Planet Payment Inc.
Planet Payment Inc (Form: 10-Q, Received: 08/11/2014 17:00:49)

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, 2014

 

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 x

 

 

 

Non-Accelerated Filer o

 

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, 2014 there were 55,370,017 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, 2014

 

Table of Contents

 

 

 

 

Page

 

 

 

 

Part I.

Financial Information

 

2

 

 

 

 

Item 1.

Financial Statements

 

2

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013

 

2

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013 (unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

Item 2.

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

 

13

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

Item 4.

Controls and Procedures

 

24

 

 

 

 

Part II.

Other Information

 

24

 

 

 

 

Item 1.

Legal Proceedings

 

24

 

 

 

 

Item 1A.

Risk Factors

 

24

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

42

 

 

 

 

Item 4.

Mine Safety Disclosures

 

42

 

 

 

 

Item 5.

Other Information

 

42

 

 

 

 

Item 6.

Exhibits

 

42

 

 

 

 

Signatures

 

 

44

 

Planet Payment®, iPAY® and Pay in Your Currency® and our logo are registered trademarks of Planet Payment and Shop in Your Currency ™ is an additional trademark 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,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,336,577

 

$

6,572,468

 

Restricted cash

 

4,293,638

 

3,471,023

 

Accounts receivable, net of allowances of $0.2 million as of June 30, 2014 and December 31, 2013

 

5,980,520

 

6,016,296

 

Prepaid expenses and other assets

 

1,486,307

 

1,457,660

 

Total current assets

 

19,097,042

 

17,517,447

 

Other assets:

 

 

 

 

 

Restricted cash

 

566,161

 

446,044

 

Property and equipment, net

 

2,313,899

 

2,198,640

 

Software development costs, net

 

4,839,704

 

4,904,415

 

Intangible assets, net

 

2,562,114

 

2,820,909

 

Goodwill

 

358,986

 

362,063

 

Security deposits and other assets

 

2,345,390

 

2,141,620

 

Total other assets

 

12,986,254

 

12,873,691

 

Total assets

 

$

32,083,296

 

$

30,391,138

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

408,523

 

$

585,604

 

Accrued expenses

 

3,626,931

 

5,032,620

 

Due to merchants

 

3,787,708

 

3,018,900

 

Current portion of capital leases

 

511,779

 

466,010

 

Total current liabilities

 

8,334,941

 

9,103,134

 

Long-term liabilities:

 

 

 

 

 

Long-term portion of capital leases and deferred revenue

 

1,785,759

 

1,432,513

 

Total long-term liabilities

 

1,785,759

 

1,432,513

 

Total liabilities

 

10,120,700

 

10,535,647

 

Commitments and contingencies (Note 8)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock— 10,000,000 shares authorized as of June 30, 2014 and December 31, 2013, $0.01 par value: Series A— 2,243,750 issued and outstanding as of June 30, 2014 and December 31, 2013; $8,975,000 aggregate liquidation preference

 

22,438

 

22,438

 

Common stock—250,000,000 shares authorized as of June 30, 2014 and December 31, 2013, $0.01 par value, and 55,355,794 and 55,037,488 issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

 

553,557

 

550,375

 

Additional paid-in capital

 

102,425,454

 

101,038,685

 

Accumulated other comprehensive income

 

122,261

 

135,231

 

Accumulated deficit

 

(81,161,114

)

(81,891,238

)

Total stockholders’ equity

 

21,962,596

 

19,855,491

 

Total liabilities and stockholders’ equity

 

$

32,083,296

 

$

30,391,138

 

 

The accompanying notes are an integral part of these financial statements

 

2



Table of Contents

 

Planet Payment, Inc.

Condensed Consolidated Statements of Operations (unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

Net revenue

 

$

11,884,605

 

$

11,764,663

 

$

23,059,722

 

$

23,850,726

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Payment processing services fees

 

2,374,857

 

2,748,935

 

4,893,678

 

5,551,224

 

Processing and service costs

 

3,245,321

 

3,178,655

 

6,959,914

 

6,354,302

 

Total cost of revenue

 

5,620,178

 

5,927,590

 

11,853,592

 

11,905,526

 

Selling, general and administrative expenses

 

4,502,977

 

5,448,955

 

9,584,770

 

11,171,639

 

Restructuring charges

 

53,752

 

 

682,967

 

 

Total operating expenses

 

10,176,907

 

11,376,545

 

22,121,329

 

23,077,165

 

Income from operations

 

1,707,698

 

388,118

 

938,393

 

773,561

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(15,816

)

(15,765

)

(31,986

)

(28,911

)

Interest income

 

288

 

312

 

463

 

524

 

Other income

 

16,949

 

 

16,949

 

 

Total other income (expense), net

 

1,421

 

(15,453

)

(14,574

)

(28,387

)

Income before provision for income taxes

 

1,709,119

 

372,665

 

923,819

 

745,174

 

Provision for income taxes

 

(199,705

)

(67,974

)

(193,695

)

(68,567

)

Net income

 

$

1,509,414

 

$

304,691

 

$

730,124

 

$

676,607

 

Basic net income per share applicable to common stockholders

 

$

0.02

 

$

0.01

 

$

0.01

 

$

0.01

 

Diluted net income per share applicable to common stockholders

 

$

0.02

 

$

0.00

 

$

0.01

 

$

0.01

 

Weighted average common stock outstanding (basic)

 

53,802,936

 

52,832,451

 

53,621,071

 

52,805,938

 

Weighted average common stock outstanding (diluted)

 

54,767,440

 

54,570,476

 

55,288,195

 

54,672,972

 

 

The accompanying notes are an integral part of these financial statements

 

3



Table of Contents

 

Planet Payment, Inc. Condensed

Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,509,414

 

$

304,691

 

$

730,124

 

$

676,607

 

Foreign currency translation adjustment

 

(57

)

33,548

 

(12,970

)

(78,338

)

Total comprehensive income

 

$

1,509,357

 

$

338,239

 

$

717,154

 

$

598,269

 

 

The accompanying notes are an integral part of these financial statements

 

4



Table of Contents

 

Planet Payment, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

730,124

 

$

676,607

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Stock-based compensation expense

 

585,793

 

548,956

 

Depreciation and amortization expense

 

1,477,297

 

1,405,036

 

Provision for doubtful accounts

 

3,248

 

230,644

 

Disposal of property and equipment

 

 

4,979

 

Gain on insurance settlement

 

 

(301,281

)

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in settlement assets

 

1,291,208

 

465,071

 

Decrease (increase) in accounts receivables, prepaid expenses and other current assets

 

3,881

 

(97,700

)

Increase in security deposits and other assets

 

(203,770

)

(345,503

)

Decrease in accounts payable and accrued expenses

 

(1,289,370

)

(1,563,329

)

Decrease in due to merchants

 

(1,345,015

)

(611,430

)

Other

 

6,611

 

(39,164

)

Net cash provided by operating activities

 

1,260,007

 

372,886

 

Cash flows from investing activities:

 

 

 

 

 

Insurance proceeds

 

 

401,281

 

Increase in restricted cash

 

(2,233,940

)

 

Increase in merchant reserves

 

2,113,823

 

 

Purchase of property and equipment

 

(87,681

)

(684,667

)

Capitalized software development

 

(718,593

)

(807,027

)

Purchase of intangible assets

 

(81,453

)

(59,287

)

Net cash used in investing activities

 

(1,007,844

)

(1,149,700

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the issuance of common stock

 

782,598

 

292,202

 

Principal payments on capital lease obligations

 

(270,652

)

(203,874

)

Net cash provided by financing activities

 

511,946

 

88,328

 

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

 

 

 

Net increase (decrease) in cash and cash equivalents

 

764,109

 

(688,486

)

Beginning of period

 

6,572,468

 

6,002,457

 

End of period

 

$

7,336,577

 

$

5,313,971

 

Supplemental disclosure:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

32,552

 

$

31,146

 

Income taxes

 

396,692

 

201,946

 

Non-cash investing and financing activities:

 

 

 

 

 

Assets acquired under capital leases

 

$

287,275

 

$

464,729

 

Accrued capitalized hardware, software and fixed assets

 

88,992

 

63,507

 

Capitalized stock-based compensation

 

21,560

 

27,669

 

 


(*)                                  For the six months ended June 30, 2014 and 2013, 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 and transaction processing and multi-currency processing services. The Company provides its services to approximately 80,000 active merchant locations in 23 countries and territories across the Asia Pacific region, the Americas, 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 provides banks and their merchants with innovative services to accept, process and reconcile electronic payments.  The Company’s point-of-sale and e-commerce services are integrated within the payment card transaction process enabling its acquiring customers to process and reconcile payment transactions in multiple currencies, geographies and channels.  The Company’s ATM services provide its domestic and international acquirers with additional processing capabilities to help them increase revenue and improve customer satisfaction.  The Company also offers non-financial transaction processing services that allow merchants to offer a range of commercial services including pre-paid mobile phone top-up, bill payments and insurance premium payments, using the same point-of-sale devices deployed to accept payment cards.  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.

 

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.

 

Unaudited consolidated interim financial information

 

The accompanying unaudited condensed consolidated interim financial statements as of June 30, 2014 and for the periods ended June 30, 2014 and 2013 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, 2013. Operating results for the interim period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  The December 31, 2013 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 May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The new guidance includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with customers.  ASU 2014-09 will be effective January 1, 2017 and early application is not permitted.  The standard allows for either retrospective application to each reporting period presented or retrospective application with the cumulative effect of initially applying this update recognized at the date of initial application.  The Company is currently evaluating the effect ASU 2014-09 will have on the Company’s Consolidated Financial Statements and disclosures.

 

3. 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.

6



Table of Contents

 

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,
2014

 

As of
December 31,
2013

 

Customer A

 

15

%

22

%

Customer B (*)

 

**

 

12

 

Customer C

 

**

 

13

 

Customer D

 

12

 

**

 

 


(*)                                  Customer 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.

 

(**)                           Less than 10% accounts receivable concentration.

 

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

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Customer A

 

21

%

20

%

21

%

20

%

Customer C

 

10

 

13

 

11

 

15

 

 

4. Net income (loss) per share

 

The Company computes net income (loss) per share in accordance with 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 (loss) 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 (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.

 

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

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

1,509,414

 

$

304,691

 

$

730,124

 

$

676,607

 

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

 

(170,325

)

(34,890

)

(82,389

)

(77,477

)

Net income applicable to common stockholders (basic and diluted)

 

$

1,339,089

 

$

269,801

 

$

647,735

 

$

599,130

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common stock outstanding (basic)

 

53,802,936

 

52,832,451

 

53,621,071

 

52,805,938

 

Common equivalent shares from options and warrants to purchase common stock

 

964,504

 

1,738,025

 

1,667,124

 

1,867,034

 

Weighted average common stock outstanding (diluted)(1)

 

54,767,440

 

54,570,476

 

55,288,195

 

54,672,972

 

Basic net income per share applicable to common stockholders

 

$

0.02

 

$

0.01

 

$

0.01

 

$

0.01

 

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

 

$

0.02

 

$

0.00

 

$

0.01

 

$

0.01

 

 

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Table of Contents

 


(1)                                  In accordance with ASC 260-10-45-48 for the three and six months ended June 30, 2014 and 2013, the Company has excluded 1,236,119 and 915,000, respectively, of contingently issued restricted shares from diluted weighted average common stock outstanding as the contingencies (a) were not 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 per share calculation because the effect would have been anti-dilutive:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Stock options

 

3,737,421

 

3,532,291

 

2,375,051

 

2,592,282

 

Warrants

 

 

60,000

 

45,117

 

60,000

 

Convertible preferred stock(1)

 

6,851,144

 

6,851,144

 

6,851,144

 

6,851,144

 

Total anti-dilutive securities

 

10,588,565

 

10,443,435

 

9,271,312

 

9,503,426

 

 


(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 and six months ended June 30, 2014 and 2013.

 

5. Stock-based compensation expense and assumptions

 

During the first and second quarters of 2014, stock options granted to certain employees of the Company were 0.4 million and 0.1 million, respectively, with a grant fair value of $0.6 million and $0.2 million, respectively.  The actual number of shares that will be issued upon exercise of options is subject to the achievement of service-based vesting conditions.  Stock-based compensation expense is recorded on a straight line basis from the date of the grant over the requisite service period of 36 months.

 

During the second quarter of 2014, 0.3 million restricted stock performance awards with a grant fair value of $5,735 were granted to certain employees of the Company.  The final number of vested shares is subject to the achievement of certain market-based performance targets and vesting conditions.  Expense is recorded on a straight line basis from the date of the grant over the applicable service period of 17 months.

 

During the second quarter of 2014, 0.1 million restricted stock awards with a grant fair value of $0.2 million were granted to certain employees of the Company.  The final number of vested shares is subject to service-based 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 compensation 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 compensation expense recognized by income statement classification:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Processing and service costs

 

$

62,400

 

$

58,162

 

$

126,310

 

$

107,805

 

Selling, general and administrative expenses

 

212,269

 

231,865

 

424,350

 

441,151

 

Restructuring charges

 

 

 

35,133

 

 

Total stock-based compensation expense

 

$

274,669

 

$

290,027

 

$

585,793

 

$

548,956

 

 

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Table of Contents

 

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

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Stock options

 

$

202,809

 

$

252,640

 

$

420,392

 

$

511,569

 

Restricted stock awards

 

71,860

 

37,387

 

165,401

 

37,387

 

Total stock-based compensation expense

 

$

274,669

 

$

290,027

 

$

585,793

 

$

548,956

 

 

6. Property and equipment

 

Property and equipment, net consist of the following:

 

 

 

Estimated
useful life
(years)

 

As of
June 30,
2014

 

As of
December 31,
2013

 

Equipment

 

2 - 5

 

$

947,763

 

$

939,129

 

Computer hardware

 

3 - 5

 

2,829,634

 

2,493,658

 

Furniture and fixtures

 

5 - 7

 

195,581

 

182,562

 

Leasehold improvements

 

5 - 9

 

739,197

 

689,648

 

Total property and equipment, gross

 

 

 

4,712,175

 

4,304,997

 

Less: Accumulated depreciation and amortization

 

 

 

(2,398,276

)

(2,106,357

)

Property and equipment, net

 

 

 

$

2,313,899

 

$

2,198,640

 

 

Property and equipment depreciation and amortization expense is as follows:

 

 

 

Three months ended
June 30,

 

Six months ended
June,

 

 

 

2014

 

2013

 

2014

 

2013

 

Depreciation and amortization expense

 

$

139,768

 

$

152,730

 

$

296,191

 

$

271,491

 

 

7. Goodwill and intangible assets

 

The change in carrying amount of goodwill for the six months ended June 30, 2014 is as follows:

 

Goodwill, gross, as of December 31, 2013

 

$

362,063

 

Impact of change in Euro exchange rate

 

(3,077

)

Accumulated impairment losses as of June 30, 2014

 

 

Goodwill, net, as of June 30, 2014

 

$

358,986

 

 

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 June 30, 2014

 

As of December 31, 2013

 

Amortization

 

 

 

Gross book

 

Accumulated

 

Net book

 

Gross book

 

Accumulated

 

Net book

 

period

 

 

 

value

 

amortization

 

value

 

value

 

amortization

 

value

 

(years)

 

Trademarks and patents

 

$

1,197,406

 

$

(366,349

)

$

831,057

 

$

1,100,696

 

$

(327,200

)

$

773,496

 

15

 

Technology

 

2,989,569

 

(1,258,512

)

1,731,057

 

3,015,192

 

(967,779

)

2,047,413

 

5

 

Intangible assets, net

 

$

4,186,975

 

$

(1,624,861

)

$

2,562,114

 

$

4,115,888

 

$

(1,294,979

)

$

2,820,909

 

 

 

 

Amortization expense related to intangible assets is as follows:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Amortization expense

 

$

168,164

 

$

199,882

 

$

339,455

 

$

404,175

 

 

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8. Commitments and contingencies

 

Employment agreements

 

Pursuant to employment agreements with certain employees, the Company had a commitment to pay severance of approximately $1.4 million and $2.0 million as of June 30, 2014 and December 31, 2013, respectively, in the event of termination without cause, as defined in the employment agreements. Additionally, in the event of termination upon a change of control, as defined in the employment agreements, the Company had a commitment to pay severance of approximately $1.5 million and $2.3 million as of June 30, 2014 and December 31, 2013, respectively.

 

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 $0.3 million with the sponsoring bank against such liabilities and has itself paid the sponsoring bank a security deposit in connection therewith, as shown on the consolidated balance sheets. In addition, the Company holds merchant reserves of approximately $2.3 million.  This reserve amount is included in “Restricted cash” with an offset in “Due to merchants”.  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 and processing errors based upon an assessment of actual historical fraud rates and errors in processing compared to recent bank card processing volume levels. No contingent liability has been recorded as of June 30, 2014 and December 31, 2013, as the risk of material loss is considered remote. The Company monitors these contingent liabilities 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 material legal proceedings pending against it.

 

Acquiring bank sponsorship agreement

 

In order to offer merchant acquiring services for Visa and MasterCard transactions, the Company must be sponsored by a financial institution that is a principal member of the Visa and MasterCard networks.

 

The Company entered into a five year agreement with a sponsoring bank effective September 1, 2013.  The Company is required to pay minimum annual sponsorship transaction fees of $0.3 million in year one, escalating each year with minimum fees of $0.5 million in year five for total minimum fees of $1.8 million to be paid over the term of the agreement.  Sponsorship fees are recorded to cost of sales with the total agreement minimum of $1.8 million recognized on a straight line basis over the term of the agreement.

 

Pursuant to the agreement, the Company is liable for all losses incurred by the sponsoring bank with respect to the activities of our merchants sponsored under the agreement.  No contingent liability has been recorded as of June 30, 2014 as the risk of material loss is considered remote based on historical information.  The Company monitors this contingent liability on a quarterly basis and will provide for a reserve if deemed necessary.

 

9. 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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Rent

 

$

125,999

 

$

88,524

 

$

251,093

 

$

166,154

 

Consulting and professional fees

 

2,815

 

18,418

 

3,426

 

39,790

 

 

Rent was paid to BDP Realty Associates LLC, a company in which our former chief executive officer and the current Chairman of the Board of Directors, Philip Beck has a one-third (1/3 rd ) interest.

 

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

 

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Table of Contents

 

10. Accrued expenses

 

The following are the components of accrued expenses:

 

 

 

As of
June 30,
2014

 

As of
December 31,
2013

 

Bonus

 

$

69,277

 

$

419,205

 

Professional fees

 

162,208

 

322,547

 

Gift card liabilities

 

416,528

 

1,150,096

 

Deferred revenue (*)

 

653,068

 

549,390

 

Other (**)

 

2,325,850

 

2,591,382

 

Total accrued expenses

 

$

3,626,931

 

$

5,032,620

 

 


(*) Current deferred revenue will be recognized as revenue ratably over the next 12 months.  Included in the balance sheet classification “Long-term portion of capital leases liability and deferred revenue” are the non-current portion of deferred revenue in the amount of $1.1 million and $0.9 million as of June 30, 2014 and December 31, 2013, respectively.

 

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

 

11. 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 $0.5 million and $0.4 million, which is included in “processing and services costs” for the three months ended June 30, 2014 and 2013, respectively, and $1.1 million and $0.8 million for the six months ended June 30, 2014 and 2013, respectively.  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, 2014 and December 31, 2013, long-lived asset amounts are $10.1 million and $10.3 million, respectively.

 

The Company conducts its business primarily in three geographical regions: Asia Pacific (“APAC”), the Americas, 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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net Revenue:

 

 

 

 

 

 

 

 

 

APAC

 

$

4,102,146

 

$

3,795,160

 

$

7,988,153

 

$

7,511,832

 

Americas

 

2,079,643

 

1,657,383

 

3,290,449

 

3,118,484

 

CEMEA

 

1,943,757

 

1,994,644

 

4,285,379

 

4,647,600

 

Total multi-currency processing services revenue

 

8,125,546

 

7,447,187

 

15,563,981

 

15,277,916

 

Payment processing services revenue

 

3,759,059

 

4,317,476

 

7,495,741

 

8,572,810

 

Net revenue

 

$

11,884,605

 

$

11,764,663

 

$

23,059,722

 

$

23,850,726

 

Gross Profit:

 

 

 

 

 

 

 

 

 

APAC

 

$

4,079,966

 

$

3,775,477

 

$

7,938,105

 

$

7,459,481

 

Americas

 

2,043,352

 

1,633,102

 

3,222,055

 

3,069,268

 

CEMEA

 

1,486,429

 

1,655,830

 

3,290,173

 

3,924,884

 

Total multi-currency processing services gross profit

 

7,609,747

 

7,064,409

 

14,450,333

 

14,453,633

 

Payment processing services gross profit

 

1,384,202

 

1,568,542

 

2,602,063

 

3,021,587

 

Total gross profit

 

$

8,993,949

 

$

8,632,951

 

$

17,052,396

 

$

17,475,220

 

 

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Table of Contents

 

Payment processing service revenue and gross profit is the result of transactions that primarily originated in the Americas 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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Multi-currency processing services revenue:

 

 

 

 

 

 

 

 

 

APAC:

 

 

 

 

 

 

 

 

 

Customer A

 

60

%

63

%

62

%

64

%

Americas:

 

 

 

 

 

 

 

 

 

Customer E

 

16

 

29

 

18

 

29

 

Customer F

 

19

 

27

 

21

 

31

 

Customer G

 

*

 

11

 

*

 

10

 

Customer H

 

30

 

*

 

19

 

*

 

CEMEA:

 

 

 

 

 

 

 

 

 

Customer C

 

60

 

74

 

61

 

77

 

Customer I

 

39

 

26

 

39

 

23

 

 


(*)                                  Less than 10% revenue concentration.

 

12. Restructuring charges

 

In 2014, the Company initiated a realignment of its workforce aimed at achieving greater operational efficiencies.  The Company reduced its workforce by 27 people, or 15% of its total employees, including senior-level positions.  As a result of the realignment, the Company incurred total restructuring charges during the three and six months ended June 30, 2014 of approximately $0.1 million and $0.7 million, respectively.

 

The table below sets forth the cash components and activity associated with the realignment of workforce and business for the six months ended June 30, 2014:

 

 

 

Balance as of
January 1,
2014

 

Charges

 

Cash Payments

 

Balance as of
June 30, 2014

 

Severance and benefits

 

$

 

$

576,806

 

$

361,863

 

$

214,943

 

Legal expenses

 

 

40,549

 

40,549

 

 

Total restructuring charges

 

$

 

$

617,355

 

$

402,412

 

$

214,943

 

 

13. 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 headquarters 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 was recorded as a gain in selling, general and administrative expenses in that period.

 

*****

 

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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. 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 80,000 active merchant locations in 23 countries and territories across the Asia Pacific region, the Americas, 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 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. The global economy has 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 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, 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.

 

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Table of Contents

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

KEY METRICS:

 

 

 

 

 

 

 

 

 

Consolidated gross billings(1)

 

$

31,637,314

 

$

30,406,907

 

$

63,469,886

 

$

62,908,833

 

Total settled dollar volume processed(2)

 

$

2,104,436,930

 

$

1,731,199,719

 

$

4,099,711,638

 

$

3,431,303,136

 

Adjusted EBITDA (non-GAAP)(3)

 

$

2,784,052

 

$

1,347,575

 

$

3,666,266

 

$

2,727,553

 

Capitalized expenditures

 

$

466,674

 

$

627,582

 

$

998,279

 

$

1,642,157

 

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

 

79,811

 

44,467

 

79,811

 

44,467

 

Total settled transactions processed(5)

 

26,339,466

 

14,882,349

 

50,330,376

 

28,061,154

 

Multi-currency processing services key metrics :

 

 

 

 

 

 

 

 

 

Active merchant locations (at period end)(4)

 

34,720

 

23,509

 

34,720

 

23,509

 

Settled transactions processed(6)

 

3,293,739

 

3,015,374

 

6,465,430

 

6,059,344

 

Gross foreign currency mark-up(7)

 

$

27,878,255

 

$

26,089,431

 

$

55,974,145

 

$

54,336,023

 

Settled dollar volume processed(8)

 

$

660,128,540

 

$

637,806,403

 

$

1,340,698,984

 

$

1,335,672,927

 

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

 

1.14

%

1.17

%

1.12

%

1.14

%

Payment processing services key metrics :

 

 

 

 

 

 

 

 

 

Active merchant locations (at period end)(4)

 

45,113

 

20,979

 

45,113

 

20,979

 

Payment processing services revenue(10)

 

$

3,759,059

 

$

4,317,476

 

$

7,495,741

 

$

8,572,810

 

Settled transactions processed(11)

 

23,045,727

 

11,866,975

 

43,864,946

 

22,001,810

 

Settled dollar volume processed(12)

 

$

1,444,308,390

 

$

1,093,393,316

 

$

2,759,012,654

 

$

2,095,630,209

 

 


(1)                                  Represents gross foreign currency mark-up (see footnote 7) plus payment processing services revenue (see footnote 10).

 

(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 adjusted to exclude (1) interest expense, (2) interest income, (3) provision for income taxes, (4) depreciation and amortization, (5) stock-based compensation expense 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 (loss), 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, 2014 and 2013, there were 22 and 21 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 counting these locations twice.

 

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

 

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

 

(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.  Refer to our segment disclosure in Note 11 of our condensed consolidated financial statements for information on our net revenue from multi-currency processing services.

 

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Table of Contents

 

(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 total multi-currency processing services net revenue ($7.5 million and $7.4 million for the three months ended June 30, 2014 and 2013, respectively, and $15.0 million and $15.3 million for the six months ended June 30, 2014 and 2013, respectively) and dividing by settled dollar volume processed (see footnote 8).  For purposes of calculating “Average net mark-up percentage on settled dollar volume processed”, multi-currency processing services revenue includes revenue related to multi-currency transactions only.

 

(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 and rate look-ups).

 

(12)                           Represents the total settled dollar volume processed using our 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 compensation expense 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 results. 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, our most directly comparable financial measure in accordance with GAAP:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

ADJUSTED EBITDA:

 

 

 

 

 

 

 

 

 

Net income

 

$

1,509,414

 

$

304,691

 

$

730,124

 

$

676,607

 

Interest expense

 

15,816

 

15,765

 

31,986

 

28,911

 

Interest income

 

(288

)

(312

)

(463

)

(524

)

Provision for income taxes

 

199,705

 

67,974

 

193,695

 

68,567

 

Depreciation and amortization

 

730,984

 

669,430

 

1,477,297

 

1,405,036

 

Stock-based compensation expense

 

274,669

 

290,027

 

550,660

 

548,956

 

Restructuring charges

 

53,752

 

 

682,967

 

 

Adjusted EBITDA (non-GAAP)

 

$

2,784,052

 

$

1,347,575

 

$

3,666,266

 

$

2,727,553

 

 

15



Table of Contents

 

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.  Also included are fees for non-transactional services.

 

· 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, the Americas, 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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue:

 

 

 

 

 

 

 

 

 

APAC

 

$

4,102,146

 

$

3,795,160

 

$

7,988,153

 

$

7,511,832

 

Americas

 

2,079,643

 

1,657,383

 

3,290,449

 

3,118,484

 

CEMEA

 

1,943,757

 

1,994,644

 

4,285,379

 

4,647,600

 

Total multi-currency processing services revenue

 

8,125,546

 

7,447,187

 

15,563,981

 

15,277,916

 

Payment processing services revenue

 

3,759,059

 

4,317,476

 

7,495,741

 

8,572,810

 

Net revenue

 

$

11,884,605

 

$

11,764,663

 

$

23,059,722

 

$

23,850,726

 

 

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, 2014, subsidiaries of Global Payments, Inc. represented 21% of our revenue and Network International, LLC represented 10% and 11% 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.

 

16



Table of Contents

 

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.

 

Restructuring charges.   The Company recorded restructuring charges in connection with a realignment of its workforce.  These charges primarily include employee severance and benefits.

 

Critical accounting policies and estimates

 

The 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.  These principles require us to make certain estimates and judgments that affect the reported amounts and the disclosure in our financial statements.  We base our estimates on historical experience, future trends and other assumptions we believe to be reasonable under the circumstances.  Because these accounting policies require significant judgment, our actual results may differ materially from our estimates.

 

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, 2013.

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

$ amount

 

revenue

 

$ amount

 

revenue

 

$ amount

 

revenue

 

$ amount

 

revenue

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

APAC

 

$

4,102,146

 

34.5

 

$

3,795,160

 

32.3

%

$

7,988,153

 

34.6

%

$

7,511,832

 

31.5

%

Americas

 

2,079,643

 

17.5

 

1,657,383

 

14.1

 

3,290,449

 

14.3

 

3,118,484

 

13.1

 

CEMEA

 

1,943,757

 

16.4

 

1,994,644

 

17.0

 

4,285,379

 

18.6

 

4,647,600

 

19.5

 

Total multi-currency processing services revenue

 

8,125,546

 

68.4

 

7,447,187

 

63.4

 

15,563,981

 

67.5

 

15,277,916

 

64.1

 

Payment processing services revenue

 

3,759,059

 

31.6

 

4,317,476

 

36.6

 

7,495,741

 

32.5

 

8,572,810

 

35.9

 

Net revenue

 

11,884,605

 

100.0

 

11,764,663

 

100.0

 

23,059,722

 

100.0

 

23,850,726

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment processing services fees

 

2,374,857

 

20.0

 

2,748,935

 

23.4

 

4,893,678

 

21.2

 

5,551,224

 

23.3

 

Processing and service costs

 

3,245,321

 

27.3

 

3,178,655

 

27.0

 

6,959,914

 

30.2

 

6,354,302

 

26.6

 

Total cost of revenue

 

5,620,178

 

47.3

 

5,927,590

 

50.4

 

11,853,592

 

51.4

 

11,905,526

 

49.9

 

Selling, general and administrative expenses

 

4,502,977

 

37.9

 

5,448,955

 

46.3

 

9,584,770

 

41.6

 

11,171,639

 

46.8

 

Restructuring charges

 

53,752

 

0.5

 

 

 

682,967

 

3.0

 

 

 

Total operating expenses

 

10,176,907

 

85.7

 

11,376,545

 

96.7

 

22,121,329

 

96.0

 

23,077,165

 

96.7

 

Income from operations

 

1,707,698

 

14.3

 

388,118

 

3.3

 

938,393

 

4.0

 

773,561

 

3.3

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(15,816

)

(0.1

)

(15,765

)

(0.1

)

(31,986

)

(0.1

)

(28,911

)

(0.1

)

Interest income

 

288

 

0.0

 

312

 

0.0

 

463

 

0.0

 

524

 

0.0

 

Other income

 

16,949

 

0.1

 

 

 

16,949

 

0.1

 

 

 

Total other income (expense), net

 

1,421

 

0.0

 

(15,453

)

(0.1

)

(14,574

)

0.0

 

(28,387

)

(0.1

)

Income before provision for income taxes

 

1,709,119

 

14.3

 

372,665

 

3.2

 

923,819

 

4.0

 

745,174

 

3.2

 

Provision for income taxes

 

(199,705

)

(1.7

)

(67,974

)

(0.6

)

(193,695

)

(0.8

)

(68,567

)

(0.3

)

Net income

 

$

1,509,414

 

12.6

 

$

304,691

 

2.6

%

$

730,124

 

3.2

%

$

676,607

 

2.9

%

 

17



Table of Contents

 

Comparison of the three months ended June 30, 2014 and 2013

 

Revenue

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2014

 

2013

 

Amount

 

Percent

 

APAC

 

$

4,102,146

 

$

3,795,160

 

$

306,986

 

8

%

Americas

 

2,079,643

 

1,657,383

 

422,260

 

25

 

CEMEA

 

1,943,757

 

1,994,644

 

(50,887

)

(3

)

Total multi-currency processing services revenue

 

8,125,546

 

7,447,187

 

678,359

 

9

 

Payment processing services revenue

 

3,759,059

 

4,317,476

 

(558,417

)

(13

)

Net revenue

 

$

11,884,605

 

$

11,764,663

 

$

119,942

 

1

 

 

Net revenue increased $0.1 million, or 1%, to $11.9 million for the three months ended June 30, 2014 from $11.8 million for the three months ended June 30, 2013.  The quarter over quarter increase in revenue was primarily due to an increase in multi-currency settled dollar volume processed and revenues earned on multi-currency non-transactional services.  These increases are mostly offset by a decrease in our payment processing services revenue.  These changes are described below.

 

Multi-currency processing services revenue

 

APAC multi-currency processing services revenue.   APAC multi-currency processing services revenue increased $0.3 million, or 8%, to $4.1 million for the three months ended June 30, 2014 from $3.8 million for the three months ended June 30, 2013. The increase in APAC multi-currency processing services revenue was driven by changes in the following key business metrics:

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2014

 

2013

 

Amount

 

Percent

 

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

 

12,865

 

11,943

 

922

 

8

%

APAC multi-currency processing settled transactions processed

 

1,522,563

 

1,365,604

 

156,959

 

11

 

APAC multi-currency processing gross foreign currency mark-up

 

$

15,839,106

 

$

14,626,043

 

$

1,213,063

 

8

 

APAC multi-currency processing settled dollar volume processed

 

$

370,509,543

 

$

349,185,321

 

$

21,324,222

 

6

 

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

 

1.11

%

1.09

%

0.02

%

2

 

 

The 6% increase in settled dollar volume processed resulted in a $0.2 million increase to revenue and the 2% increase in our average net mark-up percentage on settled dollar volume processed resulted in a $0.1 million increase to revenue.  The increase in settled dollar volume processed was primarily due to the 8% increase in active merchant locations.

 

Americas multi-currency processing services revenue.   Americas multi-currency processing services revenue increased $0.4 million, or 25%, to $2.1 million for the three months ended June 30, 2014 from $1.7 million for the three months ended June 30, 2013.  The decrease in Americas multi-currency processing services revenue was driven by changes in the following key business metrics:

 

18



Table of Contents

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2014

 

2013

 

Amount

 

Percent

 

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

 

11,663

 

3,851

 

7,812

 

203

%

Americas multi-currency processing settled transactions processed

 

687,553

 

724,565

 

(37,012

)

(5

)

Americas multi-currency processing gross foreign currency mark-up

 

$

3,819,111

 

$

3,655,634

 

$

163,477

 

4

 

Americas multi-currency processing settled dollar volume processed

 

$

84,192,991

 

$

94,885,146

 

$

(10,692,155

)

(11

)

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

 

1.78

%*

1.75

%

0.03

%

2

 

 

The 25% increase in Americas multi-currency processing revenue is due to revenues earned on non-transactional services of $0.6 million partially offset by a 11% decrease in settled dollar volume processed, which resulted in a $0.2 million decrease to revenue. The primary reason for the decrease in settled dollar volume processed is due to a decrease in volume for a specific currency and certain retail merchants.

 


(*)                                  For purposes of calculating “Average net mark-up percentage on settled dollar volume processed”, multi-currency processing services revenue includes revenue related to multi-currency transactions only.

 

CEMEA multi-currency processing services revenue. CEMEA multi-currency processing services revenue decreased $0.1 million, or 3%, to $1.9 million for the three months ended June 30, 2014 from $2.0 million for the three months ended June 30, 2013.  The decrease in CEMEA multi-currency processing services revenue was driven by changes in the following key business metrics:

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2014

 

2013

 

Amount

 

Percent

 

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

 

10,192

 

7,715

 

2,477

 

32

%

CEMEA multi-currency processing settled transactions processed

 

1,083,623

 

925,205

 

158,418

 

17

 

CEMEA multi-currency processing gross foreign currency mark-up

 

$

8,220,038

 

$

7,807,754

 

$

412,284

 

5

 

CEMEA multi-currency processing settled dollar volume processed

 

$

205,426,006

 

$

193,735,936

 

$

11,690,070

 

6

 

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

 

0.95

%

1.03

%

(0.08

)%

(8

)

 

The 8% decrease in average net mark-up percentage on settled dollar volume processed resulted in a $0.2 million decrease to revenue partially offset by a 6% increase in settled dollar volume processed, which resulted in a $0.1 million increase to revenue.  This decrease is primarily a result of customer and pricing mix.

 

Payment processing services revenue

 

Payment processing services revenue is primarily earned from transaction processing services for customers in North America.  Payment processing services revenue decreased $0.6 million, or 13%, to $3.7 million for the three months ended June 30, 2014 from $4.3 million compared to the three months ended June 30, 2013.  The decrease was primarily due to professional services fees recognized in the three months ended June 30, 2013, but not in 2014.

 

Cost of revenue

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2014

 

2013

 

Amount

 

Percent

 

Payment processing services fees

 

$

2,374,857

 

$

2,748,935

 

$

(374,078

)

(14

)%

Processing and service costs

 

3,245,321

 

3,178,655

 

66,666

 

2

 

Total cost of revenue

 

$

5,620,178

 

$

5,927,590

 

$

(307,412

)

(5

)

 

Payment processing service fees

 

The decrease in payment processing service fees of $0.4 million, or 14%, to $2.3 million for the three months ended June 30, 2014 from $2.7 million for the three months ended June 30, 2013 is a direct result of the decrease in payment processing service revenue.

 

19



Table of Contents

 

Selling, general and administrative expenses

 

 

 

Three months ended June 30,

 

Variance

 

 

 

2014

 

2013

 

Amount

 

Percent

 

Selling, general and administrative expenses

 

$

4,502,977

 

$

5,448,955

 

$

(945,978

)

(17