WASHINGTON, D.C. 20549
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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
x
The number of outstanding shares of common
stock, $.0001 par value, of the registrant as of November 11, 2017 was 2,454,457 after giving effect to the registrant's one-for-ten
reverse stock split effected October 5, 2017.
Net Element, Inc. is a corporation organized
under the laws of the State of Delaware. As used in this Quarterly Report on Form 10-Q (this “Report”), unless the
context otherwise requires, the terms “Company,” “we,” “us” and “our” refer to
Net Element, Inc. and, as applicable, its majority-owned and consolidated subsidiaries. References in this Report to “PayOnline”
refer, collectively, to PayOnline System LLC, Innovative Payment Technologies LLC, Polimore Capital Limited and Brosword Holding.
This Report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended. Any statements contained in this Report that are not statements of historical
fact may be deemed forward-looking statements. Forward-looking statements generally are identified by the words “expects,”
“anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,”
“may,” “will,” “continue,” “seeks,” “should,” “believe,”
“potential” or the negative of such terms and similar expressions. Forward-looking statements are based on current
plans, estimates and projections, and therefore you should not place too much reliance on them. Forward-looking statements speak
only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement in light of
new information or future events, except as expressly required by law. Forward-looking statements involve inherent risks and uncertainties,
most of which are difficult to predict and are generally beyond the Company’s control. The Company cautions you that a number
of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking
statements. These factors include, among other factors:
If these or other risks and uncertainties
(including those described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and
in Part II, Item 1A of this Report and the Company’s subsequent filings with the Commission) materialize, or if the assumptions
underlying any of these statements prove incorrect, the Company’s actual results may be materially different from those
expressed or implied by such statements. We undertake no obligation to publicly revise any forward-looking statement to reflect
circumstances or events after the date of this Report to reflect the occurrence of unanticipated events. You should, however,
review the factors and risks described in the reports we file from time-to-time with the Commission after the date of this Report.
World Wide Web addresses contained in this
Report are for explanatory purposes only and they (and the content contained therein) do not form a part of and are not incorporated
by reference into this Report.
PCI Certification
At September 30, 2017 and December 31, 2016,
the net book value of our PCI certification was $93,539 and $205,790, respectively. For the three and nine months ended September
30, 2017, amortization for this certification was $37,417 and $112,251, respectively. For the three and nine months ended September
30, 2016, amortization for this certification was $37,417 and $112,251, respectively.
NOTE 7. ACCRUED EXPENSES
At September 30, 2017 and December 31, 2016,
accrued expenses amounted to $3,419,879 and $5,518,823, respectively. Accrued expenses represent expenses that are owed at the
end of the period and have not been billed by the provider or are estimates of services provided. The following table details
the items comprising the balances outstanding at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Accrued professional fees
|
|
$
|
220,140
|
|
|
$
|
220,140
|
|
PayOnline accrual
|
|
|
1,633,271
|
|
|
|
3,784,451
|
|
Accrued interest
|
|
|
180,844
|
|
|
|
183,778
|
|
Accrued bonus
|
|
|
1,253,577
|
|
|
|
774,485
|
|
Accrued franchise taxes
|
|
|
-
|
|
|
|
180,000
|
|
Accrued foreign taxes
|
|
|
108,456
|
|
|
|
131,810
|
|
Short term loan advances
|
|
|
-
|
|
|
|
174,376
|
|
Other accrued expenses
|
|
|
23,591
|
|
|
|
69,783
|
|
|
|
$
|
3,419,879
|
|
|
$
|
5,518,823
|
|
The accrual for PayOnline at September 30,
2017 consists of a $480,936 stock price guarantee obligation pursuant to a settlement agreement entered into in connection with
the PayOnline acquisition. Additionally, the accrual includes a $1,152,335 obligation for refundable merchant reserves assumed
pursuant to an amendment to the PayOnline acquisition agreement. See Note 11 and Note 17 for additional information.
The accrual for PayOnline at December 31,
2016 consists of a $199,000 earn-out accrual and a $2,075,687 stock price guarantee obligation pursuant to a settlement agreement
entered into in connection with the PayOnline acquisition. Additionally, the accrual includes a $1,433,475 million obligation
for refundable merchant reserves assumed pursuant to an amendment to the PayOnline acquisition agreement.
Accrued bonuses are attributed to our TOT
Group subsidiaries resulting from a discretionary bonus accrual for $1,253,577 and $774,485 at September 30, 2017 and December
31, 2016, respectively.
NOTE 8. SHORT TERM DEBT
At September 30, 2017 and December 31, 2016,
short term debt consists of $503,041 and $808,976, respectively in principal repayments due to RBL Capital Group, LLC and Priority
Payment Systems, LLC.
NOTE 9. LONG TERM DEBT
Long term debt consists of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
RBL Capital Group, LLC
|
|
$
|
4,544,087
|
|
|
$
|
4,044,056
|
|
Priority Payments Systems LLC
|
|
|
2,477,678
|
|
|
|
-
|
|
MBF Merchant Capital, LLC
|
|
|
504,794
|
|
|
|
520,303
|
|
Subtotal
|
|
|
7,526,559
|
|
|
|
4,564,359
|
|
Less Deferred loan costs
|
|
|
(136,136
|
)
|
|
|
(139,601
|
)
|
Subtotal
|
|
|
7,390,423
|
|
|
|
4,424,758
|
|
Less Current portion
|
|
|
(503,041
|
)
|
|
|
(808,976
|
)
|
Long term debt
|
|
$
|
6,887,382
|
|
|
$
|
3,615,782
|
|
RBL Capital Group, LLC
Effective June 30, 2014, TOT Group, Inc. and
its subsidiaries as co-borrowers, TOT Payments, LLC, TOT BPS, LLC, TOT FBS, LLC, Process Pink, LLC, TOT HPS, LLC and TOT New Edge,
LLC, entered into a Loan and Security Agreement with RBL Capital Group, LLC (“RBL”), as lender (the “RBL Loan
Agreement”). Pursuant to the original terms of the RBL Loan Agreement, we could borrow up to $10,000,000 from RBL during
the 18 month period from the closing of this credit facility. Prior to maturity of the loan, the principal amount of the borrowings
under the credit facility will carry a fixed interest rate of the higher of 13.90% per annum or the prime rate plus 10.65%. After
maturity of the loan, until all borrowings are paid in full, with respect to the advances under the credit facility, an additional
three percent per annum would be added to such interest rate, and for any other amounts, obligations or payments due to RBL, an
annual default rate not to exceed the lesser of (i) the prime rate plus 13% per annum and (ii) 18.635% per annum. As further described
below, borrowings from the line of credit in the amounts of $3,315,000, $400,000 and $250,000 were converted into term loans.
On May 2, 2016, we renewed our credit facility with RBL, increasing the facility from $10 million to $15 million and extended
the term through February 2018. At September 30, 2017 and December 31, 2016, we had $10,455,913 and $10,955,414 available under
our RBL credit line.
The co-borrowers’ obligations to RBL
pursuant to the RBL Loan Agreement are secured by a first priority security interest in all of the co-borrowers’ tangible
and intangible assets, including but not limited to their merchants, merchant contracts and proceeds thereof, and all right title
and interest in co-borrowers’ processing contracts, contract rights, and portfolio cash flows with all processors of the
co-borrowers.
On July 17, 2014, we entered into a $3,315,000
term note with RBL. Net proceeds from the term note were used to repay a $3.0 million note previously due to MBF Merchant Capital,
LLC (“MBF”) in addition to approximately $239,000 for working capital. The term note required interest only payments
at 13.90% interest through January 2015 commencing on August 20, 2014 followed by monthly interest and principal payments of $90,421
through January 2019. The note balance reduced the amount available under our RBL credit line. The note also provided for a 2%
front end fee due at execution of the note and a 4% backend fee due at the final payment of the note. During 2016, Crede CG III,
Ltd. (“Crede”) purchased $1,849,481 of the principal balance of this note in various tranches. We exchanged and extinguished
these note tranches for 16,426 shares of common stock during the second quarter of 2016, 99,203 shares of our common stock during
the third quarter of 2016, and 19,608 shares during the fourth quarter of 2016. See “—Crede CG III, Ltd.” At
December 20, 2016, the remaining balance of the note was refinanced into another note and its balance was $0 at December 31, 2016.
Effective February 10, 2015, we entered into
a $400,000 term note with RBL based on a draw down from the line of credit. The term note provided for interest-only payments
at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019 (maturity date), we were obligated to make
interest and principal payments of $10,911 per month. We paid $8,000 in costs related to this loan. This term note was purchased
by Crede, which was exchanged and extinguished for an aggregate of 21,928 shares of our common stock on June 9, 2016, June 23,
2016, and June 30, 2016. The balance of this note was $0 at December 31, 2016.
Effective March 27, 2015, we entered into
a $250,000 term note with RBL based on the draw down from the line of credit. The term note provided for interest-only payments
at 13.90% interest through July 20, 2015. From August 20, 2015 through July 20, 2019 (the note maturity date), we were obligated
to make interest and principal payments of $6,819 per month. We paid $5,000 in costs related to this term note. This term note
was purchased by Crede, which was exchanged and extinguished for an aggregate of 9,174 shares of our common stock on May 9, 2016.
The balance of this note was $0 at December 31, 2016.
On May 4, 2016, we entered into a $250,000
term note with RBL. The term note provided for interest-only payments at 14.15% interest through October 20, 2016. From November
20, 2016 through October 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $6,850
per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% back end fee due
at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was
$0 at December 31, 2016.
On May 20, 2016, we entered into a $400,000
term note with RBL. The term note provided for interest-only payments at 14.15% interest through November 20, 2015. From December
20, 2016 through November 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $10,961
per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% back end fee due
at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was
$0 at December 31, 2016.
On June 23, 2016, we entered into a $190,000
term note with RBL. The term note provided for interest-only payments at 14.15% interest through December 20, 2016. From January
20, 2017 through December 20, 2020 (the note maturity date), we were obligated to make interest and principal payments of $5,206
per month. The term note also provided for a 2% front end fee, due upon the execution of the term note and a 4% backend fee due
at the final payment of the term note. On December 20, 2016, this note was refinanced into another term note and its balance was
$0 at December 31, 2016.
On July 15, 2016, we entered into a $350,000
term note with RBL. The term note provided for interest-only payments at 14.15% through January 20, 2017. From February 20, 2017
through January 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for
a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December
20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.
On August, 15, 2016, we entered into a $400,000
term note with RBL. The term note provided for interest only payments at 14.15% through February 20, 2017. From March 20, 2017
through February 20, 2021, we were obligated to make interest and principal payments of $10,961. The term note also provided for
a 2% front end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December
20, 2016, this note was refinanced into another term note and its balance was $0 at December 31, 2016.
On September 15, 2016, we entered into a $350,000
term note with RBL. The term note provided for interest only payments at 14.15% through March 20, 2017. From April 20, 2017 through
March 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for a 2% front
end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016,
this note was refinanced into another term note and its balance was $0 at December 31, 2016.
On November 7, 2016, we entered into a $350,000
term note with RBL. The term note provided for interest only payments at 14.15% through May 20, 2017. From June 20, 2017 through
May 20, 2021, we were obligated to make interest and principal payments of $9,591. The term note also provided for a 2% front
end fee due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016,
this note was refinanced into another term note and its balance was $0 at December 31, 2016.
On December 15, 2016, we entered into a $325,000
term note with RBL. The term note provided for interest only payments at 14.15% through June 20, 2017. From July 20, 2017 through
June 20, 2021, we were obligated to make interest and principal payments of $8,906. The term note also provided for a 2% front
end fee, due upon the execution of the loan and a 4% back end fee due at the final payment of the term note. On December 20, 2016,
this note was refinanced into another term note and its balance was $0 at December 31, 2016.
On December 20, 2016, we entered into a $4,044,055
term note with RBL. This note effectively refinanced all RBL notes described above. The term note provides for interest only payments
at 14.15% through May 20, 2017 of $47,686. From June 20, 2017 through May 20, 2021, we are obligated to make interest and principal
payments of $110,814. The term note also required a $20,000 front end refinancing fee upon execution of the loan and a $104,600
back end fee due at the final payment on May 20, 2021. This note balance was $0 at September 30, 2017 as it was refinanced into
the new refinancing note on June 1, 2017 as described below.
On March 30, 2017, we entered into a $100,000
term note with RBL based on a draw down from the line of credit. The term note provides for interest-only payments at 14.4% interest
rate through May 20, 2017. From June 20, 2017 through May 20, 2021 (maturity date), we are obligated to make interest and principal
payments of $2,753 per month. We paid $2,000 in costs related to this term note at its inception and another $4,000 of costs is
due at the maturity of the note. This note balance was $0 at September 30, 2017 as it was refinanced into the new refinancing
note on June 1, 2017 as described below.
On April 17, 2017, we entered into a $400,000
term note with RBL based on a draw down from the line of credit. The term note provides for interest-only payments at 14.4% through
May 20, 2017 of $5,208. From June 20, 2017 through May 20, 2021 (maturity date), we are obligated to make interest and principal
payments of $11,011 per month. We paid $8,000 in costs related to this loan at its inception and another $16,000 of costs is due
at the maturity of the note. This note balance was $0 at September 30, 2017 as it was refinanced into the new refinancing note
on June 1, 2017 as described below.
On April 26, 2017, we exchanged 10,235 shares
of our common stock for $75,000 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an average
per share exchange price of $0.73. The exchange also settled current interest and loan fees of $4,500 and a non-cash exchange
premium of $9,951.
On April 26, 2017, the $4,044,055 term note
with RBL entered into on December 20, 2016 was revised to reflect the $75,000 exchange transaction mentioned above. As a result,
the note was updated to reflect a principal payment and interest payment of $108,759 on June 20, 2017.
On May 19, 2017, we entered into a $75,000
term note with RBL based on a draw down from the line of credit. The term note provides for one interest only payment of $947
on May 20, 2017 at a 14.4% interest rate, then 48 equal monthly payments of principal and interest of $2,065. This note balance
was zero at September 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below.
On May 24, 2017, we exchanged 23,058 shares
of our common stock for $150,000 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an average
per share exchange price of $0.65. The exchange also settled current interest and loan fees of and a non-cash exchange premium
of $23,156.
On May 26, 2017, we entered into a $150,000
term note with RBL based on a draw down from the line of credit. The term note provides for one interest only payment of $1,479
at a 14.4% interest rate, on June 20, 2017 then 48 equal monthly payments of principal and interest of $4,129. This note balance
was zero at September 30, 2017 as it was refinanced into the new refinancing note on June 1, 2017 as described below.
On June 1, 2017 the $4,044,055 refinance note
dated December 20, 2016 was updated to roll the above $150,000, $75,000, $400,000 and $100,000 term notes. The note principal
amount was $4,544,055 at September 30, 2017. The note provided for the interest rate of $14.19% per annum and interest only payments
from June 20, 2017 through September 20, 2017. For the next 48 months thereafter until the maturity date on September 20, 2021,
the note provides for $124,607 monthly payments of interest and principal.
On July 27, 2017, the $4,544,055 term note
with RBL entered into on June 1, 2017 was revised to reflect the $105,969 exchange transaction described below, in the Crede CG
III Ltd. Section. As a result, the note was updated to reflect a principal payment and interest payment of $105,969 on July 28,
2017. The monthly principal and interest payment was adjusted to $121,810. At September 30, 2017 the balance of the note was $4,438,087.
On August 1, 2017, we entered into a $106,000
term note with RBL based on our draw down from our line of credit. The term note provided for an interest only payments of $822
on August, 20, 2017 and $1,316 at 14.9% interest rate per annum afterwards through September 20, 2017. From October 20, 2017 through
September 20, 2021 (maturity date), we are obligated to make interest and principal payments of $2,945. We paid $2,120 in costs
related to this loan at its inception and another $4,240 of costs is due at the maturity of the note.
Also see Note 17 for activity subsequent to
September 30, 2017.
MBF Merchant Capital, LLC
We issued the following notes payable to MBF,
an entity owned by William Healy, a former member of our Board of Directors.
On March 28, 2016, we entered into a $75,000
promissory note with MBF. The promissory note provided for interest only payments at 14% through May 28, 2016. From June 28, 2016
through March 28, 2017, we were obligated to make interest and principal payments of $7,990. The promissory note also provided
for a 6% backend fee due at the final payment of the promissory note. As of September 30, 2017, and December 31, 2016, the balance
of the note was $0 and $23,420, respectively.
On April 19, 2016, we entered into a $300,000
promissory note with MBF. The promissory note provides for interest only payments at 15.5% through May 28, 2016. From June 28,
2016 through May 28, 2018, we are obligated to make interest and principal payments of $14,617. The promissory note also provides
for a 6% back end fee due at the final payment of the promissory note. At September 30, 2017 and December 31, 2016, the balance
of the note was $110,424 and $221,826, respectively.
On July 1, 2016, our subsidiary, TOT Group,
Inc., entered into a $353,500 promissory note with MBF. The promissory note provides for interest only payments at 15.5% through
June 28, 2016. From July 28, 2016 through June 28, 2018, we are obligated to make interest and principal payments of $17,224.
The promissory note also provides for a 1% front end fee and for a 6.6% back end fee due at the final payment of the promissory
note. At September 30, 2017 and December 31, 2016, the remaining balance of the note was $145,462 and $275,056, respectively.
On August 29, 2017, our subsidiary, TOT Group,
Inc., entered into a $275,000 promissory note with MBF. The principal amount of the loan carries an interest rate 13.95% per annum.
We are obligated to pay a $16,500 finance fee to MBF, of which $5,500 is due at funding and the remainder due at the final payment
of the promissory note. The principal and interest under the note is repayable in 10 monthly installments of $29,288 each. At
September 30, 2017 and December 31, 2016, the remaining balance of the note was $248,908 and $0, respectively.
Crede CG III, Ltd.
On May 2, 2016, we entered into a Master Exchange
Agreement with Crede (the “Master Exchange Agreement”), an entity that purchased a portion our previously issued notes
held by RBL described above. Pursuit to the Master Exchange Agreement, we have the right to request that Crede exchange up to
$3,965,000 of the RBL promissory notes for shares of our common stock. On March 3, 2017, we entered into an Amendment to Master
Exchange Agreement with Crede, which extended the expiration date of the Master Exchange Agreement from December 31, 2016 to August
31, 2017. Accordingly, this extends the time to which we have the right to request Crede to exchange RBL promissory notes for
shares of the Company’s common stock on the terms and conditions set forth in the Master Exchange Agreement.
On July 27, 2017, we exchanged 26,772 shares
of our common stock for $105,969 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an average
per share exchange price of $4.00. The exchange included a non-cash exchange premium of $19,865. For the three months ended September
30, 2016, we did not exchange any shares of our common stock for RBL term notes.
For the year ended December 31, 2016, we exchanged
166,340 shares of our common stock with Crede for an aggregate of $2,499,481 of RBL promissory notes, including the full exchange
of the $400,000 promissory note (originally entered into February 10, 2015) and $250,000 promissory note (originally entered into
March 27, 2015), and the partial exchange for $1,849,481 of the $3,315,000 promissory note (originally entered July 17, 2014).
These notes were purchased by Crede for an average per share exchange price of $16.80. The exchanges also settled current interest
and loan fees of $302,294 and a non-cash exchange premium of $487,064.
Priority Payment Systems LLC
Effective as of May 18, 2017, we entered into
a loan agreement and security agreement with Priority Payment Systems LLC and issued a promissory note dated May 18, 2017. Pursuant
to the loan agreement and the note, we borrowed $2,000,000. Prior to maturity of the loan, the principal amount of the loan will
carry a floating interest rate of prime rate plus 6% per annum which was 10.25% at September 30, 2017. We may prepay the loan
in whole or in part at any time. The loan is repayable in monthly installments consisting of principal plus interest. The loan
matures and becomes due and payable in full on May 20, 2019 to the extent not previously prepaid.
Pursuant to the security agreement, the loan
is secured by collateral consisting of accounts, cash or cash equivalents, residuals related to the merchants originated by us
and processed by Priority Payments Systems LLC. The loan agreement, the note and the security agreement contain customary representations,
warranties, events of default, remedies and affirmative and negative covenants, as well as the right of first refusal and the
right related to the merchants.
Effective as of May 17, 2017, we entered into
a corporate guaranty in favor of Priority Payments Systems LLC, pursuant to which we unconditionally guaranteed the full and prompt
payment of each present and future liability, debt and obligation under the loan agreement, the note, the security agreement and
other related documents.
On June 27, 2017, we entered into an amendment
to the loan agreement with Priority Payment Systems LLC pursuant to which:
|
(i)
|
The original term loan was modified into a multi - draw
loan with an increase of the borrowing limit to $2,500,000 and;
|
|
(ii)
|
The loan maturity was extended to May 20, 2021.
|
During the quarter ended September 30, 2017,
we borrowed a total of $284,000 from our $2,500,000 Priority Payments multi – draw loan and repaid $306,323. At September
30, 2017, the balance of this loan is $2,477,677.
Also see Note 17 for activity subsequent to
September 30, 2017.
Scheduled Debt Principal Repayment
Scheduled principal maturities on indebtedness
at September 30, 2017 is as follows:
2017 (3 months)
|
|
|
503,041
|
|
2018
|
|
|
2,440,661
|
|
2019
|
|
|
1,716,673
|
|
2020
|
|
|
1,162,309
|
|
2021
|
|
|
1,338,621
|
|
thereafter
|
|
|
365,254
|
|
Balance September 30, 2017
|
|
$
|
7,526,559
|
|
Also see Note 17 for activity subsequent to
September 30, 2017.
NOTE 10. CONCENTRATIONS
The Company’s total revenue was $44,604,113
and $38,963,559 for the nine months ended September 30, 2017 and 2016, respectively.
Of the $44,604,113 in revenues for the nine
months ended September 30, 2017, $43,263,217 was derived from processing of Visa®, MasterCard®, Discover® and American
Express® card transactions and $1,340,896 was derived from providing mobile payment services branded content during the nine
months ended September 30, 2017.
Total revenue was $38,963,559 for the nine
months ended September 30, 2016, of which $29,442,868 was derived from processing of Visa®, MasterCard®, Discover®
and American Express® card transactions, and $5,000,137 that was derived from providing mobile payment services branded content
during the nine months ended September 30, 2016.
The credit card processing revenues were from
merchant customer transactions, which were processed primarily by two third-party processors (greater than 5%) during the nine
months ended September 30, 2017 and 2016. For the nine months ended September 30, 2017 and 2016, the Company processed 77% and
61%, respectively, of its total revenue with Priority Payment Systems, LLC and 5% and 7%, respectively, of its total revenue with
Vantiv, Inc. (f/k/a National Processing Company (NPC)).
Mobile electronic payment revenues were derived
from merchant customer transactions processed by mobile operators. For the nine months ended September 30, 2017, no mobile operator
processed transactions that generated more than 5% our revenues. For the nine months ended September 30, 2016, Beeline (OJSC Vimpelcom)
processed transactions that generated 11% of our revenues.
NOTE 11. COMMITMENTS AND CONTINGENCIES
PayOnline Acquisition Commitments
On May 20, 2015, our subsidiaries TOT Group
Europe, Ltd. and TOT Group Russia LLC, entered into an agreement with Maglenta Enterprises Inc. and Champfremont Holding Ltd.
(together, the “PayOnline Sellers”) to acquire all of the assets and liabilities that comprise PayOnline. PayOnline’s
business includes the operation of a protected payment processing system to accept bank card payments for goods and services.
Purchase consideration consisted of a combination
of $3.6 million in cash, and restricted common shares with a value of $3.6 million payable in five quarterly installments, and,
if applicable, additional earn-out payments in cash and restricted common shares based on a multiple of EBITDA and subject to
certain EBITDA target achievements in the applicable quarter. The PayOnline acquisition agreement set forth the determination
of the value of such shares based on the closing stock price on the date before each applicable payment date. The agreement called
for a guarantee, payable in cash, for decreases in the market value of the restricted common shares issued at 12 months from the
date of the respective issuances. On May 19, 2016, we recognized a charge in the amount of $2,162,861 for decreases in the market
value of the restricted common shares issued pursuant to the stock price guarantee.
On October 25, 2016, we entered into a settlement
agreement with the PayOnline Sellers relating to the stock price guarantee provision in the PayOnline acquisition agreement pursuant
to which we agreed to pay the PayOnline Sellers an aggregate of $2,288,667 plus 10% per annum interest accrued from May 20, 2016
in installments pursuant to the payment schedule set forth in the settlement agreement.
On October 25, 2016, we entered into an amendment
to the PayOnline acquisition agreement with the PayOnline Sellers, in which we agreed to assume $1,433,475 of certain refundable
merchant deposit reserves. These reserves are expected to be paid in a mix of cash and stock beginning in 2017. On July 19, 2017,
we issued 30,759 shares of our common stock in settlement of $252,223 of the reserve liability.
On May 20, 2017, we entered into an amendment
to the PayOnline settlement agreement, which reflected the new terms under which the Company agreed to pay to the PayOnline Sellers
an aggregate of $1,792,071 plus $29,604 in interest in installments pursuant to a payment schedule set forth in the amendment.
For the three months ended September 30, 2017, we paid $623,762 under this payment schedule and the remaining balance of $197,912
was paid on October 20, 2017. See Note 17 for events subsequent to September 30, 2017.
Leases
In May 2013, we entered into a lease agreement
for approximately 4,000 square feet of office space located at 3363 N.E. 163rd Street, Suites 705 through 707, North
Miami Beach, Florida 33160. The term of the lease agreement was from May 1, 2013 through December 31, 2016, with monthly
rent increasing from $16,800 per month at inception to $19,448 per month (or $233,377 per year) for the period from
January 1, 2016 through December 31, 2016.
In September 2016, this lease was extended
for a period of five years commencing January 1, 2017 and expiring December 31, 2021 with monthly base rent increasing each year
from $20,421 per month beginning January 1, 2017 ($245,046 per year) to $24,821 per month beginning January 1, 2021 ($297,855
per year). This lease was terminated effective as of August 9, 2017 and superseded by a new lease we entered into on. On August
9, 2017, we executed a new five year lease for our office space in North Miami Beach, Florida through July 2022, which supersedes
our previous lease for the premises. The lease provides for a monthly rent of $14,354 ($172,248 annually).
Effective June 1, 2017, Netlab Systems, LLC,
through its Russian representative office, executed a lease for 1,654 square feet of office space in Yekaterinburg, Russia, where
we conduct software development activities, at annual rent of approximately $24,000 (utilities included). The current lease
term expires in June 1, 2018.
PayOnline leases approximately 5,435 square
feet of office space in Moscow, Russia at an annual rent of $153,623. The current lease term for 5,268 square feet of this
office space expires on July 15, 2018 and this lease has an auto-renewal feature. The remaining 167 square feet in Moscow has
an annual rent of $3,104 and the lease expires April 30, 2018. PayOnline also operates two regional offices. For the first regional
office, PayOnline leases approximately 275 square feet of office space in Ekaterinburg, Russia at annual rent of $3,444. For the
second regional office, PayOnline leases approximately 155 square feet of office space in Almaty, Russia at annual rent of $1,536.
On May 12, 2017, Digital Provider leased approximately
1,566 square feet of office space in Moscow, Russia at annual rent of $27,500. The lease term for the office space was set to
expire on April 11, 2018. This lease was terminated in August 2017 as part of the consolidation of Digital Provider operations
into the PayOnline Moscow office.
We believe that our current facilities are
suitable and adequate for our present purposes, and we anticipate that we will be able to extend our existing leases on terms
satisfactory to us or acquire new facilities on acceptable terms.
Litigation
Aptito.com, Inc.
On August 6, 2014, our subsidiary (Aptito,
LLC) filed a lawsuit against Aptito.com, Inc. and the shareholders of Aptito.com, Inc., in state court in the 11th Judicial
Circuit in and for Miami-Dade County. This is an interpleader action in regards to 12,500 shares of stock. Aptito, LLC acquired Aptito.com,
Inc. in exchange for, among other things, 12,500 shares of Net Element, Inc. stock. There has been disagreement among the Aptito.com,
Inc. shareholders as to proper distribution of the 12,500 shares. To avoid any liability in regards to improper distribution,
Aptito, LLC filed the interpleader action so as to allow the defendants to litigate amongst themselves as to how the shares
should be distributed. Aptito.com, Inc. opposed the motion to interplead and has filed counterclaims relative to Aptito,
LLC non-delivery of the 12,500 shares. On February 10, 2017, the Court held a hearing on Aptito.com, Inc.’s
motion to dismiss the complaint and Aptito, LLC and Net Element’s motion to dismiss Aptito.com, Inc.’s counterclaims.
The Court denied Aptito.com, Inc.’s motion to dismiss and granted Aptito, LLC and Net Element’s
motion to dismiss the counterclaims without prejudice.
On March 20, 2017, Aptito.com filed
amended counterclaims against Aptito, LLC as well as claims against us alleging amongst other matters, breach of contract and
violations of federal and state securities laws. Management believes that these counterclaims are without merit, and we and Aptito,
LLC and the Company have filed a motion to dismiss the claims and a motion for sanctions. Counsel is waiting for a hearing date
for determination on these matters.
A hearing on the motion to interplead was
heard in July 2017 and the Court granted Aptito, LLC’s motion to interplead. Aptito.com, Inc. shareholders
will now have to settle their internal dispute regarding this matter. Aptito, LLC still has potential
liability arising from an alleged delay in issuing the shares to Aptito.com, Inc. The company is disputing
these allegations through the ongoing litigation process.
Gene Zell
In June 2014, we, as plaintiff, commenced
an action in the Miami-Dade Circuit Court, Florida against Gene Zell for defamation of our Company and CEO and tortious interference
with our business relationships. In October 2014, the court granted a temporary injunction against Zell enjoining him from
posting any information about our Company and CEO on any website and enjoining him from contacting our business partners or investors.
Zell violated the Court Order and the Court granted a Motion imposing sanctions against Zell. We continue to seek enforcement
of the Court Order. On April 13, 2015, Zell filed a Motion to set aside the Court Order alleging he was unaware of the Court
Proceedings. The Court, on August 26, 2015, dismissed Zell’s Motion to dissolve the injunction. In March 2017, the Court
dismissed another Motion brought by Zell to dissolve the injunction. Accordingly, the injunction order prohibiting Zell from making
further defamatory posts remains in place. The Company continues to protect its rights by ongoing enforcement of the injunction.
Other Legal Proceedings
We are involved in certain legal proceedings
and claims which arise in the ordinary course of business. In our opinion, based on consultations with outside counsel, the results
of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our
results of operations, financial condition, or cash flows. As more information becomes available, if management should determine
that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim
is reasonably estimable, we will record a reserve for the claim in question. If and when we record such a reserve is recorded,
it could be material and could adversely impact our results of operations, financial condition, and cash flows.
NOTE 12. RELATED PARTY TRANSACTIONS
We and our subsidiary, TOT Group, Inc., have
entered into certain term loan notes with MBF. For additional information about such term loan notes, see “MBF Merchant
Capital, LLC” in Note 9. William Healy, a former member of our Board of Directors, is the sole member of MBF.
During the nine months ended September 30,
2017 and 2016, agent commissions resulting from merchant processing of $67,483 and $0, respectively, were paid to Prime Portfolios,
LLC, an entity owned by Oleg Firer, our CEO, and Steven Wolberg, our Chief Legal Officer.
On March 1, 2017, we entered into a promissory
note with Star Equities, LLC, an entity which our CEO is the managing member, in the principal amount of $348,083 (the “Note”).
Pursuant to the Note, previously advanced funds of $290,954 plus interest accrued through the date of the Note totaled $348,083.
The Note provides for 18 monthly interest payments of $3,481 through September 30, 2018 followed by one interest and principle
payment on October 1, 2018. The principal balance of the Note outstanding bears interest at the rate of 12% per annum. In the
event of any capital raise by us that is not in the ordinary course of business and that results in funding in excess of $5 million
(a “Liquidity Event”), the maturity date will be accelerated to coincide with the closing date of such Liquidity Event.
The balance of this loan at September 30, 2017 was $348,083 and is included in Due to related parties on our condensed consolidated
balance sheet.
NOTE 13. STOCKHOLDERS’ EQUITY
On May 25, 2016 and October 5, 2017, we effected
one-for-ten reverse stock splits of our common stock. Our condensed consolidated financial statements and disclosures reflect
these changes in capital structure for all periods presented.
On June 12, 2015 and June 13, 2016, our shareholders
approved 100,000,000 increases in our authorized common stock to 300,000,000 and 400,000,000, respectively. On October 2,
2017, our shareholders approved a 300,000,000 decrease in our authorized common stock to 100,000,000.
On July 5, 2017, the Company entered into
a common stock purchase agreement (the “Cobblestone Purchase Agreement”) with Cobblestone Capital Partners LLC (“Cobblestone
Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Cobblestone
Capital is committed to purchase up to an aggregate of $10 million of shares of our common stock over the 30-month term of the
Cobblestone Purchase Agreement. In consideration for entering into the Cobblestone Purchase Agreement, the Company was obligated
to issue to Cobblestone Capital such number of shares of common stock that would have a value equivalent to $200,000 calculated
using the average of volume weighted average price for the common stock during the 3 trading days period immediately preceding
the date of issuance of such shares. Accordingly, on August 3, 2017, the Company issued to Cobblestone Capital 45,676 shares of
common stock based on a price of $4.38 per share. During the quarter ended September 30th, 2017, we sold 234,135 shares of common
stock for $1,057,500 at an average price of $4.52 per share. See Note 17 for activity that occurred subsequent to September 30,
2017.
Also see Note 17 regarding our regaining compliance
with Nasdaq requirements (including a minimum bid price for our common stock of $1.00 per share and a $2.5 million minimum of
stockholders’ equity).
Equity Incentive Plan Activity
On December 5, 2013, our shareholders approved
the Net Element International, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). Awards under the 2013 Plan may be
granted in any one or all of the following forms: (i) incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended; (ii) non-qualified stock options (unless otherwise indicated, references to “Options”
include both Incentive Stock Options and Non-Qualified Stock Options); (iii) stock appreciation rights, which may be awarded either
in tandem with Options or on a stand-alone basis; (iv) shares of common stock that are restricted; (v) units representing shares
of common stock; (vi) units that do not represent shares of common stock but which may be paid in the form of common stock; and
(vii) shares of common stock that are not subject to any conditions to vesting. The maximum aggregate number of shares of common
stock available for award under the 2013 Plan at September 30, 2017 and December 31, 2016 were 23,488 and 128,026, respectively.
The 2013 Plan is administered by the compensation committee.
On February 28, 2017, the Compensation Committee
(the “Committee”) of our Board of Directors approved and authorized grants of the following equity awards to our employees
and consultants pursuant to the 2013 Plan, as amended:
|
(i)
|
45,105
qualified options to acquire shares of our common stock (50% of such options vesting
immediately and the balance 50% of such options vesting in 4 equal proportions quarterly
after the grant date).
|
|
(ii)
|
62,668
restricted shares of our common stock (50% of such shares vesting immediately and the
balance 50% of such shares vesting in 4 equal proportions quarterly after the grant date).
|
For the nine months ended September 30, 2017,
we recorded $677,467 in non-cash compensation expense for vesting of stock and options for the above mentioned grants.
Other Stock Issuance
We accrued 1,667 shares to our independent
directors for payment of services during the third quarter of 2017.
On July 27, 2017, we exchanged 26,772 shares
of our common stock for $105,969 of the original $3,315,000 RBL promissory note partially purchased by Crede, based on an average
per share exchange price of $4.00.
On July 19, 2017, we issued 30,759 shares
for a $252,223 partial settlement of our $1.4 million reserve liability assumed with the PayOnline acquisition. See Note 11 for
additional information.
Agreement with ESOUSA Holdings
On July 6, 2016, we entered into a common
stock purchase agreement (“Purchase Agreement”), with ESOUSA Holdings, LLC, a New York limited liability company (“ESOUSA”),
which provides that ESOUSA is committed to purchase up to an aggregate of $10 million of our shares of common stock over the 30-month
term of the Purchase Agreement. We did not issue any shares of our common stock to ESOUSA during the three months ended September
30, 2017.
NOTE 14. WARRANTS AND NON-INCENTIVE PLAN
OPTIONS
Warrants
In 2013, our predecessor entity (then known
as Cazador Acquisition Corporation Ltd.) issued warrants to purchase 89,400 shares (reverse split adjusted) of common stock in
connection with its private placement and initial public offering. At September 30, 2017 and December 31, 2016, we had warrants
outstanding to purchase 89,389 shares of common stock. At September 30, 2017, the warrants had a weighted average exercise
price of $750.00 per share purchased and a weighted average remaining contractual term of 0.0 years (0.75 years at December 31,
2016). These warrants were “out-of-the-money” and had no intrinsic value at September 30, 2017 and December 31, 2016.
These warrants expired on October 1, 2017.
Non-Incentive Plan Options
At September 30, 2017 and December 31, 2016,
we had 160,214 non-incentive options outstanding with a weighted average exercise price of $21.80 and a remaining contract term
of 3.17 and 3.92 years, respectively. These options were out of the money at September 30, 2017 and December 31, 2016 and had
no intrinsic value.
NOTE 15. INCOME TAXES
Our net deferred tax assets primarily are
comprised of net operating loss carryforwards (“NOLs”), and basis difference in goodwill and intangibles. These NOLs
total approximately $53.8 million and $48.6 million for federal, and approximately $13.8 million and $13.2 million for foreign
NOLs as of September 30, 2017 and September 30, 2016, respectively.
The timing and manner in which we will be
able to utilize our NOLs is limited by Section 382 of the Internal Revenue Code of 1986, as amended (IRC). IRC Section 382 imposes
limitations on a corporation’s ability to use its NOLs when it undergoes an “ownership change.” Generally, an
ownership change occurs if one or more shareholders, each of whom owns 5% or more in value of a corporation’s stock, increase
their percentage ownership, in the aggregate, by more than 50% over the lowest percentage of stock owned by such shareholders
at any time during the preceding three-year period. Because on June 10, 2014, we underwent an ownership change as defined by IRC
Section 382, the limitation applies to us. The losses generated prior to the ownership change date (pre-change losses) are subject
to the Section 382 limitation. The pre-change losses may only become available to be utilized by us at the rate of $2.4 million
per year. Any unused losses can be carried forward, subject to their original carry forward limitation periods. In the year 2017,
approximately $2.4 million in the pre-change losses was released from the Section 382 loss limitation. We can still fully utilize
the NOLs generated after the change of the ownership, which was approximately $14.0 million. Thus, we expect the total of approximately
$18.1 million as of September 30, 2017 is available to offset future taxable income.
In order to fully utilize the net deferred
tax assets, we will need to generate sufficient taxable income in future years to utilize its NOLs prior to their expiration.
ASC Topic 740, “Income Taxes”, requires us to analyze all positive and negative evidence to determine if, based on
the weight of available evidence, we are more likely than not to realize the benefit of the net deferred tax assets. The recognition
of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates
of future earnings based on information currently available, current and anticipated customers, contracts and product introductions,
as well as historical operating results and certain tax planning strategies.
We have evaluated the available evidence and
the likelihood of realizing the benefit of our net deferred tax assets. From our evaluation, we have concluded that based on the
weight of available evidence, it is more likely than not that we will not realize any of the benefit of its net deferred tax assets.
Accordingly, at September 30, 2017, we maintain a full valuation allowance totaling approximately $24.9 million.
NOTE 16. SEGMENT INFORMATION
Our three reportable segments include: (i)
North American Transaction Solutions for electronic commerce, (ii) Mobile Solutions (primarily servicing the Russian Federation
and Eurasia) and (iii) Online Solutions. Management determines the reportable segments based on the internal reporting used by
our Chief Operating Decision Maker to evaluate performance and to assess where to allocate resources. During the three months
ended September 30, 2017 and 2016, the principal revenue stream for all segments came from services fees.
Factors management used to identify the
entity’s reportable segments
The Company’s reportable segments are
business units that offer different products and services in different geographies. The reportable segments are each managed separately
because they offer distinct products with different delivery and service processes.
North American Transaction Solutions
Our U.S. payment processing business segment
consists of the former Unified Payments business and Aptito. This segment operates primarily in North America. In March 2013,
we acquired all of the business assets of Unified Payments, a provider of comprehensive turnkey, payment processing solutions
to small and medium size business owners (merchants) and independent sales organizations across the United States.
In April 2013, we purchased 80% of Aptito,
a cloud based Software-as-a-Service (“SaaS”) restaurant management solution, which provides integrated POS, mPOS,
Kiosk, Digital Menus functionality to drive consumer engagement via Apple® iPad®-based POS, kiosk and all other cloud-connected
devices.
Mobile Solutions
Our Russian mobile and online payment processing
segment consists of Digital Provider, which operates primarily in the Russian Federation and Eurasia.
In June 2012, we formed our mobile payment
subsidiary that launched initial operations in Russia as a payment facilitator using SMS (short message services, which is a text
messaging service) and MMS (multimedia message services) for mobile phone subscribers. During 2015, we changed or business model,
rebranded our name to Digital Provider and began to offer branded content to subscribers.
The business model required significant working
capital investment as payments were advanced and then collected from mobile operators 45 days later. During 2016, we began working
to raise additional capital for this business and develop an alternative business model that did not require large amounts of
working capital to advance the business. This process is on-going and in August 2017, we substantially reorganized this business,
and consolidated its operations into PayOnline and TOT Group Russia. We currently are not generating revenues from new content,
and we continue to explore partnership opportunities that can monetize our relationships and contracts with mobile operators.
Online Solutions
On May 20, 2015, we acquired the net assets
that comprise PayOnline, which includes a protected payment processing system to accept bank card payments for goods and services.
PayOnline primarily operates in Russia and Eurasia.
The accounting policies of the individual
transactions in the reportable segments are the same as those of the company, as described in Note 1. Transactions between reportable
segments are primarily conducted at market rates, resulting in segment profits or expenses that are eliminated for reporting consolidated
results.
Segment Summary Information
The following tables present financial information
of the Company’s reportable segments at September 30, 2017 and 2016. The “Corporate Expenses & Eliminations”
column includes all corporate expenses and intercompany eliminations for consolidated purposes.
Three Months Ended September 30, 2017
|
|
North
America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Net revenues
|
|
$
|
13,123,204
|
|
|
$
|
-
|
|
|
$
|
1,777,927
|
|
|
$
|
-
|
|
|
$
|
14,901,131
|
|
Cost of revenues
|
|
|
11,279,098
|
|
|
|
-
|
|
|
|
1,477,529
|
|
|
|
-
|
|
|
|
12,756,627
|
|
Gross Margin
|
|
|
1,844,106
|
|
|
|
-
|
|
|
|
300,398
|
|
|
|
-
|
|
|
|
2,144,504
|
|
Gross margin %
|
|
|
14
|
%
|
|
|
0
|
%
|
|
|
17
|
%
|
|
|
-
|
|
|
|
14
|
%
|
General, administrative, and asset disposal
|
|
|
661,505
|
|
|
|
41,880
|
|
|
|
548,676
|
|
|
|
1,105,668
|
|
|
|
2,357,729
|
|
Non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111,277
|
|
|
|
111,277
|
|
Provision for bad debt
|
|
|
248,279
|
|
|
|
68,305
|
|
|
|
3,106
|
|
|
|
-
|
|
|
|
319,690
|
|
Depreciation and amortization
|
|
|
372,858
|
|
|
|
555
|
|
|
|
256,607
|
|
|
|
-
|
|
|
|
630,020
|
|
Interest expense (income), net
|
|
|
276,644
|
|
|
|
(32,010
|
)
|
|
|
(5,616
|
)
|
|
|
63,795
|
|
|
|
302,813
|
|
Other expenses (income)
|
|
|
208
|
|
|
|
94,267
|
|
|
|
(1,571
|
)
|
|
|
-
|
|
|
|
92,904
|
|
Net (loss) income for segment
|
|
$
|
284,612
|
|
|
$
|
(172,997
|
)
|
|
$
|
(500,804
|
)
|
|
$
|
(1,280,740
|
)
|
|
$
|
(1,669,929
|
)
|
Segment assets
|
|
|
20,863,462
|
|
|
|
226,136
|
|
|
|
4,219,400
|
|
|
|
(4,874,368
|
)
|
|
|
20,434,630
|
|
Three Months Ended September 30, 2016
|
|
North
America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Net revenues
|
|
$
|
11,186,287
|
|
|
$
|
1,226,241
|
|
|
$
|
1,597,124
|
|
|
$
|
-
|
|
|
|
14,009,652
|
|
Cost of revenues
|
|
|
9,585,952
|
|
|
|
1,045,836
|
|
|
|
1,063,380
|
|
|
|
-
|
|
|
|
11,695,168
|
|
Gross Margin
|
|
|
1,600,335
|
|
|
|
180,405
|
|
|
|
533,744
|
|
|
|
-
|
|
|
|
2,314,484
|
|
Gross margin %
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
33
|
%
|
|
|
-
|
|
|
|
17
|
%
|
General, administrative, and asset disposal
|
|
|
633,918
|
|
|
|
150,884
|
|
|
|
447,902
|
|
|
|
1,052,033
|
|
|
|
2,284,737
|
|
Non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
732,701
|
|
|
|
732,701
|
|
Provision for bad debt
|
|
|
291,965
|
|
|
|
7,679
|
|
|
|
1,526
|
|
|
|
-
|
|
|
|
301,170
|
|
Depreciation and amortization
|
|
|
359,814
|
|
|
|
5,405
|
|
|
|
392,880
|
|
|
|
6,787
|
|
|
|
764,886
|
|
Interest expense (income), net
|
|
|
90,897
|
|
|
|
(15,682
|
)
|
|
|
(12,549
|
)
|
|
|
546,050
|
|
|
|
608,716
|
|
Loss from stock value guarantee
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,559,281
|
|
|
|
1,559,281
|
|
Other expenses (income)
|
|
|
3,184
|
|
|
|
(444,343
|
)
|
|
|
5,256
|
|
|
|
2,119
|
|
|
|
(433,784
|
)
|
Net (loss) income for segment
|
|
$
|
220,557
|
|
|
$
|
476,462
|
|
|
$
|
(301,271
|
)
|
|
$
|
(3,898,971
|
)
|
|
$
|
(3,503,223
|
)
|
Segment assets
|
|
|
12,596,088
|
|
|
|
2,470,845
|
|
|
|
5,743,882
|
|
|
|
2,584,991
|
|
|
|
23,395,806
|
|
Nine Months Ended September 30, 2017
|
|
North
America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Net revenues
|
|
$
|
37,701,136
|
|
|
$
|
1,375,160
|
|
|
$
|
5,527,817
|
|
|
$
|
-
|
|
|
$
|
44,604,113
|
|
Cost of revenues
|
|
|
32,213,056
|
|
|
|
1,319,704
|
|
|
|
4,002,251
|
|
|
|
-
|
|
|
|
37,535,011
|
|
Gross Margin
|
|
|
5,488,080
|
|
|
|
55,456
|
|
|
|
1,525,566
|
|
|
|
-
|
|
|
|
7,069,102
|
|
Gross margin %
|
|
|
15
|
%
|
|
|
4
|
%
|
|
|
28
|
%
|
|
|
-
|
|
|
|
16
|
%
|
General, administrative, and asset disposal
|
|
|
2,098,121
|
|
|
|
363,270
|
|
|
|
1,690,640
|
|
|
|
3,636,037
|
|
|
|
7,788,068
|
|
Non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
836,218
|
|
|
|
836,218
|
|
Provision for bad debt
|
|
|
1,193,657
|
|
|
|
265,149
|
|
|
|
5,020
|
|
|
|
1,485
|
|
|
|
1,465,311
|
|
Depreciation and amortization
|
|
|
1,063,475
|
|
|
|
2,208
|
|
|
|
783,545
|
|
|
|
11,173
|
|
|
|
1,860,401
|
|
Interest expense (income), net
|
|
|
698,627
|
|
|
|
(91,547
|
)
|
|
|
(23,051
|
)
|
|
|
310,524
|
|
|
|
894,553
|
|
Other expenses (income)
|
|
|
48,481
|
|
|
|
93,784
|
|
|
|
(3,294
|
)
|
|
|
9,128
|
|
|
|
148,099
|
|
Net (loss) income for segment
|
|
$
|
385,719
|
|
|
$
|
(577,408
|
)
|
|
$
|
(927,294
|
)
|
|
$
|
(4,804,565
|
)
|
|
$
|
(5,923,548
|
)
|
Segment assets
|
|
$
|
20,863,462
|
|
|
$
|
226,136
|
|
|
$
|
4,219,400
|
|
|
$
|
4,874,368
|
|
|
$
|
20,434,630
|
|
Nine Months Ended September 30, 2016
|
|
North
America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Net revenues
|
|
$
|
29,442,868
|
|
|
$
|
4,999,452
|
|
|
$
|
4,521,239
|
|
|
$
|
-
|
|
|
|
38,963,559
|
|
Cost of revenues
|
|
|
25,206,769
|
|
|
|
4,427,043
|
|
|
|
2,931,390
|
|
|
|
-
|
|
|
|
32,565,202
|
|
Gross Margin
|
|
|
4,236,099
|
|
|
|
572,409
|
|
|
|
1,589,849
|
|
|
|
-
|
|
|
|
6,398,357
|
|
Gross margin %
|
|
|
14
|
%
|
|
|
11
|
%
|
|
|
35
|
%
|
|
|
-
|
|
|
|
16
|
%
|
General, administrative, and asset disposal
|
|
|
1,921,296
|
|
|
|
21,232
|
|
|
|
1,228,877
|
|
|
|
3,200,956
|
|
|
|
6,372,361
|
|
Non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,108,274
|
|
|
|
3,108,274
|
|
Provision for bad debt
|
|
|
668,414
|
|
|
|
7,790
|
|
|
|
1,946
|
|
|
|
-
|
|
|
|
678,150
|
|
Depreciation and amortization
|
|
|
1,010,103
|
|
|
|
15,332
|
|
|
|
1,370,960
|
|
|
|
101,143
|
|
|
|
2,497,538
|
|
Interest expense (income), net
|
|
|
377,473
|
|
|
|
(19,725
|
)
|
|
|
(36,137
|
)
|
|
|
864,596
|
|
|
|
1,186,207
|
|
Loss from stock value guarantee
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,722,142
|
|
|
|
3,722,142
|
|
Other expenses (income)
|
|
|
4,118
|
|
|
|
(433,750
|
)
|
|
|
35,240
|
|
|
|
2,135
|
|
|
|
(392,257
|
)
|
Net (loss) income for segment
|
|
$
|
254,695
|
|
|
$
|
981,530
|
|
|
$
|
(1,011,037
|
)
|
|
$
|
(10,999,246
|
)
|
|
$
|
(10,774,058
|
)
|
Segment assets
|
|
|
12,596,088
|
|
|
|
2,470,845
|
|
|
|
5,743,882
|
|
|
|
2,584,991
|
|
|
|
23,395,806
|
|
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read
and evaluated in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in this
Report and with the discussion under “Forward-Looking Statements” on page 2 at the beginning of this Report and the
Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in
Part II, Item 1A of this Report.
Results of Operations for the Three Months
Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016
We reported a net loss attributable to our
stockholders of $1,702,536, or $0.90 per share, for the three months ended September 30, 2017 as compared to a net loss attributable
to net loss attributable to our stockholders of $3,469,540, or $2.47 per share, for the three months ended September 30, 2016.
This resulted in a decrease in net loss attributable to stockholders of $1,767,004 primarily due to an increase in revenues, decreases
in non-cash compensation and interest expenses, partially offset by an increase in other expenses. Net loss attributable
to stockholders for the three months ended September 30, 2016 was also negatively affected by an expense for loss from stock value
guarantee related to the PayOnline acquisition.
Net revenues consist primarily of payment
processing fees. Net revenues were $14,901,131 for the three months ended September 30, 2017 as compared to $14,009,652 for the
three months ended September 30, 2016. The increase in net revenue is primarily due to an increase to North American Transaction
Solutions segment revenue of $1,936,917 (or 17% increase) for the three months ended September 30, 2017 versus the three months
ended September 30, 2016. Increases in our North American Transaction Solutions segment revenue were primarily due to continued
organic growth of merchants with emphasis on value-added offerings partially offset by some loss of processing revenues resulting
from storms primarily affecting merchants processing in Florida and Texas. Our Online Solutions segment revenue increased $180,803
(or 11%), from $1,597,124 for the three months ended September 30, 2016 to $1,777,927 for the three months ended September 30,
2017. Net revenue for the three months ended September 30, 2017 was also negatively affected by a $1,226,241 (or 100%) decrease
in revenue in our Mobile Solutions segment, as we experience increased competition, decreased margins and reorganizing assignments
of the Mobile Solutions segment to employees at PayOnline and TOT Group Russia.
The following table sets forth our sources
of revenues, cost of revenues and gross margins for the three months ended September 30, 2017 and 2016:
Gross Margin Analysis
|
|
Three
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Increase /
|
|
Source of Revenues
|
|
2017
|
|
|
Mix
|
|
|
2016
|
|
|
Mix
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
|
$
|
13,123,204
|
|
|
|
88
|
%
|
|
$
|
11,186,287
|
|
|
|
80
|
%
|
|
$
|
1,936,917
|
|
Mobile Solutions
|
|
|
-
|
|
|
|
0
|
%
|
|
|
1,226,241
|
|
|
|
9
|
%
|
|
|
(1,226,241
|
)
|
Online Solutions
|
|
|
1,777,927
|
|
|
|
12
|
%
|
|
|
1,597,124
|
|
|
|
11
|
%
|
|
|
180,803
|
|
Total
|
|
$
|
14,901,131
|
|
|
|
100
|
%
|
|
$
|
14,009,652
|
|
|
|
100
|
%
|
|
$
|
891,479
|
|
|
|
Three
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
% of
|
|
|
September 30,
|
|
|
% of
|
|
|
Increase /
|
|
Cost of Revenues
|
|
2017
|
|
|
revenues
|
|
|
2016
|
|
|
revenues
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
|
$
|
11,279,098
|
|
|
|
86
|
%
|
|
$
|
9,585,952
|
|
|
|
86
|
%
|
|
$
|
1,693,146
|
|
Mobile Solutions
|
|
|
-
|
|
|
|
0
|
%
|
|
|
1,045,836
|
|
|
|
85
|
%
|
|
|
(1,045,836
|
)
|
Online Solutions
|
|
|
1,477,529
|
|
|
|
83
|
%
|
|
|
1,063,380
|
|
|
|
67
|
%
|
|
|
414,149
|
|
Total
|
|
$
|
12,756,627
|
|
|
|
86
|
%
|
|
$
|
11,695,168
|
|
|
|
83
|
%
|
|
$
|
1,061,459
|
|
|
|
Three
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
% of
|
|
|
September 30,
|
|
|
% of
|
|
|
Increase /
|
|
Gross Margin
|
|
2017
|
|
|
revenues
|
|
|
2016
|
|
|
revenues
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
|
$
|
1,844,106
|
|
|
|
14
|
%
|
|
$
|
1,600,335
|
|
|
|
14
|
%
|
|
$
|
243,771
|
|
Mobile Solutions
|
|
|
-
|
|
|
|
0
|
%
|
|
|
180,405
|
|
|
|
15
|
%
|
|
|
(180,405
|
)
|
Online Solutions
|
|
|
300,398
|
|
|
|
17
|
%
|
|
|
533,744
|
|
|
|
33
|
%
|
|
|
(233,346
|
)
|
Total
|
|
$
|
2,144,504
|
|
|
|
14
|
%
|
|
$
|
2,314,484
|
|
|
|
17
|
%
|
|
$
|
(169,980
|
)
|
Cost of revenues represents direct costs of
generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing
fees. Cost of revenues for the three months ended September 30, 2017 were $12,756,627 as compared to $11,695,168 for the three
months ended September 30, 2016. The $1,061,459 increase in cost of revenues was primarily due to a $1,693,145 increase in our
North American Transaction Solutions segment due to the corresponding increase in sales volume. There also was a $414,149 increase
in cost of revenues resulting from our Online Solutions segment operations primarily due the costs associated with onboarding
additional merchants. This was partially offset by a $1,045,836 decrease in our Mobile Solutions segment cost of revenues, which
resulted from the corresponding decrease in revenues for our Mobile Solutions segment for the three months ended September 30,
2017.
Gross margin or the three months ended September
30, 2017 was $2,144,504, or 14% of net revenue, as compared to $2,314,484, or 17% of net revenue, for the three months ended September
30, 2016. The $169,980 decrease in gross margin was primarily due to a decrease of $180,405 in Mobile Solutions margin caused
by a decrease in business and a $233,346 decrease in Online Solutions offset by $243,771 increase in gross margin in North American
Transaction Solutions caused by continued growth of merchants with emphasis on value-added offerings.
Total operating expenses were $3,418,716 for
the three months ended September 30, 2017, which consisted of general and administrative expenses of $2,357,729, non-cash compensation
expenses of $111,277, provision for bad debts of $319,690, and depreciation and amortization of $630,020. Total operating expenses
were $4,083,494 for the three months ended September 30, 2016, which consisted of general and administrative expenses of $2,284,737,
non-cash compensation expenses of $732,701, provision for bad debts of $301,170, and depreciation and amortization of $764,886.
The components of our general and administrative
expenses are discussed below.
General and administrative expenses for the
three months ended September 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Condensed Consolidated
Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, business development,
travel expense, filing fees, transaction gains or losses, office expenses, communication expenses, insurance expenses, and other
expenses required to run our business, as follows:
Three Months Ended September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North
America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
459,412
|
|
|
$
|
44,733
|
|
|
$
|
213,351
|
|
|
$
|
539,002
|
|
|
$
|
1,256,498
|
|
Professional fees
|
|
|
100,772
|
|
|
|
(46
|
)
|
|
|
233,836
|
|
|
|
326,876
|
|
|
|
661,438
|
|
Rent
|
|
|
-
|
|
|
|
5,803
|
|
|
|
39,037
|
|
|
|
58,410
|
|
|
|
103,250
|
|
Business development
|
|
|
6,572
|
|
|
|
(6
|
)
|
|
|
8,902
|
|
|
|
222
|
|
|
|
15,690
|
|
Travel expense
|
|
|
21,753
|
|
|
|
2,897
|
|
|
|
1,142
|
|
|
|
20,634
|
|
|
|
46,426
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,056
|
|
|
|
12,056
|
|
Transaction (gains) losses
|
|
|
-
|
|
|
|
(13,327
|
)
|
|
|
54
|
|
|
|
(3
|
)
|
|
|
(13,276
|
)
|
Office expenses
|
|
|
67,140
|
|
|
|
566
|
|
|
|
21,319
|
|
|
|
13,005
|
|
|
|
102,030
|
|
Communications expenses
|
|
|
5,507
|
|
|
|
1,173
|
|
|
|
29,416
|
|
|
|
20,211
|
|
|
|
56,307
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,853
|
|
|
|
34,853
|
|
Other expenses
|
|
|
349
|
|
|
|
87
|
|
|
|
1,619
|
|
|
|
80,402
|
|
|
|
82,457
|
|
Total
|
|
$
|
661,505
|
|
|
$
|
41,880
|
|
|
$
|
548,676
|
|
|
$
|
1,105,668
|
|
|
$
|
2,357,729
|
|
Three Months Ended September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North
America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
414,659
|
|
|
$
|
107,310
|
|
|
$
|
167,802
|
|
|
$
|
442,497
|
|
|
$
|
1,132,268
|
|
Professional fees
|
|
|
89,985
|
|
|
|
36,874
|
|
|
|
161,394
|
|
|
|
384,227
|
|
|
|
672,480
|
|
Rent
|
|
|
-
|
|
|
|
942
|
|
|
|
35,682
|
|
|
|
116,703
|
|
|
|
153,327
|
|
Business development
|
|
|
10,827
|
|
|
|
4,869
|
|
|
|
27,752
|
|
|
|
1,395
|
|
|
|
44,843
|
|
Travel expense
|
|
|
61,700
|
|
|
|
2,563
|
|
|
|
5,978
|
|
|
|
50,466
|
|
|
|
120,707
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,789
|
|
|
|
17,789
|
|
Transaction (gains) losses
|
|
|
-
|
|
|
|
(11,068
|
)
|
|
|
(655
|
)
|
|
|
(141,639
|
)
|
|
|
(153,362
|
)
|
Office expenses
|
|
|
29,600
|
|
|
|
8,805
|
|
|
|
21,534
|
|
|
|
33,532
|
|
|
|
93,471
|
|
Communications expenses
|
|
|
17,392
|
|
|
|
583
|
|
|
|
27,065
|
|
|
|
20,447
|
|
|
|
65,486
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123,992
|
|
|
|
123,992
|
|
Other expenses
|
|
|
9,755
|
|
|
|
6
|
|
|
|
1,350
|
|
|
|
2,624
|
|
|
|
13,736
|
|
Total
|
|
$
|
633,918
|
|
|
$
|
150,884
|
|
|
$
|
447,902
|
|
|
$
|
1,052,034
|
|
|
$
|
2,284,737
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North
America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor payments
|
|
$
|
44,753
|
|
|
$
|
(62,577
|
)
|
|
$
|
45,549
|
|
|
$
|
96,505
|
|
|
$
|
124,230
|
|
Professional fees
|
|
|
10,787
|
|
|
|
(36,920
|
)
|
|
|
72,442
|
|
|
|
(57,351
|
)
|
|
|
(11,042
|
)
|
Rent
|
|
|
-
|
|
|
|
4,861
|
|
|
|
3,355
|
|
|
|
(58,293
|
)
|
|
|
(50,077
|
)
|
Business development
|
|
|
(4,255
|
)
|
|
|
(4,875
|
)
|
|
|
(18,850
|
)
|
|
|
(1,173
|
)
|
|
|
(29,153
|
)
|
Travel expense
|
|
|
(39,947
|
)
|
|
|
334
|
|
|
|
(4,836
|
)
|
|
|
(29,832
|
)
|
|
|
(74,281
|
)
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,733
|
)
|
|
|
(5,733
|
)
|
Transaction (gains) losses
|
|
|
-
|
|
|
|
(2,259
|
)
|
|
|
709
|
|
|
|
141,636
|
|
|
|
140,086
|
|
Office expenses
|
|
|
37,540
|
|
|
|
(8,239
|
)
|
|
|
(215
|
)
|
|
|
(20,527
|
)
|
|
|
8,559
|
|
Communications expenses
|
|
|
(11,885
|
)
|
|
|
590
|
|
|
|
2,351
|
|
|
|
(236
|
)
|
|
|
(9,179
|
)
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(89,139
|
)
|
|
|
(89,139
|
)
|
Other expenses
|
|
|
(9,406
|
)
|
|
|
81
|
|
|
|
269
|
|
|
|
77,778
|
|
|
|
68,721
|
|
Total
|
|
$
|
27,587
|
|
|
$
|
(109,004
|
)
|
|
$
|
100,774
|
|
|
$
|
53,634
|
|
|
$
|
72,992
|
|
Salaries, benefits, taxes and contractor payments
were $1,256,498 for the three months ended September 30, 2017 as compared to $1,132,268 for the three months ended September 30,
2016.
Segment
|
|
Salaries
and
benefits
for the
three
months
ended
September
30, 2017
|
|
|
Salaries
and
benefits
for the
three
months
ended
September
30, 2016
|
|
|
Increase
/
(Decrease)
|
|
North America Transaction Solutions
|
|
$
|
459,412
|
|
|
$
|
414,659
|
|
|
$
|
44,753
|
|
Mobile Solutions
|
|
|
44,733
|
|
|
|
107,310
|
|
|
|
(62,577
|
)
|
Online Solutions
|
|
|
213,351
|
|
|
|
167,802
|
|
|
|
45,549
|
|
Corporate Expenses & Eliminations
|
|
|
539,002
|
|
|
|
442,497
|
|
|
|
96,505
|
|
Total
|
|
$
|
1,256,498
|
|
|
$
|
1,132,268
|
|
|
$
|
124,230
|
|
The increase in salaries of $124,230 was due
to the North American Transaction Solutions segment and corporate salaries increasing $44,743 and $96,505, respectively, due to
an increase in headcount and sales incentives for key employees as the business grows. In addition, an increase in our Online
Solutions segment of $45,549 was primarily due to the Ruble exchange rate. These increases were offset by a decrease of $62,577
in our Mobile Solutions segment due to the elimination of headcount as we assigned the current workloads to existing employees
of PayOnline and TOT Group Russia.
Professional fees were $661,438 for the three
months ended September 30, 2017 as compared to $672,480 for the three months ended September 30, 2016.
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
819
|
|
|
$
|
-
|
|
|
$
|
185
|
|
|
$
|
4,305
|
|
|
$
|
5,309
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,564
|
|
|
|
88,564
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
97,500
|
|
|
|
98,500
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consulting
|
|
|
99,953
|
|
|
|
(46
|
)
|
|
|
232,651
|
|
|
|
136,507
|
|
|
|
469,065
|
|
Total
|
|
$
|
100,772
|
|
|
$
|
(46
|
)
|
|
$
|
233,836
|
|
|
$
|
326,876
|
|
|
$
|
661,438
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
5,818
|
|
|
$
|
56
|
|
|
$
|
847
|
|
|
$
|
99,179
|
|
|
$
|
105,900
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,750
|
|
|
|
43,750
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101,732
|
|
|
|
101,732
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,200
|
|
|
|
33,200
|
|
Consulting
|
|
|
84,167
|
|
|
|
36,818
|
|
|
|
160,547
|
|
|
|
106,366
|
|
|
|
387,898
|
|
Total
|
|
$
|
89,985
|
|
|
$
|
36,874
|
|
|
$
|
161,394
|
|
|
$
|
384,227
|
|
|
$
|
672,480
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses
&
Eliminations
|
|
|
Increase /
(Decrease)
|
|
General Legal
|
|
$
|
(4,999
|
)
|
|
$
|
(56
|
)
|
|
$
|
(662
|
)
|
|
$
|
(94,874
|
)
|
|
$
|
(100,591
|
)
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,814
|
|
|
|
44,814
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
(4,232
|
)
|
|
|
(3,232
|
)
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(33,200
|
)
|
|
|
(33,200
|
)
|
Consulting
|
|
|
15,786
|
|
|
|
(36,864
|
)
|
|
|
72,104
|
|
|
|
30,141
|
|
|
|
81,167
|
|
Total
|
|
$
|
10,787
|
|
|
$
|
(36,920
|
)
|
|
$
|
72,442
|
|
|
$
|
(57,351
|
)
|
|
$
|
(11,042
|
)
|
Professional fees decreased by $11,042
mainly due to a decrease in general legal fees because of decreases in litigation and tax compliance fees partially offset by
an increases in SEC compliance and consulting fees due to increased public market transactions.
Non-cash compensation expense from share-based
compensation was $111,277 for the three months ended September 30, 2017, compared to $732,701 for the three months ended September
30, 2016. The majority of these expenses were for employee and consultant equity incentives for both periods.
We recorded bad debt expense of $319,690
for the three months ended September 30, 2017 as compared to $301,170 for the three months ended September 30, 2016. For the three
months ended September 30, 2017, we recorded a loss which was primarily comprised of $227,281 in ACH rejects and a $92,409 provision
from our Russian operations. Of the $678,143 of gross ACH rejects, $111,174 were passed through to independent sales organizations
via a reduction in commissions. For the three months ended September 30, 2016, we recorded a loss which was primarily comprised
of $301,132 in net ach rejects. Of the $301,132 of net ACH rejects, $117,794 were passed through to independent sales organizations
via a reduction in commissions.
Depreciation and amortization expense
consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs,
capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization
expense was $630,020 for the three months ended September 30, 2017 as compared to $764,886 for the three months ended September
30, 2016. The decrease was due to the full amortization of certain software and merchant portfolio assets during 2016.
Interest expense was $302,813 for the
three months ended September 30, 2017 as compared to $608,716 for three months ended September 30, 2016, representing a decrease
of $305,904 due to lower balances as follows:
Funding Source
|
|
Three months
ended
September 30,
2017
|
|
|
Three months
ended
September 30,
2016
|
|
|
Increase /
(Decrease)
|
|
MBF Notes
|
|
$
|
15,277
|
|
|
$
|
11,356
|
|
|
$
|
3,921
|
|
RBL Notes
|
|
|
195,736
|
|
|
|
510,655
|
|
|
|
(314,919
|
)
|
Priority Payments Note
|
|
|
65,630
|
|
|
|
-
|
|
|
|
65,630
|
|
Other
|
|
|
26,170
|
|
|
|
86,705
|
|
|
|
(60,537
|
)
|
Total
|
|
$
|
302,813
|
|
|
$
|
608,716
|
|
|
$
|
(305,904
|
)
|
Other interest expense for the three months
ended September 30, 2017 consisted of $10,407 resulting from the promissory note entered into on March 1, 2017 with Star Equities,
LLC (See Note 12. Related Party Transactions) and $17,762 related to the PayOnline acquisition. During the three months ended
September 30, 2016, other interest expense primarily consisted of $76,289 related to the PayOnline acquisition. The primary reason
for the decrease was due to less Crede stock paydowns on RBL debt during the three months ended September 30, 2017, which resulted
in increased RBL interest expense during 2016.
Other expenses for the three months ended
September 30, 2017 consists primarily of a $94,267 of expenses attributed to our Mobile Solutions division.
The net income attributable to non-controlling
interests amounted to $32,607 for three months ended September 30, 2017 as compared to the net loss of $33,683 for the three months
ended September 30, 2016. The $66,290 decrease was caused by an adjustment to commission expense for prior quarters recorded during
the three months ended September 30, 2017.
Results of Operations for the Nine Months Ended September
30, 2017 Compared to the Nine Months Ended September 30, 2016
We reported a net loss attributable to
stockholders of $5,830,373, or $3.29 per share, for the nine months ended September 30, 2017 as compared to a net loss attributable
to stockholders of $10,663,708, or $8.65 per share, for the nine months ended September 30, 2016. This resulted in a decrease
in net loss attributable to stockholders of $4,833,335 primarily due to an increase in revenues and a decrease in the loss from
stock value guarantee, a decrease in noncash compensation expense, and a decrease in other income offset by an increase in general
and administrative expenses.
Net revenues consist primarily of payment
processing fees. Net revenues were $44,604,113 for the nine months ended September 30, 2017 as compared to $38,963,559 for the
nine months ended September 30, 2016. The increase in net revenue is primarily due to organic growth of merchants in our North
American Transaction Solutions segment which resulted in an increase to North American Transaction Solutions segment revenue of
$8,258,268 (or 28% increase) for the nine months ended September 30, 2017 versus the nine months ended September 30, 2016. Increases
in our North American Transaction Solutions segment revenue were primarily due to continued growth of merchants with emphasis
on value-added offerings. Our Online Solutions segment revenue increased $1,006,578 (or 22%), from $4,521,239 for the nine months
ended September 30, 2016 to $5,527,817 for the nine months ended September 30, 2017, primarily due to the onboarding of additional
merchants. The increases in North American Transaction Solutions and Online Solutions segments were offset by a $3,624,292 (or
72%) decrease in our Mobile Solutions segment, as we have eliminated staff and assigned current responsibilities to team members
at PayOnline and TOT Group Russia.
The following table sets forth our sources
of revenues, cost of revenues and gross margins for the nine months ended September 30, 2017 and 2016:
Gross Margin Analysis
|
|
Nine
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
Increase /
|
|
Source of Revenues
|
|
2017
|
|
|
Mix
|
|
|
2016
|
|
|
Mix
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
|
$
|
37,701,136
|
|
|
|
85
|
%
|
|
$
|
29,442,868
|
|
|
|
76
|
%
|
|
$
|
8,258,268
|
|
Mobile Solutions
|
|
|
1,375,160
|
|
|
|
3
|
%
|
|
|
4,999,452
|
|
|
|
13
|
%
|
|
|
(3,624,292
|
)
|
Online Solutions
|
|
|
5,527,817
|
|
|
|
12
|
%
|
|
|
4,521,239
|
|
|
|
12
|
%
|
|
|
1,006,578
|
|
Total
|
|
$
|
44,604,113
|
|
|
|
100
|
%
|
|
$
|
38,963,559
|
|
|
|
100
|
%
|
|
$
|
5,640,554
|
|
|
|
Nine
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
% of
|
|
|
September 30,
|
|
|
% of
|
|
|
Increase /
|
|
Cost of Revenues
|
|
2017
|
|
|
revenues
|
|
|
2016
|
|
|
revenues
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
|
$
|
32,213,056
|
|
|
|
85
|
%
|
|
$
|
25,206,769
|
|
|
|
86
|
%
|
|
$
|
7,006,287
|
|
Mobile Solutions
|
|
|
1,319,704
|
|
|
|
96
|
%
|
|
|
4,427,043
|
|
|
|
89
|
%
|
|
|
(3,107,339
|
)
|
Online Solutions
|
|
|
4,002,251
|
|
|
|
72
|
%
|
|
|
2,931,390
|
|
|
|
65
|
%
|
|
|
1,070,861
|
|
Total
|
|
$
|
37,535,011
|
|
|
|
84
|
%
|
|
$
|
32,565,202
|
|
|
|
84
|
%
|
|
$
|
4,969,809
|
|
|
|
Nine
|
|
|
|
|
|
Nine
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
% of
|
|
|
September 30,
|
|
|
% of
|
|
|
Increase /
|
|
Gross Margin
|
|
2017
|
|
|
revenues
|
|
|
2016
|
|
|
revenues
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Transaction Solutions
|
|
$
|
5,488,080
|
|
|
|
15
|
%
|
|
$
|
4,236,099
|
|
|
|
14
|
%
|
|
$
|
1,251,981
|
|
Mobile Solutions
|
|
|
55,456
|
|
|
|
4
|
%
|
|
|
572,409
|
|
|
|
11
|
%
|
|
|
(516,953
|
)
|
Online Solutions
|
|
|
1,525,566
|
|
|
|
28
|
%
|
|
|
1,589,849
|
|
|
|
35
|
%
|
|
|
(64,283
|
)
|
Total
|
|
$
|
7,069,102
|
|
|
|
16
|
%
|
|
$
|
6,398,357
|
|
|
|
16
|
%
|
|
$
|
670,745
|
|
Cost of revenues represents direct costs
of generating revenues, including commissions, mobile operator fees, purchases of short numbers, interchange expense and processing
fees. Cost of revenues for the nine months ended September 30, 2017 were $37,535,011 as compared to $32,565,202 for the nine months
ended September 30, 2016. The increase in cost of revenues was primarily due to a $7,006,287 increase in our North American Transaction
Solutions segment due to the corresponding increase in sales volume. There was also a $1,070,861 increase in cost of revenues
resulting from our Online Solutions segment operations also primarily due to with boarding additional merchants. This was offset
by a $3,107,339 decrease in our Mobile Solutions segment cost of revenues, which resulted from the corresponding decrease in sales
for our Mobile Solutions segment for the nine months ended September 30, 2017.
Gross margin for the nine months ended
September 30, 2017 was $7,069,102, or 16% of net revenue, as compared to $6,398,357, or 16% of net revenue, for the nine months
ended September 30, 2016. The $670,745 increase in gross margin was primarily due to the increased sales volume of processing
and business mix in our North American Transaction Solutions offset by a decrease of $516,953 in our Mobile Solutions margin caused
from a decrease in business.
Total operating expenses were $11,949,998
for the nine months ended September 30, 2017, which consisted of general and administrative expenses of $7,788,068, non-cash compensation
expenses of $836,218, provision for bad debts of $1,465,311, and depreciation and amortization of $1,860,401. Total operating
expenses were $12,656,323 for the nine months ended September 30, 2016, which consisted of general and administrative expenses
of $6,372,361, non-cash compensation expenses of $3,108,274, provision for bad debts of $678,150, and depreciation and amortization
of $2,497,538.
The components of our general and administrative
expenses are discussed below.
General and administrative expenses for
the nine months ended September 30, 2017 and 2016 consisted of operating expenses not otherwise delineated in our Consolidated
Statements of Operations and Comprehensive Loss and include salaries and benefits, professional fees, rent, business development,
travel expense, filing fees, transaction gains, office expenses, communication expense, insurance expense, and other expenses
required to run our business, as follows:
Nine Months Ended September 30, 2017
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor
payments
|
|
$
|
1,404,162
|
|
|
$
|
295,068
|
|
|
$
|
670,056
|
|
|
$
|
1,927,741
|
|
|
$
|
4,297,027
|
|
Professional fees
|
|
|
351,736
|
|
|
|
44,793
|
|
|
|
717,713
|
|
|
|
881,613
|
|
|
|
1,995,855
|
|
Rent
|
|
|
-
|
|
|
|
33,092
|
|
|
|
119,129
|
|
|
|
240,172
|
|
|
|
392,393
|
|
Business development
|
|
|
9,381
|
|
|
|
971
|
|
|
|
26,689
|
|
|
|
2,718
|
|
|
|
39,759
|
|
Travel expense
|
|
|
133,901
|
|
|
|
9,723
|
|
|
|
6,479
|
|
|
|
111,551
|
|
|
|
261,654
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,990
|
|
|
|
26,990
|
|
Transaction (gains) losses
|
|
|
742
|
|
|
|
(30,423
|
)
|
|
|
(6,138
|
)
|
|
|
3,031
|
|
|
|
(32,788
|
)
|
Office expenses
|
|
|
165,742
|
|
|
|
6,591
|
|
|
|
62,830
|
|
|
|
104,506
|
|
|
|
339,669
|
|
Communications expenses
|
|
|
28,894
|
|
|
|
3,368
|
|
|
|
88,987
|
|
|
|
60,373
|
|
|
|
181,622
|
|
Insurance expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111,194
|
|
|
|
111,194
|
|
Other expenses
|
|
|
3,563
|
|
|
|
87
|
|
|
|
4,895
|
|
|
|
166,148
|
|
|
|
174,693
|
|
Total
|
|
$
|
2,098,121
|
|
|
$
|
363,270
|
|
|
$
|
1,690,640
|
|
|
$
|
3,636,037
|
|
|
$
|
7,788,068
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor
payments
|
|
$
|
1,223,240
|
|
|
$
|
343,247
|
|
|
$
|
423,238
|
|
|
$
|
1,498,541
|
|
|
$
|
3,488,266
|
|
Professional fees
|
|
|
372,492
|
|
|
|
39,422
|
|
|
|
462,650
|
|
|
|
999,627
|
|
|
|
1,874,191
|
|
Rent
|
|
|
-
|
|
|
|
3,260
|
|
|
|
104,056
|
|
|
|
317,317
|
|
|
|
424,633
|
|
Business development
|
|
|
31,784
|
|
|
|
4,869
|
|
|
|
92,544
|
|
|
|
6,043
|
|
|
|
135,240
|
|
Travel expense
|
|
|
152,795
|
|
|
|
9,657
|
|
|
|
15,964
|
|
|
|
88,368
|
|
|
|
266,784
|
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,185
|
|
|
|
77,185
|
|
Transaction (gains) losses
|
|
|
-
|
|
|
|
(394,880
|
)
|
|
|
38,449
|
|
|
|
(115,797
|
)
|
|
|
(472,228
|
)
|
Office expenses
|
|
|
76,347
|
|
|
|
13,779
|
|
|
|
47,619
|
|
|
|
84,971
|
|
|
|
222,716
|
|
Communications expenses
|
|
|
64,369
|
|
|
|
1,639
|
|
|
|
42,742
|
|
|
|
69,756
|
|
|
|
178,506
|
|
Insurance expense
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
|
|
129,776
|
|
|
|
129,863
|
|
Other expenses
|
|
|
269
|
|
|
|
152
|
|
|
|
1,615
|
|
|
|
45,169
|
|
|
|
47,205
|
|
Total
|
|
$
|
1,921,296
|
|
|
$
|
21,232
|
|
|
$
|
1,228,877
|
|
|
$
|
3,200,956
|
|
|
$
|
6,372,361
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
Salaries, benefits, taxes and contractor
payments
|
|
$
|
180,922
|
|
|
$
|
(48,179
|
)
|
|
$
|
246,818
|
|
|
$
|
429,200
|
|
|
$
|
808,761
|
|
Professional fees
|
|
|
(20,756
|
)
|
|
|
5,371
|
|
|
|
255,063
|
|
|
|
(118,014
|
)
|
|
|
121,664
|
|
Rent
|
|
|
-
|
|
|
|
29,832
|
|
|
|
15,073
|
|
|
|
(77,145
|
)
|
|
|
(32,240
|
)
|
Business development
|
|
|
(22,403
|
)
|
|
|
(3,898
|
)
|
|
|
(65,855
|
)
|
|
|
(3,325
|
)
|
|
|
(95,481
|
)
|
Travel expense
|
|
|
(18,894
|
)
|
|
|
66
|
|
|
|
(9,485
|
)
|
|
|
23,183
|
|
|
|
(5,130
|
)
|
Filing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,195
|
)
|
|
|
(50,195
|
)
|
Transaction (gains) losses
|
|
|
742
|
|
|
|
364,457
|
|
|
|
(44,587
|
)
|
|
|
118,828
|
|
|
|
439,440
|
|
Office expenses
|
|
|
89,395
|
|
|
|
(7,188
|
)
|
|
|
15,211
|
|
|
|
19,535
|
|
|
|
116,953
|
|
Communications expenses
|
|
|
(35,475
|
)
|
|
|
1,729
|
|
|
|
46,245
|
|
|
|
(9,383
|
)
|
|
|
3,116
|
|
Insurance expense
|
|
|
-
|
|
|
|
(87
|
)
|
|
|
-
|
|
|
|
(18,582
|
)
|
|
|
(18,669
|
)
|
Other expenses
|
|
|
3,294
|
|
|
|
(65
|
)
|
|
|
3,280
|
|
|
|
120,979
|
|
|
|
127,488
|
|
Total
|
|
$
|
176,825
|
|
|
$
|
342,038
|
|
|
$
|
461,763
|
|
|
$
|
435,081
|
|
|
$
|
1,415,707
|
|
Salaries, benefits, taxes and contractor
payments were $4,297,027 for the nine months ended September 30, 2017 as compared to $3,488,266 for the nine months ended September
30, 2016.
Segment
|
|
Salaries and
benefits for the
nine months
ended
September
30, 2017
|
|
|
Salaries and
benefits for the
nine months
ended
September
30, 2016
|
|
|
Increase /
(Decrease)
|
|
North America Transaction Solutions
|
|
$
|
1,404,162
|
|
|
$
|
1,223,240
|
|
|
$
|
180,922
|
|
Mobile Solutions
|
|
|
295,068
|
|
|
|
343,247
|
|
|
|
(48,179
|
)
|
Online Solutions
|
|
|
670,056
|
|
|
|
423,238
|
|
|
|
246,818
|
|
Corporate Expenses & Eliminations
|
|
|
1,927,741
|
|
|
|
1,498,541
|
|
|
|
429,200
|
|
Total
|
|
$
|
4,297,027
|
|
|
$
|
3,488,266
|
|
|
$
|
808,761
|
|
The increase in salaries of $808,761 was
due primarily to the increase of corporate expenses for a $300,000 discretionary bonus payable to our CEO and approved by the
Board of directors. The bonus is payable when cash flow of the business can support the payment. Additionally, North American
Transaction Solutions segment salaries increased $180,922 due to an increase in headcount and sales incentives for key employees.
There was also an increase of $246,818 in our Online Solutions segment which were primarily due to increasing payroll and consulting
on PayOnline and the Ruble exchange rate. This was offset by a decrease in Mobile Solutions segment of $48,179 due to reducing
headcount in response to the continued decrease in sales and reorganizing the business and responsibilities.
Professional fees were $1,995,855 for
the nine months ended September 30, 2017 as compared to $1,874,191 for the nine months ended September 30, 2016.
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
23,418
|
|
|
$
|
-
|
|
|
$
|
4,142
|
|
|
$
|
62,533
|
|
|
$
|
90,093
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
191,349
|
|
|
|
191,349
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
15,433
|
|
|
|
307,782
|
|
|
|
323,215
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,400
|
|
|
|
15,400
|
|
Consulting
|
|
|
328,318
|
|
|
|
44,793
|
|
|
|
698,138
|
|
|
|
304,549
|
|
|
|
1,375,798
|
|
Total
|
|
$
|
351,736
|
|
|
$
|
44,793
|
|
|
$
|
717,713
|
|
|
$
|
881,613
|
|
|
$
|
1,995,855
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Total
|
|
General Legal
|
|
$
|
39,215
|
|
|
$
|
268
|
|
|
$
|
3,867
|
|
|
$
|
168,039
|
|
|
$
|
211,389
|
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
131,250
|
|
|
|
131,250
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
578
|
|
|
|
326,132
|
|
|
|
326,710
|
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,200
|
|
|
|
44,200
|
|
Consulting
|
|
|
273,277
|
|
|
|
39,154
|
|
|
|
458,205
|
|
|
|
390,006
|
|
|
|
1,160,642
|
|
Total
|
|
$
|
312,492
|
|
|
$
|
39,422
|
|
|
$
|
462,650
|
|
|
$
|
1,059,627
|
|
|
$
|
1,874,191
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
North America
Transaction
Solutions
|
|
|
Mobile
Solutions
|
|
|
Online
Solutions
|
|
|
Corporate
Expenses &
Eliminations
|
|
|
Increase /
(Decrease)
|
|
General Legal
|
|
$
|
(15,797
|
)
|
|
$
|
(268
|
)
|
|
$
|
275
|
|
|
$
|
(105,506
|
)
|
|
$
|
(121,296
|
)
|
SEC Compliance Legal Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,099
|
|
|
|
60,099
|
|
Accounting and Auditing
|
|
|
-
|
|
|
|
-
|
|
|
|
14,855
|
|
|
|
(18,350
|
)
|
|
|
(3,495
|
)
|
Tax Compliance and Planning
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,800
|
)
|
|
|
(28,800
|
)
|
Consulting
|
|
|
55,041
|
|
|
|
5,639
|
|
|
|
239,933
|
|
|
|
(85,457
|
)
|
|
|
215,156
|
|
Total
|
|
$
|
39,244
|
|
|
$
|
5,371
|
|
|
$
|
255,063
|
|
|
$
|
(178,014
|
)
|
|
$
|
121,664
|
|
Professional fees increased by $121,664
primarily due to an increase in Online Solutions segment’s consulting fees of $239,933 and $60,099 in corporate’s
SEC compliance fees primarily offset by a decrease in general legal corporate expenses of $105,506 and a $85,457 decrease in corporate
consulting expenses.
Non-cash compensation expense from share-based
compensation was $836,218 for the nine months ended September 30, 2017, compared to $3,108,274 for the nine months ended September
30, 2016. The majority of these expenses were for employee and consultant incentives in both periods.
We recorded bad debt expense of $1,465,311
for the nine months ended September 30, 2017 as compared to $678,150 for the nine months ended September 30, 2016. For the nine
months ended September 30, 2017, we recorded a loss which was primarily comprised of $1,185,804 in net ACH rejects and a $279,508
provision from our Russian operations. Of the $1,185,804 of net ACH rejects, $781,923 were passed through to independent sales
organizations that board their merchants with us. For the nine months ended September 30, 2016, we recorded a loss which was primarily
comprised of $710,508 in net ACH rejects offset by a $32,358 recovery from our Russian operations. Of the $678,150 of net ACH
rejects, $286,128 were passed through as a reduction to commissions to independent sales organizations that board their merchants
with us.
Depreciation and amortization expense
consists primarily of the amortization of merchant portfolios plus depreciation expense on fixed assets, client acquisition costs,
capitalized software expenses, trademarks, domain names and employee non-compete agreements. Depreciation and amortization
expense was $1,860,401 for the nine months ended September 30, 2017 as compared to $2,497,538 for the nine months ended September
30, 2016.
Interest expense was $894,553 for the
nine months ended September 30, 2017 as compared to $1,186,207 for nine months ended September 30, 2016, representing a decrease
of $291,655 as follows:
Funding Source
|
|
Nine months
ended
September 30, 2017
|
|
|
Nine months
ended
September 30,
2016
|
|
|
Increase /
(Decrease)
|
|
MBF Notes
|
|
$
|
49,606
|
|
|
$
|
39,806
|
|
|
$
|
9,800
|
|
RBL Notes
|
|
|
572,231
|
|
|
|
1,066,227
|
|
|
|
(493,996
|
)
|
Priority Payments Note
|
|
|
90,378
|
|
|
|
-
|
|
|
|
90,378
|
|
Other
|
|
|
182,338
|
|
|
|
80,174
|
|
|
|
102,164
|
|
Total
|
|
$
|
894,552
|
|
|
$
|
1,186,207
|
|
|
$
|
(291,655
|
)
|
Other interest expense primarily consisted
of $84,199 resulting from the promissory note entered into on March 1, 2017 with Star Equities, LLC (see Note 12. Related Party
Transactions) and $98,139 related to the PayOnline acquisition. During the nine months ended September 30, 2016, other interest
consisted primarily of $76,289 related to the PayOnline acquisition. The primary reason for the decrease was due to less Crede
stock paydowns on RBL debt during nine months ended 2017, which resulted in increased RBL interest expense during 2016.
Other expenses for the nine months ended
September 30, 2017, consisted of $98,721 attributed to our Mobile Solutions Division, by $48,481 in from our North American Transaction
Solutions segment and $9,128 of expenses from corporate, offset by $5,359 in other income from our Online Solutions segment.
The net income attributable to non-controlling
interests amounted to $93,175 for nine months ended September 30, 2017 as compared to $110,350 for the nine months ended September
30, 2016. The decrease was caused by an adjustment to commission expense for prior quarters recorded during the three months ended
September 30, 2017.
Liquidity and Capital Resources
Our total assets at September 30, 2017
were $20.4 million compared to $23.2 million at December 31, 2016. The period over period change in total assets is primarily
attributable to a decrease in accounts receivable due to collections from our Mobile Solutions segment of $2.7 million and our
North American Transaction Solutions segment collections of $0.6 million.
At December 31, 2016, we had total current
assets of $9.2 million including $0.6 million of cash, $7.1 million of accounts receivable, and $1.5 million of prepaid expenses
and other assets. At September 30, 2017, we had total current assets of $7.0 million, including $0.9 million of cash, $4.4 million
of accounts receivable and $1.7 million of prepaid expenses.
We currently believe that we will require
an additional $4.8 million to finance continuing operations as currently conducted over the next 12 months. In addition, we have
a payment obligation of approximately $1.4 million associated with our PayOnline acquisition. These conditions raise substantial
doubt about our ability to continue as a going concern.
Additional funds may be raised through
debt financing and/or the issuance of equity securities, there being no assurance that any type of financing on terms satisfactory
to us will be available or otherwise occur. Debt financing must be repaid regardless of whether we generate revenues or cash flows
from operations and may be secured by substantially all of our assets. Any equity financing or debt financing that requires the
issuance of equity securities or warrants to the lender would cause the percentage ownership by our current stockholders to be
diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences or privileges
senior to those of existing stockholders. If such financings are not available when required or are not available on acceptable
terms, we may be unable to implement our business plans or take advantage of business opportunities, any of which could have a
material adverse effect on our business, financial condition, results of operations and/or prospects and may ultimately require
us to suspend or cease operations, which could cause investors to lose the entire amount of their investment.
The net loss attributable to Net Element,
Inc. stockholders was $5.8 million for the nine months ended September 30, 2017 compared to $10.7 million for the nine months
ended September 30, 2016.
Operating activities used $2,609,164 of
cash for the nine months ended September 30, 2017 as compared to $1,067,490 of cash used for the nine months ended September 30,
2016. Negative operating cash flow of $2,609,164 for the nine months ended September 30, 2017 was primarily due to a net loss
of $5,923,548 and a $2,390,495 decrease in accounts payable and accrued expenses, primarily the result of paying down amounts
related to the PayOnline acquisition, a $159,228 net decrease of deferred revenue primarily resulting from amortization of annual
fees.
For the nine months ended September 30,
2017, investing activities used $1,303,231 in cash primarily for client acquisition costs as compared to $1,346,718 of cash used
primarily to purchase portfolios and client acquisition costs for the nine months ended September 30, 2016.
Financing activities provided $4,193,358
in cash for the nine months ended September 30, 2017 as compared to $2,675,845 of cash provided from financing activities for
the nine months ended September 30, 2016. Financing activities provided $4,193,358 for the nine months ended September 30, 2017,
primarily from the sale of stock for $1,150,098 and proceeds and repayments from indebtedness, which netted $2,965,673. Financing
activities provided $2,675,845 in cash for the nine months ended September 30, 2016 resulting from related party advances of $117,779
and the proceeds and repayments from indebtedness which netted $2,558,066.
We have international operations that
transact in foreign currencies including Russian Rubles, Euros, and Kazakhstan Tenges. The effect of exchange rate changes increased
our US Dollar-denominated cash balance by $19,503 for the nine months ended September 30, 2017 as compared to a $97,902 decrease
for the nine months ended September 30, 2016.
Off-balance sheet arrangements
At September 30, 2017, we did not have
any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative
and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls
and Procedures.
Our disclosure controls and procedures
are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules
and forms, and that such information is accumulated and communicated to our management, including our chief executive officer
and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by
this Report, our management conducted an evaluation, under the supervision and with the participation of our chief executive officer
and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) under the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were not effective because there are a limited number of personnel employed and we
cannot have an adequate segregation of duties, and due to the material weaknesses in our internal control over financial reporting
as discussed below under “Management’s Report on Internal Control Over Financial Reporting.” Accordingly, management
cannot provide reasonable assurance of achieving the desired control objective. Management works to mitigate these risks by being
personally involved in all substantive transactions and attempts to obtain verification of transactions and accounting policies
and treatments involving our operations, including those overseas. We are in the process of reviewing and, where necessary, modifying
controls and procedures throughout the Company, particularly in light of our recent acquisitions and the continued integration
of these businesses. We will continue to address deficiencies as resources permit.
Management’s Report on Internal
Control over Financial Reporting
Management of the Company is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under Exchange
Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets
of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.
We recognize that because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies and procedures may deteriorate.
Management of the Company conducted an
assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2017, based
on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the “COSO II Framework”). Based on management’s assessment in accordance with the criteria
in the COSO Framework, our management concluded that our internal control over financial reporting was not effective as of September
30, 2017.
Management is aware of the following material
weaknesses (a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements
will not be prevented or detected and corrected on a timely basis) in the Company’s internal control over financial reporting:
Control Environment
|
■
|
Inadequate Policies and Procedures: Based on management’s
review of key accounting policies and procedures, our management determined that such policies and procedures were inadequate
as of September 30, 2017. Management identified certain policies and procedures as inadequate regarding the design of the
control and formal written documentation.
|
|
■
|
We do not have sufficient personnel or financial
resources to provide adequate risk assessment functions.
|
|
■
|
Changing of Key Employees in Russia: A changing
organizational structure provided challenges to ensure a sound control environment with appropriate tone, authority, responsibilities,
and high ethical values. Due to reorganization of our Russian organization, we have not been able to provide adequate training
to new employees in order to establish adequate best practice procedures.
|
Control Activities
|
■
|
Testing of Internal Controls: The Company’s
accounting staff is relatively small and the Company does not have the required infrastructure for meeting the demands of
being a U.S. public company. As a result we have identified deficiencies in our internal controls within our key business
processes, particularly with respect to the design of quarterly accounting, financial statement close, consolidation, and
external financial reporting procedures. Management believes there are control procedures that are effective in implementation
within our key business processes. However, certain of these processes could not be formally tested because of lack of design,
inadequate documentation, and lack of financial resources.
|
Information and Communication
|
■
|
We did not have adequate written procedures, risk
assessment processes or board of directors training at September 30, 2017. Our quarterly reporting process, particularly
in Russia, requires additional controls and processes.
|
Monitoring
|
■
|
Internal Control Monitoring: As a result of our
limited financial personnel and ineffective controls (both preventative and detective) management’s ability to monitor
the design and operating effectiveness of our internal controls is limited. Accordingly, management’s ability to timely
detect, prevent and remediate deficiencies and potential fraud risks is inadequate.
|
These material weaknesses impede the ability
of management to adequately oversee our internal control over financial reporting on a consistent basis. Management intends to
continue focusing its remediation efforts in the near term on training new staff in Russia and designing revised accounting and
financial reporting policies and procedures that will help ensure that adequate internal controls over financial reporting are
met. Additionally, these revised procedures will be formally documented and procedures will focus on transaction processing, period-end
account analyses and providing for additional review and monitoring procedures and periodically assess the need for additional
accounting resources as the business develops and resources permit. Management also is committed to taking further action and
implementing enhancements or improvements as resources permit. We recognize that, due to the size and stage of development of
our foreign businesses, implementation of additional measures may take considerable time.
Notwithstanding the material weaknesses
discussed above, our management has concluded that the financial statements included in this Report fairly present in all material
respects our financial condition, results of operations and cash flows for the periods presented in conformity with generally
accepted accounting principles.
Except as specifically described above
in this Item 4, there was no change in our internal control over financial reporting during our third fiscal quarter of 2017 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.