Planet Payment Inc.
Planet Payment Inc (Form: 10-Q, Received: 05/05/2016 06:13:31)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 

(Mark One)

 

 

 

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

 

For the quarterly period ended March 31 , 201 6

 

OR

 

 

 

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

 

For the transition period from               to              

 

Commission file number 001-35699

 

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  No

 

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

 

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

 

 

 

 

Large Accelerated Filer

 

Accelerated Filer

 

 

 

Non-Accelerated Filer

 

Smaller Reporting Company

(Do not check if smaller reporting company)

 

 

 

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

 

As of April 30, 2016 ,   there were 49,988,073 shares of the registrant’s common stock outstanding.

 

 

 

 


 

Table of Contents

Planet Payment, Inc.

Report on Form 10-Q

For the Quarterly Period Ended March 31, 2016

 

Table of Contents

 

 

 

 

 

 

Page

 

 

 

Part I.  

Financial Information

 

 

 

Item 1.  

Financial Statements

 

 

 

 

Condensed Con solidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 201 5

 

 

 

 

Condensed Consolidated Statements of Income for the three   months ended March 31 , 201 6  and 201 5 (unaudited)

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three   months ended  March 31 , 201 6 and 201 5 (unaudited)

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31 , 201 6 and 201 5  (unaudited)

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

Item 2.  

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

17 

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

29 

 

 

 

Item 4.  

Controls and Procedures

29 

 

 

 

Part II.  

Other Information

29 

 

 

 

Item 1.  

Legal Proceedings

29 

 

 

 

Item 1A.  

Risk Factors

30 

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

30 

 

 

 

Item 3.  

Defaults Upon Senior Securities

30 

 

 

 

Item 4.  

Mine Safety Disclosures

30 

 

 

 

Item 5.  

Other Information

30 

 

 

 

Item 6.  

Exhibits

31 

 

 

 

Signatures  

 

32 

 

Planet Payment®, iPAY® and Pay in Your Currency® , as well as our logo , are registered trademarks of Planet Payment , and Multi-Currency Pricing ™ 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.

 

2


 

Table of Contents

PART  I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Planet Payment, Inc.

Condensed Consolidated Balance Sheet s

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

March 31,

 

December 31,

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

    

    

 

    

Cash and cash equivalents

 

$

13,849,551

 

$

14,675,515

Restricted cash

 

 

4,930,965

 

 

5,050,147

Accounts receivable, net of allowances of $0.2 million as of March 31, 2016 and $0.1 million as of December 31, 2015

 

 

6,636,151

 

 

6,406,496

Prepaid expenses and other assets

 

 

2,006,621

 

 

1,800,566

Total current assets

 

 

27,423,288

 

 

27,932,724

Other assets:

 

 

 

 

 

 

Restricted cash

 

 

551,869

 

 

551,917

Property and equipment, net

 

 

1,821,977

 

 

1,811,619

Software development costs, net

 

 

3,972,881

 

 

3,964,454

Intangible assets, net

 

 

1,262,080

 

 

1,378,264

Goodwill

 

 

298,655

 

 

286,852

Deferred tax asset and other long-term assets

 

 

8,456,296

 

 

8,581,082

Total other assets

 

 

16,363,758

 

 

16,574,188

Total assets

 

$

43,787,046

 

$

44,506,912

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

450,016

 

$

306,520

Accrued expenses

 

 

6,297,607

 

 

6,438,600

Due to merchants

 

 

5,117,988

 

 

5,240,427

Current portion of capital leases

 

 

270,968

 

 

290,911

Total current liabilities

 

 

12,136,579

 

 

12,276,458

Long-term liabilities:

 

 

 

 

 

 

Other long-term liabilities

 

 

1,514,429

 

 

1,666,938

Total long-term liabilities

 

 

1,514,429

 

 

1,666,938

Total liabilities

 

 

13,651,008

 

 

13,943,396

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Convertible preferred stock—10,000,000 shares authorized as of March 31, 2016 and December 31, 2015, $0.01 par value: Series A—2,243,750 issued and outstanding as of March 31, 2016 and December 31, 2015; $8,975,000 aggregate liquidation preference

 

 

22,438

 

 

22,438

Common stock—250,000,000 shares authorized as of March 31, 2016 and December 31, 2015, $0.01 par value, and 56,525,013 issued and 51,633,574 shares outstanding as of March 31, 2016, and 56,191,389 issued and 52,585,503 shares outstanding as of December 31, 2015

 

 

565,250

 

 

561,914

Treasury stock, at cost, 4,891,439 shares and 3,605,886 shares as of March 31, 2016 and December 31, 2015, respectively

 

 

(11,504,517)

 

 

(7,883,012)

Additional paid-in capital

 

 

108,098,582

 

 

106,741,026

Accumulated other comprehensive loss

 

 

(437,615)

 

 

(510,445)

Accumulated deficit

 

 

(66,608,100)

 

 

(68,368,405)

Total stockholders’ equity

 

 

30,136,038

 

 

30,563,516

Total liabilities and stockholders’ equity

 

$

43,787,046

 

$

44,506,912

 

The accompanying notes are an integral part of these financial statements .

3


 

Table of Contents

 

Planet Payment, Inc.

Condensed Consolidated Statements of Income (unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

 

2016

 

2015

Revenue:

    

 

    

    

 

    

Net revenue

 

$

13,684,513

 

$

12,132,770

Operating expenses:

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

Payment processing service fees

 

 

2,691,224

 

 

2,588,204

Processing and service costs

 

 

3,500,668

 

 

3,237,940

Total cost of revenue

 

 

6,191,892

 

 

5,826,144

Selling, general and administrative expenses

 

 

5,480,714

 

 

4,470,400

Total operating expenses

 

 

11,672,606

 

 

10,296,544

Income from operations

 

 

2,011,907

 

 

1,836,226

Other (expense) income:

 

 

 

 

 

 

Interest expense

 

 

(14,676)

 

 

(14,613)

Interest income

 

 

424

 

 

426

Total other expense, net

 

 

(14,252)

 

 

(14,187)

Income from operations before provision for income taxes

 

 

1,997,655

 

 

1,822,039

Provision for income taxes

 

 

(237,350)

 

 

(110,413)

Net income

 

$

1,760,305

 

$

1,711,626

Basic net income per share applicable to common stockholders

 

$

0.03

 

$

0.03

Diluted net income per share applicable to common stockholders

 

$

0.03

 

$

0.03

Weighted-average common stock outstanding (basic)

 

 

50,771,451

 

 

53,800,606

Weighted-average common stock outstanding (diluted)

 

 

52,062,499

 

 

54,448,382

 

The accompanying notes are an integral part of these financial statements .

 

4


 

Table of Contents

 

Planet Payment, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

 

2016

 

2015

Net income

  

$

1,760,305

  

$

1,711,626

Foreign currency translation adjustment

 

 

72,830

 

 

(257,431)

Total comprehensive income

 

$

1,833,135

 

$

1,454,195

 

 

The accompanying notes are an integral part of these financial statements .

 

 

5


 

Table of Contents

 

Planet Payment, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

 

2016

 

2015

Cash flows from operating activities:

    

 

    

    

 

    

Net income

 

$

1,760,305

 

$

1,711,626

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

 

 

 

 

 

 

Stock-based compensation expense

 

 

603,968

 

 

233,462

Depreciation and amortization expense

 

 

608,990

 

 

725,173

Provision (recovery) for doubtful accounts

 

 

57,328

 

 

(1,007)

Gain on insurance settlement

 

 

 —

 

 

(517,930)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Decrease in settlement assets

 

 

117,192

 

 

486,539

Increase in accounts receivables, prepaid expenses and other current assets

 

 

(493,038)

 

 

(436,702)

Decrease (increase) in other long-term assets

 

 

124,786

 

 

(47,230)

(Decrease) increase in accounts payable and accrued expenses

 

 

(215,331)

 

 

454,979

Decrease in due to merchants

 

 

(120,449)

 

 

(487,255)

Other

 

 

34,365

 

 

(81,947)

Net cash provided by operating activities

 

 

2,478,116

 

 

2,039,708

Cash flows from investing activities:

 

 

 

 

 

 

Decrease in restricted cash

 

 

2,038

 

 

119

Decrease in merchant reserves

 

 

(1,990)

 

 

(96)

Purchase of property and equipment

 

 

(60,746)

 

 

(123,817)

Capitalized software development

 

 

(288,162)

 

 

(287,223)

Purchase of intangible assets

 

 

 —

 

 

(5,888)

Net cash used for investing activities

 

 

(348,860)

 

 

(416,905)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

772,813

 

 

 —

Principal payments on capital lease obligations

 

 

(106,528)

 

 

(146,905)

Purchase of treasury stock

 

 

(3,621,505)

 

 

 —

Net cash used for financing activities

 

 

(2,955,220)

 

 

(146,905)

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

 

 

 —

 

 

 —

Net (decrease) increase in cash and cash equivalents

 

 

(825,964)

 

 

1,475,898

Cash and cash equivalents at beginning of period

 

 

14,675,515

 

 

9,837,791

Cash and cash equivalents at end of period

 

$

13,849,551

 

$

11,313,689

Supplemental disclosure:

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

8,544

 

$

18,837

Income taxes

 

 

295,589

 

 

199,364

Non-cash investing and financing activities:

 

 

 

 

 

 

Common stock issued for stock options exercised

 

 

98

 

 

 —

Assets acquired under capital leases

 

 

98,988

 

 

79,291

Accrued capitalized hardware, software and fixed assets

 

 

30,667

 

 

38,609

Capitalized stock-based compensation

 

 

6,366

 

 

10,711

 

(*) For the three months ended March 31, 2016 and 201 5 , the effect of exchange rate changes on cash and cash equivalents was immaterial .

 

The accompanying notes are an integral part of these financial statements .

 

 

6


 

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   135 , 000 active merchant locations in 2 1   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 multi-currency payment processing services are designed for merchants in the retail, restaurant, and hospitality environments. We also provide payment services for e-commerce and mail and telephone order merchants. Our point-of-sale and e-commerce services help merchants sell more goods and services to consumers, and 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 and bill 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 unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

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

 

Unaudited condensed consolidated interim financial information

 

The accompanying unaudited condensed consolidated inte rim financial statements as of March 31, 2016 and for the periods ended March 31, 2016 and 201 5 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, 201 5 . Operating result s for the interim period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 201 6 .  The December 31, 201 5 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 (“ SEC ”) .

 

7


 

Table of Contents

2. Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) 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 The original effective date of ASU 2014-09 of January 1, 2017 has been delayed until January 1, 2018.  Early adoption is not permitted before the original effective date.  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 condensed consolidated financial statements and disclosures .

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU No. 2016-02 ) The new standard establishes a right-of-use (ROU) model that requires a lessee to record a n ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in ASU No. 2016-02 is permitted for all entities.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.   The Company is currently evaluating the effect ASU 2016-02 will have on the Company’s condensed consolidated financial statements and disclosures .

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606) (“ASU 2016-08”). The amendments in ASU 2016-08 do not change the core principle of the guidance. The amendments clarify the implementation guidance on principal versus agent considerations.   The update suggests that entities recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services The effective date and transition requirements for the amendments in ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09.   The Company is currently evaluating the effect ASU 2016-08 will have on the Company’s condensed consolidated financial statements and disclosures .

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718) (“ASU No. 2016-09 ) This update is part of the FASB’s Simplification Initiative, which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods .   Early adoption is permitted for any entity in any interim or annual period The Company is currently evaluating the effect ASU 2016-09 will have on the Company’s condensed consolidated financial statements and disclosures .

 

In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606) (“ASU 201 6-10”). The amendments in this u pdate do not change the core principle of the guidance. The amendments in this u pdate clarify the identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  The amendments in this u pdate clarify that contractual provisions that, explicitly or implicitly, require an entity to transfer control of additional goods or services to a customer should be distinguished from contractual provisions that, explicitly or implicitly, define the attributes of a single promised license The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of update 2014-09.  The Company is currently evaluating the effect ASU 2016-10 will have on the Company’s condensed 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 some of 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.

8


 

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

 

As of

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

Customer A

    

12

%  

15

%  

Customer C

 

20

 

*

 

Customer H

 

*

 

11

 

 

* Less than 10% accounts receivable concentration.

 

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended 

  

 

 

March 31,

 

 

 

2016

 

2015

 

Customer A

    

17

%  

20

%  

Customer C

 

12

 

11

 

Customer G

 

11

 

*

 

 

* Less than 10% revenue concentration.

 

a

 

4 .   Net income per share

 

The Company computes net income 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 per share using the two-class method. The two-class method is an earnings formula that treats a participating security as having rights to dividends that otherwise would have been available to common and preferred stockholders based on their respective rights to receive dividends. Losses are not allocated to the preferred stockholders for computing net loss per share under the two-class method because the preferred stockholders do not have contractual obligations to share in the losses of the Company.

 

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

 

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

 

9


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

    

2016

    

2015

Numerator:

 

 

 

 

 

 

Net income

 

$

1,760,305

 

$

1,711,626

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

 

 

(210,498)

 

 

(193,285)

Net income applicable to common stockholders (basic and dilutive)

 

$

1,549,807

 

$

1,518,341

Denominator:

 

 

 

 

 

 

Weighted-average common stock outstanding (basic)

 

 

50,771,451

 

 

53,800,606

Common equivalent shares from options and warrants to purchase common stock

 

 

1,291,048

 

 

647,776

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

 

 

52,062,499

 

 

54,448,382

Basic net income per share applicable to common stockholders

 

$

0.03

 

$

0.03

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

 

$

0.03

 

$

0.03

 

(1)

In accordance with ASC 260-10-45-48 , for the three   months ended March 31 , 201 6 and 201 5 , the Company excluded 996 ,500 and 1, 035 , 180 , respectively, of contingently - issued restricted shares from diluted weighted average common stock outstanding as the contingencies were neither (a) 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 

 

 

March 31,

 

 

2016

    

2015

Stock options

 

1,933,471

 

5,908,970

Restricted stock awards

 

 —

 

225,442

Convertible preferred stock(1)

 

6,851,144

 

6,851,144

Total anti-dilutive securities

 

8,784,615

 

12,985,556

 

(1)

Diluted net income per share increases when convertible preferred stock is included in the required sequence in the diluted earnings per share computation. As such, convertible preferred stock is excluded from the computation of diluted earnings per share for the three   months ended March 31 , 201 6 and 201 5 .

 

5. Stock-based compensation expense

 

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.

 

During the first quarter of 201 6 ,   0.8 million stock options were granted to certain employees of the Company, with a grant fair value of $0. 7 million. The actual number of shares that will be issued upon exercise of the 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. 

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

    

2016

    

2015

Processing and service costs

 

$

48,806

 

$

50,497

Selling, general and administrative expenses

 

 

555,162

 

 

182,965

Total stock-based compensation expense

 

$

603,968

 

$

233,462

 

10


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

 

2016

    

2015

Stock options

 

$

281,396

 

$

131,272

Restricted stock awards

 

 

322,572

 

 

102,190

Total stock-based compensation expense

 

$

603,968

 

$

233,462

 

 

6. Property and equipment

 

Property and equipment, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

As of

 

As of

 

 

useful life

 

March 31,

 

December 31,

 

 

(in years)

 

2016

 

2015

Equipment

 

2

-

7

 

$

960,281

    

$

958,175

Computer hardware

 

3

-

5

 

 

3,397,404

 

 

3,266,233

Furniture and fixtures

 

5

-

7

 

 

203,536

 

 

192,565

Leasehold improvements

 

3

-

10

 

 

778,359

 

 

746,336

Total property and equipment, gross

 

 

 

 

 

 

5,339,580

 

 

5,163,309

Less: Accumulated depreciation and amortization

 

 

 

 

 

 

(3,517,603)

 

 

(3,351,690)

Property and equipment, net

 

 

 

 

 

$

1,821,977

 

$

1,811,619

 

Property and equipment depreciation and amortization expense is as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

 

2016

 

2015

Depreciation and amortization expense

 

$

163,126

    

$

171,229

 

 

7. Goodwill and intangible assets

 

The change in carrying amount of goodwill for the three months ended March 31 , 201 6 is as follows:

 

 

 

 

 

Goodwill, gross, as of December 31, 2015

    

$

286,852

Impact of change in Euro exchange rate

 

 

11,803

Accumulated impairment losses as of March 31, 2016

 

 

 —

Goodwill, net, as of March 31, 2016

 

$

298,655

 

 

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 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

As of December 31, 2015

 

Amortization

 

 

Gross book

 

Accumulated

 

Net book

 

Gross book

 

Accumulated

 

Net book

 

period

 

 

value

 

amortization

 

value

 

value

 

amortization

 

value

 

(in years)

 

Trademarks and patents

$

1,187,142

  

$

(494,697)

  

$

692,445

  

$

1,184,612

  

$

(472,914)

  

$

711,698

  

15

-

21

 

Technology

 

2,487,139

 

 

(1,917,504)

 

 

569,635

 

 

2,388,852

 

 

(1,722,286)

 

 

666,566

 

5

 

 

 

Intangible assets, net

$

3,674,281

 

$

(2,412,201)

 

$

1,262,080

 

$

3,573,464

 

$

(2,195,200)

 

$

1,378,264

 

 

 

 

 

 

11


 

Table of Contents

Amortization expense related to intangible assets is as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

    

2016

    

2015

Amortization expense

 

$

142,138

 

$

145,000

 

 

8. Commitments and contingencies

 

Employment agreements

 

Pursuant to employment agreements with certain employees, the Company had a commitment to pay severance of approximately $ 1. 2 million as of March 31 , 201 6 and $0. 9 million as of December 31, 201 5 , in the event of an involuntary termination , as defined in the employment 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. 2 million as of March  3 1 , 201 6 and $1. 1 million as of December 31, 201 5 .

 

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 on 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. 9   million with the sponsoring bank against such liabilities and has itself paid the acquirer a reserve of $0. 3 million in connection therewith, which is included in long-term “Restricted cash” on the condensed consolidated balance sheets. In addition, the Company holds merchant reserves of approximately  $ 2 . 2 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 March 31 , 201 6 and December 31, 201 5 ,   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’s operating entities are involved in legal proceeding s in the ordinary course of business. While any litigation contains an element of uncertainty, the Company has no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on the financial condition or results of operations of the Company.

 

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 wa s required to pay minimum annual sponsorship transaction fees of $0. 3 million in year one.  The minimum fees escalate each subsequent year with minimum fees of $0. 5 million due 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 payment processing service fees 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 its merchants sponsored under the agreement.  No contingent liability has been recorded as of March 31 , 201 6 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.    

12


 

Table of Contents

 

9. Credit Facility

 

On June 10, 2015, the Company entered into a $10.0 million secured revolving credit facility (the “Credit Facility”) with Citizens Bank, N.A. (“Citizens”) pursuant to a Credit and Security Agreement by and among the Company, certain affiliates thereof as borrowers or guarantors, and Citizens (the “Credit Agreement”). 

 

On January 28, 2016, the Company entered into a Second Amendment to Credit and Security Agreement with Citizens and certain subsidiary affiliates of the Company as borrowers and/or guarantors (the “Amendment”). The Amendment amends the Credit Agreement and provides for an increase in the Company’s line of credit (the “Line of Credit”) with Citizens from $10.0 million to $20.0 million.  The L ine of C redit is secured by substantially all of the Company’s personal property, including the Company’s intellectual property and that of its subsidiaries that are borrowers or guarantors.  The interest rate applicable to committed borrowings is tied to LIBOR plus a margin of 2.5%.  The Credit Agreement also provides for a letter of credit sub-facility of up to $2.0 million. The Credit Agreement contains customary affirmative and negative covenants, including, among others, financial covenants based on the Company’s leverage and fixed charge coverage ratios, as well as an obligation to maintain a minimum availability requirement of at least $5.0 million in the aggregate of cash and availability under the line of credit.  The Credit Facility will provide funds for general corporate purposes and repurchases of issued and outstanding capital stock of the Company.  The Credit Facility matures on December 31, 2020 and is payable in full upon maturity.  As of March 31 , 2016 , the Company was in compliance with all financial covenants contained in the Credit Agreement and no amounts were outstanding.    

 

On April 12, 2016, the Company borrowed approximately $13.9 million under the Credit Facility to repurchase approximately 3.9 million shares of common stock as part of the modified “Dutch auction” tender offer Subsequently, on April 26, 2016, the Company repaid $4.0 million on the Credit Facility.  Refer to the stock repurchase program disclosure in Note 12 of our condensed consolidated financial statements for information on our modified “Dutch auction” tender offer .    

 

10. Accrued expenses

 

The following are the components of accrued expenses:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

March 31,

 

December 31,

 

 

2016

 

2015

Bonus

    

$

126,865

    

$

710,739

Deferred revenue(*)

 

 

618,735

 

 

688,418

Deferred incentive(**)

 

 

825,000

 

 

950,000

Other(***)

 

 

4,727,007

 

 

4,089,443

Total accrued expenses

 

$

6,297,607

 

$

6,438,600

 

 

(*) Current deferred revenue will be recognized as revenue ratably over the next 12 months.  As of March 31, 2016, included in the balance sheet classification “Other long-term liabilities,” is the non-current portion of deferred revenue in the amount of $0.6 million. The long-term portion of deferred revenue balance as of December 31, 2015 was approximately $0.6 million.

 

(**) As of March 31, 2016, the Company recorded approximately $0.8 million in short-term incentives in relation to future obligations under a contract. As of March 31, 2016 and December 31, 2015, included in the balance sheet classification “Other long-term liabilities,” is the non ‑current portion of these incentives of approximately $0.5 million and $0.7 million, respectively.    

 

(***) As of March 31, 2016 and December 31, 2015, included in “other” were third party referral commissions of approximately $2.1 million and $1.6 million, respectively.  No other amount included in “Other” exceeded 10% of total current liabilities.

 

13


 

Table of Contents

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 (“CODM”) in deciding how to allocate resources and in assessing performance. The 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 $0.7 million and $0.6 million, which is included in “processing and services costs” for the three months ended March 31, 2016 and 2015, 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 the Americas and Europe and as of March 31, 2016 and December 31, 2015, long-lived asset amounts are $7.4 million.

 

The Company conducts its business primarily in three geographical regions: Asia-Pacific (“APAC”); the Americas; and Europe, Middle East and Africa (“EMEA”). The following table provides revenue concentration by geographic region. Analysis of revenue by segment and geographical region and reconciliations to consolidated revenue, gross profit, and income before the provision for income taxes are as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

March 31,

 

    

2016

    

2015

Net Revenue:

 

 

 

 

 

 

APAC

 

$

3,817,064

 

$

4,036,276

The Americas

 

 

2,185,374

 

 

1,493,130

EMEA

 

 

2,631,794

 

 

2,152,359

Total multi-currency processing services revenue

 

 

8,634,232

 

 

7,681,765

Payment processing services revenue

 

 

5,050,281

 

 

4,451,005

Net revenue

 

$

13,684,513

 

$

12,132,770

Gross Profit:

 

 

 

 

 

 

APAC

 

$

3,793,504

 

$

4,006,712

The Americas

 

 

2,034,688

 

 

1,396,279

EMEA

 

 

2,065,618

 

 

1,666,004

Total multi-currency processing services gross profit

 

 

7,893,810

 

 

7,068,995

Payment processing services gross profit

 

 

2,359,057

 

 

1,862,800

Total reportable segment gross profit

 

 

10,252,867

 

 

8,931,795

Corporate allocated cost of sales

 

 

2,760,246

 

 

2,625,169

Total gross profit

 

$

7,492,621

 

$

6,306,626

 

 

 

 

 

 

 

Income from operations before provision for income taxes:

 

 

 

 

 

 

Total gross profit

 

$

7,492,621

 

$

6,306,626

Selling, general and administrative expenses

 

 

5,480,714

 

 

4,470,400

Income from operations

 

 

2,011,907

 

 

1,836,226

Interest expense

 

 

(14,676)

 

 

(14,613)

Interest income

 

 

424

 

 

426

Total other expense, net

 

 

(14,252)

 

 

(14,187)

Income from operations before provision for income taxes

 

$

1,997,655

 

$

1,822,039

 

14


 

Table of Contents

Payment processing services revenue and gross profit are the result of transactions that primarily originated in the Americas. For the three months ended March 31, 2016, Customer B and Customer G had revenue concentration of 15% and 28%, respectively.  For the three months ended March 31, 2015, Customer B and Customer G had revenue concentration of 15% and 19%, respectively. No individual merchant of the payment processing segment was greater than 10% of segment revenue. 

 

“Corporate allocated cost of sales” includes expenses of running its platform infrastructure including: Internet connectivity, hosting and data storage expenses, amortization expenses of capitalized software development costs, compensation and related benefits of its technology personnel and a portion of general overhead expenses.

 

Concentration of revenue by customer by geographical region:

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

March 31,

 

 

 

2016

 

2015

 

Multi-currency processing services revenue:

    

 

 

 

 

APAC:

 

 

 

 

 

Customer A

 

59

%  

60

%  

The Americas:

 

 

 

 

 

Customer D

 

27

 

15

 

Customer E

 

*

 

14

 

Customer F

 

10

 

18

 

EMEA:

 

 

 

 

 

Customer C

 

63

 

62

 

Customer H

 

35

 

37

 

 

(*) Less than 10% revenue concentration.

 

12. Stock Repurchases

 

Stock repurchase program

 

In October 2014, the Company announced that its Board of Directors authorized the repurchase of up to $6.0 million of the Company’s outstanding shares of common stock.  On August 4, 2015 and December 21, 2015, the Board expanded its share repurchase authorization by an incremental $5.2 million and $2.3 million, respectively. We may repurchase shares in the open market or as otherwise may be determined by us, subject to market conditions, business opportunities and other factors. This authorization has no expiration date and may be suspended or terminated at any time.

 

From January 1, 2016 to March 9, 2016, prior to the tender offer discussed below, the Company repurchased approximately 1.3 million shares of common stock for an aggregate price of $3.6 million. The total amount of common stock repurchased under the program through March 9, 2016 was 4.9 million shares for an aggregate price of $11.5 million. As of March 9, 2016, $2.0 million remained available for repurchase under the program.  As of March 10, 2016, the stock repurchase program was suspended in connection with the tender offer, and may not be reinstated in accordance with applicable law until at least ten business days after the expiration time (described in tender offer section below).     

 

Tender offer

 

On March 10, 2016, the Board of Directors authorized the Company to commence a modified “Dutch auction” tender offer to repurchase up to $15.0 million of its outstanding shares of common stock at a tender price of not less than $3.20 per share or greater than $3.60 per share. The tender offer commenced on March 14, 2016 and expired on April 11, 2016. On April 12, 2016, the Company paid $13.9 million, including transaction costs, to repurchase approximately 3.9 million shares at a tender price of $3.60 per share. The purchase price and all transaction costs were funded from the Citizens Bank Credit Facility (described above in Note 9). The repurchased shares of common stock became treasury shares of the Company.

   

 

15


 

Table of Contents

13. Subsequent Event

 

On April 11, 2016, 708,352 shares of Series A Preferred Stock were converted into 2,162,907 shares of common stock at a conversion ratio of approximately 3.05 shares of common stock per share of Series A Preferred Stock.

 

On April 12, 2016, the Company borrowed approximately $13.9 million under the Credit Facility to repurchase approximately 3.9 million shares of common stock as part of the modified “Dutch auction” tender offer (described above in Note 12).  Subsequently, on April 26, 2016, the Company repaid $4.0 million on the Credit Facility.

 

On April 15, 2016, 450,000 shares of the 2015 restricted stock awards granted to certain officers of the Company vested.  The market condition was achieved as the Company’s volume weighted average price on NASDAQ was greater than or equal to $3.50 per share for seven consecutive trading days, or any ten trading days over a consecutive thirty-five day period. The market condition was valued at $0.7 million, of which $0.5 million was expensed as of March 31, 2016 and $0.2 million will be expensed in the second quarter of 2016.      

 

16


 

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 en titled “ Item 1A - Risk Factors” included in the C ompany's Annual Report on Form 10-K for the year ended December 31, 2015 . 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.   We refer to Planet Payment, Inc. together with its wholly - owned subsidiaries as “Planet Payment,” the “Company,” “we,” or “our.”

 

Business overview

 

Planet Payment is a provider of international payment and transaction processing and multi-currency processing services. We provid e our services to approximately   1 35 ,000 active merchant locations in 2 1   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. We provide banks and their merchants with innovative services to accept, process and reconcile electronic payments. Our point-of-sale multi-currency payment processing services are designed for merchants in the retail, restaurant, and hospitality environments. We also provide payment services for e-commerce and mail and telephone order merchants. Our point-of-sale and e-commerce services help merchants sell more goods and services to consumers, and are integrated within the payment card transaction process, enabling our acquiring customers to process and reconcile payment transactions in multiple currencies, geographies and channels. Our ATM services provide our domestic and international acquirers with additional processing capabilities to help them increase revenue and improve customer satisfaction.  We also offer non-financial transaction processing services that allow merchants to offer a range of commercial services including pre-paid mobile phone top-up and bill payments using the same point-of-sale devices deployed to accept payment c ards. We are a registered third- party processor with the major card associations and operate in accordance with industry standards, including the Payment Card Industry, or PCI, Security Council’s Data Security Standards .

 

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, mobile payments and e-commerce; as well as the processing of non-financial transactions such as mobile phone 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 and other factors which negatively impact international travel may negatively impact the growth in total transaction volume processed using our platform. The global economy has been

17


 

Table of Contents

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.

 

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.

 

Key metrics

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

March 31,

 

 

 

2016

 

2015

 

KEY METRICS:

    

 

 

 

 

 

 

Consolidated gross billings(1)

 

$

40,111,199

 

$

33,246,649

 

Total settled dollar volume processed(2)

 

$

2,063,282,670

 

$

2,009,741,732

 

Adjusted EBITDA (non-GAAP)(3)

 

$

3,224,865

 

$

2,794,861

 

Capitalized expenditures

 

$

385,941

 

$

466,248

 

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

 

 

135,526

 

 

101,968

 

Total settled transactions processed(5)

 

 

53,391,673

 

 

43,701,681

 

Multi-currency processing services key metrics:

 

 

 

 

 

 

 

Active merchant locations (at period end)(4)

 

 

62,532

 

 

37,872

 

Settled transactions processed(6)

 

 

4,274,099

 

 

3,487,873

 

Gross foreign currency mark-up(7)

 

$

35,060,918

 

$

28,795,644

 

Settled dollar volume processed(8)

 

$

726,274,722

 

$

660,276,744

 

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

 

 

1.19

%  

 

1.12

%  

Payment processing services key metrics :

 

 

 

 

 

 

 

Active merchant locations (at period end)(4)

 

 

74,703

 

 

64,551

 

Payment processing services revenue(10)

 

$

5,050,281

 

$

4,451,005

 

Settled transactions processed(11)

 

 

49,261,402

 

 

40,322,627

 

Settled dollar volume processed(12)

 

$

1,364,585,533

 

$

1,359,459,918

 

 

(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. For the three months ended March 31, 2015, total settled dollar volume processed was updated from the amount previously reported of $2, 074,690,850 .  

 

(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, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

18


 

Table of Contents

(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.  For the three months ended March 31, 2015 , total active merchant locatio ns was updated from the amount originally reported of 104,916 .  In addition, for the three months ended March 31, 2015 , multi-currency processin g active merchant locations was updated from the amount originally reported of 42,527 , and payment processing service s active merchant locations was updated from the amount originally reported of 62,412 .     The total number of active merchant locations exceeds the total number of merchants, as merchants may have multiple locations. As of March 31 , 201 6 and 201 5 , there were 1,709 and 455 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. For the three months ended March 31, 2015, active merchant locations included in both multi-currency and payment processing was updated from the amount originally reported of 2 3.

 

(5)

Represents total settled transactions (excluding other transaction types such as authorizations and rate look-ups).  For the t hree months ended March 31, 2015 , total settled transactions was updated from the amount previously reported of 45,350,822 .  

 

(6)

Represents settled transactions processed using our multi-currency processing services (excluding other transaction types such as authorizations and rate look-ups).   For the three months ended March 31, 2015, settled transactions processed was updated from the amount previously reported of 3,487,816.

 

(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 the segment disclosure in Note 1 1 of our condensed consolidated financial statements for information on our net revenue from multi-currency processing services.

 

(8)

Represents the total settled dollar volume processed using our multi-currency processing services.   For the t hree months ended March 31, 2015 , total settled dollar volume processed using our multi-currency processing services was updated from the amount previously reported of $ 660,276,149 .

 

(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 ($ 8 .6 million and $ 7 . 7 million for the three months ended March 31 , 201 6 and 201 5 , respectively) and dividing by settled dollar volume processed (see footnote 8 above).  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). For the three months ended March 31, 2015, settled transactions processed using our payment processing services was updated from the amount previously reported of 41,863,006 .

 

(12)

Represents the total settled dollar volume processed using our payment processing services . For the three months ended March 31, 2015, total settled dollar volume processed using our payment processing services was updated from the amount previously reported of $1 ,414,414,701 .

 

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.

 

19


 

Table of Contents

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 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.

 

20


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

 

 

March 31,

 

 

 

2016

    

2015

    

ADJUSTED EBITDA:

    

 

 

 

 

 

 

Net income

 

$

1,760,305

 

$

1,711,626

 

Interest expense

 

 

14,676

 

 

14,613

 

Interest income

 

 

(424)

 

 

(426)

 

Provision for income taxes

 

 

237,350

 

 

110,413

 

Depreciation and amortization

 

 

608,990

 

 

725,173

 

Stock-based compensation expense

 

 

603,968

 

 

233,462

 

Adjusted EBITDA (non-GAAP)

 

$

3,224,865

 

$

2,794,861

 

 

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 transaction 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 t hree geographical regions: Asia- Pacific, or APAC ; the Americas ; and Europe, Middle East and Africa, or EMEA. 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 

 

 

 

March 31,

 

 

 

2016

 

2015

 

Revenue:

    

 

 

    

 

 

    

APAC

 

$

3,817,064

 

$

4,036,276

 

The Americas

 

 

2,185,374

 

 

1,493,130

 

EMEA

 

 

2,631,794

 

 

2,152,359

 

Total multi-currency processing services revenue

 

 

8,634,232

 

 

7,681,765

 

Payment processing services revenue

 

 

5,050,281

 

 

4,451,005

 

Net revenue

 

$

13,684,513

 

$

12,132,770

 

 

21


 

Table of Contents

A significant portion of our revenue is derived from   agreements with a limited number of customers.   Specifically, for the three months ended March 31, 2016 , subsidiaries of Global Payments, Inc. and Network International LLC represented approximately 1 7 % and 1 2 % 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 the 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.

 

Other (expense) income, net.  Other (expense) income, net, primarily consists of non-operating income as well as interest expense related to our capital leases.

 

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.  GAAP require s 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 ’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 201 5 .

 

22


 

Table of Contents

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 

 

 

 

March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

    

$ amount

    

revenue

    

$ amount

    

revenue

    

Revenue:

 

 

    

  

    

    

 

    

  

    

    

APAC

 

$

3,817,064

 

27.9

%  

$

4,036,276

 

33.3

%  

The Americas

 

 

2,185,374

 

16.0

 

 

1,493,130

 

12.3

 

EMEA

 

 

2,631,794

 

19.2

 

 

2,152,359

 

17.7

 

Total multi-currency processing services revenue

 

 

8,634,232

 

63.1

 

 

7,681,765

 

63.3

 

Payment processing services revenue

 

 

5,050,281

 

36.9

 

 

4,451,005

 

36.7

 

Net revenue

 

 

13,684,513

 

100.0

 

 

12,132,770

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

Payment processing services fees

 

 

2,691,224

 

19.7

 

 

2,588,204

 

21.3

 

Processing and service costs

 

 

3,500,668

 

25.6

 

 

3,237,940

 

26.7

 

Total cost of revenue

 

 

6,191,892

 

45.3

 

 

5,826,144

 

48.0

 

Selling, general and administrative expenses

 

 

5,480,714

 

40.1

 

 

4,470,400

 

36.8

 

Total operating expenses

 

 

11,672,606

 

85.4

 

 

10,296,544

 

84.9

 

Income from operations

 

 

2,011,907

 

14.6

 

 

1,836,226

 

15.1

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(14,676)

 

(0.1)

 

 

(14,613)

 

(0.1)

 

Interest income

 

 

424

 

 —

 

 

426

 

 —

 

Total other expense, net

 

 

(14,252)

 

(0.1)

 

 

(14,187)

 

(0.1)

 

Income from operations before provision for income taxes

 

 

1,997,655

 

14.5

 

 

1,822,039

 

15.0

 

Provision for income taxes

 

 

(237,350)

 

(1.7)

 

 

(110,413)

 

(0.9)