Planet Payment Inc.
Planet Payment Inc (Form: 10-Q, Received: 08/13/2013 17:18:17)

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 June 30, 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 o

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer x

 

Smaller Reporting Company o

(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 July 31, 2013 there were 54,568,179 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

Planet Payment, Inc.

Report on Form 10-Q

For the Quarterly Period Ended June 30, 2013

 

Table of Contents

 

 

 

Page

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012

2

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (loss) for the three and six months ended June 30, 2013 and 2012 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for six months ended June 30, 2013 and 2012 (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

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

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 3.

Defaults Upon Senior Securities

45

 

 

 

Item 4.

Mine Safety Disclosures

45

 

 

 

Item 5.

Other Information

45

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

 

47

 

Planet Payment®, iPAY® and Pay in Your Currency® are registered trademarks of Planet Payment and Shop in Your Currency ™ and our logo are additional trademarks of Planet Payment. All other service marks, trademarks and trade names 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 June 30,

 

As of December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

5,313,971

 

$

6,002,457

 

Restricted cash

 

2,052,545

 

2,517,616

 

Accounts receivable, net of allowances of $0.2 million as of June 30, 2013 and $1.5 million December 31, 2012

 

5,589,554

 

5,585,815

 

Prepaid expenses and other assets

 

1,896,573

 

2,395,137

 

Total current assets

 

14,852,643

 

16,501,025

 

Other assets:

 

 

 

 

 

Restricted cash

 

669,406

 

669,406

 

Property and equipment, net

 

2,186,276

 

1,396,154

 

Software development costs, net

 

5,013,802

 

4,776,320

 

Intangible assets, net

 

2,925,065

 

3,289,590

 

Goodwill

 

342,208

 

347,599

 

Security deposits and other assets

 

945,792

 

338,408

 

Total other assets

 

12,082,549

 

10,817,477

 

Total assets

 

$

26,935,192

 

$

27,318,502

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,119,542

 

$

889,118

 

Accrued expenses

 

3,019,662

 

5,298,789

 

Due to merchants

 

1,934,710

 

2,546,140

 

Current portion of capital leases liability

 

450,644

 

337,588

 

Total current liabilities

 

6,524,558

 

9,071,635

 

Long-term liabilities:

 

 

 

 

 

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

 

1,060,681

 

364,010

 

Total long-term liabilities

 

1,060,681

 

364,010

 

Total liabilities

 

7,585,239

 

9,435,645

 

Commitments and contingencies (Note 10)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock— 10,000,000 shares authorized as of June 30, 2013 and December 31, 2012, $0.01 par value: Series A— 2,243,750 issued and outstanding as of June 30, 2013 and December 31, 2012; $8,975,000 aggregate liquidation preference

 

22,438

 

22,438

 

Common stock—250,000,000 shares authorized as of June 30, 2013 and December 31, 2012, $0.01 par value, and 54,483,340 and 53,658,857 issued and outstanding as of June 30, 2013 and December 31, 2012, respectively

 

544,833

 

536,589

 

Additional paid-in capital

 

100,059,732

 

99,199,149

 

Accumulated other comprehensive (loss) gain

 

(40,413

)

37,925

 

Accumulated deficit

 

(81,236,637

)

(81,913,244

)

Total stockholders’ equity

 

19,349,953

 

17,882,857

 

Total liabilities and stockholders’ equity

 

$

26,935,192

 

$

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
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue:

 

 

 

 

 

 

 

 

 

Net revenue

 

$

11,764,663

 

$

10,117,038

 

$

23,850,726

 

$

21,797,974

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Payment processing services fees

 

2,748,935

 

2,434,248

 

5,551,224

 

5,217,839

 

Processing and service costs

 

3,178,655

 

2,642,590

 

6,354,302

 

5,373,419

 

Total cost of revenue

 

5,927,590

 

5,076,838

 

11,905,526

 

10,591,258

 

Selling, general and administrative expenses

 

5,448,955

 

6,049,283

 

11,171,639

 

11,319,331

 

Total operating expenses

 

11,376,545

 

11,126,121

 

23,077,165

 

21,910,589

 

Income (loss) from operations

 

388,118

 

(1,009,083

)

773,561

 

(112,615

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(15,765

)

(14,355

)

(28,911

)

(28,575

)

Interest income

 

312

 

242

 

524

 

413

 

Total other expense, net

 

(15,453

)

(14,113

)

(28,387

)

(28,162

)

Income (loss) before provision for income taxes

 

372,665

 

(1,023,196

)

745,174

 

(140,777

)

Provision for income taxes

 

(67,974

)

(135,426

)

(68,567

)

(230,698

)

Net income (loss)

 

$

304,691

 

$

(1,158,622

)

$

676,607

 

$

(371,475

)

Basic net income (loss) per share applicable to common stockholders

 

$

0.01

 

$

(0.02

)

$

0.01

 

$

(0.01

)

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

 

$

0.00

 

$

(0.02

)

$

0.01

 

$

(0.01

)

Weighted average common stock outstanding (basic)

 

52,832,451

 

52,035,014

 

52,805,938

 

51,906,425

 

Weighted average common stock outstanding (diluted)

 

54,570,476

 

52,035,014

 

54,672,972

 

51,906,425

 

 

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 Comprehensive Income (Loss) (unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

304,691

 

$

(1,158,622

)

$

676,607

 

$

(371,475

)

Foreign currency translation adjustment

 

33,548

 

(79,162

)

(78,338

)

(65,689

)

Total comprehensive income (loss)

 

$

338,239

 

$

(1,237,784

)

$

598,269

 

$

(437,164

)

 

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)

 

 

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

676,607

 

$

(371,475

)

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

 

 

 

 

 

Stock option expense

 

548,956

 

540,397

 

Depreciation and amortization expense

 

1,405,036

 

1,307,461

 

Provision for doubtful accounts

 

230,644

 

78,988

 

Loss on disposal of equipment

 

4,979

 

 

Gain on insurance settlement

 

(301,281

)

 

Changes in operating assets and liabilities, net of effects of acquisition

 

 

 

 

 

Decrease (increase) in settlement assets

 

465,071

 

(518,202

)

(Increase) decrease in accounts receivables, prepaid expenses and other current assets

 

(97,700

)

443,426

 

Increase in security deposits and other assets

 

(345,503

)

(6,901

)

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

 

(1,563,329

)

(63,572

)

(Decrease) increase in due to merchants

 

(611,430

)

455,132

 

Other

 

(39,164

)

(16,007

)

Net cash provided by operating activities

 

372,886

 

1,849,247

 

Cash flows from investing activities:

 

 

 

 

 

Insurance proceeds

 

401,281

 

 

Decrease in restricted cash

 

 

59,984

 

Purchase of property and equipment

 

(684,667

)

(95,782

)

Capitalized software development

 

(807,027

)

(744,902

)

Purchase of intangible assets

 

(59,287

)

(38,318

)

Cash paid for business combination, net of cash acquired

 

 

(1,577,829

)

Net cash used in investing activities

 

(1,149,700

)

(2,396,847

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

292,202

 

61,680

 

Principal payments on capital lease obligations

 

(203,874

)

(184,757

)

Payment of IPO costs

 

 

(354,531

)

Net cash provided by (used in) financing activities

 

88,328

 

(477,608

)

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

 

 

 

Net decrease in cash and cash equivalents

 

(688,486

)

(1,025,208

)

Beginning of period

 

6,002,457

 

7,671,963

 

End of period

 

5,313,971

 

6,646,755

 

Supplemental disclosure:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

31,146

 

$

27,872

 

Income taxes

 

201,946

 

179,027

 

Non cash investing and financing activities:

 

 

 

 

 

Assets acquired under capital leases

 

$

464,729

 

$

180,805

 

Common stock issued for BPS acquisition

 

 

1,596,862

 

Accrued capitalized hardware, software and fixed assets

 

63,507

 

55,643

 

Capitalized stock-based compensation

 

27,669

 

 

Accrued IPO Costs

 

 

340,890

 

 


(*)                                  For the six months ended June 30, 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

 

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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 and transaction processing and multi-currency processing services. The Company provides its services to approximately 44,000 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, e-commerce and ATM 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”.  From March 2006 until June 2013 shares of our common stock were also traded on AIM under the symbol “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 June 30, 2013 and for the periods ended June 30, 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 June 30, 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 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, or 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, or 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

 

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Table of Contents

 

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 six months ended June 30, 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 the Company received $0.3 million in insurance proceeds which is recorded as a gain in Selling, general and administrative expenses.

 

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 June 30, 2013 and December 31, 2012 the Company’s uninsured cash balances totaled $4.7 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
June 30,
2013

 

As of
December 31,
2012

 

Customer A

 

19

%

26

%

Customer B (*)

 

12

 

14

 

Customer C

 

 

 

11

 

Customer D

 

22

 

 

 

 


(*)                                  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.

 

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

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Customer A

 

20

%

24

%

20

%

23

%

Customer C

 

13

 

16

 

15

 

18

 

 

5. Net income (loss) per share

 

The Company computes net income (loss) 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.

 

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Basic earnings per share is calculated by dividing net income (loss), 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 (loss) 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 (loss) per share:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

304,691

 

$

(1,158,622

)

$

676,607

 

$

(371,475

)

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

 

(34,890

)

 

(77,477

)

 

Net income (loss) applicable to common stockholders (basic and diluted)

 

$

269,801

 

$

(1,158,622

)

$

599,130

 

$

(371,475

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common stock outstanding (basic)

 

52,832,451

 

52,035,014

 

52,805,938

 

51,906,425

 

Common equivalent shares from options and warrants to purchase common stock

 

1,738,025

 

 

1,867,034

 

 

Weighted average common stock outstanding (diluted) (1) (2) 

 

54,570,476

 

52,035,014

 

54,672,972

 

51,906,425

 

Basic net income (loss) per share applicable to common stockholders

 

$

0.01

 

$

(0.02

)

$

0.01

 

$

(0.01

)

Diluted net income (loss) per share applicable to common stockholders (1) (2)

 

$

0.00

 

$

(0.02

)

$

0.01

 

$

(0.01

)

 


(1)                                  In accordance with ASC 260-10-45-48 for the three and six months ended June 30, 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.

 

(2)                                  In accordance with ASC 260-10-45-48 for the three and six months ended June 30, 2013, the Company has excluded 409,794 shares for both the three and six months ended June 30, 2013, which are 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.

 

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

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Stock options

 

3,532,291

 

9,055,113

 

2,592,282

 

8,369,738

 

Warrants

 

60,000

 

2,108,575

 

60,000

 

2,108,575

 

Convertible preferred stock(1) 

 

6,851,144

 

6,851,144

 

6,851,144

 

6,851,144

 

Total anti-dilutive securities

 

10,443,435

 

18,014,832

 

9,503,426

 

17,329,457

 

 


(1)                                  Diluted net income (loss) 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 and six months ended June 30, 2013 and 2012.

 

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6. Stock-based expense

 

The Company has two types of stock-based compensation programs, stock options and restricted stock awards.

 

During the second quarter of 2013, 0.9 million stock options were granted to certain employees of the Company.  The actual number of shares to be issued upon exercise of options is subject to vesting conditions.  Expense is recorded on a straight line basis from the date of the grant over the applicable service period of 36 months.

 

During the second quarter of 2013, 0.7 million restricted stock awards were granted to certain employees and members of the Board of Directors of the Company.  The final number of vested shares is subject to the achievement of certain performance targets and/or other vesting conditions.  Expense is recorded on a straight line basis from the date of the grant over the applicable service period of 36 months.

 

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
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Processing and service costs

 

$

58,162

 

$

48,220

 

$

107,805

 

$

129,001

 

Selling, general and administrative expenses

 

231,865

 

267,785

 

441,151

 

411,396

 

Total stock-based expense

 

$

290,027

 

$

316,005

 

$

548,956

 

$

540,397

 

 

The following summarizes stock-based expense recognized by stock based compensation program:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Stock options

 

$

252,640

 

$

316,005

 

$

511,569

 

$

540,397

 

Restricted stock awards

 

37,387

 

 

37,387

 

 

Total stock-based expense

 

$

290,027

 

$

316,005

 

$

548,956

 

$

540,397

 

 

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 equal to 488,337 shares of the Company’s Common Stock, $0.01 par value, issued to the BPS shareholders. Of the 488,337 consideration shares, 72,887 (valued on the date of closing at $0.2 million) were issued subject to certain technology development milestones which were deemed satisfied in May 2013 and the contingent shares have been 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 straight line 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
June 30,
2013

 

As of
December 31,
2012

 

Equipment

 

2 - 5

 

$

929,582

 

$

923,356

 

Computer hardware

 

3 - 5

 

2,246,963

 

1,688,262

 

Furniture and fixtures

 

5 - 7

 

179,015

 

72,155

 

Leasehold improvements

 

5 – 9

 

650,286

 

263,691

 

 

 

 

 

4,005,846

 

2,947,464

 

Less: Accumulated depreciation and amortization

 

 

 

(1,819,570

)

(1,551,310

)

Property and equipment, net

 

 

 

$

2,186,276

 

$

1,396,154

 

 

Property and equipment depreciation and amortization expense is as follows:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Depreciation and amortization expense

 

$

152,730

 

$

131,850

 

$

271,491

 

$

271,603

 

 

9. Goodwill and intangible assets

 

The changes in carrying amount of goodwill for the six months ended June 30, 2013 is as follows:

 

Goodwill, gross, as of December 31, 2012

 

$

347,599

 

Impact of change in Euro exchange rate

 

(5,391

)

Accumulated impairment losses as of June 30, 2013

 

 

Goodwill, net, as of June 30, 2013

 

$

342,208

 

 

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.

 

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Table of Contents

 

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

 

 

 

As of June 30, 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

 

$

994,977

 

$

(290,035

)

$

704,942

 

$

917,456

 

$

(258,325

)

$

659,131

 

15

 

Technology

 

2,849,847

 

(629,724

)

2,220,123

 

2,894,742

 

(351,018

)

2,543,724

 

5

 

Customer contracts

 

867,354

 

(867,354

)

 

867,354

 

(780,619

)

86,735

 

5

 

Intangible assets, net

 

$

4,712,178

 

$

(1,787,113

)

$

2,925,065

 

$

4,679,552

 

$

(1,389,962

)

$

3,289,590

 

 

 

 

Amortization expense related to intangible assets is as follows:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Amortization expense

 

$

199,882

 

$

117,044

 

$

404,175

 

$

174,021

 

 

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 June 30, 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 both June 30, 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 June 30, 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
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Rent

 

$

88,524

 

$

125,196

 

$

166,154

 

$

250,655

 

Consulting and professional fees

 

18,418

 

11,822

 

39,790

 

26,884

 

 

Rent was paid to BDP Realty Associates LLC a company in which the CEO has a one-third 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
June 30,
2013

 

As of
December 31,
2012

 

Bonus

 

$

479,559

 

$

852,274

 

Professional fees

 

160,989

 

1,095,526

 

Gift card liabilities

 

228,456

 

778,237

 

Deferred income (*)

 

390,413

 

292,001

 

Other (**)

 

1,760,245

 

2,280,751

 

Total accrued expenses

 

$

3,019,662

 

$

5,298,789

 

 


(*) Deferred income will be recognized as revenue ratably over the next 12 months.  As of June 30, 2013, included in the balance sheet classification “Long-term portion of capital leases liability and other long-term liabilities” is the non-current portion of deferred income in the amount of $0.5 million.  The non-current deferred income balance as of December 31, 2012 is zero.

 

(**) 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.

 

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 and $0.8 million which is included in “processing and services costs” for the three and six months ended June 30, 2013, respectively, and for the three and six months ended June 30, 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 includes 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 June 30, 2013 and December 31, 2012, long-lived asset amounts are $10.5 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
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net Revenue:

 

 

 

 

 

 

 

 

 

APAC

 

$

3,795,160

 

$

4,064,492

 

$

7,511,832

 

$

8,254,260

 

North America

 

1,657,383

 

1,106,674

 

3,118,484

 

2,076,259

 

CEMEA

 

1,994,644

 

1,668,894

 

4,647,600

 

4,032,166

 

Total multi-currency processing services revenue

 

7,447,187

 

6,840,060

 

15,277,916

 

14,362,685

 

Payment processing services revenue

 

4,317,476

 

3,276,978

 

8,572,810

 

7,435,289

 

Net revenue

 

$

11,764,663

 

$

10,117,038

 

$

23,850,726

 

$

21,797,974

 

Gross Profit:

 

 

 

 

 

 

 

 

 

APAC

 

$

3,775,477

 

$

4,064,492

 

$

7,459,481

 

$

8,254,260

 

North America

 

1,633,102

 

1,106,674

 

3,069,268

 

2,076,259

 

CEMEA

 

1,655,830

 

1,668,894

 

3,924,884

 

4,032,166

 

Total multi-currency processing services gross profit

 

7,064,409

 

6,840,060

 

14,453,633

 

14,362,685

 

Payment processing services gross profit

 

1,568,542

 

842,731

 

3,021,587

 

2,217,450

 

Total gross profit

 

$

8,632,951

 

$

7,682,791

 

$

17,475,220

 

$

16,580,135

 

 

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Table of Contents

 

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

 

Concentration of revenue by customer by geographical region:

 

 

 

Three months
ended
June 30,

 

Six months
ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Multi-currency processing services revenue:

 

 

 

 

 

 

 

 

 

APAC:

 

 

 

 

 

 

 

 

 

Customer A

 

63

%

61

%

64

%

62

%

Customer E

 

 

 

13

 

 

 

13

 

North America:

 

 

 

 

 

 

 

 

 

Customer F

 

29

 

16

 

29

 

16

 

Customer G

 

27

 

43

 

31

 

47

 

Customer H

 

11

 

11

 

10

 

12

 

CEMEA:

 

 

 

 

 

 

 

 

 

Customer C

 

74

 

100

 

77

 

100

 

Customer I

 

26

 

 

 

23

 

 

 

 

*****

 

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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 and transaction processing and multi-currency processing services. We provide our services to approximately 44,000 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, together with our ATM services, enable our acquiring customers to process and reconcile payment transactions in multiple currencies, geographies and channels.

 

To ensure our long-term success and the success of our customers:

 

·                   we invest in new services and in enhancing our processing platform to facilitate more convenient and innovative payment methods, such as money transfer, mobile payments and eCommerce; as well as the processing of non-financial transactions such as mobile telephone top-up.

·                   we continually work to improve the speed, efficiency, security and performance of our platform and our payments and transaction processing services to enhance the reliability of our global processing infrastructure and protect the security of cardholder information.

 

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 global economy 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.

 

We expect that our payment processing service fees, which primarily represent transaction processing and card acceptance fees, will continue to rise as our revenue increases from new customers using our platform for transaction processing services.  These services (whether or not involving currency conversion) may include the processing of POS, e-commerce and ATM transactions, as well as certain non-financial transactions. We also expect that our processing and service costs,

 

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Table of Contents

 

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 and the product mix of new business.

 

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
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

KEY METRICS:

 

 

 

 

 

 

 

 

 

Consolidated gross billings(1)

 

$

30,406,907

 

$

27,418,225

 

$

62,908,833

 

$

57,655,465

 

Total settled dollar volume processed(2)

 

$

1,731,199,719

 

$

1,439,048,428

 

$

3,431,303,136

 

$

2,870,031,526

 

Adjusted EBITDA (non-GAAP)(3)

 

$

1,347,575

 

$

115,518

 

$

2,727,553

 

$

1,856,998

 

Capitalized expenditures

 

$

949,610

 

$

440,493

 

$

2,079,217

 

$

934,645

 

Total active merchant locations (at period end)(4)

 

44,467

 

34,172

 

44,467

 

34,172

 

Total settled transactions processed(5)

 

$

14,882,349

 

$

11,097,084

 

$

28,061,154

 

$

21,432,710

 

Multi-currency processing services key metrics :

 

 

 

 

 

 

 

 

 

Active merchant locations (at period end)(4)

 

23,509

 

18,076

 

23,509

 

18,076

 

Settled transactions processed(6)

 

3,015,374

 

2,843,781

 

6,059,344

 

5,820,697

 

Gross foreign currency mark-up(7)

 

$

26,089,431

 

$

24,141,247

 

$

54,336,023

 

$

50,220,176

 

Settled dollar volume processed(8)

 

$

637,806,403

 

$

625,873,503

 

$

1,335,672,927

 

$

1,309,308,011

 

Average net mark-up percentage on settled dollar volume processed(9)

 

1.17

%

1.09

%

1.14

%

1.10

%

Payment processing services key metrics :

 

 

 

 

 

 

 

 

 

Active merchant locations (at period end)(4)

 

20,979

 

16,109

 

20,979

 

16,109

 

Payment processing services revenue(10)

 

$

4,317,476

 

$

3,276,978

 

$

8,572,810

 

$

7,435,289

 

Settled transactions processed(11)

 

11,866,975

 

8,253,303

 

22,001,810

 

15,612,013

 

Settled dollar volume processed(12)

 

$

1,093,393,316

 

$

813,174,925

 

$

2,095,630,209

 

$

1,560,723,515

 

 


(1)                                  Represents gross foreign currency mark-up (see footnote 6) plus payment processing services revenue (see footnote 9).

 

(2)                                  Represents total settled dollar volume processed through both our multi-currency and payment processing services.

 

(3)                                  We define Adjusted EBITDA as GAAP net income (loss) 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.

 

(4)                                  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 June 30, 2013 and 2012, there were 21 and 13 active merchant locations, respectively, included in both multi-currency and payment processing active merchant locations but are not included in total active merchant locations, in order to eliminate double counting.

 

(5)                                  Represents total settled transactions (excluding other transaction types such as authorizations, rate look-ups and non-financial transactions).

 

(6)                                  Represents settled transactions processed using our multi-currency processing services (excluding other transaction types such as authorizations, rate look-ups and non-financial transactions).

 

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(7)                                  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. 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.

 

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

 

(9)                                  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 ($7.4 million and $6.8 million for the three months ended June 30, 2013 and 2012, respectively, and $15.3 million and $14.4 million for the six months ended June 30, 2013 and 2012, respectively) and dividing by settled dollar volume processed (see footnote 6).

 

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

 

(11)                           Represents settled transactions processed using our payment processing services ( excluding other transaction types such as authorizations, rate look-ups and non-financial transactions).

 

 

(12)                           Represents the total settled dollar volume processed using our payment processing services.

 

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Table of Contents

 

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 (loss) 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.

 

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 (loss), our most directly comparable financial measure in accordance with GAAP:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

ADJUSTED EBITDA:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

304,691

 

$

(1,158,622

)

$

676,607

 

$

(371,475

)

Interest expense

 

15,765

 

14,355

 

28,911

 

28,575

 

Interest income

 

(312

)

(242

)

(524

)

(413

)

Provision for income taxes

 

67,974

 

135,426

 

68,567

 

230,698

 

Depreciation and amortization

 

669,430

 

686,841

 

1,405,036

 

1,307,461

 

Stock-based expense

 

290,027

 

316,005

 

548,956

 

540,397

 

Acquisition deal costs

 

 

121,755

 

 

121,755

 

Adjusted EBITDA (non-GAAP)

 

$

1,347,575

 

$

115,518

 

$

2,727,553

 

$

1,856,998

 

 

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

 

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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, the processing of certain non-financial transactions 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.

 

Analysis of revenue by segment and geographical region:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2013

 

2012

 

2013

 

2012

 

Revenue:

 

 

 

 

 

 

 

 

 

APAC

 

$

3,795,160

 

$

4,064,492

 

$

7,511,832

 

$

8,254,260

 

North America

 

1,657,383

 

1,106,674

 

3,118,484

 

2,076,259

 

CEMEA

 

1,994,644

 

1,668,894

 

4,647,600

 

4,032,166

 

Total multi-currency processing services revenue

 

7,447,187

 

6,840,060

 

15,277,916

 

14,362,685

 

Payment processing services revenue

 

4,317,476

 

3,276,978

 

8,572,810

 

7,435,289

 

Net revenue

 

$

11,764,663

 

$

10,117,038

 

$

23,850,726

 

$

21,797,974

 

 

A significant portion of our revenue is derived from agreements with a limited number of customers. Specifically, for the three and six months ended June 30, 2013, subsidiaries of Global Payments, Inc. represented 20% and 20% of our revenue, respectively, and Network International, LLC represented 13% and 15% of our revenue, respectively.

 

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 certain expenses related to multi-currency processing segment, expenses of 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 six months ended June 30, 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 we received $0.3 million in insurance proceeds which is recorded as a gain in Selling, general and administrative expenses.

 

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

 

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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.

 

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, or 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.

 

Results of operations

 

The following tables set 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 June 30,

 

Six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

$ amount

 

% of
revenue

 

$ amount

 

% of
revenue

 

$ amount

 

% of
revenue

 

$ amount

 

% of
revenue

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

APAC

 

$

3,795,160

 

32.3

%

$

4,064,492

 

40.2

%

$

7,511,832

 

31.5

%

$

8,254,260

 

37.9

%

North America

 

1,657,383

 

14.1

 

1,106,674

 

10.9

 

3,118,484

 

13.1

 

2,076,259

 

9.5

 

CEMEA

 

1,994,644

 

17.0

 

1,668,894

 

16.5

 

4,647,600

 

19.5

 

4,032,166

 

18.5

 

Total multi-currency processing services revenue

 

7,447,187

 

63.4

 

6,840,060

 

67.6

 

15,277,916

 

64.1

 

14,362,685

 

65.9

 

Payment processing services revenue

 

4,317,476

 

36.6

 

3,276,978

 

32.4

 

8,572,810

 

35.9

 

7,435,289

 

34.1

 

Net revenue

 

11,764,663

 

100.0

 

10,117,038

 

100.0

 

23,850,726

 

100.0

 

21,797,974

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment processing services fees

 

2,748,935

 

23.4

 

2,434,248

 

24.1

 

5,551,224

 

23.3

 

5,217,839

 

23.9

 

Processing and service costs

 

3,178,655

 

27.0

 

2,642,590

 

26.1

 

6,354,302

 

26.6

 

5,373,419

 

24.7

 

Total cost of revenue

 

5,927,590

 

50.4

 

5,076,838

 

50.2

 

11,905,526

 

49.9

 

10,591,258

 

48.6

 

Selling, general and administrative expenses

 

5,448,955

 

46.3

 

6,049,283

 

59.8

 

11,171,639

 

46.8

 

11,319,331

 

51.9

 

Total operating expenses

 

11,376,545

 

96.7

 

11,126,121

 

110.0

 

23,077,165

 

96.7

 

21,910,589

 

100.5

 

Income (loss) from operations

 

388,118

 

3.3

 

(1,009,083

)

(10.0

)

773,561

 

3.3

 

(112,615

)

(0.5

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(15,765

)

(0.1

)

(14,355

)

(0.1

)

(28,911

)

(0.1

)

(28,575

)

(0.1

)

Interest income

 

312

 

0.0

 

242

 

0.0

 

524

 

0.0

 

413

 

0.0

 

Total other expense, net

 

(15,453

)

(0.1

)

(14,113

)

(0.1

)

(28,387

)

(0.1

)

(28,162

)

(0.1

)

Income (loss) before provision for income taxes

 

372,665

 

3.2

 

(1,023,196

)

(10.1

)

745,174

 

3.2

 

(140,777

)

(0.6

)

Provision for income taxes

 

(67,974

)

(0.6

)

(135,426

)

(1.3

)

(68,567

)

(0.3

)

(230,698

)

(1.1

)

Net income (loss)

 

$

304,691

 

2.6

%

$

(1,158,622

)

(11.4

)

$

676,607

 

2.9

%

$

(371,475

)

(1.7

)%

 

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Table of Contents

 

Comparison of the three months ended June 30, 2013 and 2012

 

Revenue

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

APAC

 

$

3,795,160

 

$

4,064,492

 

$

(269,332

)

(7

)%

North America

 

1,657,383

 

1,106,674

 

550,709

 

50

 

CEMEA

 

1,994,644

 

1,668,894

 

325,750

 

20

 

Total multi-currency processing services revenue

 

7,447,187

 

6,840,060

 

607,127

 

9

 

Payment processing services revenue

 

4,317,476

 

3,276,978

 

1,040,498

 

32

 

Net revenue

 

$

11,764,663

 

$

10,117,038

 

$

1,647,625

 

16

 

 

Net revenue increased $1.7 million, or 16%, to $11.8 million for the three months ended June 30, 2013 from $10.1 million for the three months ended June 30, 2012. The quarter over quarter 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 $0.3 million, or 7%, to $3.8 million for the three months ended June 30, 2013 from $4.1 million for the three months ended June 30, 2012. The decrease in APAC multi-currency processing services revenue was driven by changes in the following key business metrics:

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

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

 

11,943

 

11,346

 

597

 

5

%

APAC multi-currency processing settled transactions processed

 

1,365,604

 

1,428,028

 

(62,424

)

(4

)

APAC multi-currency processing gross foreign currency mark-up

 

$

14,626,043

 

$

14,921,984

 

$

(295,941

)

(2

)

APAC multi-currency processing settled dollar volume processed

 

$

349,185,321

 

$

360,902,716

 

$

(11,717,395

)

(3

)

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

 

1.09

%

1.13

%

(0.04

)%

(4

)

 

The 3% decrease in settled dollar volume processed resulted in a $0.1 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 $0.6 million, or 50% to $1.7 million for the three months ended June 30, 2013 from $1.1 million for the three months ended June 30, 2012. The increase in North America multi-currency processing services revenue was driven by changes in the following key business metrics:

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

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

 

3,851

 

2,329

 

1,522

 

65

%

North America multi-currency processing settled transactions processed

 

724,565

 

721,863

 

2,702

 

0

 

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

 

$

3,655,634

 

$

2,763,665

 

$

891,969

 

32

 

North America multi-currency processing settled dollar volume processed

 

$

94,885,146

 

$

88,686,462

 

$

6,198,684

 

7

 

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

 

1.75

%

1.25

%

0.50

%

40

 

 

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The 7% increase in settled dollar volume processed resulted in a $0.1 million increase to revenue. The primary reason for the increase in settled dollar volume processed was an increase in active North America merchant locations.  North America multi-currency processing revenue was further impacted by a 40% increase in our average net mark-up percentage on settled dollar volume processed, which resulted in a $0.5 million increase to revenue. The primary reason for the increase in our average net mark-up percentage on settled dollar volume processed is due to customer and product mix.

 

CEMEA multi-currency processing services revenue. CEMEA multi-currency processing services revenue increased $0.3 million, or 20% to $2.0 million for the three months ended June 30, 2013 from $1.7 million for the three months ended June 30, 2012. The increase in CEMEA multi-currency processing services revenue was driven by changes in the following key business metrics:

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

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

 

7,715

 

4,401

 

3,314

 

75

%

CEMEA multi-currency processing settled transactions processed

 

925,205

 

693,890

 

231,315

 

33

 

CEMEA multi-currency processing gross foreign currency mark-up

 

$

7,807,754

 

$

6,455,598

 

$

1,352,156

 

21

 

CEMEA multi-currency processing settled dollar volume processed

 

$

193,735,936

 

$

176,284,325

 

$

17,451,611

 

10

 

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

 

1.03

%

0.95

%

0.08

%

8

 

 

The 10% increase in settled dollar volume processed resulted in a $0.2 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 transaction processing services for customers in North America.  Payment processing services revenue increased $1.0 million, or 32%, to $4.3 million for the three months ended June 30, 2013 from $3.3 million for the three months ended June 30, 2012.  The increase was primarily due to professional services fees and transaction processing fees, arising from the roll-out of new payment processing customers for both financial and non-financial transactions.

 

Cost of revenue

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

Payment processing services fees

 

$

2,748,935

 

$

2,434,248

 

$

314,687

 

13

%

Processing and service costs

 

3,178,655

 

2,642,590

 

536,065

 

20

 

Total cost of revenue

 

$

5,927,590

 

$

5,076,838

 

$

850,752

 

17

 

 

The increase in payment processing service fees of $0.3 million, or 13%, to $2.7 million for the three months ended June 30, 2013 from $2.4 million for the three months ended June 30, 2012 is a result of $0.1 million increase due to the roll-out of new payment processing customers and a $0.1 million increase as a result of the pricing mix of services for the three months ended June 30, 2013.

 

The increase in processing and service costs of $0.5 million, or 20%, to $3.1 million for the three months ended June 30, 2013 from $2.6 million for the three months ended June 30, 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.

 

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Table of Contents

 

Selling, general and administrative expenses

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

Selling, general and administrative expenses

 

$

5,448,955

 

$

6,049,283

 

$

(600,328

)

(10

)%

 

Selling, general and administrative expenses decreased $0.6 million, or 10%, to $5.4 million for the three months ended June 30, 2013 from $6.0 million for the three months ended June 30, 2012. The decrease in selling, general and administrative expenses was primarily the result of a decrease in professional fees of $0.5 million due to the non-recurrence of expenses incurred related to the filing of our registration statement with the SEC in 2012, $0.3 million insurance settlement gain related to Hurricane Sandy and $0.2 million decrease in recruiting expense and other selling, general and administrative costs due to corporate cost reduction efforts.  These decreases offset by an increase to salary compensation and related benefits 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 in the second quarter of 2012).

 

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.

 

Comparison of the six months ended June 30, 2013 and 2012

 

Revenue

 

 

 

Six months ended June 30,

 

Variance

 

 

 

2013

 

2012

 

Amount

 

Percent

 

APAC

 

$

7,511,832

 

$

8,254,260

 

$

(742,428

)

(9

)%

North America

 

3,118,484

 

2,076,259

 

1,042,225

 

50

 

CEMEA

 

4,647,600

 

4,032,166

 

615,434

 

15

 

Total multi-currency processing services revenue

 

15,277,916

 

14,362,685

 

915,231

 

6

 

Payment processing services revenue