Planet Payment Inc.
Planet Payment Inc (Form: 10-Q, Received: 05/10/2017 06:10:17)

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, 2017

 

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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)

 

 

      Emerging growth Company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

As of April 30, 2017 ,   there were 49,754,877 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, 2017

 

Table of Contents

 

 

 

 

 

 

Page

 

 

 

Part I.  

Financial Information

3

 

 

 

Item 1.  

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 201 6

3

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2.  

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

15

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.  

Controls and Procedures

26

 

 

 

Part II.  

Other Information

27

 

 

 

Item 1.  

Legal Proceedings

27

 

 

 

Item 1A .  

Risk Factors

27

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 6.  

Exhibits

28

 

 

 

Signatures  

 

29

 

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.

 

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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,

 

 

 

2017

 

2016

 

 

 

 

(unaudited)

 

 

 

 

Current assets:

 

 

    

    

 

    

 

Cash and cash equivalents

 

$

15,577,764

 

$

13,305,816

 

Restricted cash

 

 

5,271,492

 

 

4,981,472

 

Accounts receivable, net of allowances of $0.1 million as of March 31, 2017 and December 31, 2016

 

 

6,954,633

 

 

6,060,533

 

Prepaid expenses and other assets

 

 

2,006,760

 

 

1,940,544

 

Total current assets

 

 

29,810,649

 

 

26,288,365

 

Other assets:

 

 

 

 

 

 

 

Restricted cash

 

 

612,502

 

 

550,402

 

Property and equipment, net

 

 

1,644,582

 

 

1,674,410

 

Software development costs, net

 

 

4,126,196

 

 

4,197,142

 

Intangible assets, net

 

 

698,685

 

 

827,474

 

Goodwill

 

 

280,935

 

 

276,786

 

Deferred tax asset

 

 

22,673,170

 

 

22,673,206

 

Other long-term assets

 

 

1,753,892

 

 

2,095,817

 

Total other assets

 

 

31,789,962

 

 

32,295,237

 

Total assets

 

$

61,600,611

 

$

58,583,602

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,048,087

 

$

830,479

 

Accrued expenses

 

 

5,216,455

 

 

5,353,735

 

Due to merchants

 

 

5,459,868

 

 

5,199,390

 

Current portion of capital leases

 

 

221,608

 

 

166,966

 

Total current liabilities

 

 

11,946,018

 

 

11,550,570

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

9,916,000

 

 

9,916,000

 

Other long-term liabilities

 

 

786,259

 

 

854,991

 

Total long-term liabilities

 

 

10,702,259

 

 

10,770,991

 

Total liabilities

 

 

22,648,277

 

 

22,321,561

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Convertible preferred stock—10,000,000 shares authorized as of March 31, 2017 and December 31, 2016, $0.01 par value: Series A—1,535,398 shares issued and outstanding as of March 31, 2017 and December 31, 2016; $6,141,592 aggregate liquidation preference as of March 31, 2017 and December 31, 2016

 

 

15,354

 

 

15,354

 

Common stock—250,000,000 shares authorized as of March 31, 2017 and December 31, 2016, $0.01 par value, and 60,072,783 shares issued and 49,697,429 shares outstanding as of March 31, 2017, and 59,666,333 shares issued and 49,290,979 shares outstanding as of December 31, 2016

 

 

600,728

 

 

596,663

 

Treasury stock, at cost, 10,375,354 shares as of March 31, 2017 and December 31, 2016

 

 

(31,726,486)

 

 

(31,726,486)

 

Additional paid-in capital

 

 

112,565,197

 

 

111,327,321

 

Accumulated other comprehensive loss

 

 

(623,596)

 

 

(654,408)

 

Accumulated deficit

 

 

(41,878,863)

 

 

(43,296,403)

 

Total stockholders’ equity

 

 

38,952,334

 

 

36,262,041

 

Total liabilities and stockholders’ equity

 

$

61,600,611

 

$

58,583,602

 

 

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

 

 

 

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Planet Payment, Inc.

Condensed Consolidated Statements of Income (unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

Revenue:

    

 

    

    

 

    

Net revenue

 

$

12,728,885

 

$

13,684,513

Operating expenses:

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

Payment processing service fees

 

 

2,115,609

 

 

2,691,224

Processing and service costs

 

 

3,192,073

 

 

3,500,668

Total cost of revenue

 

 

5,307,682

 

 

6,191,892

Selling, general and administrative expenses

 

 

5,287,338

 

 

5,480,714

Restructuring charges

 

 

65,458

 

 

 —

Total operating expenses

 

 

10,660,478

 

 

11,672,606

Income from operations

 

 

2,068,407

 

 

2,011,907

Other (expense) income:

 

 

 

 

 

 

Interest expense

 

 

(116,332)

 

 

(14,676)

Interest income

 

 

523

 

 

424

Total other expense, net

 

 

(115,809)

 

 

(14,252)

Income from operations before provision for income taxes

 

 

1,952,598

 

 

1,997,655

Provision for income taxes

 

 

(535,058)

 

 

(237,350)

Net income

 

$

1,417,540

 

$

1,760,305

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)

 

 

48,917,601

 

 

50,771,451

Weighted-average common stock outstanding (diluted)

 

 

51,353,807

 

 

52,062,499

 

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

 

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Planet Payment, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

Net income

  

$

1,417,540

  

$

1,760,305

Foreign currency translation adjustment

 

 

30,812

 

 

72,830

Total comprehensive income

 

$

1,448,352

 

$

1,833,135

 

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

 

 

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Planet Payment, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

Cash flows from operating activities:

    

 

    

    

 

    

    

Net income

 

$

1,417,540

 

$

1,760,305

 

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

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

325,872

 

 

603,968

 

Depreciation and amortization expense

 

 

552,982

 

 

608,990

 

Provision for doubtful accounts

 

 

3,786

 

 

57,328

 

Deferred tax benefit

 

 

36

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in settlement assets

 

 

(294,389)

 

 

117,192

 

Increase in accounts receivables, prepaid expenses and other current assets

 

 

(890,025)

 

 

(493,038)

 

Decrease in other long-term assets

 

 

314,915

 

 

124,786

 

Increase (decrease) in accounts payable and accrued expenses

 

 

33,022

 

 

(193,076)

 

Increase (decrease) in due to merchants

 

 

264,847

 

 

(120,449)

 

Other

 

 

23,894

 

 

34,365

 

Net cash provided by operating activities

 

 

1,752,480

 

 

2,500,371

 

Cash flows from investing activities:

 

 

 

 

 

 

 

(Increase) decrease in restricted cash

 

 

(57,731)

 

 

2,038

 

Increase in merchant reserves

 

 

(4,369)

 

 

(1,990)

 

Purchase of property and equipment

 

 

(83,159)

 

 

(60,746)

 

Capitalized software development

 

 

(167,311)

 

 

(288,162)

 

Net cash used in investing activities

 

 

(312,570)

 

 

(348,860)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

936,053

 

 

772,813

 

Principal payments on capital lease obligations

 

 

(78,110)

 

 

(106,528)

 

Purchase of treasury stock

 

 

 —

 

 

(3,621,505)

 

Common stock repurchases for tax witholdings

 

 

(25,905)

 

 

(22,255)

 

Net cash provided by (used in) financing activities

 

 

832,038

 

 

(2,977,475)

 

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

 

 

 —

 

 

 —

 

Net increase (decrease) in cash and cash equivalents

 

 

2,271,948

 

 

(825,964)

 

Cash and cash equivalents at beginning of period

 

 

13,305,816

 

 

14,675,515

 

Cash and cash equivalents at end of period

 

$

15,577,764

 

$

13,849,551

 

Supplemental disclosure:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

87,825

 

$

8,544

 

Income taxes

 

 

295,755

 

 

295,589

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Common stock issued for stock options exercised

 

 

419

 

 

98

 

Assets acquired under capital leases

 

 

47,067

 

 

98,988

 

Accrued capitalized hardware, software and fixed assets

 

 

64,259

 

 

30,667

 

Capitalized stock-based compensation

 

 

5,921

 

 

6,366

 

 

(*) For the three months ended March 31, 2017 and 2016, the effect of exchange rate changes on cash and cash equivalents was immaterial.

 

 

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

 

 

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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 multi­currency processing services. The Company provides its services to approximately 188,000 active merchant locations in 22 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 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 interim financial statements as of March 31, 2017 and for the periods ended March 31, 2017 and 2016 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, 2016. Operating results for the interim period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  The December 31, 2016 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”).

 

Reclassifications  

 

Certain prior period amounts have been reclassified to conform to current year presentation.

 

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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.  Through the use of various data gathering methods, the Company is categorizing the types of sales for our business units for the purpose of comparing how we currently recognize revenue for the purpose of quantifying the impact, if any, that this ASU will have on our consolidated financial statements.

 

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 an 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. While the Company is currently evaluating the effect ASU 2016-02 will have on the condensed consolidated financial statements and disclosures, the adoption of this ASU will result in a significant increase to the Company’s stated assets and liabilities.

 

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.  Through the use of various data gathering methods, the Company is categorizing the types of sales for our business units for the purpose of comparing how we currently recognize revenue for the purpose of quantifying the impact, if any, that this ASU will have on our consolidated financial statements.

 

In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606) (“ASU 2016-10”). The amendments in this update do not change the core principle of the guidance. The amendments in this update clarify the identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas.  The amendments in this update 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 ASU 2014-09.  Through the use of various data gathering methods, the Company is categorizing the types of sales for our business units for the purpose of comparing how we currently recognize revenue for the purpose of quantifying the impact, if any, that this ASU will have on our consolidated financial statements.

 

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) (“ASU 2016-12”), in which the FASB finalized the guidance in the new revenue standard on collectibility, noncash consideration, presentation of sales tax, and transition.  The amendments are intended to address implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group, and provide additional practical expedients.  The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of update ASU 2014-09.  Through the use of various data gathering methods, the Company is categorizing the types of sales for our business units for the purpose of comparing how we currently recognize revenue for the purpose of quantifying the impact, if any, that this ASU will have on our consolidated financial statements.

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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.

 

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,

 

 

 

2017

 

2016

 

Customer A

    

23

%  

22

%

Customer B

 

17

 

17

 

Customer C

 

11

 

*

 

 

* Less than 10% accounts receivable concentration.

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

  

 

 

March 31,

 

 

 

2017

 

2016

 

Customer A

    

19

%  

17

%  

Customer C

 

*

 

12

 

Customer G

 

11

 

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.

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Numerator:

 

 

 

 

 

 

Net income

 

$

1,417,540

 

$

1,760,305

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

 

 

(123,537)

 

 

(210,498)

Net income applicable to common stockholders (basic and dilutive)

 

$

1,294,003

 

$

1,549,807

Denominator:

 

 

 

 

 

 

Weighted-average common stock outstanding (basic)

 

 

48,917,601

 

 

50,771,451

Common equivalent shares from options to purchase common stock

 

 

2,436,206

 

 

1,291,048

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

 

 

51,353,807

 

 

52,062,499

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, 2017 and 2016, the Company excluded 396,500 and 996,500, 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,

 

 

2017

    

2016

Stock options

 

7,500

 

1,933,471

Convertible preferred stock(1)

 

4,688,237

 

6,851,144

Total anti-dilutive securities

 

4,695,737

 

8,784,615

 

(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, 2017 and 2016.

 

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Processing and service costs

 

$

42,435

 

$

48,806

Selling, general and administrative expenses

 

 

283,437

 

 

555,162

Total stock-based compensation expense

 

$

325,872

 

$

603,968

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

    

2016

Stock options

 

$

227,506

 

$

281,396

Restricted stock awards

 

 

98,366

 

 

322,572

Total stock-based compensation expense

 

$

325,872

 

$

603,968

 

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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)

 

2017

 

2016

Equipment

 

2

-

7

 

$

999,096

    

$

998,722

Computer hardware

 

3

-

5

 

 

3,744,736

 

 

3,637,938

Furniture and fixtures

 

5

-

7

 

 

257,013

 

 

256,889

Leasehold improvements

 

3

-

10

 

 

1,059,643

 

 

1,037,386

Total property and equipment, gross

 

 

 

 

 

 

6,060,488

 

 

5,930,935

Less: Accumulated depreciation and amortization

 

 

 

 

 

 

(4,415,906)

 

 

(4,256,525)

Property and equipment, net

 

 

 

 

 

$

1,644,582

 

$

1,674,410

 

Property and equipment depreciation and amortization expense is as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

2016

Depreciation and amortization expense

 

$

158,617

    

$

163,126

 

 

 

 

 

 

 

 

 

 

 

 

 

7. Goodwill and intangible assets

 

The change in carrying amount of goodwill for the three months ended March 31, 2017 is as follows:

 

 

 

 

 

Goodwill, gross, as of December 31, 2016

    

$

276,786

Impact of change in Euro exchange rate

 

 

4,149

Accumulated impairment losses as of March 31, 2017

 

 

 —

Goodwill, net, as of March 31, 2017

 

$

280,935

 

 

The entire goodwill balance is assigned to the payment processing services segment.

 

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, 2017

 

As of December 31, 2016

 

Amortization

 

Gross book

 

Accumulated

 

Net book

 

Gross book

 

Accumulated

 

Net book

 

period

 

value

 

amortization

 

value

 

value

 

amortization

 

value

 

(in years)

Trademarks and patents

$

1,208,510

  

$

(577,748)

  

$

630,762

  

$

1,203,097

  

$

(557,794)

  

$

645,303

  

15

-

21

Technology

 

2,339,577

 

 

(2,271,654)

 

 

67,923

 

 

2,305,019

 

 

(2,122,848)

 

 

182,171

 

 

5

 

Intangible assets, net

$

3,548,087

 

$

(2,849,402)

 

$

698,685

 

$

3,508,116

 

$

(2,680,642)

 

$

827,474

 

 

 

 

 

Amortization expense related to intangible assets is as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2017

    

2016

Amortization expense

 

$

136,427

 

$

142,138

 

 

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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 $1.2 million as of March 31, 2017 and as of December 31, 2016, 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 $1.5 million as of March 31, 2017 and $1.4 million as of December 31, 2016.

 

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 $1.0  million with the sponsoring bank against such liabilities and has itself paid the acquirer a reserve of $0.4 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, 2017 and December 31, 2016, 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 may be involved in legal proceedings 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 was 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, 2017 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. Credit Facility

 

On February 2, 2017, the Company entered into an amendment to its credit facility (the “Credit Facility”) with Citizens Bank, N.A. to increase the Company’s borrowing capacity from $20.0 million to $30.0 million and extended the maturity date to December 31, 2021. The Line of Credit is secured by substantially all of the Company’s personal

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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 Facility also provides for a letter of credit sub-facility of up to $2.0 million. The Credit Facility 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 Company had $9.9 million outstanding under the Credit Facility at March 31, 2017 and December 31, 2016 and was in compliance with all financial covenants contained in the Credit Agreement.

 

10. Convertible preferred stock

 

During 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 in accordance with the terms of the Series A Preferred Stock Purchase agreement.  As of March 31, 2017, the remaining preferred stock consists of 1,535,398 shares designated (and issued) as Series A Preferred Stock, and 1,756,250 shares which are undesignated (and unissued). Each issued share of Series A Preferred Stock is convertible into approximately 3.05 shares of common stock, for a total of 4,688,237 shares of common stock.

 

For additional information on the Company’s convertible preferred stock disclosure, refer to Note 9 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

11. Accrued expenses

 

The following are the components of accrued expenses:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2017

 

2016

Bonus

    

$

34,846

    

$

611,228

Deferred revenue(*)

 

 

821,447

 

 

881,715

Deferred incentive(**)

 

 

699,798

 

 

1,087,591

Other(***)

 

 

3,660,364

 

 

2,773,201

Total accrued expenses

 

$

5,216,455

 

$

5,353,735

 

 

(*) Current deferred revenue will be recognized as revenue ratably over the next 12 months.  As of March 31, 2017, included in the balance sheet classification “Other long-term liabilities” is the non-current portion of deferred revenue in the amount of $0.5 million. The long-term portion of deferred revenue balance as of December 31, 2016 was approximately $0.7 million.

 

(**) As of March 31, 2017 and December 31, 2016, the Company recorded approximately $0.7 million and $1.1 million, respectively, in short-term incentives in relation to future obligations under contracts. As of  December 31, 2016, included in the balance sheet classification “Other long-term liabilities” is the non‑current portion of these incentives of approximately $0.1 million.    

 

(***) As of March 31, 2017 and December 31, 2016, included in “other” were third party referral commissions of approximately $0.8 million and $0.6 million, respectively. No other amount included in “Other” exceeded 10% of total current liabilities.

 

12. 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

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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 $0.7 million, which is included in “processing and services costs” for the three months ended March 31, 2017 and 2016, 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, 2017 and December 31, 2016, long-lived asset amounts are $6.8 million and $7.0 million, respectively.

 

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,

 

    

2017

    

2016

Net Revenue:

 

 

 

 

 

 

APAC

 

$

4,093,385

 

$

3,817,064

The Americas

 

 

2,969,152

 

 

2,185,374

EMEA

 

 

1,370,367

 

 

2,631,794

Total multi-currency processing services revenue

 

 

8,432,904

 

 

8,634,232

Payment processing services revenue

 

 

4,295,981

 

 

5,050,281

Net revenue

 

$

12,728,885

 

$

13,684,513

Gross Profit:

 

 

 

 

 

 

APAC

 

$

4,072,794

 

$

3,793,504

The Americas

 

 

2,796,896

 

 

2,034,688

EMEA

 

 

1,049,416

 

 

2,065,618

Total multi-currency processing services gross profit

 

 

7,919,106

 

 

7,893,810

Payment processing services gross profit

 

 

2,180,372

 

 

2,359,057

Total reportable segment gross profit

 

 

10,099,478

 

 

10,252,867

Corporate allocated cost of sales

 

 

2,678,275

 

 

2,760,246

Total gross profit

 

$

7,421,203

 

$

7,492,621

 

 

 

 

 

 

 

Income from operations before provision for income taxes:

 

 

 

 

 

 

Total gross profit

 

$

7,421,203

 

$

7,492,621

Selling, general and administrative expenses

 

 

5,287,338

 

 

5,480,714

Restructuring charges

 

 

65,458

 

 

 —

Income from operations

 

 

2,068,407

 

 

2,011,907

Interest expense

 

 

(116,332)

 

 

(14,676)

Interest income

 

 

523

 

 

424

Total other expense, net

 

 

(115,809)

 

 

(14,252)

Income from operations before provision for income taxes

 

$

1,952,598

 

$

1,997,655

 

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, 2017, Customer B and Customer G had revenue concentration of 23% and 23%, respectively.  For the three months ended March 31, 2016, Customer B and Customer G had revenue concentration of 15% and 28%, respectively.

 

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“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,

 

 

 

2017

 

2016

 

Multi-currency processing services revenue:

    

 

 

 

 

APAC:

 

 

 

 

 

Customer A

 

58

%  

59

%  

The Americas:

 

 

 

 

 

Customer D

 

24

 

27

 

Customer F

 

*

 

10

 

Customer G

 

14

 

*

 

Customer I

 

14

 

*

 

EMEA:

 

 

 

 

 

Customer C

 

52

 

63

 

Customer H

 

43

 

35

 

 

(*) Less than 10% revenue concentration.

 

13. Stock Repurchases

 

Stock repurchase program

 

As of March 31, 2017, the total amount of common stock repurchased under the program was 6.5 million shares for an aggregate price of $17.5 million, and $10.0 million remained available for repurchase under the program.  No repurchases were made during the three months ended March 31, 2017. 

 

For additional information on the Company’s stock repurchase program, refer to Note 16 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 

 

 

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 entitled “Item 1A - Risk Factors” included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. 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.”

 

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Business overview

 

Planet Payment is a provider of international payment and transaction processing and multi-currency processing services. We provide our services to approximately 188,000 active merchant locations in 22 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 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 cards. 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 ; and

 

·

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 positive 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 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. For example, the strength of the US Dollar may lead to reduced cross-border travel to the United States and other markets whose currencies are pegged to the US Dollar.

 

We plan to grow our business by increasing the use of our services by the merchants of our existing acquiring bank and processor customers adding new acquiring bank and processor customers and expanding into new geographies and business sectors. If we are successful in increasing our share of this currently addressable market, 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

KEY METRICS:

    

 

 

 

 

 

 

Total active merchant locations (at period end)(1)

 

 

188,356

 

 

135,526

 

Total settled transactions processed(2)

 

 

46,510,692

 

 

53,391,673

 

Total settled dollar volume processed(3)

 

$

2,195,099,898

 

$

2,063,282,670

 

Adjusted EBITDA (non-GAAP)(4)

 

$

3,012,719

 

$

3,224,865

 

Capitalized expenditures

 

$

320,650

 

$

385,941

 

Multi-currency processing services key metrics:

 

 

 

 

 

 

 

Active merchant locations (at period end)(1)

 

 

129,330

 

 

62,532

 

Settled transactions processed(5)

 

 

5,066,472

 

 

4,274,099

 

Settled dollar volume processed(6)

 

$

755,925,509

 

$

726,274,722

 

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

 

 

1.12

%  

 

1.19

%  

Payment processing services key metrics :

 

 

 

 

 

 

 

Active merchant locations (at period end)(1)

 

 

60,615

 

 

74,703

 

Payment processing services revenue(8)

 

$

4,295,981

 

$

5,050,281

 

Settled transactions processed(9)

 

 

41,857,101

 

 

49,261,402

 

Settled dollar volume processed(10)

 

$

1,489,720,023

 

$

1,364,585,533

 

 

(1)

We consider a merchant location to be active as of a date if the merchant completed at least one revenue-generating transaction at the location during the 90-day period ending on such date.  The total number of active merchant locations exceeds the total number of merchants, as merchants may have multiple locations. As of March 31, 2017 and 2016, there were 1,589 and 1,709 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.

 

(2)

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

 

(3)

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

 

(4)

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.

 

(5)

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

 

(6)

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

 

(7)

Represents the average net foreign currency mark-up percentage earned on settled dollar volume processed using our multi-currency processing services. The average net mark-up percentage on settled dollar volume processed is calculated by taking total multi-currency processing services net revenue ($8.4 million and $8.6 million for the three months ended March 31, 2017 and 2016, respectively) and dividing by settled dollar volume processed (see footnote 6 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.

 

(8)

Represents revenue earned and reported on payment processing services.

 

(9)

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

 

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(10)

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 (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.

 

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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,

 

 

 

2017

    

2016

    

ADJUSTED EBITDA:

    

 

 

 

 

 

 

Net income

 

$

1,417,540

 

$

1,760,305

 

Interest expense

 

 

116,332

 

 

14,676

 

Interest income

 

 

(523)

 

 

(424)

 

Provision for income taxes

 

 

535,058

 

 

237,350

 

Depreciation and amortization

 

 

552,982

 

 

608,990

 

Stock-based compensation expense

 

 

325,872

 

 

603,968

 

Restructuring charges

 

 

65,458

 

 

 —

 

Adjusted EBITDA (non-GAAP)

 

$

3,012,719

 

$

3,224,865

 

 

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 three 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,

 

 

 

2017

 

2016

 

Revenue:

    

 

 

    

 

 

    

APAC

 

$

4,093,385

 

$

3,817,064

 

The Americas

 

 

2,969,152

 

 

2,185,374

 

EMEA

 

 

1,370,367

 

 

2,631,794

 

Total multi-currency processing services revenue

 

 

8,432,904

 

 

8,634,232

 

Payment processing services revenue

 

 

4,295,981

 

 

5,050,281

 

Net revenue

 

$

12,728,885

 

$

13,684,513

 

 

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A significant portion of our revenue is derived from agreements with a limited number of customers. Specifically, for the three months ended March 31, 2017, subsidiaries of Customer A and Customer G represented approximately 19% 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 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 credit facility and 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 requires 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, 2016.

 

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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,

 

 

 

2017

 

2016

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

    

$ amount

    

revenue

    

$ amount

    

revenue

    

Revenue:

 

 

    

  

    

    

 

    

  

    

    

APAC

 

$

4,093,385

 

32.2

%  

$

3,817,064

 

27.9

%  

The Americas

 

 

2,969,152

 

23.3

 

 

2,185,374

 

16.0

 

EMEA

 

 

1,370,367

 

10.8

 

 

2,631,794

 

19.2

 

Total multi-currency processing services revenue

 

 

8,432,904

 

66.3

 

 

8,634,232

 

63.1

 

Payment processing services revenue

 

 

4,295,981

 

33.7

 

 

5,050,281

 

36.9

 

Net revenue

 

 

12,728,885

 

100.0

 

 

13,684,513

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

Payment processing services fees

 

 

2,115,609

 

16.6

 

 

2,691,224

 

19.7