (used in) provided by operating activities

 

(76,886

)

1,510,819

 

Cash flows from investing activities:

 

 

 

 

 

Insurance proceeds

 

100,000

 

 

Decrease in restricted cash

 

 

53,311

 

Purchase of property and equipment

 

(405,739

)

(53,674

)

Capitalized software development

 

(375,066

)

(418,527

)

Purchase of intangible assets

 

(22,701

)

(21,951

)

Net cash used in investing activities

 

(703,506

)

(440,841

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

106,250

 

41,989

 

Principal payments on capital lease obligations

 

(91,175

)

(105,614

)

Payment of IPO costs

 

 

(103,980

)

Net cash provided by (used in) financing activities

 

15,075

 

(167,605

)

Effect of exchange rate changes on cash and cash equivalents(*)

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(765,317

)

902,373

 

Beginning of period

 

6,002,457

 

7,671,963

 

End of period

 

5,237,140

 

8,574,336

 

Supplemental disclosure:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

14,454

 

$

14,811

 

Income taxes

 

103,227

 

110,030

 

Non cash investing and financing activities:

 

 

 

 

 

Assets acquired under capital leases

 

$

115,032

 

$

171,380

 

Accrued capitalized hardware, software and fixed assets

 

197,445

 

 

Capitalized stock-based compensation

 

13,624

 

 

Accrued IPO Costs

 

 

111,806

 

 


(*)                                  For the three months ended March 31, 2013 and 2012, the effect of exchange rate changes on cash and cash equivalents was inconsequential.

 

The accompanying notes are an integral part of these financial statements

 

5



Table of Contents

 

Planet Payment, Inc.

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

1. Business description and basis of presentation

 

Business description

 

Planet Payment, Inc. together with its wholly owned subsidiaries (“Planet Payment,” the “Company,” “we,” or “our”) is a provider of international payment processing and multi-currency processing services. The Company provides its services to approximately 42,000 active merchant locations in more than 20 countries and territories across the Asia Pacific region, North America, the Middle East, Africa and Europe, primarily through its acquiring bank and processor customers, as well as through its own direct sales force. The Company’s point-of-sale and e-commerce services are integrated within the payment card transaction flow and enable its acquiring customers to process and reconcile payment transactions in multiple currencies, geographies and channels. The Company is a registered third party processor with the major card associations and operates in accordance with industry standards, including the Payment Card Industry, or PCI, Security Council’s Data Security Standards.

 

Company structure

 

Planet Payment was incorporated in the State of Delaware on October 12, 1999 as Planet Group Inc. and changed its name to Planet Payment, Inc. on June 18, 2007.

 

Since March 20, 2006, shares of the Company’s common stock have traded on the Alternative Investment Market of the London Stock Exchange, or AIM, under the symbols “PPT” and “PPTR.” From November 19, 2008 until December 14, 2012, shares of our common stock were traded on the OTCQX under the symbol “PLPM.” On December 17, 2012 shares of our common stock began trading on NASDAQ under the symbol “PLPM.”

 

Basis of presentation

 

The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

The accompanying condensed consolidated financial statements include the accounts of Planet Payment, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

 

As of March 31, 2013 the Company wrote-off a previously fully reserved trade receivable in the amount of $1.4 million.

 

Unaudited consolidated interim financial information

 

The accompanying unaudited condensed consolidated interim financial statements as of March 31, 2013 and for the periods ended March 31, 2013 and 2012 have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are normal and recurring, necessary for a fair presentation of the statement of operations, financial position and cash flows. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for the interim periods ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  The December 31, 2012 balance sheet information has been

 

6



Table of Contents

 

derived from the audited financial statements at that date. Certain information and disclosures normally included in annual consolidated financial statements have been omitted pursuant to the rules and regulation of the Securities and Exchange Commission (SEC).

 

2. Recent accounting pronouncements

 

In February 2013, the Financial Accounting Standards Board issued an update to existing guidance on the presentation of comprehensive income. This update requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income (AOCI) by component. For significant items reclassified out of AOCI to net income in their entirety during the reporting period, companies must report the effect on the line items in the statement where net income is presented. For significant items not reclassified to net income in their entirety during the period, companies must provide cross-references in the notes to other disclosures that already provide information about those amounts. The Company adopted this update effective January 1, 2013 and it did not have a material impact on the Company’s condensed consolidated financial statements.

 

3. Hurricane Sandy

 

In October 2012, the East Coast of the United States was hit by Hurricane Sandy, including the city of Long Beach, where the Company’s corporate offices are located. For the three months ended March 31, 2013 the Company recorded capital additions related to Hurricane Sandy of approximately $0.5 million primarily related to leasehold improvements, furniture and fixtures and computer hardware.  During the second quarter of 2013 (through date of filing) the Company received $0.3 million in insurance proceeds which will be recorded as a gain in that period.  Based on information currently available the Company does not expect future write-offs or losses related to Hurricane Sandy.

 

4. Concentration of credit risk

 

The Company’s assets that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash and receivables from clients. The Company places its cash, cash equivalents, and restricted cash with financial banking institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company also maintains cash balances at foreign banking institutions, which are not insured by the FDIC. As of March 31, 2013 and December 31, 2012 the Company’s uninsured cash balances totaled $4.5 million and $5.3 million, respectively.

 

The Company maintains an allowance for uncollectible accounts receivable based on expected collectability and performs ongoing credit evaluations of customers’ financial condition.

 

The Company’s accounts receivable concentrations of 10% and greater are as follows:

 

 

 

As of
March 31,
2013

 

As of
December 31,
2012

 

Customer A

 

23

%

26

%

Customer B (*)

 

14

 

14

 

Customer C

 

12

 

11

 

Customer D

 

14

 

 

 

 


(*)                                  Customer B is a sponsoring bank for certain merchants within the Company’s payment processing services. Customer B serves as an aggregator of merchant transactions and therefore, there is a concentration risk relating to receivables.  However, revenues are generated from individual merchants that individually do not exceed 10% of the Company’s revenue.

 

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The Company’s revenue concentrations of 10% and greater are as follows:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Customer A

 

20

%

23

%

Customer C

 

17

 

20

 

 

5. Net income per share

 

The Company computes net income per share in accordance with Financial Accounting Standards Board (“FASB”) ASC 260, Earnings per Share (“ASC topic 260”). Under ASC topic 260, securities that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities and should be included in the two-class method of computing earnings per share. The Company’s preferred stockholders are entitled to participate in dividends and earnings when, and if, dividends are declared on the common stock. As such, the Company calculates net income per share using the two-class method. The two-class method is an earnings formula that treats a participating security as having rights to dividends that otherwise would have been available to common and preferred stockholders based on their respective rights to receive dividends. Losses are not allocated to the preferred stockholders for computing net loss per share under the two-class method because the preferred stockholders do not have contractual obligations to share in the losses of the Company.

 

Basic earnings per share is calculated by dividing net income, adjusted for amounts allocated to participating securities under the two-class method, if applicable, by the weighted average number of common stock outstanding during the period.

 

Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding, assuming dilution, during the period. The diluted earnings per share calculation assumes (i) all stock options and warrants which are in the money are exercised at the beginning of the period and (ii) each issue or series of issues of potential common stock are considered in sequence from the most dilutive to the least dilutive. That is, dilutive potential common stock with the lowest “earnings add-back per incremental share” shall be included in dilutive earnings per share before those with higher earnings add back per incremental share. For this purpose potential dilutive common stock include the stock options, warrants and shares of preferred stock.

 

The following table sets forth the computation of basic and diluted net income per share:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Numerator:

 

 

 

 

 

Net income

 

$

371,916

 

$

787,147

 

Amounts allocated to participating preferred stockholders under the two-class method

 

(42,722

)

(93,406

)

Net income applicable to common stockholders (basic and diluted)

 

$

329,194

 

$

693,741

 

Denominator:

 

 

 

 

 

Weighted average common stock outstanding (basic)

 

52,779,130

 

51,782,902

 

Common equivalent shares from options and warrants to purchase common stock

 

2,026,896

 

2,476,598

 

Weighted average common stock outstanding (diluted) (1)

 

54,806,026

 

54,259,500

 

Basic net income per share applicable to common stockholders

 

$

0.01

 

$

0.01

 

Diluted net income per share applicable to common stockholders (1)

 

$

0.01

 

$

0.01

 

 


(1)           In accordance with ASC 260-10-45-48 for the three months ended March 31, 2013 and 2012, the Company has excluded 915,000 contingently issued restricted shares from diluted weighted average common stock outstanding as the contingent compensation (a) have not been satisfied at the reporting date nor (b) would have been satisfied if the reporting date was at the end of the contingency period.

 

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The following table sets forth the weighted average securities outstanding that have been excluded from the diluted net income per share calculation because the effect would have been anti-dilutive:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Stock options

 

1,544,580

 

1,781,405

 

Warrants

 

163,941

 

182,539

 

Convertible preferred stock(1)

 

6,851,144

 

6,851,144

 

Total anti-dilutive securities

 

8,559,665

 

8,815,088

 

 


(1)          Diluted net income per share increases when convertible preferred stock is included in the required sequence in the diluted earnings per share computation. As such, convertible preferred stock is excluded from the computation of diluted earnings per share for the three months ended March 31, 2013 and 2012.

 

6. Stock-based expense and assumptions

 

Stock-based expense is measured at the grant date based on fair value and recognized as an expense over the requisite service period, net of an estimated forfeiture rate.

 

The following summarizes stock-based expense recognized by income statement classification:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Processing and service costs

 

$

49,643

 

$

80,781

 

Selling, general and administrative expenses

 

209,286

 

143,611

 

Total stock-based expense

 

$

258,929

 

$

224,392

 

 

7. Branded Payment Solutions Acquisition

 

On May 23, 2012, the Company acquired all of the outstanding shares of Branded Payment Solutions Limited (“BPS”) for a purchase price of approximately $3.4 million consisting of approximately $1.8 million in cash and $1.6 million in equity or 488,337 shares of Common Stock of $0.01 par value each of Planet Payment, Inc. issued to the BPS shareholders. Of the 488,337 consideration shares, 72,887 (valued on the date of closing at $0.2 million) are subject to certain technology development milestones. In May 2013 the contingent shares related to technology development milestones have been considered to be earned.

 

The Company expensed approximately $0.1 million of professional fees associated with the acquisition.

 

This business combination resulted in the total purchase price being allocated to the assets acquired and liabilities assumed according to their estimated fair values at the date of acquisition with the remaining unallocated purchase price recorded as goodwill as follows:

 

Current assets 

 

$

818,601

 

Property and equipment

 

29,758

 

Non-current assets

 

113,603

 

Developed technology

 

2,796,411

 

Goodwill

 

335,791

 

 

 

 

 

Total assets acquired

 

4,094,164

 

Total liabilities assumed

 

(672,684

)

 

 

 

 

Net assets acquired

 

$

3,421,480

 

 

Included in current assets is approximately $0.2 million of cash acquired.

 

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The amount allocated to developed technology (the acquired intangible asset) is $2.8 million. The fair values assigned to developed technology was determined primarily by using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. The acquired identifiable intangible assets are being amortized on a straightline basis over five years, which approximates the pattern in which the assets are utilized over their estimated useful lives.

 

Goodwill represents the excess of the purchase price over the fair values of the acquired net tangible and intangible assets. In accordance with the provisions of ASC 350, goodwill is not amortized but will be tested for impairment at least annually. The allocated value of goodwill of $0.3 million primarily relates to the anticipated synergies resulting from adding BPS to our current products and the acquired workforce. The goodwill amount has been assigned to the payment processing services segment. Neither the acquired goodwill nor intangible assets are deductible for tax purposes.

 

The liabilities assumed includes a $0.3 million deferred tax liability that relates primarily to the future amortization of acquired intangibles offset by a $0.2 million deferred tax asset that relates primarily to acquired net operating loss carryovers.

 

The results of BPS were included in our consolidated statement of operations from the date of acquisition.

 

8. Property and equipment

 

Property and equipment, net consist of the following:

 

 

 

Estimated
useful life
(years)

 

As of
March 31,
2013

 

As of
December 31,
2012

 

Equipment

 

2 - 5

 

$

927,012

 

$

923,356

 

Computer hardware

 

3 - 5

 

1,863,187

 

1,688,262

 

Furniture and fixtures

 

5 - 7

 

163,891

 

72,155

 

Leasehold improvements

 

5 - 7

 

616,566

 

263,691

 

 

 

 

 

3,570,656

 

2,947,464

 

Less: Accumulated depreciation and amortization

 

 

 

(1,668,718

)

(1,551,310

)

Property and equipment, net

 

 

 

$

1,901,938

 

$

1,396,154

 

 

Property and equipment depreciation and amortization expense is as follows:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Depreciation and amortization expense

 

$

118,761

 

$

139,753

 

 

9. Goodwill and intangible assets

 

The changes in carrying amount of goodwill for the three months ended March 31, 2013 is as follows:

 

Goodwill, gross, as of December 31, 2012

 

$

347,599

 

Impact of change in Euro exchange rate

 

(10,440

)

Accumulated impairment losses as of March 31, 2013

 

 

Goodwill, net, as of March 31, 2013

 

$

337,159

 

 

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The entire goodwill balance is assigned to the payment processing services segment as this is the reporting unit expected to benefit from the synergies of the combination.

 

Intangible assets are recorded at estimated fair value and are amortized ratably over their estimated useful lives to processing and service costs, which are included in cost of revenue.

 

The gross book value, accumulated amortization and amortization periods of intangible assets were as follows:

 

 

 

As of March 31, 2013

 

As of December 31, 2012

 

Amortization

 

 

 

Gross book

 

Accumulated

 

Net book

 

Gross book

 

Accumulated

 

Net book

 

period

 

 

 

value

 

amortization

 

value

 

value

 

amortization

 

value

 

(years)

 

Trademarks and patents

 

$

962,357

 

$

(274,589

)

$

687,768

 

$

917,456

 

$

(258,325

)

$

659,131

 

15

 

Technology

 

2,807,799

 

(481,381

)

2,326,418

 

2,894,742

 

(351,018

)

2,543,724

 

5

 

Customer contracts

 

867,354

 

(823,986

)

43,368

 

867,354

 

(780,619

)

86,735

 

5

 

Intangible assets, net

 

$

4,637,510

 

$

(1,579,956

)

$

3,057,554

 

$

4,679,552

 

$

(1,389,962

)

$

3,289,590

 

 

 

 

Amortization expense related to intangible assets is as follows:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Amortization expense

 

$

204,293

 

$

56,977

 

 

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10. Commitments and contingencies

 

Employment agreements

 

Pursuant to employment agreements with certain employees, the Company had a commitment to pay severance of approximately $1.6 million as of both March 31, 2013 and December 31, 2012 in the event of termination without cause, as defined in the agreements. Additionally, in the event of termination upon a change of control, as defined in the agreements, the Company had a commitment to pay severance of approximately $1.9 million as of March 31, 2013 and December 31, 2012.

 

Contingent liabilities

 

In instances where the Company is acting as the merchant acquirer, the Company bears a risk that a merchant may engage in fraud by submitting for payment certain credit card transactions that may have been manipulated, are fictitious, or are otherwise not bona fide. Similarly, the Company bears the risk that a merchant becomes insolvent, owing money to cardholders. To the extent that such fraud or insolvency occurs in circumstances where the Company is liable to make good any resultant losses, this could affect the Company’s operating results and cash flows. The Company has required certain merchants to post cash reserves of approximately $0.2 million with the acquirer against such liabilities and has itself paid the acquirer a security deposit in connection therewith, as shown on the consolidated balance sheets. Under FASB ASC 460, Guarantees , the Company evaluates its ultimate risk and records an estimate of potential loss for chargeback’s related to merchant fraud based upon an assessment of actual historical fraud rates compared to recent bank card processing volume levels. No contingent liability has been recorded as of March 31, 2013 and December 31, 2012, as the risk of material loss is considered remote. The Company monitors this contingent liability on a quarterly basis and will provide for a reserve if deemed necessary.

 

Outstanding litigation

 

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company currently has no legal proceedings pending against it.

 

11. Related party transactions

 

The Company incurred the following amounts to companies that are principally owned by executives, directors or stockholders of the Company:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Rent

 

$

77,630

 

$

125,459

 

Consulting and professional fees

 

21,372

 

15,062

 

 

Rent was paid to BDP Realty Associates LLC a company in which the CEO has a 1/3 interest.

 

Consulting and professional fees were paid to a professional services company where a family member of the CEO has a substantial interest but the CEO does not have any financial interest in such company.

 

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12. Accrued expenses

 

 

 

As of
March 31,
2013

 

As of
December 31,
2012

 

Bonus

 

$

962,849

 

$

852,274

 

Professional fees

 

204,371

 

1,095,526

 

Gift card liabilities

 

159,437

 

778,237

 

Other (*)

 

2,304,233

 

2,572,752

 

Total accrued expenses

 

$

3,630,890

 

$

5,298,789

 

 


(*)  No amounts included in “other” exceed 10% of total current liabilities.

 

13. Segment information

 

General information

 

The segment and geographic information provided in the table below is being reported consistent with the Company’s method of internal reporting. Operating segments are defined as components of an enterprise for which separate financial information is available and which is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker, or CODM, reviews net revenue and gross profit by service by geographical region. The Company operates in two reportable segments; multi-currency processing services and payment processing services.

 

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Table of Contents

 

Information about revenue, profit and assets

 

The CODM evaluates performance and allocates resources based on net revenue and gross profit of each segment. For purposes of analyzing segments, gross profit of the multi-currency processing services segment is equal to net revenue less multi-currency cost of sales of $0.4 million which is included in “processing and services costs” for the three months ended March 31, 2013 and for the three months ended March 31, 2012 the amount of multi-currency cost of sales is immaterial , while the gross profit for the payment processing services segment includes net revenue of the segment less the cost of revenue component “payment processing services fees”, which may include interchange and card network fees and assessments. Net revenue and gross profit by geographical region is based upon where the transaction originated. Lastly, the Company does not evaluate performance or allocate resources using segment asset data. Long-lived assets are primarily located in North America and Europe and as of March 31, 2013 and December 31, 2012 long-lived asset amounts are $10.1 million and $9.8 million, respectively.

 

The Company conducts its business primarily in three geographical regions: Asia Pacific (“APAC”), North America, and Central Europe, Middle East and Africa (“CEMEA”). The following table provides revenue concentration by geographic region. Analysis of revenue by segment and geographical region and reconciliations to consolidated revenue and gross profit are as follows:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Net Revenue:

 

 

 

 

 

APAC

 

$

3,716,672

 

$

4,189,768

 

North America

 

1,461,101

 

969,585

 

CEMEA

 

2,652,956

 

2,363,272

 

Total multi-currency processing services revenue

 

7,830,729

 

7,522,625

 

Payment processing services revenue

 

4,255,334

 

4,158,311

 

Net revenue

 

$

12,086,063

 

$

11,680,936

 

Gross Profit:

 

 

 

 

 

APAC

 

$

3,684,004

 

$

4,189,768

 

North America

 

1,436,166

 

969,585

 

CEMEA

 

2,269,054

 

2,363,272

 

Total multi-currency processing services gross profit

 

7,389,224

 

7,522,625

 

Payment processing services gross profit

 

1,453,045

 

1,374,720

 

Total gross profit

 

$

8,842,269

 

$

8,897,345

 

 

Payment processing service revenue and gross profit is the result of transactions that primarily originated in North America and no individual merchant of the payment processing segment was greater than 10% of segment revenue.

 

Concentration of revenue by customer by geographical region:

 

 

 

Three months
ended
March 31,

 

 

 

2013

 

2012

 

Multi-currency processing services revenue:

 

 

 

 

 

APAC:

 

 

 

 

 

Customer A

 

66

%

63

%

Customer E

 

 

 

13

 

North America:

 

 

 

 

 

Customer F

 

28

 

16

 

Customer G

 

36

 

53

 

Customer H

 

 

 

12

 

CEMEA:

 

 

 

 

 

Customer C

 

79

 

100

 

Customer I

 

21

 

 

 

 

*****

 

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Table of Contents

 

Item 2. Management’s discussion and analysis of financial condition and results of operations

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 25, 2013. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Business overview

 

We believe Planet Payment is a leading provider of international payment processing and multi-currency processing services. We provide our services to approximately 42,000 active merchant locations in more than 20 countries and territories across the Asia Pacific region, North America, the Middle East, Africa and Europe, primarily through our acquiring bank and processor customers, as well as through our own direct sales force. Our point-of-sale and e-commerce services help merchants sell more goods and services to consumers and enable our acquiring customers to process and reconcile payment transactions in multiple currencies, geographies and channels.

 

Key trends

 

Our financial results have been and we believe will continue to be impacted by trends in the international payment processing industry, including the global shift toward electronic-based methods of payments and away from paper-based methods of payment, the increasing levels of international travel and commerce and the rapid adoption of e-commerce on a global scale. Our results are impacted by the changes in levels of international spending using electronic methods, and as a result, negative trends in the global economy may negatively impact the growth in total transaction volume processed using our platform. Since 2008, the United States and other global economies have been undergoing a period of economic uncertainty and stock markets are experiencing high levels of volatility, and it is difficult to predict how long this uncertainty and volatility will continue.

 

Despite these negative macro-economic trends, we plan to continue to grow our business by increasing the use of our services by the merchants of our existing and future acquiring bank and processor customers. If we are successful in increasing our share of this currently addressable market, as well as by adding new acquiring bank and processor customers and expanding into new geographies and business sectors, we would expect our revenue to continue to grow. In addition, based on the positive trends in the international payment processing industry noted above, we anticipate that as and when more payments are made using electronic methods, such as those that we offer, our revenue would also increase.

 

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Table of Contents

 

We expect that our payment processing service fees, which primarily represent fees, interchange and assessments will continue to rise as our revenue from direct acquiring customers increases. We also expect that our processing and service costs, which include expenses related to running our platform infrastructure, and our selling, general and administrative expense will increase, but at a rate of increase that is less than the growth of our revenue due to the leverage in our business model.

 

Key metrics

 

Our management relies on certain performance indicators to manage and assess our business. The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We believe that improvements in these metrics will result in improvements in our financial performance over time. We monitor our non-GAAP financial measures and other business statistics as a measure of operating performance in addition to net income and the other measures included in our consolidated financial statements.

 

The following is a table consisting of non-GAAP financial measures and certain other business statistics that management monitors:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

KEY METRICS:

 

 

 

 

 

Consolidated gross billings(1)

 

$

32,501,926

 

$

30,237,240

 

Adjusted EBITDA (non-GAAP)(2)

 

$

1,379,978

 

$

1,741,480

 

Capitalized expenditures

 

$

1,129,607

 

$

494,152

 

Total active merchant locations (at period end)

 

41,930

 

30,977

 

Multi-currency processing services key metrics :

 

 

 

 

 

Active merchant locations (at period end)(3)

 

22,503

 

17,209

 

Settled transactions processed(4)

 

3,043,970

 

2,976,916

 

Gross foreign currency mark-up(5)

 

$

28,246,592

 

$

26,078,929

 

Settled dollar volume processed(6)

 

$

697,866,524

 

$

683,434,508

 

Average net mark-up percentage on settled dollar volume processed(7)

 

1.12

%

1.10

%

Payment processing services key metrics :

 

 

 

 

 

Active merchant locations (at period end)(3)

 

19,447

 

13,782

 

Payment processing services revenue(8)

 

$

4,255,334

 

$

4,158,311

 

 


(1)                                  Represents gross foreign currency mark-up (see footnote 5) plus payment processing services revenue (see footnote 8).

 

(2)                                  We define Adjusted EBITDA as GAAP net income adjusted to exclude (1) interest expense, (2) interest income, (3) provision (benefit) for income taxes, (4) depreciation and amortization, (5) stock-based expense from options and warrants and (6) certain other items management believes affect the comparability of operating results. Please see “—Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

(3)                                  We consider a merchant location to be active as of a date if the merchant completed at least one revenue-generating transaction at the location during the 90-day period ending on such date. The total number of active merchant locations exceeds the total number of merchants, as merchants may have multiple locations. As of March 31, 2013 and 2012, there were 20 and 14 active merchant locations, respectively, which used both our multi-currency processing services and our payment processing services. These amounts are included in multi-currency and payment processing active merchant locations but are not included in total active merchant locations.

 

(4)                                  Represents settled transactions processed using our multi-currency processing services.

 

(5)                                  Represents the gross foreign currency mark-up amount on settled dollar volume processed using our multi-currency processing services. Gross foreign currency mark-up represents multi-currency processing services net revenue plus amounts paid to acquiring banks and their merchants associated with such multi-currency processing transactions.

 

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Management believes this metric is relevant because it provides the reader an indication of the gross mark-up derived from multi-currency transactions processed through our platform during a given period.

 

(6)                                  Represents the total settled dollar volume processed using our multi-currency processing services.

 

(7)                                  Represents the average net foreign currency mark-up percentage earned on settled dollar volume processed using our multi-currency processing services. The average net mark-up percentage on settled dollar volume processed is calculated by taking the reported total multi-currency processing services net revenue ($7.8 million and $7.5 million for the three months ended March 31, 2013 and 2012, respectively) and dividing by settled dollar volume processed (see footnote 6).

 

(8)                                  Represents revenue earned and reported on payment processing services.

 

Adjusted EBITDA

 

This discussion includes information about Adjusted EBITDA that is not prepared in accordance with GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.

 

Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net income adjusted to exclude (1) interest expense, (2) interest income, (3) provision (benefit) for income taxes, (4) depreciation and amortization, (5) stock-based expense from options and warrants and (6) certain other items management believes affect the comparability of operating results.

 

Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period growth. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team in connection with our executive compensation.

 

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:

 

·                   Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

·                   Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

·                   although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

·                   non-cash compensation is and will remain a key element of our long-term incentive compensation for our employees, although we exclude it from Adjusted EBITDA when evaluating our ongoing performance for a particular period; and

 

·                   Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations.

 

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Table of Contents

 

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplement to our GAAP results.

 

The following table sets forth the reconciliation of Adjusted EBITDA to net income, our most directly comparable financial measure in accordance with GAAP:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

ADJUSTED EBITDA:

 

 

 

 

 

Net income

 

$

371,916

 

$

787,147

 

Interest expense

 

13,146

 

14,220

 

Interest income

 

(212

)

(171

)

Provision for income taxes

 

593

 

95,272

 

Depreciation and amortization

 

735,606

 

620,620

 

Stock-based expense

 

258,929

 

224,392

 

Adjusted EBITDA (non-GAAP)

 

$

1,379,978

 

$

1,741,480

 

 

Components of operating results

 

Sources of revenue

 

We derive our revenue principally through transaction fees earned under fixed contractual arrangements with customers who use our international payment and multi-currency processing services. We operate the business in two reportable segments:

 

· Multi-currency processing services revenue.   Revenue derived from foreign currency transaction fees earned on processing and converting a credit or debit card transaction from one currency into another currency. Foreign currency transactions fees earned under our agreements with our multi-currency processing services customers have traditionally been based on a fixed percentage applied to the net foreign currency margin earned, after deducting any merchant revenue and other contractual costs.

 

· Payment processing services revenue.   Revenue derived from transaction fees earned on processing services provided in facilitating the sale of goods and services by means of credit and debit cards and other electronic payments and professional services fees related to the payment processing business.

 

Geographic and customer concentration

 

We conduct our business primarily in three geographical regions: Asia Pacific, or APAC, North America, and Central Europe, Middle East and Africa, or CEMEA. The following table provides multi-currency processing services revenue concentration by geographical region. Revenue by region is based upon where the transaction originated. We conduct our payment processing services primarily in North America.

 

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Table of Contents

 

Analysis of revenue by segment and geographical region:

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Revenue:

 

 

 

 

 

APAC

 

$

3,716,672

 

$

4,189,768

 

North America

 

1,461,101

 

969,585

 

CEMEA

 

2,652,956

 

2,363,272

 

Total multi-currency processing services revenue

 

7,830,729

 

7,522,625

 

Payment processing services revenue

 

4,255,334

 

4,158,311

 

Net revenue

 

$

12,086,063

 

$

11,680,936

 

 

A significant portion of our revenue is derived from agreements with a limited number of customers. Specifically, for the three months ended March 31, 2013, subsidiaries of Global Payments, Inc. represented 20% and of our revenue, and Network International, LLC represented 17% of our revenue.

 

Operating expenses

 

Cost of revenue.     Cost of revenue primarily consists of two categories: (1) payment processing services fees, which includes payment processing transactions fees such as sponsorship fees, interchange and card association fees and assessments; and (2) processing and service costs, which include expenses related to multi-currency processing segment, running our platform infrastructure, including: internet connectivity, hosting and data storage expenses, amortization expense on acquired intangibles and capitalized software development costs, compensation and related benefits and a portion of general overhead expenses.

 

Selling, general and administrative expenses.     Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costs, public company costs and professional service fees for our sales, marketing, customer service, administrative functions, and a portion of general overhead expenses.

 

We allocate overhead such as occupancy, telecommunication charges and depreciation expense based on headcount, as we believe this to be the most accurate measure. As a result, a portion of general overhead expenses is reflected in both our cost of revenue and selling, general and administrative expenses.

 

In October 2012, the East Coast of the United States was hit by Hurricane Sandy, including the city of Long Beach, where our corporate offices are located. For the three months ended March 31, 2013 we recorded capital additions related to Hurricane Sandy of approximately $0.5 million primarily related to leasehold improvements, furniture and fixtures and computer hardware.  During the second quarter of 2013 (through date of filing) we received $0.3 million in insurance proceeds which will be recorded as a gain in that period.  Based on information currently available, we do not expect future write-offs or losses related to Hurricane Sandy.

 

Critical accounting policies and estimates

 

Our management’s discussion and analysis of our financial condition and results of our operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the amounts reported for assets, liabilities, revenue, expenses and the disclosure of contingent liabilities.

 

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Table of Contents

 

Our critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations and that involve difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The estimates are based on historical experience and on various assumptions about the ultimate outcome of future events. Our actual results may differ from these estimates if unforeseen events occur or should the assumptions used in the estimation process differ from actual results. Management believes there have been no material changes to the critical accounting policies discussed in the section entitled “Management Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Recent accounting pronouncements

 

In February 2013, the Financial Accounting Standards Board issued an update to existing guidance on the presentation of comprehensive income. This update requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income (AOCI) by component. For significant items reclassified out of AOCI to net income in their entirety during the reporting period, companies must report the effect on the line items in the statement where net income is presented. For significant items not reclassified to net income in their entirety during the period, companies must provide cross-references in the notes to other disclosures that already provide information about those amounts. We adopted this update effective January 1, 2013 and it did not have a material impact on our condensed consolidated financial statements.

 

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Table of Contents

 

Results of operations

 

The following table sets forth our condensed consolidated results of operations for the periods presented and as a percentage of our net revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

 

 

$ amount

 

% of
revenue

 

$ amount

 

% of
revenue

 

Revenue:

 

 

 

 

 

 

 

 

 

APAC

 

$

3,716,672

 

30.8

%

$

4,189,768

 

35.9

%

North America

 

1,461,101

 

12.1

 

969,585

 

8.3

 

CEMEA

 

2,652,956

 

21.9

 

2,363,272

 

20.2

 

Total multi-currency processing services revenue

 

7,830,729

 

64.8

 

7,522,625

 

64.4

 

Payment processing services revenue

 

4,255,334

 

35.2

 

4,158,311

 

35.6

 

Net revenue

 

12,086,063

 

100.0

 

11,680,936

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Payment processing services fees

 

2,802,289

 

23.2

 

2,783,591

 

23.8

 

Processing and service costs

 

3,175,647

 

26.3

 

2,730,829

 

23.4

 

Total cost of revenue

 

5,977,936

 

49.5

 

5,514,420

 

47.2

 

Selling, general and administrative expenses

 

5,722,684

 

47.3

 

5,270,048

 

45.1

 

Total operating expenses

 

11,700,620

 

96.8

 

10,784,468

 

92.3

 

Income from operations

 

385,443

 

3.2

 

896,468

 

7.7

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest expense

 

(13,146

)

(0.1

)

(14,220

)

(0.1

)

Interest income

 

212

 

0.0

 

171

 

0.0

 

Total other (expense) income, net

 

(12,934

)

(0.1

)

(14,049

)

(0.1

)

Income from operations before provision for income taxes

 

372,509

 

3.1

 

882,419

 

7.6

 

Provision for income taxes

 

(593

)

(0.0

)

(95,272

)

(0.8

)

Net income

 

$

371,916

 

3.1

%

$

787,147

 

6.8

%

 

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Comparison of the three months ended March 31, 2013 and 2012

 

Revenue

 

 

 

Three months ended March 31,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

APAC

 

$

3,716,672

 

$

4,189,768

 

$

(473,096

)

(11

)%

North America

 

1,461,101

 

969,585

 

491,516

 

51

 

CEMEA

 

2,652,956

 

2,363,272

 

289,684

 

12

 

Total multi-currency processing services revenue

 

7,830,729

 

7,522,625

 

308,104

 

4

 

Payment processing services revenue

 

4,255,334

 

4,158,311

 

97,023

 

2

 

Net revenue

 

$

12,086,063

 

$

11,680,936

 

$

405,127

 

3

 

 

Net revenue increased $0.4 million, or 3%, to $12.1 million for the three months ended March 31, 2013 from $11.7 million for the three months ended March 31, 2012. The year over year increase in revenue is further described below.

 

Multi-currency processing services revenue

 

APAC multi-currency processing services revenue.   APAC multi-currency processing services revenue decreased $0.5 million, or 11%, to $3.7 million for the three months ended March 31, 2013 from $4.2 million for the three months ended March 31, 2012. The decrease in APAC multi-currency processing services revenue was driven by changes in the following key business metrics:

 

 

 

Three months ended March 31,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

APAC multi-currency processing active merchant locations (at period end)

 

11,804

 

11,078

 

726

 

7

%

APAC multi-currency processing settled transactions processed

 

1,298,779

 

1,449,565

 

(150,786

)

(10

)

APAC multi-currency processing gross foreign currency mark-up

 

$

14,525,542

 

$

14,910,579

 

$

(385,037

)

(3

)

APAC multi-currency processing settled dollar volume processed

 

$

344,210,148

 

$

372,849,034

 

$

(28,638,886

)

(8

)

APAC average net mark-up % on settled dollar volume processed

 

1.08

%

1.12

%

(0.04

)%

(4

)

 

The 8% decrease in settled dollar volume processed resulted in a $0.3 million decrease to revenue.  APAC multi-currency processing revenue was further decreased by a 4% decrease in our average net mark-up percentage on settled dollar volume processed, which resulted in a $0.2 million decrease to revenue.  The decrease in average net mark-up percentage on settled dollar volume processed was primarily due to re-pricing certain contracts that have been renewed on a long-term basis as well as the pricing mix of services during the period.

 

North America multi-currency processing services revenue.   North America multi-currency processing services revenue increased $0.5 million, or 51% to $1.5 million for the three months ended March 31, 2013 from $1.0 million for the three months ended March 31, 2012. The increase in North America multi-currency processing services revenue was driven by changes in the following key business metrics:

 

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Table of Contents

 

 

 

Three months ended March 31,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

North America multi-currency processing active merchant locations (at period end)

 

3,622

 

1,998

 

1,624

 

81

%

North America multi-currency processing settled transactions processed

 

731,513

 

725,056

 

6,457

 

1

 

North America multi-currency processing gross foreign currency mark-up

 

$

3,280,947

 

$

2,561,285

 

$

719,662

 

28

 

North America multi-currency processing settled dollar volume processed

 

$

97,447,957

 

$

80,010,326

 

$

17,437,631

 

22

 

North America average net mark-up % on settled dollar volume processed

 

1.50

%

1.21

%

0.29

%

24

 

 

The 22% increase in settled dollar volume processed resulted in a $0.3 million increase to revenue. North America multi-currency processing revenue was further impacted by a 24% increase in our average net mark-up percentage on settled dollar volume processed, which resulted in a $0.2 million increase to revenue. The primary reason for the increase in settled dollar volume processed was an increase in active North America merchant locations.

 

CEMEA multi-currency processing services revenue. CEMEA multi-currency processing services revenue increased $0.3 million, or 12% to $2.7 million for the three months ended March 31, 2013 from $2.4 million for the three months ended March 31, 2012. The increase in CEMEA multi-currency processing services revenue was driven by changes in the following key business metrics:

 

 

 

Three months ended March 31,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

CEMEA multi-currency processing active merchant locations (at period end)

 

7,077

 

4,133

 

2,944

 

71

%

CEMEA multi-currency processing settled transactions processed

 

1,013,678

 

802,295

 

211,383

 

26

 

CEMEA multi-currency processing gross foreign currency mark-up

 

$

10,440,103

 

$

8,607,065

 

$

1,833,038

 

21

 

CEMEA multi-currency processing settled dollar volume processed

 

$

256,208,419

 

$

230,575,148

 

$

25,633,271

 

11

 

CEMEA average net mark-up % on settled dollar volume processed

 

1.04

%

1.03

%

0.01

%

1

 

 

The 11% increase in settled dollar volume processed resulted in a $0.3 million increase in revenue. This increase in settled dollar volume processed was due to the continued merchant rollout for a new CEMEA customer. The addition of new merchant locations from this new customer significantly impacted the number of transactions processed through our multi-currency services in CEMEA.

 

Payment processing services revenue

 

Payment processing services revenue is primarily earned from transactions originating in North America.  Payment processing services revenue increased $0.1 million, or 2%, to $4.3 million for the three months ended March 31, 2013 from $4.2 million for the three months ended March 31, 2012.  The slight increase was primarily due to professional services fees related to payment processing customers.

 

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Cost of revenue

 

 

 

Three months ended March 31,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

Payment processing services fees

 

$

2,802,289

 

$

2,783,591

 

$

18,698

 

1

%

Processing and service costs

 

3,175,647

 

2,730,829

 

444,818

 

16

 

Total cost of revenue

 

$

5,977,936

 

$

5,514,420

 

$

463,516

 

8

 

 

Payment processing service fees were basically flat period over period.

 

The increase in processing and service costs of $0.4 million, or 16%, to $3.1 million for the three months ended March 31, 2013 from $2.7 million for the three months ended March 31, 2012 is due to a $0.4 million increase in multi-currency referral commissions earned by third party agents for new multi-currency customers implemented in the fourth quarter of 2012, $0.1 million of technology salary expenses and $0.1 million of amortization of acquired intangible assets both related to the acquisition of BPS (acquired late second quarter of 2012).  These amounts are offset by $0.2 million in other salary and related benefits primarily related to a decrease in bonus expense.

 

Selling, general and administrative expenses

 

 

 

Three months ended March 31,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

Selling, general and administrative expenses

 

$

5,722,684

 

$

5,270,048

 

$

452,636

 

9

%

 

Selling, general and administrative expenses increased $0.4 million, or 9%, to $5.7 million for the three months ended March 31, 2013 from $5.3 million for the three months ended March 31, 2012. The increase in selling, general and administrative expenses was primarily the result of increased salary compensation and related benefit costs of $0.4 million due to budgeted head count additions to support the growth in our existing business, launches into new markets with new customers and additional operating expenses related to the acquisition of BPS (acquired late second quarter of 2012) and professional fees of $0.3 million primarily due to an increase in accounting fees.  These increases are offset by decreases in recruiting expense and other selling, general and administrative costs of $0.3 primarily due to corporate cost reduction efforts.

 

Provision for income taxes

 

The decrease in the tax provision of $0.1 million related primarily to decreased profitability of certain foreign subsidiaries. Our effective tax rate could fluctuate depending on the mix of earnings from foreign jurisdictions taxed at substantially lower statutory rates, primarily Hong Kong.

 

Liquidity and capital resources

 

We currently anticipate that our available cash balances will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next twelve months. However, we may be required to raise additional funds through public or private debt or equity financing to meet additional working capital requirements. There can be no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders. If adequate funds are not available on acceptable terms, our business and operating results could be adversely affected.

 

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Table of Contents

 

Sources of liquidity

 

As of March 31, 2013, we had approximately $5.2 million in cash and cash equivalents of which we had $2.9 million in cash held by foreign subsidiaries. Currently, if we were to repatriate cash held by our foreign subsidiaries, to the extent that such repatriation was a taxable event, we could utilize a portion of our $70.5 million net operating loss carryforward to offset the tax obligation, so that no U.S. tax liability would arise. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

 

Capital expenditures

 

Our capital expenditures related to property and equipment, software development costs, and intangible assets were $1.1 million in the first three months of 2013. The 2013 capital expenditures were primarily attributable to our investment in the business through capital expenditures for network infrastructure and investments in software development and tenant improvements at our corporate office following Hurricane Sandy.

 

Cash flows

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Cash (used in) provided by operating activities

 

$

(76,886

)

$

1,510,819

 

Cash used in investing activities

 

(703,506

)

(440,841

)

Cash provided by (used in) financing activities

 

15,075

 

(167,605

)

 

Operating activities

 

Cash used in operating activities during the three months ended March 31, 2013 was $0.1 million, comprising $1.5 million cash generated by operations and a net decrease in our operating assets and liabilities of $1.6 million. This net decrease in our operating assets and liabilities of $1.6 million primarily consisted of a $1.6 million decrease in accounts payable, accrued expenses and other long-term liabilities due to timing of vendor payments, $0.8 million decrease in our settlement assets which was offset by a $0.8 million decrease in our due to merchants. Cash generated by operations of $1.5 million was inclusive of net income of $0.4 million and total net non-cash charges of $1.1 million. Significant non-cash adjustments to net income primarily included: (i) depreciation and amortization expense of $0.7 million and (ii) stock option expense of $0.3 million.

 

Cash provided by operating activities during the three months ended March 31, 2012 was $1.5 million, comprising $1.7 million cash generated by operations and a net increase in our operating assets and liabilities of $0.2 million. This net decrease in our operating assets and liabilities of $0.2 million primarily consisted of a $0.4 million decrease in accounts receivable, driven by an increase in our cash collection efforts, offset by a $0.6 million decrease in accounts payable and accrued expenses. Cash generated by operations of $1.7 million was inclusive of net income of $0.8 million and total net non-cash charges of $0.9 million. Significant non-cash adjustments to net income primarily included: (i) depreciation and amortization expense of $0.6 million and (ii) stock option expense of $0.2 million.

 

Investing activities

 

Cash provided by investing activities for the three months ended March 31, 2013 was $0.7 million, which was primarily attributable to our investment in the business through capital expenditures for network

 

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Table of Contents

 

infrastructure and investments in software development and tenant improvements at our corporate office following Hurricane Sandy.

 

Cash used in investing activities for the three months ended March 31, 2012 was $0.4 million, which was primarily attributable to our investment in the business through capital expenditures for network infrastructure and investments in software development.

 

Financing activities

 

Cash used in financing activities for the three months ended March 31, 2013  primarily consisted of $0.1 million in proceeds from option exercises offset by $0.1 million in capital lease payments.

 

Cash used in financing activities for the three months ended March 31, 2012 was $0.2 million, primarily consisting of $0.1 million in capital lease payments and $0.1 million in paid IPO costs.

 

Contractual obligations and commitments

 

As of March 31, 2013, there we no material changes in our contractual obligations and commitments as disclosed in our financial statements for the year ended December 31, 2012.

 

Off-balance sheet arrangements

 

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or variable interest entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.

 

Effects of inflation

 

Our monetary assets consist primarily of cash and cash equivalents and receivables, and our non-monetary assets consist primarily of property and equipment, software development and intangible assets, which are not affected significantly by inflation. We believe the replacement costs of property and equipment will not materially affect our operations. However, the rate of inflation affects our expenses, which may not be readily recoverable in the prices of services we offer.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Interest rate risk

 

We had cash and cash equivalents totaling $5.2 million and $6.0 million as of March 31, 2013 and December 31, 2012, respectively. Our exposure to interest rate risk primarily relates to the interest income generated by excess cash invested in highly liquid investments. The cash and cash equivalents are held for working capital purposes. We did not have any derivative financial instruments as of March 31, 2013 and December 31, 2012. We are not exposed, nor do we anticipate being exposed, to material risks due to changes in market interest rates given the historic low levels of interest being earned on the short-term fixed-rate cash operating accounts.

 

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Table of Contents

 

Foreign currency exchange risk

 

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. Dollar, principally the Hong Kong Dollar. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Although we have experienced and will continue to experience fluctuations in our net income as a result of transaction gains (losses), we believe such a change would not have a material impact on our results of operations as Hong Kong is not considered to be a highly inflationary or deflationary economy and historically the Hong Kong Dollar has traded in a very narrow band of exchange rates against the U.S. Dollar. Based upon our annual historical financial statements, for every 1% change in the exchange rate between the U.S. Dollar and the Hong Kong Dollar, our net (loss) income would be impacted by approximately $10,000 and the carrying value of assets on our balance sheet would be impacted by approximately $0.1 million.

 

In the event our foreign sales and expenses increase and expand into other currencies, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. At this time we do not enter into derivatives or other financial activities in an attempt to hedge our foreign currency exchange risk, but may do so in the future. It is difficult to predict the impact any hedging activities would have on our results of operations.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the period covered by this report. As previously disclosed in our Form 10-K, we had a material weakness in our controls over accounting for income taxes as of December 31, 2012.  While management has taken action to address this material weakness it has not been remediated as of March 31, 2013.  Our Chief Executive Officer and Chief Financial Officer have concluded that because of the material weakness in our internal control over financial reporting in accounting for income taxes, our disclosure controls and procedures were not effective as of the period covered by this report. Notwithstanding the material weakness in our internal control over financial reporting, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the audited consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the first quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting means a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

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Table of Contents

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We currently have no legal proceedings pending against us.

 

Item 1A. Risk Factors

 

You should carefully consider the risks and uncertainties described below, together with all of the other information included in this Report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.

 

Risks related to our business and industry

 

We have a history of losses and may not sustain profitability in the future.

 

We had net income of $0.4 million for the three months ended March 31, 2013 and a net loss of $(4.5) million for the year ended December 31, 2012, and have incurred losses since our inception, except in 2011.  We had an accumulated deficit of $81.5 million as of March 31, 2013.

 

Our ability to achieve profitability in the future will likely depend on our ability to continue to increase our revenue, which is subject to a number of factors including our ability to continue to increase multi-currency processing revenue, increase new merchant deployments in the regions in which we currently operate, and add new acquiring banks and processor customers in new geographies. Our revenue is also impacted by factors beyond our control such as global economic and political conditions, particularly those affecting cross-border travel and commerce, such as continuing uncertainty in global economic conditions.  Our ability to achieve profitability in the future also depends on our expense levels, including our selling, general and administrative expenses, and other expenses related to improvements in our technology, launches of new services, and our expansion into new geographic and vertical markets. In addition, our fees, interchange and assessments may also be influenced by increased competition and changes in card association rules and governmental regulations. Our efforts to grow our business may prove more expensive than we currently anticipate and we may not succeed in increasing our revenue to offset higher expenses. These expenses, among other things, may cause our net income and working capital to decrease. If we fail to grow our revenue, manage our expenses and maintain or improve our gross profit margin, we may not be able to sustain profitability in the future.

 

If the card associations do not allow our services to be offered, either generally or in certain geographies, then we cannot sell our services to acquiring banks, processors and merchants in those geographies and our ability to grow our business may be harmed.

 

Our services require us to interconnect with the Visa, MasterCard, American Express, JCB and UnionPay card associations, and if these card associations do not allow acquiring banks and processors to offer certain services, either generally or in certain geographies, then we cannot sell our services to acquiring banks, processors and merchants, either generally or in those geographies. For example, in April 2010, Visa announced a moratorium on all new acquiring banks and merchants offering dynamic currency conversion, or DCC, services, such as our Pay In Your Currency service, and studied the impact of DCC on Visa cardholders and the Visa brand. In October 2010, Visa lifted the moratorium and also established

 

28



Table of Contents

 

certain rule changes that removed a prior prohibition on offering DCC services in certain regions, namely Central Europe, the Middle East, Africa, Latin America and the Caribbean. Prior to the lifting of this moratorium we were unable to provide DCC services in those regions to potential customers. If the card associations do not allow the offering of certain services, either generally or in certain geographies, then we will not be able to sell our services to potential customers generally or in those geographies and our ability to grow our business may be harmed.

 

A limited number of our customers are responsible for a significant portion of our revenue and a decrease in revenue from these customers could have a material adverse effect on our operating results and cash flow.

 

A significant portion of our revenue is derived from agreements with a limited number of customers. Specifically, for the three months ended March 31, 2013, subsidiaries of Global Payments Inc. represented 20% of our revenue and Network International, LLC represented 17% of our revenue. Our contractual arrangements with these customers do not obligate them to offer our services and if they choose to do so, the agreements do not dictate the timing of implementation. Additionally, if these customers lose merchants or if their merchants do not use our services, then our revenue will decrease.

 

We expect that a limited number of customers will continue to account for a significant portion of our revenue in future periods. If we do not adequately perform under, or successfully renew or renegotiate, our agreements with these or our other customers, our business will suffer. Our acquiring bank and processor customers typically enter into agreements with three- or five-year terms and upon the termination of that initial contractual term, customers have the opportunity to consider other providers or renegotiate the terms of the contract. The loss of our contracts with existing customers, our failure to renegotiate contracts with existing customers on terms as favorable as in the past, or a significant decline in the number of transactions we process for them could adversely affect our business, financial condition and results of operations.

 

In addition, the financial position of our customers and their willingness to pay for our services and solutions are affected by general market conditions, competitive pressures and operating margins within the banking industry. Any of these factors could negatively affect our business, financial condition and results of operations.

 

We rely on third parties to implement our services and to market them to consumers.

 

We rely on acquiring banks, processors and merchants to integrate our services within their services and ultimately to offer our services to consumers in order to generate revenue for us. Although we have contracts with our customers, they are not obligated to offer our services and if they choose to do so, the agreements do not dictate the timing of implementation. If the pace of adoption of our services is slower than anticipated it could adversely affect our business, financial condition and results of operations. Following initial implementation of our services, we continue to be significantly dependent on our relationships with acquiring banks and processors to market our services to their merchants and customers. Even those contractual arrangements with our customers that contain exclusivity provisions are not perpetual, and customers could reassess their commitments to us in the future, purchase alternative services and/or develop their own competitive services following the expiration of the exclusivity period, which in several cases does not run for the full term of the agreement.

 

Also, we collaborate with service providers that facilitate the provision of our services, technology and service providers to the electronic payments industry, including point-of-sale system providers, such as e-commerce gateways, terminal manufacturers and other processors that have certified their solutions to our platform. These third parties include acquiring banks, processors and merchants, each of which could be a

 

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Table of Contents

 

customer, as well as a supplier, in addition to commercial communications providers. If these service providers fail to perform in accordance with the requirements of the technological specifications necessary for us to provide our services to our customers, it could result in our failure to provide our services in accordance with our contracts, potentially exposing us to liability to our customers. In these cases, we may have to rely on an indemnity or other contractual obligation from the service provider in order to avoid ultimate liability or suffering damages. However, due to the inherent risk of litigation, such indemnity or other obligation may not prove to be enforceable against the service provider, or even if favorable judgment is obtained, the service provider may not have the financial ability to meet its obligations, thereby exposing us to bearing the burden of the loss.

 

In many cases, we have little or no direct access to our customers’ merchant bases and are heavily reliant on our customers’ sales forces to promote our services. It is ultimately up to our customers or our customers’ merchants to offer our services to consumers and to do so in an effective manner, and there is no guarantee that these merchants or their consumers will continue to use our services. Our customers may not be as effective at selling our services and solutions as our own sales personnel. Our customers are also competing with other participants in the industry for processing business and may have other actual or perceived disadvantages relative to such competitors, which may affect their ability to generate business, whether or not such business includes our services and solutions. As a result, much of our business depends on the continued success and competitiveness of our acquiring banks and processors. We further rely on the success of the merchants. If these merchants experience a reduction in transaction volume or become financially unstable, we may lose revenue. The performance of our customers and our customers’ merchants is subject to general economic conditions and their impact on consumer spending.

 

In addition, we rely on the continuing expansion of merchant and consumer acceptance of the card associations’ brands and programs. There can be no guarantee that merchant and consumer acceptance will continue to expand, and if the rate of merchant acceptance growth slows or reverses itself, our business could suffer.

 

Any security and privacy breaches in our systems may damage client relations, our reputation and expose us to liability.

 

We electronically collect and store sensitive personal information, such as credit card numbers, about consumers. We process that data and deliver our products and services by using computer systems and telecommunications networks operated by both us and by third party service providers. The confidentiality of the consumer information that resides on our systems is critical to our business. Although, we have what we believe to be sufficient security around our systems to prevent unauthorized access, we cannot be certain that our measures will be successful and sufficient to counter all current and emerging technology threats designed to breach our systems in order to gain access to confidential information. If we are unable to protect, or our customers perceive that we are unable to protect, the security and privacy of our electronic transactions:

 

·                   our clients may lose confidence in our services;

 

·                   our reputation may be harmed;

 

·                   we may be exposed to unbudgeted or uninsured financial liability;

 

·                   it may become more difficult for us to register with card associations;

 

·                   we may be subject to increased regulatory scrutiny; and

 

·                   our expenses may increase as a result of potential remediation costs.

 

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Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. While we believe we use proven applications and processes designed for data security and integrity to process electronic transactions, there can be no assurance that our use of these applications and processes will be sufficient to counter all current and emerging technology threats designed to breach our systems in order to gain access to confidential client information or our intellectual property or address the security and privacy concerns of existing and potential customers. Any failures in our security and privacy measures could adversely affect our business, financial condition and results of operations.

 

Any new laws, regulations, card association rules or other industry standards affecting our business, or any changes made to them, in any of the geographic regions in which we operate may require significant development efforts or have an unfavorable impact on our financial results.

 

We are subject to regulations that affect the electronic payments industry in the countries and territories in which we operate. Regulation and proposed regulation of the payments industry has increased significantly in recent years. Failure to comply with regulations may result in the suspension or revocation of a license or registration, the limitation, suspension or termination of service, and the imposition of civil and criminal penalties, including fines, which could have a material adverse effect on our financial condition. For example, we are subject to:

 

·                   the rules of Visa, MasterCard, American Express, JCB, UnionPay and other payment networks;

 

·                   applicable privacy and information security regulations in the regions where we operate and of the card associations;

 

·                  banking and financial regulations or monetary authority rules in the jurisdictions in which we operate; and

 

·                   governmental regulation of the payments, payment processing and financial services industries.

 

For example, in April 2010, Visa announced a moratorium on all new acquiring banks and merchants offering DCC services, including our Pay In Your Currency service, and studied the impact of DCC on Visa cardholders and the Visa brand. In October 2010, Visa lifted the moratorium and also established certain rule changes that removed a prior prohibition on offering DCC services in certain regions, namely Central Europe, the Middle East, Africa, Latin America and the Caribbean. Prior to the lifting of this moratorium we were unable to provide DCC services in those regions to existing or potential customers.

 

Interchange fees, which are typically paid by the acquiring bank to the card issuing bank in connection with transactions, are subject to increasingly intense legal, regulatory, and legislative scrutiny worldwide. For instance, in the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, requires the Board of Governors of the Federal Reserve System to regulate the fees charged or received by card issuing banks for processing point-of-sale debit card transactions. Rules limiting point-of-sale debit card interchange fees and restricting routing rules and network exclusivity became effective in 2011. Certain of our customers or potential customers may experience difficulty complying with any new regulations and as a result, reduce or eliminate purchases of services such as ours. In addition, regulatory actions that impact our industry, even if not directed at us, may require significant efforts and costs to change our services and may require changes to how we price our

 

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services to customers. We cannot predict the impact of any of these changes on our operations and financial condition.

 

Although we are registered with the card associations and other payment networks as a third party processor and an independent sales organization, or ISO, we do not actively participate in their affairs by, for example, participating in the development of operating rules and procedures. The card associations could adopt new operating rules or interpretations of the existing rules that could be damaging to our competitive position because, for example, compliance might be difficult for us or our customers, but not for other participants.

 

Changes in the electronic payments industry in general, or changes in the laws and regulations that affect the electronic payments industry, or interpretation or enforcement thereof, could adversely affect our business, financial condition and results of operations. In addition, even an inadvertent failure to comply with laws and regulations could damage our business or our reputation.

 

We rely on our management team and will need to attract, retain and motivate highly skilled personnel to grow our business, and the loss of one or more key employees or our inability to attract and retain qualified personnel could harm our business.

 

Our success and future growth depend on the skills, working relationships and continued services of our management team and other key personnel. The loss of any of member of our senior management team, and in particular Philip D. Beck, our founder and Chief Executive Officer, who is our key policy-maker and has a direct working relationship with significant customers, could adversely affect our business. All of our employees in the United States work for us on an at-will basis, which means they may terminate their employment relationship with us at any time. We do not maintain key-person life insurance on any of our employees.

 

Our future success will also depend on our ability to attract, retain and motivate highly skilled personnel who have experience with our operations, the rapidly changing transaction processing industry, and the selected markets in which we offer our services. Competition for these types of personnel is intense, particularly in the New York metro area, where our headquarters are located. Additionally, we have significant operations abroad, including developing countries, and attracting highly skilled personnel with the necessary experience in these locations may be difficult.

 

Volatility or lack of successful performance in our stock price may also affect our ability to attract and retain our key personnel. Many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested stock options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of shares of our common stock. We cannot guarantee that we will continue to attract, retain or motivate such personnel, and our inability to do so could adversely affect our business.

 

We are required to be registered with Visa and MasterCard in order to provide our services, and we rely on the sponsorship of our acquiring bank customers for this registration.

 

Our services require us to interconnect with the Visa and MasterCard card associations, and to therefore be registered with those card associations. Since we are not a bank, we are unable to belong to and directly access the Visa and MasterCard card associations. Visa and MasterCard operating regulations require us to be sponsored by an acquiring bank in order to process payment card transactions.

 

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We are currently registered with Visa and MasterCard through the sponsorship of acquiring banks that are members of the card associations and a significant majority of our revenue is from transactions processed using Visa and MasterCard payment cards. If these sponsorships are terminated and we are unable to secure another bank sponsor, we will not be able to process payment card transactions. By registering with card associations, we are subject to card association rules that could subject us or our customers to fines or penalties that may be levied by the card associations for certain acts or omissions. If we or our acquiring bank sponsors fail to comply with the applicable requirements of the card associations, the card associations could fine us, suspend us or terminate our registration. The termination or suspension of our registration could require us to stop providing payment processing services, which would adversely affect our business, financial condition and results of operations.

 

In order for us to continue to grow and improve our operating results, we must continue to increase participation by existing customers, cross sell additional services and add new customers in existing and new geographies.

 

Our future growth depends in part upon our ability to increase participation by our acquiring bank and processor customers’ merchants in the various services that we offer, cross sell additional services to existing acquiring bank, processor and merchant customers, and add new acquiring banks and processors, and merchants in existing and new geographies.

 

In order to increase participation by our customers and their merchants in the various services that we offer together, we need to collaborate with our customers. However, our existing acquiring bank and processor customers may not assist us in increasing participation by their merchants or their merchants may be unreceptive to using our services. If our existing customers do not appreciate, and our sales force does not demonstrate, the benefits of our additional services, we will not be able to effectively cross sell to existing customers. Our expansion into new geographies is also dependent upon our ability to deploy our existing platform or to develop new services to meet the particular service needs of each new geographic location. We may not have adequate financial or technological resources to develop effective and secure services that will satisfy the demands of these new markets.

 

If we fail to increase participation by existing customers, cross sell additional services and add new customers in existing and new geographies, we may not be able to continue to grow and improve our operating results.

 

Fees that may be charged in connection with our Pay In Your Currency processing service are subject to change.

 

When a consumer uses our Pay In Your Currency processing service, they pay a fee that is included in the exchange rate used for each Pay In Your Currency transaction. While Visa and MasterCard rules permit merchants and other third parties to charge these fees, if these card associations change their policies in permitting merchants and other third parties to charge these fees, otherwise restrict the ability to do so or if the card associations charge additional fees for providing such service, as they have done from time to time, our business, financial condition and results of operations could be adversely affected.

 

In addition, some card issuing banks impose a fee on consumers for any foreign transaction, irrespective of the currency in which it occurred. Where this occurs, the consumer will pay the card issuing bank an extra fee on a foreign transaction in addition to any margin reflected by us in the cost of the converted amount for our Pay In Your Currency service. This additional cost, and other efforts by the card issuing banks to discourage consumers from utilizing our services, may adversely affect consumers’ willingness to use our services.

 

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We are subject to international business uncertainties.

 

Our ability to grow our business and our future success will depend to a significant extent on our ability to expand our operations and customer base worldwide. Operating in international markets requires significant resources and management attention. Historically, a significant majority of our revenue has been generated from international customers including international customers of North American merchants. For example, in 2012, we generated 56% of our revenue internationally and 44% in the United States and for the first quarter of 2013, we generated 64% of our revenue internationally and 36% in the United States. Our revenue and operations may be subject to risks such as:

 

·                   difficulties in staffing and managing foreign operations;

 

·                   burdens of complying with a wide variety of laws, regulations and standards;

 

·                   controls on or obstacles to the repatriation of earnings and cash;

 

·                   currency exchange rate fluctuations;

 

·                   different tax burdens;

 

·                   preference for local vendors;

 

·                   trade restrictions;

 

·                   changes in tariffs;

 

·                   the imposition of government controls;

 

·                   nationalization or seizure by banking regulators of our customers;

 

·                   political instability;

 

·                   exposure to a business culture in which improper sales practices may be prevalent; and

 

·                   terrorist activities.

 

The legal systems of developing countries continue to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In certain instances, local implementation rules and/or the actual implementation are not consistent with the regulations at the national level. Additionally, the laws of certain countries do not protect our intellectual property to the same extent as do the laws of the United States. Our failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, as well as civil remedies, including fines, injunctions and recalls of our services and solutions.

 

International expansion and market acceptance depend on our ability to modify our business approach and technology to take into account such factors as differing customer business models, services requirements and needs, the applicable regulatory and business environment, labor costs and other economic conditions. There can be no assurance that these factors will not have an adverse effect on our future international revenue and, consequently, on our business, financial condition and results of operations.

 

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Additionally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws in the United States and elsewhere that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We have operations in and deal with countries known to experience corruption. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, contractors or customers that could be in violation of various laws, including the FCPA, even though these parties are not always subject to our control. We have implemented safeguards to discourage these practices by our employees, consultants and customers. However, our existing safeguards and any future improvements may prove to be less than effective, and our employees, contractors or customers may engage in conduct for which we might be held responsible. Violations of the FCPA or similar laws may result in severe criminal or civil sanctions and we may be subject to other liabilities, which could adversely affect our business, financial condition and results of operations.

 

Adverse changes in political and economic policies of the Chinese government could impede the overall economic growth of China, which could reduce the demand for our services and solutions and damage our business.

 

We conduct significant operations, including through an indirect subsidiary and a branch office, and generate a significant portion of our revenue, in the People’s Republic of China, or China, as well as Hong Kong and Macau, which are special administrative regions of China.

 

Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

 

·                   a higher level of government involvement;

 

·                   an early stage of development of the market-oriented sector of the economy;

 

·                   a rapid growth rate;

 

·                   a higher level of control over foreign exchange; and

 

·                  the control over the allocation of resources.

 

As the Chinese economy has been transitioning from a planned economy to a more market-oriented economy, the Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Although these measures may benefit the overall Chinese economy, they may also have a negative effect on us.

 

Although the Chinese government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the Chinese government continues to exercise significant control over economic growth in China through the allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy, state ownership and imposing policies that impact particular industries or companies in different ways. For example, the Chinese government has suggested that Chinese government authorities should strengthen access and supervision with respect to the outsourcing of bank card data processing and related operations, specifically noting the need for specific regulations with respect to foreign-invested organizations that engage in related services in China.

 

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Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. Government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof.

 

Any adverse change in economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our services and solutions and consequently adversely affect our business, financial condition and results of operations.

 

We derive a significant percentage of our net revenue from a limited number of countries and territories, and any natural disasters or other adverse changes could harm our business.

 

A significant portion of our net revenue is derived from four countries and territories. For the year ended December 31, 2012, we derived 44%, 18%, 18% and 6% of our net revenue, from the United States, the United Arab Emirates, Hong Kong and China, respectively, and for the first quarter of 2013, we derived 36%, 22%, 18% and 5% of our net revenue, from the United States, the United Arab Emirates, Hong Kong and Canada, respectively. We expect that a limited number of countries and territories will continue to account for a significant portion of our net revenue in future periods. If any of these countries or territories are affected by acts of terrorism, natural disasters, such as Hurricane Sandy, which hit the East Coast of the United States in October 2012, the effects of climate change, outbreaks of diseases or other significant adverse changes, cross-border travel to these countries and territories could decline, which could adversely affect our business, financial condition and results of operations.

 

Adverse changes in general economic or political conditions in any of the major countries or territories in which we do business could adversely affect our operating results.

 

Our business can be affected by a number of factors that are beyond our control, such as general geopolitical, economic, and business conditions. As a result of the continuing global economic uncertainty, concerns over the U.S. economy, and continued sovereign debt, monetary and financial uncertainties globally, consumers reduced their international travel and spending. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of the economic recovery, or the magnitude of any new geopolitical or economic conditions and the affect they would have on our business. A further weakening in the global economy may reduce the number of settled transactions and dollar volumes processed and, as a result, reduce our revenue.

 

Additionally, we generate a significant amount of our revenue from cross-border transactions. Thus, revenue from processing cross-border transactions for our customers fluctuates with cross-border travel and the need for transactions to be converted into a different currency. Cross-border travel may be adversely affected by world geopolitical, economic and other conditions. These include the threat of terrorism, natural disasters, the effects of climate change, and outbreaks of diseases. A decline in cross-border travel could adversely affect our revenue. A decline in the need for conversion of currencies might also adversely affect our revenue and profitability.

 

Additionally, because we are domiciled in the United States, a negative perception of the United States arising from its political or other positions could harm the perception of our company and our brand. Any of these factors could adversely affect our business, financial condition and results of operations.

 

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Consolidation among financial institutions, including the merger of our customers with entities that are not our customers or the sale of portfolios of merchants by our customers to entities that are not our customers could materially impact our financial position and results of operation.

 

The payments industry is currently undergoing significant consolidation. Specifically, we face the risk that our acquiring bank or processor customers may merge with entities that are not our customers or may sell portfolios of merchants to entities that are not our customers, thereby impacting our existing agreements and projected revenue with these customers. Consolidation among financial institutions results in an increasingly concentrated client base of large acquiring banks and processors and could increase the bargaining power of our current and future customers. In addition, any nationalization or seizure of one of our acquiring bank customers by banking regulators in any of the jurisdictions in which we operate may also impact the services that we provide. Any significant changes in the ownership or operation of our customers, as a result of consolidation or otherwise, could adversely affect our business, financial condition and results of operations.

 

If our services and solutions do not interoperate with our customers’ systems or experience defects, errors, or delays, the purchase or deployment of our services and solutions may be delayed or cancelled.

 

Our services are based on sophisticated software and computing systems and are designed to interface with our customers’ payment card systems, each of which may have different specifications and utilize different standards. If we find errors in the existing software or defects in the hardware used in our customers’ systems, or if there are errors or delays in our processing of electronic transactions or defects in our software, we may need to modify our services or solutions to fix or overcome these errors, delays and defects and/or our customers may need to modify or fix their systems so that our services and solutions will interoperate with the existing software and hardware. Either of these solutions could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential customers, harm to our reputation, breaches in security and/or exposure to liability claims. In addition, if our services and solutions do not interoperate with our customers’ systems, customers may seek to hold us liable and demand for our services and solutions could be adversely affected. Any of these events could hurt our operating results, damage our reputation, and adversely affect our business, financial condition and results of operations.

 

Interruptions or delays in service from our systems and processing centers could impair the delivery of our services and harm our business.

 

We currently serve our customers out of seven synchronized processing centers linked by a global telecommunications network. Our primary data centers are located in Elmsford, New York, and New Castle, Delaware, but we also host facilities in Bermuda, Dublin, Shanghai and Macau and host two facilities in Hong Kong, through co-location arrangements. We depend on the efficient and uninterrupted operation of our computer network systems, software, telecommunications networks, and processing centers, as well as the systems and services of third parties.

 

Our systems and processing centers are vulnerable to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, terrorist acts, war, unauthorized entry, human error, and computer viruses or other defects. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct.

 

We have security, backup and recovery systems in place, as well as business continuity plans designed to ensure our systems will not be inoperable. However, there is still a risk that a system outage or data loss may occur which would not only damage our reputation but as a result of contractual commitments could

 

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also require the payment of penalties to our clients if our systems do not meet certain operating standards. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of sabotage or terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Our property and business interruption insurance may not be applicable or adequate to compensate us for all losses or failures that may occur.

 

Any damage to, failure of, or defects in our systems or those of third parties, errors or delays in the processing of payment transactions, telecommunications failures or other difficulties could result in loss of revenue, loss of merchants, loss of merchant and consumer data, harm to our business or reputation, exposure to fraud losses or other liabilities, negative publicity, additional operating and development costs, and diversion of technical and other resources.

 

If we fail to respond to evolving technological changes, our services and solutions could become obsolete or less competitive.

 

Our industry is characterized by new and rapidly evolving technologies, developing industry standards and legal regulations and customer requirements and preferences. Recent technological developments include smart cards, mobile commerce and radio frequency and proximity payment devices, such as contactless cards. Accordingly, our operating results depend upon, among other things, our ability to anticipate and respond to these industry and customer changes in order to remain competitive. The process of developing new technologies and services and solutions is complex, and carry the risks associated with any research and development effort, including cost overruns, delays in delivery and performance problems.

 

Our markets are experiencing rapid technological change. Any delay in the delivery of new services or solutions or the failure to differentiate our services and solutions could render them less desirable to our customers, or possibly even obsolete. In addition, our services and solutions are designed to process complex transactions and deliver reports and other information on those transactions, all at high volumes and processing speeds. Any failure to deliver an effective and secure service or solution, or any performance issue that arises with a new service or solution could result in significant processing or reporting errors, possibly resulting in losses.

 

If we are unable to develop enhancements and new features for our existing services and solutions or new services and solutions that keep pace with technological developments, industry standards, legal regulations, and customer requirements and preferences, our services and solutions may become obsolete and less marketable, and our business could be significantly harmed. Additionally, if there are delays in the introduction of new features or new services and solutions to the market, our business could be significantly harmed.

 

We operate in a highly competitive industry and we compete against many companies with substantially greater financial and other resources, and our business may be harmed if we are unable to respond to our competitors effectively.

 

Competition in our market is intense and involves rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changes in customer requirements. To maintain and improve our competitive position, we must keep pace with the evolving needs of our customers and continue to develop and introduce new features, services and solutions in a timely and efficient manner. Our primary competitors are international payment processors, multi-currency payment service providers and global e-commerce payment service providers. Our competitors that are financial institutions or subsidiaries of financial institutions do not incur the costs associated with being sponsored by a bank for registration with the card networks. These factors may allow them to offer better pricing

 

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terms to customers, which could result in a loss of our current or potential customers or could force us to lower our prices as well. Either of these actions could adversely affect our business, financial condition and results of operations.

 

Currently, there is a high level of concentration in the international payment processing industry, with a few large processors providing payment card processing services to acquiring banks on a multi-national and multi-regional basis. International processors with whom we compete include: First Data Corporation, with its OmniPay Limited subsidiary operating a multi-currency platform; Elavon, Inc., a wholly owned subsidiary of U.S. Bancorp, that operates in North America and Europe; and WorldPay (UK) Limited, formerly owned by Royal Bank of Scotland Group, PLC, that also primarily services the North American and European markets.

 

The multi-currency payment service industry is largely segmented among large, international processors, which provide multi-currency processing services as part of their broader international payment processing service, including those referenced above, and smaller companies who work on a regional or local basis to provide DCC or multi-currency processing services on behalf of acquiring banks or merchants. Specialized DCC providers include: FEXCO Holdings; Travelex Holdings Limited; Global Blue; Monex Financial Services Limited; Euronet Worldwide, Pure Commerce Pty Ltd, a subsidiary of Euronet Worldwide; Fintrax Group Holdings, Ltd.; and Continuum Commerce Ltd. (formerly known as GCX (Global Currency Exchange Limited)).

 

In the global e-commerce payment space, our Shop In Your Currency service and iPAY Gateway, or iPAY, compete with several international online payment service providers, including CyberSource Corporation, a subsidiary of Visa, MasterCard International Gateway Services, or MIGS, PayPal, Inc., FiftyOne, Inc., GlobalCollect, WorldPay (UK) Limited, and Payvision. In the United States, we compete against acquiring banks offering multi-currency processing solutions to online merchants, including Chase Paymentech and Bank of America.  In the Asia Pacific region, we compete against regional providers, including AsiaPay Limited, Joint Electronic Teller Services Ltd., or JETCO, and eNETS Pte Ltd, but also support MIGS.

 

Several of our competitors enjoy substantial competitive advantages such as:

 

·                   greater name and brand recognition and longer operating histories;

 

·                   larger sales and marketing budgets and resources;

 

·                   greater resources to make acquisitions of other competitors or products, services and technologies that strengthen their service and solution offerings and increase their presence in the market;

 

·                   lower labor and development costs;

 

·                   larger intellectual property portfolios related to electronic payment methods and systems; and

 

·                   substantially greater financial, technical, customer support and other resources.

 

Conditions in our market could change rapidly and significantly as a result of technological advancements or market consolidation. For example, one of our smaller payment processing competitors may be acquired by a larger company with significant resources, and could leverage those resources to become a more significant competitive presence in our market. The development and market acceptance of

 

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alternative technologies could decrease the demand for our services and solutions or render them obsolete.

 

Our competitors may have the ability to devote more financial and operational resources than we can to the development of new technologies, including Internet payment processing services that provide improved operating functionality and features to their service and solution offerings. If successful, their development efforts could render our services and solutions less desirable to customers. If we are unable to compete successfully in the future, our business may be harmed.

 

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, our financial performance may suffer.

 

We have substantially expanded our overall business, customer base, employee headcount and operations in recent periods both domestically and internationally. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our managerial, customer operations, research and development, sales and marketing, manufacturing, administrative, financial and other resources. In particular, we provided our services to approximately 10,000 active merchant locations in nine countries and territories as of December 31, 2009 and approximately 42,000 active merchant locations in more than 20 countries and territories as of March 31, 2013. Our growth strategy contemplates further increasing the number of our customers and active merchant locations, however, the rate at which we have been able to establish relationships with our customers and active merchant locations in the past may not be indicative of the rate at which we will be able to do so in the future.

 

Our success will depend in part upon the ability of our management team to manage growth effectively. Our ability to grow also depends upon our ability to successfully hire, train, supervise, and manage new employees, obtain financing for our capital needs, expand our systems effectively, control increasing costs, allocate our human resources optimally, enhance and improve our operational functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational and financial infrastructure. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we continue to expand our operations or that we will be able to manage growth effectively or to achieve further growth at all. If our business does not continue to grow or if we fail to effectively manage any future growth, our business, financial condition and results of operations could be adversely affected.

 

Our quarterly results are inherently unpredictable and subject to substantial fluctuations, and, as a result, we may fail to meet the expectations of securities analysts and investors, which could adversely affect the trading price of shares of our common stock.

 

We expect our quarterly revenue and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. The factors that may affect the unpredictability of our quarterly results include, but are not limited to:

 

·                   our dependence on a limited number of customers;

 

·                   our reliance on acquiring banks, processors, merchants and other technology providers to integrate our services within their services and to offer our services to consumers;

 

·                   the timing of new service launches with new and existing customers;

 

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·                   our inability to increase sales to existing customers, retain existing customers and attract new customers;

 

·                   seasonality in the use of our services, as our revenue has historically been seasonal with the first quarter of our year traditionally having less revenue compared to the prior fourth fiscal quarter;

 

·                  changes in our pricing policies;

 

·                   the amount and timing of operating expenses and capital expenditures related to the expansion of our operations and infrastructure;

 

·                   the timing of revenue and expenses related to the development or acquisition of technologies, products, services or businesses;

 

·                  changing market conditions;

 

·                   competition;

 

·                   failures of our services that result in contractual penalties or terminations; and

 

·                   economic, regulatory and political conditions in the markets where we operate or anticipate operating, particularly those impacting cross-border travel and commerce.

 

As a result, we believe that quarter-to-quarter comparisons of operating results are not necessarily a good indication of what our future performance will be. It is likely that in some future quarters, our operating results may be below the expectations of securities analysts or investors, in which case the price of shares of our common stock may decline and we could face costly securities class action suits or other unanticipated issues.

 

Seasonality may cause fluctuations in our operating results.

 

Our revenue has historically been seasonal with the first quarter of our year traditionally having less revenue compared to the prior fourth fiscal quarter. We believe that increased international travel and spending by consumers during the traditional holiday months of November and December cause the fourth quarter of our year to have relatively higher revenue than our other quarters. Our seasonal volumes and revenue trends could change from those we have historically experienced upon our entry into new geographies.

 

In addition, the timing of signing a contract and implementing our services with a large acquiring bank or processor and bringing their merchants on board may overshadow seasonal factors in any particular quarterly period. In the future, we may experience revenue growth from additional other factors such as regulatory mandates that could continue to mask underlying seasonality of our business. Seasonal or cyclical variations in our operations may become more pronounced over time and may materially affect our results of operations in the future. We expect seasonality to continue to impact our business in the future.

 

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Where we have direct contractual acquiring relationships with merchants, we incur chargeback liability when our merchants fail to reimburse chargebacks resolved in favor of their customers. We cannot accurately anticipate these liabilities, which may adversely affect our results of operations and financial condition.

 

In the event a billing dispute between a consumer and a merchant is not resolved in favor of the merchant, the transaction is normally “charged back” to the merchant and the purchase price is credited or otherwise refunded to the consumer. If we are acting as the acquiring bank by virtue of our status as an ISO or under our acquiring agreements with American Express, JCB and UnionPay and are unable to collect such amounts from the merchant’s account or reserve account (if applicable), or if the merchant refuses or is unable, due to closure, bankruptcy or other reasons, to reimburse us for a chargeback, we bear the loss for the amount of the refund paid to the consumer. The risk of chargebacks is typically greater with those merchants that promise future delivery of goods and services rather than delivering goods or rendering services at the time of payment. Although only a small part of our revenue is derived from direct contractual acquiring relationships with merchants, any increase in chargebacks not paid by our merchants may adversely affect our business, financial condition and results of operations.

 

Where we have direct contractual acquiring relationships with merchants, fraud by merchants or others or the violation of card association requirements by merchants could have an adverse effect on our operating results and financial condition.

 

We have potential liability for fraudulent bankcard transactions or credits initiated by merchants or others where we are acting as the acquiring bank by virtue of our status as an ISO or under our acquiring agreements with American Express, JCB and UnionPay. Examples of merchant fraud include when a merchant processes fraudulent debit transactions or credits an accomplice’s payment card for transactions that did not occur or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeit and fraud. While we have systems and procedures designed to detect and reduce the impact of fraud, we cannot ensure the effectiveness of these measures. It is possible that incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud would increase our chargeback liability or other liability. Additionally, if a merchant fails to comply with the applicable requirements of the card associations, it could be subject to a variety of fines or penalties that may be levied by the card associations. If we cannot collect such amounts from the applicable merchant, we could end up bearing such fines or penalties. Although only a small part of our revenue are derived from direct contractual relationships with merchants, increases in chargebacks or other liability could adversely affect our business, financial condition and results of operations.

 

We are exposed to currency exchange risk.

 

We perform currency conversion data processing services, which involves processing and accounting for payments in multiple currencies. The currency conversion underlying such services is presently carried out through the card associations and certain acquiring banks with different exchange rates being applied to a transaction on authorization and subsequent settlement. In most cases, we may have exposure to between one and three days of currency exchange risk. Daily fluctuations will occur in the rate of exchange of the various currencies for which we offer multi-currency payment processing. These fluctuations may be favorable or adverse. Although there can be no guarantee that future fluctuations will match events to date, our analysis of these variations over an extended period of years indicates that variations over the short run have been substantially less than the margin that we charge for multi-currency payment processing transactions, and over the long run to date, the average variation has been nominal. In most cases, we share revenue with acquiring banks and processors and merchants after taking into account foreign exchange fluctuations, and therefore the risk is borne proportionately by us and the other parties participating in these transactions. Although we do not currently engage in hedging or other techniques to minimize exposure to currency exchange risk, we may decide to do so in the future as international transactional volume increases, and such techniques would introduce additional risks, including the risk that a counterparty may be unable to fulfill its obligations to us under such contracts.

 

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Additionally, in the future, it is possible that an increasing proportion of our revenue will be received in non-U.S. currencies that may be subject to foreign currency risk as international currencies fluctuate relative to the value of the U.S. Dollar. Resulting exchange gains and losses are included in our net income. This may give rise to an exchange risk against the U.S. Dollar upon repatriation of foreign currency earnings or upon consolidation for financial account purposes. We will consider strategies for managing and hedging such risks once the volume of foreign earnings reaches certain threshold levels. Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of its revenue currencies into U.S. Dollars or other freely tradable currencies. The occurrence of any of these factors could adversely affect our business, financial condition and results of operations.

 

Our business may suffer if it is alleged or found that our services infringe the intellectual property rights of others.

 

The operation of our business may subject us to claims of infringement or misappropriation of third party intellectual property. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand, and cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations. Further, claims of intellectual property infringement might require us to redesign or replace affected services, delay affected service offerings, enter into costly settlement or license agreements or pay costly damage awards or face a temporary or permanent injunction prohibiting us from marketing, selling or distributing the affected services. If we cannot or do not license the infringed technology on reasonable terms or at all, or substitute similar technology from another source, our revenue and earnings could be adversely impacted. Additionally, our customers may not purchase our services if they are concerned that our services infringe third party intellectual property rights. This could reduce the market opportunity for the sale of our services and solutions.

 

For example, a competitor holds a patent for a particular method of performing DCC in several countries and territories including Canada, India, Malaysia, Mexico, Singapore and Taiwan, which could obstruct or impair us from doing business in those jurisdictions.  Other parties, including other competitors, have filed patent applications or obtained patents with respect to various aspects of DCC in the United States and abroad. We closely monitor these applications and the actions of other parties who hold patents relating to DCC. Our ability to do business in particular jurisdictions may be severely impaired in the event that a third party successfully argues that any of our services, including Pay In Your Currency, infringe a patent held by such third party. Any pre-emptive legal action or legal action to defend against a lawsuit may not be successful, and could result in substantial legal fees, which could adversely affect our financial condition and results of operations.

 

Further, we are contractually obligated to indemnify certain customers or other third parties that use our services for losses suffered or incurred in the event our services are alleged to infringe a third party’s intellectual property rights. The term of these indemnity provisions is generally perpetual after execution of the customer agreement subject to the statute of limitations.

 

The occurrence of any of these events may adversely affect our business, financial condition and results of operations.

 

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The success of our business depends on our ability to protect and enforce our intellectual property rights.

 

We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, to the extent available, may be very difficult to enforce and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third party copying, infringement or use, which could adversely affect our competitive position.

 

As of March 31, 2013, we had one patent issued and two patent applications pending in the United States, and multiple issued patents in Australia, India, New Zealand, the Philippines, Singapore, South Africa and Sri Lanka and patent applications pending in several other jurisdictions, all of which are counterparts to our patent and patent applications in the United States. We cannot ensure that any of our pending applications will be granted or that any of our issued patents will adequately protect our intellectual property. Any patents that may be issued to us may be contested, circumvented, found unenforceable or invalidated and we may not be able to prevent third parties from infringing them. In addition, third parties could claim invalidity, co-inventorship, re-examination, or similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s attention and resources, damage our reputation and brand, and substantially harm our business.

 

In addition to patented technology, we rely on our unpatented technology and trade secrets. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees and contractors and with parties with which we do business. These agreements may be breached and we may not have adequate remedies for any such breach. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, contractors, or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

 

In order to protect or enforce our proprietary technology, we may initiate litigation against third parties, such as patent infringement suits or patent interference proceedings. Litigation may be necessary to assert claims of infringement, enforce our patents, protect our trade secrets or know-how, or determine the enforceability, scope and validity of the proprietary rights of others. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable.

 

If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and could adversely affect our business, financial condition and results of operations.

 

We may not be able to enforce our contracts with our customers, including any exclusivity arrangements.

 

If our customers do not comply with the terms of our contracts, such as the payment of fees or exclusivity arrangements, we may lose revenue and this may adversely affect our business. Particularly, if those customers with whom we have exclusivity arrangements do not comply with these provisions, we may

 

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lose business to our competitors. If our customers do not comply with the provisions of our contracts, we may be required to enter into expensive litigation in order to enforce our rights. We cannot be certain that any such litigation would be successful. Even if successful, litigation may merely prevent a customer from engaging in competitive activity but would not necessarily require the customer to continue to use our services and, in any event, may severely harm the working relationship with such customer and other existing and potential customers that may learn of the litigation.

 

The costs and effects of litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect our financial position and results of operations .

 

From time to time, we may be involved in various litigation matters and governmental or regulatory investigations or similar matters arising out of our business. Our insurance may not cover all claims that may be asserted against it, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any pending or future litigation or investigation significantly exceed our insurance coverage, they could adversely affect our business, financial condition and results of operations In addition, we may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms, if at all. In addition, the expense of defending litigation may be significant, the amount of time to resolve lawsuits is unpredictable and defending ourselves may divert management’s attention from the day-to-day operations of our business, any of which could adversely affect our business, results of operations and cash flows.

 

Our inability to acquire and integrate other businesses, services or technologies could seriously harm our competitive position.

 

In order to remain competitive, obtain key competencies or accelerate our time to market, we may seek to acquire additional businesses or technologies and new products. To date, we have a limited history of acquisitions. Most recently, in May 2012, we completed the acquisition of BPS, a payments technology company headquartered in Ireland. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms of the acquisition, financing the acquisition, or effectively integrating the acquired business, services or technology into our existing business and operations. We may have difficulty integrating acquired technologies or products with our existing services and solutions. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, services or technology, including issues related to intellectual property, quality, regulatory compliance practices, revenue recognition or other accounting practices, deficiencies or weaknesses in the disclosure controls and procedures and internal controls over financial reporting, or employee or customer issues. If we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of shares of our common stock. In addition, any acquisitions we are able to complete may not result in the synergies or any other benefits we had expected to achieve, which could result in substantial write-offs. Contemplating or completing an acquisition and integrating an acquired business, services or technology will significantly divert management and employee time and resources. Further, if the integration process does not proceed smoothly, the following factors, among others, could reduce our revenue and earnings, increase our operating costs, and result in a loss of projected synergies:

 

·                   if we are unable to successfully integrate the benefits, duties and responsibilities, and other factors of interest to the management and employees of any acquired business, we could lose employees to our competitors in the region, which could significantly affect our ability to operate the business and complete the integration; and

 

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·                   if the integration process of any acquired business causes any delays with the delivery of our services, or the quality of those services, we could lose customers to our competitors, which would reduce our revenue and earnings.

 

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year before the end of that five-year period, we would cease to be an “emerging growth company” as of December 31 of that year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Under Section 107(b) of the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourself of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Our business is subject to changing regulations regarding corporate governance, disclosure controls, internal control over financial reporting and other compliance areas that will increase both our costs and the risk of noncompliance. If we fail to comply with these regulations or remediate the material weakness identified in our internal control over financial reporting, we could face difficulties in preparing and filing timely and accurate financial reports.

 

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and the rules and regulations of NASDAQ. In addition, we are currently listed on AIM and subject to AIM’s admission and compliance requirements. Maintaining compliance with these rules and regulations, particularly after we cease to be an emerging growth company, will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place increased strain on our personnel, systems and resources.

 

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The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and, in the future that we assess and report on the effectiveness of internal control over financial reporting. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal control also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports filed with the SEC, beginning for our year ending December 31, 2013 under Section 404(a) of the Sarbanes-Oxley Act or the annual auditor attestation reports regarding effectiveness of our internal controls over financial reporting that we will be required to include in our periodic reports filed with the SEC, beginning for our year ending December 31, 2017, unless, under the Jumpstart Our Business Startups Act, we meet certain criteria that would require such reports to be included prior to then, under Section 404(b) of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of shares of our common stock.

 

As previously disclosed in our Form 10-K, we had a material weakness in our controls over accounting for income taxes that had not yet been fully remediated as of December 31, 2012.  Management has taken action to remediate this material weakness and has concluded that our controls over accounting for income taxes have not been remediated as of March 31, 2013.  We have had historical errors with return to provision adjustments and deferred tax balances, as well as a lack of a thorough process to identify uncertain tax positions.  This could result in reduced net current and deferred tax assets, which could materially impact previous income tax disclosures.

 

If we are unable to appropriately maintain the remediation plan we have recently implemented and maintain any other necessary controls currently in place or that we implement in the future and pending such implementation, or if any difficulties are encountered in their implementation or improvement, (1) our management might not be able to certify, and our independent registered public accounting firm might not be able to report on, the adequacy of our internal control over financial reporting, which would cause us to fail to meet our reporting obligations, and (2) additional misstatements in our financial statements may occur that may not be prevented or detected on a timely basis.

 

In addition to the remediation plan, in order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting going forward, we will need to expend significant resources and provide significant management oversight. We have a substantial effort ahead of us to implement appropriate processes, document our system of internal control over relevant processes, assess their design, remediate any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also involve substantial accounting-related costs. Prior to becoming subject to the Exchange Act in December 2012, we have never been required to test our internal controls within a specified period and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weakness or significant deficiencies persist.

 

Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are

 

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not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, our stock price could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.

 

The Sarbanes-Oxley Act and the rules and regulations of NASDAQ may make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain or increase coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be considered independent for purposes of NASDAQ rules, and officers may be curtailed.

 

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

 

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

 

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

 

In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

 

We may not be able to utilize a significant portion of our net operating loss carryforwards, which could adversely affect our results.

 

As of December 31, 2012, we had available federal net operating loss carryforwards of $70.5 million, state net operating loss carryforwards, primarily New York state, of $24.8 million, and various foreign net operating loss carryforwards, the most significant of which expire between 2020 and 2032. Realization of these net operating loss carryforwards is dependent upon future income arising prior to the expiration dates and other factors under the relevant provisions of the Internal Revenue Code of 1986, as amended, or the Code. Our existing net operating loss carryforwards could expire and be unavailable to offset future income tax liabilities or the use of our net operating loss carryforwards could be limited, which would adversely affect our results.

 

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Our business and financial performance could be negatively impacted by the application of new tax regulations or changes in existing tax laws or regulations.

 

We are subject to taxation by various jurisdictions on our net income or fees charged to customers for our services. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Additionally, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future customers may elect not to continue or purchase our services and solutions in the future. If we are unable to pass these tax expenses on to our customers, our costs will increase, reducing our earnings. Any or all of these events could adversely impact our business and financial performance.

 

Risks related to ownership of our common stock

 

To date, there has been only a limited market for our common stock in the United States and an active trading market for our common stock may not develop in the United States.

 

To date, there has been a limited public market for shares of our common stock in the United States. Since 2006, our common stock has traded on AIM under the symbols “PPT” and “PPTR.” From 2008 until December 2012, our common stock traded on the OTCQX in the United States under the symbol “PLPM” and since December 2012, our common stock has traded on NASDAQ. There is currently a limited volume of trading in our common stock on AIM and NASDAQ, which affects the liquidity of our common stock. We cannot predict when or whether investor interest in our common stock might lead to an increase in its market price or the development of a more active trading market. An active trading market for our shares in the United States may never develop or be sustained. If an active market for our common stock does not develop, it may be difficult to sell shares of our common stock without depressing the market price for the shares, or at all.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of listed companies. Stock prices of many newly public companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, financial condition and results of operations.

 

Our common stock is traded on two separate stock markets and investors seeking to take advantage of price differences between such markets may create unexpected volatility in our share price; in addition, investors may not be able to easily move shares for trading between such markets.

 

Our shares of common stock are listed and traded on NASDAQ and on AIM. Price levels for our common stock may fluctuate significantly on either market, independent of our common stock price on the other market. Investors could seek to sell or buy our common stock to take advantage of any price differences between the two markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our common stock prices on either exchange and the volumes of shares of our common stock available for trading on either exchange. In addition, holders of common stock in either jurisdiction will not be immediately able to transfer such common stock for trading on the other market without effecting necessary procedures with our transfer agent. This could result in time delays and additional cost for our stockholders. Further, if we are unable to continue to meet the regulatory

 

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requirements for admission to AIM or listing on NASDAQ, we may lose our admission to AIM or listing on NASDAQ, which could impair the liquidity of shares of our common stock. Investors whose source of funds for the purchase of shares of our common stock is denominated in a currency other than U.S. Dollars may be adversely affected by fluctuations in the exchange rate between such currency and the U.S. Dollar, even if the price of our common stock increases.

 

A significant portion of our total outstanding shares may be sold into the market in the near future. If there are substantial sales of shares of our common stock, the price of shares of our common stock could decline.

 

The price of shares of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our common stock available for sale. As of April 30, 2013, we had 60,570,441 shares of common stock (which includes 53,719,297 shares of common stock outstanding and 6,851,144 of common stock arising from conversion of preferred stock).

 

The holders of up to an aggregate of 11,072,869 shares of our common stock (which includes shares of our Series A Preferred Stock on an as-converted to common stock basis) outstanding as of April 30, 2013 have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. We have registered shares of common stock that we issue under our employee equity incentive plans. These shares may be sold freely in the public market upon issuance. The market price of the shares of our common stock could decline as a result of sales of a substantial number of our shares in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

 

If securities or industry analysts in the United States do not continue to publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We may not obtain widespread research coverage by securities analysts in the United States, and industry analysts that currently cover us may cease to do so. If there is limited securities analysts coverage of our company, or if industry analysts cease coverage of our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

Our directors, executive officers and principal stockholders have substantial control over us and could delay or prevent a change in corporate control.

 

As of April 17, 2013, our directors, executive officers and holders of more than 5% of our common stock (which includes preferred stock on an as-converted to common stock basis), together with their affiliates, beneficially own, in the aggregate, 66% of our outstanding capital stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of shares of our common stock by:

 

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·                   delaying, deferring or preventing a change of control of us;

 

·                   impeding a merger, consolidation, takeover or other business combination involving us; or

 

·                   discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of shares of our common stock increases.

 

Holders of our Series A Preferred Stock have rights that are superior to holders of our common stock.

 

If we ever liquidate or sell our company to another company or transfer substantially all of our assets or a majority of our stock to another company, the holders of our outstanding Series A Preferred Stock may be entitled to receive proceeds prior and in preference to the holders of our common stock pursuant to the rights set forth in our certificate of incorporation.  Accordingly, it is possible that you will receive nothing in exchange for your shares in the event of a bankruptcy, liquidation or sale of our company.

 

Delaware law and provisions in our amended and restated certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of shares of our common stock.

 

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors, including the following:

 

·                   our Board of Directors is classified into three classes of directors with staggered three-year terms;

 

·                   only our chairman of the board, our chief executive officer, our president or a majority of our Board of Directors is authorized to call a special meeting of stockholders;

 

·                   our stockholders may only take action at a meeting of stockholders and not by written consent;

 

·                   vacancies on our Board of Directors may be filled only by our Board of Directors and not by stockholders;

 

·                   directors may be removed from office only for cause;

 

·                   our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval, and authorizes shares of our Series A Preferred Stock, which are currently outstanding ;

 

·                   advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and

 

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·                   if two-thirds of our Board of Directors approves the amendment of our certificate of incorporation and bylaws, or any provisions thereof, then such amendment need only be approved by stockholders holding a majority of our outstanding shares of common stock entitled to vote; otherwise, such amendment must be approved by stockholders holding two-thirds of our outstanding shares of common stock entitled to vote.

 

Item  2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended March 31, 2013, we issued 2,596 shares of our common stock to holders of warrants at an exercise price of $2.50 per share pursuant to net exercises of warrants.

 

The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and instruments issued in such transactions. All recipients had adequate access, through their relationship with us, to information about us.

 

Item 3. Defaults Upon Senior Securities

 

Not Applicable.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

Not Applicable.

 

Item 6. Exhibits

 

(a) Exhibits

 

Exhibit

 

 

 

Incorporated by Reference

 

Filing

 

Filed

Number

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

 

Date

 

Herewith

31.1

 

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1

*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2

*

 

Certification of Chief Financial Officer pursuant to Rule 

 

 

 

 

 

 

 

 

 

X

 

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Exhibit

 

 

 

Incorporated by Reference

 

Filing

 

Filed

Number

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

 

Date

 

Herewith

 

 

 

13a-14(b) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*