Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS DISCLAIMER
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results
could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described
in our annual report on Form 10-K and other reports we file with the Securities and Exchange Commission. Although we believe the
expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the
statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform
these statements to actual results or to changes in our expectations, except as required by law.
This discussion and analysis should be read in conjunction with
the unaudited interim condensed consolidated financial statements and the notes thereto included in this report, and our annual
report on Form 10-K for the fiscal year ended December 31, 2015, filed March 30, 2016, including the audited consolidated financial
statements and the notes contained therein.
Overview
We provide integrated electronic payment processing services to
merchants and businesses, including all types of Automated Clearing House, or ACH, processing, credit, prepaid card and debit card-based
processing services. We also operate an online payment processing service, under the domain name www.billx.com system, which allows
consumers to process online payments to pay any other individual, including family and friends. Through our recently acquired business
Akimbo, under the domain name www.akimbocard.com, we offer Visa prepaid cards to consumers for use as a tool to stay on budget,
manage allowances and share money with family and friends. The Akimbo MasterCard program became live on our processing platform
in early April 2015. The Akimbo Visa card program was decommissioned of all services on May 30, 2015 and the card customers were
transitioned to the Akimbo MasterCard card program. Since then we have further developed our Akimbo platform to include Akimbo
Now for businesses, Akimbo Gift for consumers and support for Apple Pay™.
We reported a net loss of $387,303 for the six months ended June
30, 2016 and net income of $1,016,088 for year ended December 31, 2015. Second quarter 2016 credit card processing volumes were
the fourth highest in company history, with the number of transactions processed up 4% over the second quarter of 2015. Credit
card dollars processed during the second quarter of 2016 decreased 4% compared to the same time period in 2015. Electronic check
transaction (ACH) volumes during the second quarter of 2016 were down 17% over the same time period in 2015.
Due to our strong sales pipeline, we believe the downward trend
in ACH transactions processed will reverse in the second half of 2016 and early 2017. We also expect to see an increase in the
number of enrolled merchant customers, for whom we provide processing for credit and debit card transactions, and we expect to
add new clients from our sales pipeline, which we believe will create increased transaction volumes. We believe we will return
to profitability we experienced in years 2015 and 2014 in the foreseeable future, but it is possible that we will not regain profitability.
We may incur future operating losses. To regain and sustain profitability, we must, among other things, grow and maintain our customer
base, implement a successful marketing strategy, continue to maintain and upgrade our technology and transaction-processing systems,
provide superior customer service, respond to competitive developments, attract, retain and motivate qualified personnel, and respond
to unforeseen industry developments and other factors. We believe that our success will depend in large part on our ability to
(a) manage our operating expenses, (b) add quality customers to our client base, (c) meet evolving customer requirements and (d)
adapt to technological changes in an emerging market. Accordingly, we intend to focus on customer acquisition activities and outsource
some of our processing services to third parties to allow us to maintain an efficient operating infrastructure and expand our operations
without significantly increasing our fixed operating expenses.
Critical Accounting Policies
General
Our management’s discussion and analysis of financial
condition and results of operations is based upon our interim condensed consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to the reported amounts of revenues and expenses, bad debt, investments, intangible assets, income taxes, and
contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from
these estimates under different assumptions or conditions. We consider the following accounting policies to be critical
because the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to
account for highly uncertain matters or the susceptibility of such matters to change or because the impact of the estimates
and assumptions on financial condition or operating performance is material.
Revenue Recognition
Revenue consists primarily of fees generated through the electronic
processing of payment transactions and related services, and is recognized as revenue during the period the transactions are processed
or when the related services are performed. Merchants may be charged for these processing services at a bundled rate based on a
percentage of the dollar amount of each transaction and, in some instances, additional fees are charged for each transaction. Certain
merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees
for chargebacks or returns, monthly minimums, and other miscellaneous services. Revenues derived from electronic processing of
credit, debit, and prepaid card transactions that are authorized and captured through third-party networks are reported gross of
amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations (Visa, MasterCard and Discover).
Revenue also includes any up-front fees for the work involved in implementing the basic functionality required to provide electronic
payment processing services to a customer. Revenue from such implementation fees is recognized over the term of the related service
contract. Sales taxes billed are reported directly as a liability to the taxing authority, and are not included in revenue.
Reserve for Processing Losses
If, due to insolvency or bankruptcy of one of our merchant customers,
or for any other reason, we are not able to collect amounts from our credit card, ACH or prepaid customers that have been properly
"charged back" by the customer, or if a prepaid cardholder incurs a negative balance, we must bear the credit risk for
the full amount of the transaction. We may require cash deposits and other types of collateral from certain merchants to minimize
any such risk. In addition, we utilize a number of systems and procedures to manage merchant risk. ACH, prepaid and credit card
merchant processing loss reserves are primarily determined by performing a historical analysis of our loss experience and considering
other factors that could affect that experience in the future, such as the types of transactions processed and nature of the merchant
relationship with its consumers and our relationship with our prepaid card holders. This reserve amount is subject to the risk
that actual losses may be greater than our estimates. We have not incurred any significant processing losses to date. Estimates
for processing losses are variable based on the volume of transactions processed and could increase or decrease accordingly. At
June 30, 2016 our reserve for processing losses was $248,868 and was the same at December 31, 2015.
Settlement Processing Assets and Obligations
Settlement processing assets and obligations represent intermediary
balances arising in our settlement process for merchants. Funds settlement refers to the process of transferring funds for sales
and credits between card issuers and merchants. For transactions processed on our systems, we use our internal network to provide
funding instructions to financial institutions that in turn fund the merchants.
Restricted Cash
Restricted cash includes certain funds collected from our merchants
that serve as collateral to minimize contingent liabilities associated with any losses that may occur under our agreement with
the merchant. The funds may be used to offset any returned items or chargebacks to the Company and to indemnify the Company against
third-party claims and any expenses that may be created by the customer as a result of any claim or fine. The Company may require
the customer security deposit based on estimated transaction volumes, amounts and chargebacks and may revise the deposit based
on periodic review of the same items. Repayment of the deposit to the customer is generally within 90 to 180 days beyond the date
the last item is processed by the Company on behalf of the customer. The customer security deposit does not accrue interest to
the benefit of the customer.
Bad Debts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability or failure of our customers to make required payments. We determine the allowance for doubtful accounts
based on an account-by-account review, taking into consideration such factors as the age of the outstanding balance, historical
pattern of collections and financial condition of the customer. Past losses incurred by us due to bad debts have been within our
expectations. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to
make contractual payments, additional allowances might be required. Estimates for bad debt losses are variable based on the volume
of transactions processed and could increase or decrease accordingly. At June 30, 2016 and December 31, 2015, our allowance for
doubtful accounts was $30,938 and $35,033, respectively.
Valuation of Long-Lived and Intangible Assets
We assess the impairment of long-lived and intangible assets periodically,
or at least annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors considered important, which could trigger an impairment review, include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy of the overall
business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible
assets may not be recoverable, impairment is measured as the excess of the assets’ carrying value over the estimated fair
value. No impairment losses were recorded in 2015 or during the six months ended June 30, 2016. Management is not aware of any
impairment changes that may currently be required; however, we cannot predict the occurrence of events that might adversely affect
the reported values in the future.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference
between financial reporting and tax bases of assets and liabilities and are measured by the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse. Deferred tax assets are computed with the presumption that
they will be realizable in future periods when taxable income is generated. Predicting the ability to realize these assets in future
periods requires a great deal of judgment by management. U.S. generally accepted accounting principles prescribe a recognition
threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Income tax benefits that
meet the “more likely than not” recognition threshold should be recognized. Goodwill is amortized over 15 years for
tax purposes.
At December 31, 2015, we had available net operating loss carryforwards
of approximately $39.7 million, which expire beginning in the year 2020. Approximately $0.1 million of the total net operating
loss is subject to an IRS Section 382 limitation from 1999. However, we cannot predict with reasonable certainty that all of the
available net operating loss carryforwards will be realized in future periods. Accordingly, we recorded a valuation allowance of
$12.2 million. As of December 31, 2015 we recognized net deferred tax assets of $1.6 million. The Company reviewed the assessment
of the deferred tax asset and valuation allowance for the period ended June 30, 2016 and will reevaluate the assessment on December
31, 2016.
Management is not aware of any tax positions that would have a significant
impact on our financial position.
Results of Operations
Our revenues are principally derived from providing integrated electronic
payment services to merchants and businesses, including credit and debit card-based processing services and transaction processing
via the Automated Clearing House, or ACH, network and the program management and processing of prepaid debit cards. We also operate
an online payment processing service for consumers under the domain name www.billx.com and sell this service as a private-label
application to resellers.
Revenues
Revenues for the quarter ended June 30, 2016 decreased 16% to $2,890,060,
as compared to $3,424,756 for the quarter ended June 30, 2015. Revenues for the six months ended June 30, 2016 decreased 15% to
$6,118,691, as compared to $7,167,216 for the six months ended June 30, 2015. The decrease for the quarter and six months ended
June 30, 2016, as compared to the same period in the prior year, was due to the decreases in the volume of ACH processing transactions,
and return transactions processed.
Cost of Services
Cost of services includes the cost of personnel dedicated to the
creation and maintenance of connections to third-party payment processors and the fees paid to such third-party providers for electronic
payment processing services. Through our contractual relationships with our payment processors and sponsoring banks, we are able
to process ACH and debit, credit or prepaid card transactions on behalf of our customers and their consumers. We pay volume-based
fees for debit, credit, ACH and prepaid transactions initiated through these processors or sponsoring banks, and pay fees for other
transactions such as returns, notices of change to bank accounts and file transmission.
Cost of services decreased 16% to $2,034,439 for the quarter ended
June 30, 2016, as compared to $2,426,612 for the same period in the prior year. Cost of services decreased 13% to $4,189,222 for
the six months ended June 30, 2016, as compared to $4,802,006 for the same period in the prior year. The decrease for the six months
ended June 30, 2016, as compared to the same period in the prior year, was due to the decrease in the volume of ACH processing
transactions, and return transactions processed.
Stock-based Compensation
Stock-based compensation expenses were $283,747 and $393,525 for
the quarters ended June 30, 2016 and June 30, 2015, respectively. Stock-based compensation expenses were $571,436 and $627,056
for the six months ended June 30, 2016 and June 30, 2015, respectively. The decrease in stock-based compensation expense is due
to shares that vested in December 2015 that we no longer have to amortize.
Cancellation of stock-based compensation expense (income) was $0
and $0 for the quarters ended June 30, 2016 and June 30, 2015, respectively and $0 and $163,936 of income for the six months ended
June 30, 2016 and June 30, 2015, respectively. This amount represents non-vested stock-based awards to former employees that were
expensed in prior years that were cancelled during the six months ended June 30, 2015.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses increased 91%
to $801,540 for the quarter ended June 30, 2016, as compared to $419,838 for the same period in the prior year. The increase in
other selling, general and administrative expenses for the three months ended June 30, 2016, as compared to the same period in
the prior year, represented increases in salaries and benefits of approximately $212,000, investor outreach fees of approximately
$85,000; marketing and advertising of approximately $58,000, and an increase in legal and professional fees of approximately $27,000.
Other selling, general and administrative expenses increased 50%
to $1,409,889 the six months ended June 30, 2016, as compared to $937,018 for the same period in the prior year. The increase in
other selling, general and administrative expenses for the six months ended June 30, 2016, as compared to the same period in the
prior year, represented an increase in salaries and benefits of approximately $418,000, a decrease in cancellation of stock based
compensation of $163,936, increase in investor outreach fees of approximately $158,000, decrease in bonuses of $90,000, increase
in marketing and advertising of approximately $61,000, an increase in director compensation of $38,500, and an increase in legal
and professional fees of approximately $30,000.
Depreciation and Amortization
Depreciation and amortization totaled $225,554 for the quarter ended
June 30, 2016, compared to depreciation and amortization of $92,948 for the same period in 2015. Depreciation and amortization
totaled $449,777 for the six months ended June 30, 2016, compared to depreciation of $178,520 for the same period in the prior
year. The increases are primarily due to a change in the useful life for $2,585,385 of software acquired from Akimbo from 10 years to 5 years in the quarter ended December 31, 2015.
Other Income (Expense)
Other income (expense), were income of $123,253 and $144,664 for
the quarter and six months ended June 30, 2016 compared to net expense of $12,947 and net income of $5,949 for the quarter and
six months ended June 30, 2015, respectively. The increase for the quarter and six months, as compared to the same periods in the
prior year is primarily due to the settlement of a legal case in our favor resulting in $97,493.
Interest income was $24,974 and $19,358, for the quarters ended
June 30, 2016 and June 30, 2015, respectively. The increase in interest for the quarter, as compared to the same period in the
prior year was primarily due to the increase in interest earned on higher cash balances.
Interest income was $46,985 and $38,358, for the six months ended
June 30, 2016 and June 30, 2015, respectively. The increase in interest for the six months, as compared to the same period in the
prior year was primarily due to the increase in interest earned on higher cash balances.
We reported net loss of $355,301 and $387,303 for the quarter and
six months ended June 30, 2016, as compared to net income of $24,850 and $733,465 for the same periods in the prior year.
Liquidity and Capital Resources
At June 30, 2016, we had $4,378,405 of cash and cash equivalents,
as compared to $4,059,606 of cash and cash equivalents at December 31, 2015. The increase in cash for the six months ended June
30, 2015 was primarily due to cash generated from operations. Beginning with December 31, 2015 we separated Restricted cash and Settlement processing assets and obligations from Cash and
cash equivalents. We have reclassified the 2015 balance sheet to the same format so that the presentation is consistent with
the 2016 presentation.
We reported a net loss of $387,303 for the first two quarters
of 2016 and net income of $1,016,088 for the year ended December 31, 2015 and at June 30, 2016 we have an accumulated deficit
of $49,442,302. Additionally, we reported working capital of $4,202,464 and $3,872,190 at June 30, 2016 and December 31,
2015, respectively.
Net cash provided by operating activities was $657,286 and $1,343,864
for the six months ended June 30, 2016 and 2015, respectively. The decrease in net cash provided by operating activities for the
six months ended June 30, 2016 as compared to the same period in the prior year was attributable to lower net income.
Net cash used by investing activities was $338,487 for the six months
ended June 30, 2016, as compared to net cash used by investing activities of $555,778 for the same period in the prior year; the
decrease in net cash used for investing activities was primarily due to lower capitalization of expenses incurred for the development
of software upgrades for internal use. Net cash used by financing activities was $0 for the six months ended June 30, 2016 and
June 30, 2015.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or
are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources.