Planet Payment Inc.
Planet Payment Inc (Form: 10-Q, Received: 11/07/2017 06:08:57)

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 September 30, 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 October 31, 2017 ,   there were 50,012,263 shares of the registrant’s common stock outstanding.

 

 

 

 


 

Table of Contents

Planet Payment, Inc.

Report on Form 10-Q

For the Quarterly Period Ended September 30, 2017

 

Table of Contents

 

 

 

 

 

 

Page

 

 

 

Part I.  

Financial Information

3

 

 

 

Item 1.  

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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

17

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.  

Controls and Procedures

32

 

 

 

Part II.  

Other Information

32

 

 

 

Item 1.  

Legal Proceedings

32

 

 

 

Item 1A .  

Risk Factors

32

 

 

 

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 6.  

Exhibits

35

 

 

 

Signatures  

 

36

 

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

 

 

September 30,

 

December 31,

 

 

2017

 

2016

 

 

 

(unaudited)

 

 

 

Current assets:

 

 

    

    

 

    

Cash and cash equivalents

 

$

9,802,497

 

$

13,305,816

Restricted cash

 

 

4,350,588

 

 

4,981,472

Accounts receivable, net of allowances of $0.1 million as of September 30, 2017 and December 31, 2016

 

 

7,915,203

 

 

6,060,533

Prepaid expenses and other assets

 

 

2,048,902

 

 

1,940,544

Total current assets

 

 

24,117,190

 

 

26,288,365

Other assets:

 

 

 

 

 

 

Restricted cash

 

 

550,580

 

 

550,402

Property and equipment, net

 

 

1,652,484

 

 

1,674,410

Software development costs, net

 

 

4,190,599

 

 

4,197,142

Intangible assets, net

 

 

605,657

 

 

827,474

Goodwill

 

 

310,736

 

 

276,786

Deferred tax asset

 

 

22,343,511

 

 

22,673,206

Other long-term assets

 

 

1,452,404

 

 

2,095,817

Total other assets

 

 

31,105,971

 

 

32,295,237

Total assets

 

$

55,223,161

 

$

58,583,602

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,064,240

 

$

830,479

Accrued expenses

 

 

3,360,875

 

 

5,353,735

Due to merchants

 

 

4,526,072

 

 

5,199,390

Current portion of capital leases

 

 

188,971

 

 

166,966

Total current liabilities

 

 

9,140,158

 

 

11,550,570

Long-term liabilities:

 

 

 

 

 

 

Long-term debt

 

 

 —

 

 

9,916,000

Other long-term liabilities

 

 

324,998

 

 

854,991

Total long-term liabilities

 

 

324,998

 

 

10,770,991

Total liabilities

 

 

9,465,156

 

 

22,321,561

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Convertible preferred stock—10,000,000 shares authorized as of September 30, 2017 and December 31, 2016, $0.01 par value: Series A—1,535,398 shares issued and outstanding as of September 30, 2017 and December 31, 2016; $6,141,592 aggregate liquidation preference as of September 30, 2017 and December 31, 2016

 

 

15,354

 

 

15,354

Common stock—250,000,000 shares authorized as of September 30, 2017 and December 31, 2016, $0.01 par value, and 60,346,797 shares issued and 49,971,443 shares outstanding as of September 30, 2017, and 59,666,333 shares issued and 49,290,979 shares outstanding as of December 31, 2016

 

 

603,468

 

 

596,663

Treasury stock, at cost, 10,375,354 shares as of September 30, 2017 and December 31, 2016

 

 

(31,726,486)

 

 

(31,726,486)

Additional paid-in capital

 

 

113,565,756

 

 

111,327,321

Accumulated other comprehensive loss

 

 

(485,852)

 

 

(654,408)

Accumulated deficit

 

 

(36,214,235)

 

 

(43,296,403)

Total stockholders’ equity

 

 

45,758,005

 

 

36,262,041

Total liabilities and stockholders’ equity

 

$

55,223,161

 

$

58,583,602

 

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

 

 

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Table of Contents

 

Planet Payment, Inc.

Condensed Consolidated Statements of Income (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

    

2016

Revenue:

    

 

    

    

 

    

    

 

    

 

 

    

Net revenue

 

$

13,805,324

 

$

13,621,239

 

$

39,050,592

 

$

40,409,128

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Payment processing service fees

 

 

2,364,028

 

 

2,781,289

 

 

6,565,082

 

 

8,207,202

Processing and service costs

 

 

3,031,105

 

 

2,878,088

 

 

9,428,424

 

 

9,902,879

Total cost of revenue

 

 

5,395,133

 

 

5,659,377

 

 

15,993,506

 

 

18,110,081

Selling, general and administrative expenses

 

 

4,621,566

 

 

5,222,560

 

 

14,590,609

 

 

15,908,166

Restructuring charges

 

 

 —

 

 

229,121

 

 

72,742

 

 

354,389

Total operating expenses

 

 

10,016,699

 

 

11,111,058

 

 

30,656,857

 

 

34,372,636

Income from operations

 

 

3,788,625

 

 

2,510,181

 

 

8,393,735

 

 

6,036,492

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(12,863)

 

 

(88,669)

 

 

(222,008)

 

 

(186,366)

Interest income

 

 

644

 

 

428

 

 

1,752

 

 

1,250

Other income

 

 

111,613

 

 

93,016

 

 

111,613

 

 

93,016

Total other income (expense), net

 

 

99,394

 

 

4,775

 

 

(108,643)

 

 

(92,100)

Income from operations before provision for income taxes

 

 

3,888,019

 

 

2,514,956

 

 

8,285,092

 

 

5,944,392

Provision for income taxes

 

 

(192,920)

 

 

(289,543)

 

 

(1,202,924)

 

 

(675,951)

Net income

 

$

3,695,099

 

$

2,225,413

 

$

7,082,168

 

$

5,268,441

Basic net income per share applicable to common stockholders

 

$

0.07

 

$

0.04

 

$

0.13

 

$

0.10

Diluted net income per share applicable to common stockholders

 

$

0.07

 

$

0.04

 

$

0.13

 

$

0.09

Weighted-average common stock outstanding (basic)

 

 

49,391,614

 

 

49,179,596

 

 

49,184,276

 

 

49,848,634

Weighted-average common stock outstanding (diluted)

 

 

51,261,769

 

 

51,254,223

 

 

51,297,019

 

 

52,002,249

 

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

 

4


 

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Planet Payment, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Net income

  

$

3,695,099

  

$

2,225,413

  

$

7,082,168

  

$

5,268,441

Foreign currency translation adjustment

 

 

86,457

 

 

(11,530)

 

 

168,556

 

 

(18,752)

Total comprehensive income

 

$

3,781,556

 

$

2,213,883

 

$

7,250,724

 

$

5,249,689

 

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

 

 

5


 

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Planet Payment, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2017

 

2016

Cash flows from operating activities:

    

 

    

    

 

    

Net income

 

$

7,082,168

 

$

5,268,441

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

 

 

 

 

 

 

Stock-based compensation expense

 

 

767,874

 

 

1,498,358

Depreciation and amortization expense

 

 

1,549,864

 

 

2,083,655

Provision for doubtful accounts

 

 

3,858

 

 

62,675

Deferred income taxes

 

 

329,695

 

 

 —

Loss on disposal of property and equipment

 

 

 —

 

 

500

Changes in operating assets and liabilities:

 

 

 

 

 

 

Decrease in settlement assets

 

 

630,884

 

 

1,160,869

Increase in accounts receivables, prepaid expenses and other assets

 

 

(1,928,650)

 

 

(258,790)

Decrease in other long-term assets

 

 

652,244

 

 

310,542

Decrease in accounts payable and accrued expenses

 

 

(2,353,775)

 

 

(2,407,891)

Decrease in due to merchants

 

 

(673,318)

 

 

(1,169,931)

Other

 

 

126,062

 

 

(44,740)

Net cash provided by operating activities

 

 

6,186,906

 

 

6,503,688

Cash flows from investing activities:

 

 

 

 

 

 

(Increase) decrease in restricted cash

 

 

(178)

 

 

2,853

Decrease in merchant reserves

 

 

 —

 

 

(1,990)

Purchase of property and equipment

 

 

(318,676)

 

 

(156,165)

Capitalized software development

 

 

(709,760)

 

 

(999,733)

Purchase of intangible assets

 

 

(12,295)

 

 

(16,299)

Net cash used in investing activities

 

 

(1,040,909)

 

 

(1,171,334)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

1,602,293

 

 

2,287,990

Principal payments on capital lease obligations

 

 

(199,349)

 

 

(272,417)

Borrowings under credit facility

 

 

 —

 

 

13,916,000

Repayments under credit facility

 

 

(9,916,000)

 

 

(4,000,000)

Purchase of treasury stock

 

 

 —

 

 

(23,843,474)

Common stock repurchases for tax withholdings

 

 

(136,260)

 

 

(655,104)

Net cash used in financing activities

 

 

(8,649,316)

 

 

(12,567,005)

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

 

 

 —

 

 

 —

Net decrease in cash and cash equivalents

 

 

(3,503,319)

 

 

(7,234,651)

Cash and cash equivalents at beginning of period

 

 

13,305,816

 

 

14,675,515

Cash and cash equivalents at end of period

 

$

9,802,497

 

$

7,440,864

Supplemental disclosure:

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

176,901

 

$

165,252

Income taxes

 

 

909,249

 

 

744,911

Non-cash investing and financing activities:

 

 

 

 

 

 

Common stock issued for preferred stock conversion

 

 

 —

 

 

21,629

Common stock issued for stock options exercised

 

 

262

 

 

98

Assets acquired under capital leases

 

 

47,067

 

 

122,630

Accrued capitalized hardware, software and fixed assets

 

 

238,970

 

 

75,870

Capitalized stock-based compensation

 

 

11,333

 

 

21,625

 

(*) For the nine months ended September 30, 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.

 

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 multi­currency processing services. The Company provides its services to approximately 190,000 active merchant locations in 23 countries and territories across the Asia- Pacific region, the Americas, the Middle East, Africa and Europe, primarily through its acquiring bank and processor customers, as well as through its own direct sales force. The Company provides banks and their merchants with innovative services to accept, process and reconcile electronic payments. The Company’s point-of-sale 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 September 30, 2017 and for the periods ended September 30, 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 September 30, 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) (“ASC 606”), 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 ASC 606 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 plans to elect to apply the modified retrospective approach upon adoption. Additionally, the new guidance requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurement and recognition. The Company has gathered all data from customer contracts and identified the promised services in each of those contracts. Those promised services primarily include transaction fees.  The Company is in the process of identifying how those promised services are grouped into performance obligations. The Company is also determining whether some or all of those distinct services are part of a series of distinct services that are substantially the same and have the same pattern of transfer. The Company has identified variable consideration, including tiered pricing on our transaction fees, and is evaluating the impact of those variable considerations on our revenue recognition upon the adoption of ASC 606. Finally, the Company has identified several contract modifications and is evaluating how to account for these under the standard.  We expect to complete the implementation of ASC 606 in 2017.

 

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 ASC 606.  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 ASC 606.  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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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 collectability, 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 ASC 606.  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 July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815) (“ASU 2017-11”).  The amendments in this update change the classification analysis of certain equity-linked financial instruments with down round features and clarify existing disclosure requirements of such instruments. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluating the effect ASU 2017-11 will have on the 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.

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

Customer A

    

18

%  

22

%

Customer B

 

12

 

17

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

  

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Customer A

    

18

%  

16

%  

19

%  

16

%

Customer G

 

*

 

14

 

*

 

12

 

 

* 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

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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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

  

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

    

2017

    

2016

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,695,099

 

$

2,225,413

 

$

7,082,168

 

$

5,268,441

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

 

 

(319,921)

 

 

(196,868)

 

 

(613,173)

 

 

(466,065)

Net income applicable to common stockholders (basic and dilutive)

 

$

3,375,178

 

$

2,028,545

 

$

6,468,995

 

$

4,802,376

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding (basic)

 

 

49,391,614

 

 

49,179,596

 

 

49,184,276

 

 

49,848,634

Common equivalent shares from options to purchase common stock

 

 

1,870,155

 

 

2,074,627

 

 

2,112,743

 

 

2,153,615

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

 

 

51,261,769

 

 

51,254,223

 

 

51,297,019

 

 

52,002,249

Basic net income per share applicable to common stockholders

 

$

0.07

 

$

0.04

 

$

0.13

 

$

0.10

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

 

$

0.07

 

$

0.04

 

$

0.13

 

$

0.09

 

 

 

(1)

In accordance with ASC 260-10-45-48, for the three and nine months ended September 30, 2017 and 2016, the Company excluded 396,500, 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

  

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

    

2016

 

2017

    

2016

Stock options

 

41,500

 

 —

 

28,921

 

581,665

Restricted stock awards

 

 —

 

 —

 

30,238

 

23,574

Convertible preferred stock(1)

 

4,688,237

 

4,688,237

 

4,688,237

 

5,493,407

Total anti-dilutive securities

 

4,729,737

 

4,688,237

 

4,747,396

 

6,098,646

 

(1)

Diluted net income per share increases when convertible preferred stock is included in the required sequence in the diluted earnings per share computation. As such, convertible preferred stock is excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2017 and 2016.

 

 

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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 second quarter of 2017, 34,000 stock options were granted to certain employees of the Company, with a grant fair value of $53,000. 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.

 

During the second quarter of 2017, 5,000 restricted stock awards with a grant fair value of $21,000 were granted to an employee of the Company.  The final number of vested shares is subject to service-based vesting conditions.  Stock-based compensation expense is recorded on a straight line basis from the date of the grant over the applicable service period of 36 months.

 

During the second quarter of 2017, 0.1 million restricted stock awards with a grant fair value of $0.2 million were granted to certain members of the Company’s Board of Directors.  The final number of vested shares is subject to 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 12 months.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

    

2017

    

2016

Processing and service costs

 

$

16,760

 

$

35,051

 

$

86,340

 

$

134,112

Selling, general and administrative expenses

 

 

176,595

 

 

282,408

 

 

681,534

 

 

1,364,246

Total stock-based compensation expense

 

$

193,355

 

$

317,459

 

$

767,874

 

$

1,498,358

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

    

2016

    

2017

    

2016

Stock options

 

$

120,772

 

$

217,537

 

$

503,995

 

$

766,766

Restricted stock awards

 

 

72,583

 

 

99,922

 

 

263,879

 

 

731,592

Total stock-based compensation expense

 

$

193,355

 

$

317,459

 

$

767,874

 

$

1,498,358

 

 

6. Property and equipment

 

Property and equipment, net consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

As of

 

As of

 

 

useful life

 

September 30,

 

December 31,

 

 

(in years)

 

2017

 

2016

Equipment

 

2

-

7

 

$

1,070,822

    

$

998,722

Computer hardware

 

3

-

5

 

 

4,057,362

 

 

3,637,938

Furniture and fixtures

 

5

-

7

 

 

258,065

 

 

256,889

Leasehold improvements

 

3

-

10

 

 

1,058,023

 

 

1,037,386

Total property and equipment, gross

 

 

 

 

 

 

6,444,272

 

 

5,930,935

Less: Accumulated depreciation and amortization

 

 

 

 

 

 

(4,791,788)

 

 

(4,256,525)

Property and equipment, net

 

 

 

 

 

$

1,652,484

 

$

1,674,410

 

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Property and equipment depreciation and amortization expense is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

    

2017

    

2016

Depreciation and amortization expense

 

$

215,488

    

$

328,181

 

$

527,526

 

$

768,740

 

Included in depreciation and amortization expense for the three and nine months ended September 30, 2016 is $0.2 million and $0.3 million, respectively, of expense related to the acceleration of amortization on certain assets due to exiting a floor in the Company’s corporate location before the end of the lease term.  The cease use date was  October 1, 2016.  For additional information on the Company’s restructuring charges disclosure, refer to Note 14.

 

 

 

 

 

 

 

 

 

 

 

 

7. Goodwill and intangible assets

 

The change in carrying amount of goodwill for the nine months ended September 30, 2017 is as follows:

 

 

 

 

 

Goodwill, gross, as of December 31, 2016

    

$

276,786

Impact of change in Euro exchange rate

 

 

33,950

Goodwill, net, as of September 30, 2017

 

$

310,736

 

 

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 September 30, 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

$

1,226,007

  

$

(620,350)

  

$

605,657

  

$

1,203,097

  

$

(557,794)

  

$

645,303

  

15

-

21

Technology

 

2,587,748

 

 

(2,587,748)

 

 

 —

 

 

2,305,019

 

 

(2,122,848)

 

 

182,171

 

 

5

 

Intangible assets, net

$

3,813,755

 

$

(3,208,098)

 

$

605,657

 

$

3,508,116

 

$

(2,680,642)

 

$

827,474

 

 

 

 

 

Amortization expense related to intangible assets is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

    

2017

    

2016

Amortization expense

 

$

21,104

 

$

143,692

 

$

246,295

    

$

431,710

 

 

8. Commitments and contingencies

 

Employment agreements

 

Pursuant to employment agreements with certain employees, the Company had a commitment to pay severance of approximately $1.3 million as of September 30, 2017 and $1.2 million 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 $1.6 million as of September 30, 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

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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  $1.1  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 September 30, 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 September 30, 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. (“Citizens”) to increase the Company’s borrowing capacity from $20.0 million to $30.0 million and extend the maturity date to December 31, 2021. The Line of Credit is secured by substantially all of the Company’s 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 agreement with Citizens, as amended (“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 provides funding availability for, among other things, general corporate purposes and repurchases of issued and outstanding capital stock of the Company.  During the second quarter of 2017, the Company repaid $9.9 million on the Credit Facility.  The Company had no outstanding borrowings under the Credit Facility at September 30, 2017 and was in compliance with all financial covenants contained in the Credit Agreement.  The Company had $9.9 million outstanding under the Credit Facility at December 31, 2016.

 

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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 September 30, 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:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

September 30,

 

December 31,

 

 

2017

 

2016

Bonus

    

$

221,277

    

$

611,228

Deferred revenue(*)

 

 

685,126

 

 

881,715

Deferred incentive(**)

 

 

397,809

 

 

1,087,591

Other(***)

 

 

2,056,663

 

 

2,773,201

Total accrued expenses

 

$

3,360,875

 

$

5,353,735

 

 

(*) Current deferred revenue will be recognized as revenue ratably over the next 12 months.  As of September 30, 2017, included in the balance sheet classification “Other long-term liabilities” is the non-current portion of deferred revenue in the amount of $0.2 million. The long-term portion of deferred revenue balance as of December 31, 2016 was approximately $0.7 million.

 

(**) As of September 30, 2017 and December 31, 2016, the Company recorded approximately $0.4 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 September 30, 2017 and December 31, 2016, included in “other” were third party referral commissions of approximately $0.2 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 geographical region. The Company operates in two reportable segments: multi-currency processing services and payment processing services.

 

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Information about revenue, profit and assets

 

The CODM evaluates performance and allocates resources based on net revenue and gross profit of each segment. For purposes of analyzing segments, gross profit of the multi-currency processing services segment is equal to net revenue less multi-currency cost of sales of $0.4 million and $0.5 million, which is included in “processing and services costs” for the three months ended September 30, 2017 and 2016, respectively, and $1.4 million and $1.9 million for the nine months ended September 30, 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 September 30, 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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

    

2017

    

2016

    

2017

    

2016

Net Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

APAC

 

$

4,320,879

 

$

3,962,539

 

$

12,558,229

 

$

11,541,521

The Americas

 

 

4,099,625

 

 

2,634,887

 

 

10,295,406

 

 

7,264,448

EMEA

 

 

1,112,749

 

 

1,578,050

 

 

3,623,488

 

 

5,962,345

Total multi-currency processing services revenue

 

 

9,533,253

 

 

8,175,476

 

 

26,477,123

 

 

24,768,314

Payment processing services revenue

 

 

4,272,071

 

 

5,445,763

 

 

12,573,469

 

 

15,640,814

Net revenue

 

$

13,805,324

 

$

13,621,239

 

$

39,050,592

 

$

40,409,128

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

APAC

 

$

4,303,113

 

$

3,942,457

 

$

12,494,444

 

$

11,467,607

The Americas

 

 

3,904,298

 

 

2,470,294

 

 

9,703,121

 

 

6,766,889

EMEA

 

 

912,020

 

 

1,229,358

 

 

2,875,245

 

 

4,636,893

Total multi-currency processing services gross profit

 

 

9,119,431

 

 

7,642,109

 

 

25,072,810

 

 

22,871,389

Payment processing services gross profit

 

 

1,908,043

 

 

2,664,474

 

 

6,008,387

 

 

7,433,612

Total reportable segment gross profit

 

 

11,027,474

 

 

10,306,583

 

 

31,081,197

 

 

30,305,001

Corporate allocated cost of sales

 

 

2,617,283

 

 

2,344,721

 

 

8,024,111

 

 

8,005,954

Total gross profit

 

$

8,410,191

 

$

7,961,862

 

$

23,057,086

 

$

22,299,047

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations before provision for income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

$

8,410,191

 

$

7,961,862

 

$

23,057,086

 

$

22,299,047

Selling, general and administrative expenses

 

 

4,621,566

 

 

5,222,560

 

 

14,590,609

 

 

15,908,166

Restructuring charges

 

 

 -

 

 

229,121

 

 

72,742

 

 

354,389

Income from operations

 

 

3,788,625

 

 

2,510,181

 

 

8,393,735

 

 

6,036,492

Interest expense

 

 

(12,863)

 

 

(88,669)

 

 

(222,008)

 

 

(186,366)

Interest income

 

 

644

 

 

428

 

 

1,752

 

 

1,250

Other income

 

 

111,613

 

 

93,016

 

 

111,613

 

 

93,016

Total other income (expense), net

 

 

99,394

 

 

4,775

 

 

(108,643)

 

 

(92,100)

Income from operations before provision for income taxes

 

$

3,888,019

 

$

2,514,956

 

$

8,285,092

 

$

5,944,392

 

Payment processing services revenue and gross profit are the result of transactions that primarily originated in the Americas. For the three months ended September 30, 2017, Customer B and Customer G had revenue concentration of 22% and 14%, respectively, and for the nine months ended September 30, 2017, Customer B and Customer G had revenue concentration of 22% and 18%, respectively.  For the three months ended September 30, 2016, Customer B and Customer G had revenue concentration of 14% and 35%, respectively, and for the nine months ended September 30, 2016, Customer B and Customer G had revenue concentration of 15% and 30%, 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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Multi-currency processing services revenue:

    

 

 

 

 

 

 

 

 

APAC:

 

 

 

 

 

 

 

 

 

Customer A

 

59

%  

56

%  

58

%  

56

%  

The Americas:

 

 

 

 

 

 

 

 

 

Customer D

 

12

 

22

 

16

 

22

 

Customer E