NET ELEMENT The following discussion should be read and evaluated in conjunction with the condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q (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 endedDecember 31, 2019 (the "Annual Report") and in Part II, Item 1A of this Report.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
As used in this Report, unless the context otherwise indicates, the references
to "we", "us," "our" or the "Company" refers to
This Report and other written or oral statements made from time to time by us
may contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. You can sometimes identify forward
looking-statements by our use of the words "believes," "anticipates," "expects,"
"intends," "plans," "forecast," "guidance" and similar expressions. Some of the
statements we use in this report contain forward-looking statements concerning
our business operations, economic performance and financial condition, including
in particular: our business strategy and means to implement the strategy?
measures of future results of operations, such as revenue, expenses, operating
margins, and earnings per share? other operating metrics such as shares
outstanding and capital expenditures? our success and timing in developing and
introducing new products or services and expanding our business, including with
respect to joint ventures? the successful integration of future
acquisitions; our future responses to and the anticipated impact of novel
coronavirus COVID-19 ("COVID-19"); and the potential Merger between the Company
and Mullen and the related transactions, including the Divestiture.
Although we believe that the plans and expectations reflected in or suggested by
our forward-looking statements are reasonable, those statements are based on a
number of assumptions and estimates that are inherently subject to significant
risks and uncertainties, many of which are beyond our control, cannot be
foreseen and reflect future business decisions that are subject to change.
Accordingly, we cannot guarantee you that our plans and expectations will be
achieved. Our actual results, including actual revenues, revenue growth rates
and margins, other results of operations and shareholder values, could differ
materially from those anticipated in our forward-looking statements as a result
of known and unknown factors, many of which are beyond our ability to predict or
control. These factors include, but are not limited to, those set forth in Part
II, Item 1A - Risk Factors of this Report and in our Annual Report, those set
forth elsewhere in this report and those set forth in our press releases,
reports and other filings made with the SEC , including under "Cautionary Note
Regarding Forward-looking Statements" in the Company's Current Report on Form
8-K filed on August 5, 2020 , as amended. In particular, these statements also
depend on the duration, severity, and evolution of the COVID-19 pandemic and
related risks, and its effect on our business, financial condition, results of
operations and cash flows.
These cautionary statements qualify all of our forward-looking statements, and you are cautioned not to place undue reliance on these forward-looking statements.
Our forward-looking statements speak only as of the date they are made and should not be relied upon as representing our plans and expectations as of any subsequent date. While we may elect to update or revise forward-looking statements at some time in the future, we specifically disclaim any obligation to publicly release the results of any revisions to our forward-looking statements. Company OverviewNet Element is a global technology and value-added solutions group that supports electronic payments acceptance in a multi-channel environment including point-of- sale (POS), ecommerce and mobile devices. The Company operates two business segments as a provider of North American Transaction Solutions and International Transaction Solutions. We offer a broad range of payment acceptance and transaction processing services that enable merchants of all sizes to accept and process over 100 different payment options in more than 120 currencies, including credit, debit, prepaid and alternative payments. We also provide merchants with value-added services and technologies including integrated payment technologies, POS solutions, fraud management, information solutions and analytical tools. We are differentiated by our technology-centered value-added service offerings built around our payments ecosystem and our diversified business model, which enables us to provide our varied customer base with a broad range of transaction-processing services from a single source across numerous channels and geographic markets. We believe these capabilities provide several competitive advantages that will enable us to continue to penetrate our existing customer base with complementary new services, win new customers, develop new sales channels and enter new markets. We believe these competitive advantages include: ? Our ability to provide competitive products through use of proprietary technologies?
? Our ability to provide in one package a range of services that traditionally
had to be sourced from different vendors?
? Our ability to provide a single agnostic on-boarding and merchant management
platform to our indirect non-bank sales force ("
? Our ability to provide management and optimization tools to our
amongst multiple networks and platforms?
? Our ability to serve customers with disparate operations in several
geographies with technology solutions that enable them to manage their
business as one enterprise? and
? Our ability to capture and analyze data across the transaction processing
value chain and use that data to provide value-added services that are
differentiated from those offered by pure-play vendors that serve only one
portion of the transaction processing value chain (such as only merchant
acquiring or POS).
We have operations and offices located within the United States ("U.S.")
(domestic) and outside of the U.S. (international) where sales, customer service
and/or administrative personnel are based. Through U.S. based subsidiaries, we
generate revenues from transactional services, valued-added payment services and
technologies that we provide to SMBs. Through wholly owned subsidiaries, we
focus on transactional services, mobile payment transactions, online payment
transactions, value-added payment services and technologies in selected
international markets.
Our business is characterized by transaction related fees, multi-year contracts,
and a diverse client base, which allows us to grow alongside our clients. Our
multi-year contracts allow us to achieve a high level of recurring revenues with
the same clients. While the contracts typically do not specify fixed revenues to
be realized thereunder, they do provide a framework for revenues to be generated
based on volume of services provided during such contracts' term.
21--------------------------------------------------------------------------------
Table of Contents
Products and Services Information
Our broad suite of services spans the entire transaction processing value chain of commerce enabling services and technologies and includes a range of front-end customer-facing solutions, as well as back-end support services and account reconciliation. We deliver our value-added solutions from a suite of proprietary technology products, software, cloud-based applications, processing services, fraud management offerings, and customer support programs that we configure to meet our client's individual needs. Many of our payment solutions are technology-enabled in that they incorporate or are incorporated into innovative, technology-driven solutions, including enterprise software solutions, designed to enable merchants to better manage their businesses. Integrated and Vertical Markets. Our integrated and vertical market solutions provide advanced payments technology that is deeply integrated into business enterprise software solutions either owned by us or by our partners. We grow our business when new merchants implement our enterprise software solutions and when new or existing merchants enable payments services through enterprise software solutions sold by us or by our partners. Our primary technology-enabled solutions include integrated and vertical markets, ecommerce and multi-channel solutions, each as described below:
? Unified Payments - doing business as Unified Payments, we provide businesses
of all sizes and types throughout
fully- integrated payment acceptance solutions, value-added POS and business
process management services?
? PayOnline - through our subsidiary, PayOnline Systems ("PayOnline"), we
provide a wide range of value-added online solutions in the selectedinternational markets utilizing our fully-integrated, agnostic electronic
commerce platform that simplifies complex enterprise online transaction
processing challenges from payment acceptance and processing through risk
prevention and payment security via point-to-point encryption and tokenization
solutions?
? Pay-Travel - integrated payment processing solutions to the travel industry,
which includes integrations with various Global Distribution Systems ("GDS")
such as Amadeus®, Galileo®, Sabre®, additional geo filters and passenger name
record (PNR) through Pay-Travel service offered by PayOnline?
? Aptito POS Platform - an integrated POS platform developed on Apple's® iOS and
Android® mobile operating systems for the hospitality, retail, service and on
the go industries. Our goal with Aptito is to create an easy to use POS and
business management solution, which incorporates everything a small business
needs to help streamline every-day management, operations and payment
acceptance?
? Restoactive - utilizing Aptito POS Platform architecture, we have developed
and launched Restoactive, which seamlessly plugs into a current restaurant
environment through integrations with some of the biggest POS and restaurant
management platforms available on the market today?
? Unified m-POS - mobile POS application makes accepting payments on the go easy
and secure. Mobile application is EMV-compliant, accepts traditional and
contactless transactions such as Apple Pay®. Unified m-POS application is
available for download in
? Zero Pay - zero-fee payment acceptance program for SMB merchants in the United
States. Zero Pay program saves merchants costs involved in accepting credit
and debit cards using mobile POS?
? Netevia - our internally developed future-ready multi-channel payments and
merchant management platform. Connecting and simplifying payments across sales
channels through a single integration point, Netevia delivers end-to-end
payment processing through easy-to-use APIs. The Netevia platform is the core
of the company's technology stack;
? Blade - our internally developed, proprietary, fully automated, artificial
intelligence powered underwriting solution with predictive scoring. Built for
underwriting and on-boarding of new merchants, reducing potential risks and
decision-making time while improving the customer experience;
? Cryptocurrency Acceptance - We are currently in the beta stage with some
merchants in
terminals to effectuate cryptocurrency acceptance at the point-of-sale; and
? Netevia Mastercard for SMB - The Netevia Mastercard®, powered by Aliaswire's
patented technology, is part of a unique platform that combines efficient and
low-cost payment processing with the ability to save money on credit and debit
card payment acceptance fees.
Recent Developments
The outbreak and continuing spread of the COVID-19 pandemic has negatively
affected businesses across the globe, in particular the service industry, which
includes restaurants, a significant part of our business, as well as disrupted
global supply chains and workforce participation, and created significant
volatility and disruption of financial markets. Further, this has resulted in
government authorities around the world implementing numerous measures to try to
reduce the spread of COVID-19, such as travel bans and restrictions,
quarantines, "shelter-in-place," "stay-at-home" or similar orders, business
limitations or total shutdowns. For example, many of our restaurant merchants
that we service located within mainland United States , as well as hospitality
and retail sector merchants, have been temporarily closed, have shortened
operating hours and/or have otherwise been adversely affected by the impact and
continuing spread of COVID-19. These merchants have experienced significant
sales declines or no sales at all due to closure of their business.
Additionally, the COVID-19 outbreak has negatively impacted our employee
productivity, including affecting the availability of employees reporting for
work.
Since March 2020 , we have taken initiatives to help minimize the risks to our
business and protect our shareholders. Our management team's experience during
the 2008 financial crisis is proving to be very valuable in dealing with the
current crisis. Our entire staff is fully committed and working diligently to
support our merchants through these difficult times. Most of our merchants have
contactless payment acceptance capabilities through their POS solutions, as well
as, e-commerce and mobile contactless payment acceptance capabilities to
eliminate the need for physical payments to help reduce the spread of COVID-19.
The following initiatives, including an extensive business continuity plan, have
been implemented:
Risk Management:
? Enhanced risk controls and safeguards have been put in place for merchants
that sell products with an extended delivery time frame, products paid in
advance, catering, ticketing, transportation and travel related merchants
? Onboarding of new merchants in the above categories has been put on hold until
further notice
? For those employees that will be working from home, we have implemented a
"remote work" policy and provided employees with the technology necessary to do
so
? For those employees that require office attendance, we are taking significant
steps to ensure seamless service delivery while safeguarding employees health
Contactless Payments:
? Most of our merchants have contactless payment acceptance capabilities through
their POS devices from equipment manufacturers such as PAX, Poynt and Verifone
which are fully integrated into Netevia and Aptito platforms
? We launched an initiative to deploy contactless payment acceptance equipment
to merchants that don't currently have it
? Mobile contactless payment acceptance is available through our Unified mPOS
App which can be downloaded from Apple's App Store and Google 's Google Play Apps
? Online ecommerce payments through shopping carts allow our merchants to sell
their products and services to customers that prefer to shop from the
convenience of their homes
During March 2020 , our Company evaluated its liquidity position, future
operating plans, and its labor force, which included a reduction in the labor
force and compensation to executives and other employees, in order to maintain
current payment processing functions, capabilities, and continued customer
service to its merchants. We are also seeking sources of capital to pay our
contractual obligations as they come due, in light of these uncertain times.
Management believes that its operating strategy will provide the opportunity for
us to continue as a going concern as long as we are able to obtain additional
financing. At this time, due to our continuing losses from operations, negative
working capital, and the COVID-19 pandemic, we cannot predict the impact of
these conditions on our ability to obtain financing necessary for the Company to
fund its future working capital requirements. Our Company has also decided to
explore strategic alternatives and potential options for its business, including
sale of the Company or certain assets, licensing of technology, spin-offs, or a
business combination. Accordingly, on August 4, 2020 , the Company entered into a
merger agreement in connection with the contemplated merger (the "Merger") with
Mullen Technologies, Inc. , a California corporation ("Mullen"), and certain
related transactions, including a divestiture of the Company's existing business
operations. See "-Recent Developments-Mullen Merger and Related Transactions"
for additional information. There can be no assurance, at this time, regarding
the eventual outcome of our planned strategic alternatives, including the Merger
and the related transactions. In most respects, it is still too early in the
COVID-19 pandemic to be able to quantify or qualify the longer-term
ramifications on our merchant processing business, our merchants, our planned
strategic alternatives to enhance current shareholder value, our current
investors, and/or future potential investors.
As part of our Company's plan to obtain capital to fund future operations, on
March 27, 2020 , our Company entered into a Master Exchange Agreement, (the
"ESOUSA Agreement") with ESOUSA Holdings, LLC ("ESOUSA"), a related party. Prior
to entering into the ESOUSA Agreement, ESOUSA agreed to acquire an existing
promissory note that had been previously issued by the Company, of up to
$2,000,000 in principal amount outstanding and unpaid interest due to RBL
Capital Group, LLC ("RBL"). Pursuant to the ESOUSA Agreement, the Company has
the right, at any time prior to March 27, 2021 , to request ESOUSA, and ESOUSA
agreed upon each such request, to exchange this promissory note in tranches on
the dates when the Company instructs ESOUSA, for such number of shares of the
Company's common stock ("Common Stock") as determined under the ESOUSA Agreement
based upon the number of shares of Common Stock (already in ESOUSA's possession)
that ESOUSA sold in order to finance its purchase of such tranche of the
promissory note from RBL. ESOUSA will purchase each tranche of the promissory
note equal to 88% of the gross proceeds from the shares of Common Stock sold by
ESOUSA to finance the purchase of such exchange amount from RBL. Each such
tranche shall be $148,000 unless otherwise agreed to by the Company and ESOUSA.
On April 23, 2020 and August 3, 2020 , the Company entered into certain
amendments to the ESOUSA Agreement, which together increased from $2,000,000 to
$15,000,000 the principal amount and unpaid interest of one or more promissory
notes of the Company or its direct or indirect subsidiaries that ESOUSA either
purchased in whole or has an irrevocable right to purchase in tranches from RBL
in connection with the ESOUSA Agreement.
On May 7, 2020 , the Company entered into a promissory note (the "Note")
evidencing an unsecured loan (the "Loan") in the amount of $491,493 made to the
Company under the Paycheck Protection Program (the "PPP"). The Note matures on
May 7, 2022 and bears interest at a rate of 1% per annum. Beginning December 7,
2020 , the Company is required to make 17 monthly payments of principal and
interest, with the principal component of each such payment based upon the level
amortization of principal over a two-year period from May 7, 2020 . Pursuant to
the terms of the CARES Act and the PPP, the Company may apply to the Lender for
forgiveness for the amount due on the Loan. The amount eligible for forgiveness
is based on the amount of Loan proceeds used by the Company (during the
eight-week period after the Lender makes the first disbursement of Loan
proceeds) for the payment of certain covered costs, including payroll costs
(including benefits), interest on mortgage obligations, rent and utilities,
subject to certain limitations and reductions in accordance with the CARES Act
and the PPP. No assurance can be given, at this time, that the Company will
obtain forgiveness of the Loan in whole or in part.
On May 18, 2020 , the Company entered into a promissory note in the amount of
$159,899 made to the Company by the U.S. Small Business Administration under the
Economic Injury Disaster Loan program.
On June 20, 2020 , in connection with those certain term notes made by TOT Group,
Inc.in favor of RBL, the Credit Facility (See Note. 8) , the Company executed
two (2) promissory term notes, totaling $9,431,157 , which replaces all previous
outstanding term notes with RBL. The first term note is for $4,432,157 and bears
interest at 14.19%. On December 20, 2021 , we are required to make one (1)
payment of interest only for $67,746 , followed by eight (8) payments of interest
only for the same amount, followed by a balloon payment for any outstanding
principal and accrued interest of approximately $5,540,128 . The second term note
is for $5,000,000 and bears interest at 14.19%. On June 20, 2020 , we
are required to make one (1) payment of interest only for $59,125 followed by
six (6) payments of interest only for the same amount. Starting on January
20,2021 , the Company shall make twenty (20) equal monthly payments of principal
and interest of $137,109 , followed by one (1) payment of principal and interest
for approximately $3,290,475 .In connection with this term note, the Company
agreed to pay a financing fee of $894,311 . Such financing fee will be due and
payable as follows; $25,000 on February 20, 2021 ; $25,000 on June 20, 2021 ;
$94,311 on August 20, 2022 ; and $750,000 on September 20, 2022 . The Company
waives demand, presentment for payment, protest, notice of protest and notice of
nonpayment or dishonor of the Note. The Company shall not have any right to
prepay this loan except as expressly provided in the Loan Agreement. The Company
waives demand, presentment for payment, protest, notice of protest and notice of
nonpayment or dishonor of the Note. The Company shall not have any right to
prepay this loan except as expressly provided in the Loan Agreement.
OnAugust 4, 2020 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") withMullen and Mullen Acquisition, Inc. , aCalifornia corporation and wholly owned subsidiary of the Company ("Merger Sub"). Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, Merger Sub will be merged with and into Mullen, with Mullen continuing as the surviving corporation in the Merger. The parties to the Merger Agreement intend that the number of shares of the Company's common stock outstanding immediately after the Merger effective time on a fully diluted and fully converted basis will not exceed 75,000,000, with 15% of such common stock outstanding immediately after the Merger effective time on a fully diluted and fully converted basis to be allocated to the persons that hold shares of the Company common stock immediately prior to the Merger effective time (the "Parent Pre-Merger Stockholders") (subject to upward adjustment described below). The parties to the Merger Agreement intend that, subject to the Company's stockholders' approval, the Company will effect a private placement of the Company common stock prior to the Merger effective time (the "Private Placement") and to loan at 14% annual interest rate compounding monthly all or a portion of the net proceeds of the Private Placement to Mullen on an unsecured basis. In connection with such financing, for everyone dollar of loan funding (including all accrued interest on such loans) provided by the Company to Mullen prior to the Merger effective time, the Parent Pre-Merger Stockholders will retain an additional 0.00000067% of the shares of the Company common stock to be outstanding on a fully diluted basis immediately after the Merger effective time. The Parties to the Merger Agreement intend that, prior to the Merger effective time but, subject to and after the Company's stockholders' approval, the Company will divest itself of its existing business operations to another party, and will cause such party to assume all liabilities of the Company directly related to its operations of its existing business immediately prior to the closing of such divestiture (the "Divestiture"). As contemplated by the Merger Agreement, onAugust 11, 2020 , our Company as lender, borrowed an additional$500,000 from RBL and entered into an unsecured Promissory Note, datedAugust 11, 2020 (the "Note"), with Mullen. Pursuant to the Note, Mullen borrowed from the Company$500,000 . Prior to maturity of the loan, the principal amount of the loan will carry an interest rate of 14% per annum compounded monthly and payable upon demand. This loan will mature on the earlier of (i) the date that the Merger Agreement is terminated for any reason by any party thereto and (ii) the Merger Effective Time (as defined in the Merger Agreement). OnSeptember 14, 2020 , an advance of$141,000 which was previously borrowed by the Company from RBL, was sent to Mullen by the Company.in connection with expenses incurred by the Company on behalf of Mullen. Subsequent toSeptember 30, 2020 , the Company received$55,000 from Mullen, as a payment towards this advance.. Consummation of the Merger, the Divestiture, the Private Placement and the other transactions contemplated in the Merger Agreement, is subject to customary conditions including, among others, the approval of the Company's stockholders. There is no guarantee that the Merger, the Divestiture, the Private Placement or the other transactions contemplated in the Merger Agreement will be completed. For additional information, see the Company's Current Report on Form 8-K filed onAugust 5, 2020 , as amended. Our Mission and Vision
Our mission is to power global commerce and allow our clients to conduct business globally through a centralized solution. We believe that understanding consumer behavior and the needs of our merchants is the most effective and, ultimately, the most profitable means to accomplish our mission and create long-term value for all stakeholders.
We drive client growth through our in-depth knowledge of global transactional
services and related value-added service offerings which separate us from the
competition.
Our vision is to set the standard for multi-channel payments acceptance and
value-added service offerings with focus on the creation of a unified global
transaction acceptance ecosystem. We believe in disruptive emerging technologies
and, as such, we have developed Netevia, our future-ready multi-channel payments
platform to support development of value-added solutions designed for everyday
commerce. Moving forward, we believe exciting projects and disruptive
technologies like blockchain, IoT, biometric payments and artificial
intelligence will provide us the opportunity to continue developing innovative
payments solutions, which will provide value to our clients.
In order to achieve this vision, we seek to further develop single on-boarding,
global transaction acceptance ecosystem. Manifesting this vision requires
scaling our direct and indirect connectivity to multiple payment and mobile
networks internationally. By implementing this vision, we believe that we will
be able to provide centralized, global multi-channel transactional platform to
our clients internationally.
22--------------------------------------------------------------------------------
Table of Contents Our Strategy Subject to the potential Merger between the Company and Mullen and the related transactions, including the Divestiture, our strategy is to capitalize on consumer appetite for digital payment methods, the perceived movement towards a cashless society. To continue to grow our business, our strategy is to focus on providing merchants with the ability to process a variety of electronic transactions across multiple channels. We seek to leverage the adoption of and transition to card, electronic and digital-based payments by expanding our market share through our distribution channels and services innovations. We also seek growth through strategic acquisitions to improve our offerings, scale and geography. We intend to continue to invest in and leverage our technology infrastructure and our people to increase our penetration in existing markets.
Key elements of our business strategy include:
? Continued investment in our core technology and new technology offerings?
? Allocation of resources and expertise to grow in commerce and payments
segments?
? Grow and control distribution by adding new merchants and partners?
? Leverage technology and operational advantages throughout our global
footprint?
? Expansion of our cardholder and subscriber customer base?
? Continue to develop seamless multinational solutions for our clients?
? Increase monetization while creating value for our clients?
? Focus on continued improvement and operation excellence? and
? Pursue potential domestic and international acquisitions of, investments in,
and alliances with companies that have high growth potential, significant
market presence or key technological capabilities.
With our existing infrastructure and supplier relationships, we believe that we
can accommodate expected revenue growth. We believe that our available capacity
and infrastructure will allow us to take advantage of operational efficiencies
and increased margin as we grow our processing volume and expand to other
geographical territories.
Market Overview
The financial technology and transaction processing industry is an integral part
of today's worldwide financial structure. The industry is continually evolving,
driven in large part by technological advances. The benefits of card-based
payments allow merchants to access a broader universe of consumers, enjoy faster
settlement times and reduce transaction errors. By using credit or debit cards,
consumers are able to make purchases more conveniently, whether in person, over
the Internet, or by mail, fax or telephone, while gaining the benefit of loyalty
programs, such as frequent flyer miles or cash back, which are increasingly
being offered by credit or debit card issuers.
In addition, consumers are also beginning to use card-based and other electronic
payment methods for purchases at an earlier age in life, and increasingly for
small dollar amount purchases. Given these advantages of card-based payment
systems to merchants and consumers, favorable demographic trends, and the
resulting proliferation of credit and debit card usage, we believe businesses
will increasingly seek to accept card-based payment systems in order to remain
competitive.
We believe that cash transactions are becoming progressively obsolete. The
proliferation of bankcards has made the acceptance of bankcard payments a
virtual necessity for many businesses, regardless of size, in order to remain
competitive. In addition, the advent and growth of e-commerce and
crypto-currencies have marked a significant new trend in the way business is
being conducted. E-commerce is dependent upon credit and debit cards, as well as
other cashless payment processing methods.
The payment processing industry continues to evolve rapidly, based on the
application of new technology and changing customer needs. We intend to continue
to evolve with the market to provide the necessary technological advances to
meet the ever-changing needs of our market place. Traditional players in the
industry must quickly adapt to the changing environment or be left behind in the
competitive landscape.
The recent outbreak and continuing spread of the novel coronavirus pandemic
("COVID-19") is currently impacting countries, communities, supply chains and
markets, global financial markets, as well as, the largest industry group
serviced by our Company. The Company cannot predict, at this time, whether
COVID-19 will
continue to have a material impact on our future financial condition and results
of operations due to understaffing in the service sector and the decrease in
revenues and profits, particularly restaurants, and any possible future
government ordinances that may further restrict restaurant and other service or
retail sectors operations.
23--------------------------------------------------------------------------------
Business Segments We operate two reportable business operating segments: (i) North American Transaction Solutions and (ii) International Transaction Solutions. Our segments are designed to establish lines of businesses that support our client base and further globalize our 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. The principal revenue stream for all segments comes from service and transaction related fees.
North American Transaction Solutions
North American Transaction Solutions is currently our largest segment, where through our subsidiaryTOT Payments, LLC , doing business as Unified Payments, we provide businesses of all sizes and types with a wide range of fully-integrated payment acceptance solutions at the point of sale, including Merchant Acquiring, e-commerce, mobile commerce, POS and other business solutions. Our largest service in this segment is Merchant Acquiring, which facilitates the acceptance of cashless transactions at the POS, whether a retail transaction at a physical business location, a mobile commerce transaction through a mobile or tablet device, which includes m-POS acceptance, Android Pay™, Apple Pay™ and Samsung Pay or an electronic commerce transaction over the web. Geographical presence for this segment isNorth America .
International Transaction Solutions
Through our subsidiary, PayOnline, we provide a wide range of value-added online and mobile solutions utilizing our fully-integrated, platform agnostic electronic commerce offering that simplifies complex enterprise online transaction processing challenges from payment acceptance and processing through risk prevention and payment security via point-to-point encryption and tokenization solutions. Our proprietary SaaS suite of solutions for electronic and mobile commerce gateway and payment processing platform is compliant at Level 1 of PCI DSS, streamlines the order-to-cash process, improves electronic payment acceptance and reduces the scope of burden of PCI DSS compliance. PayOnline holds a potential leadership position in theRussian Federation as one of the largest independent Internet Payment Services Providers ("IPSP"). Segment Summary Information The following tables present financial information of the Company's reportable segments at and for the three and nine months endedSeptember 30, 2020 and 2019. The "corporate and eliminations" column includes corporate expenses and intercompany eliminations for consolidated purposes. North American International Transaction Transaction Corp Exp & Three months ended September 30, 2020 Solutions Solutions Eliminations Total Net revenues$ 16,072,518 $ 661,856 $ -$ 16,734,374 Cost of revenues 14,083,449 476,741 - 14,560,190 Gross Margin 1,989,069 185,115 - 2,174,184 Gross margin % 12 % 28 % - 13 % Selling, general and administrative 816,740 205,733 625,123 1,647,596 Non-cash compensation - - 1,089,113 1,089,113 Provision for bad debt 590,322 1,878 - 592,200 Depreciation and amortization 744,452 5,022 - 749,474 Interest expense 352,480 - 8,023 360,503 Other expense - 2,784 75,000 77,784 Net loss for segment$ (514,925 ) $ (30,302 )$ (1,797,259 ) $ (2,342,486 ) Goodwill 6,671,750 1,009,436 - 7,681,186 Other segment assets 14,491,982 399,399 - 14,891,381 Total segment assets$ 21,163,732 $ 1,408,835 $ -$ 22,572,567 24
--------------------------------------------------------------------------------
North American International
Transaction Transaction Corp Exp &
Three months ended September 30, 2019 Solutions Solutions Eliminations Total
Net revenues $ 15,923,805 $ 895,881 $ - $ 16,819,686
Cost of revenues 13,414,334 664,907 - 14,079,241
Gross Margin 2,304,622 378,328 - 2,740,445
Gross margin % 14 % 42 % - 16 %
Selling, general and administrative 687,509 292,269 1,419,008 2,398,786
Non-cash compensation - - 15,008 15,008
Provision for bad debt 422,204 1,175 - 423,379
Depreciation and amortization 746,829 9,156 - 755,985
Interest expense (income), net 270,041 - - 270,041
Other expense (income) 28,974 (151,469 ) 39,152 (83,343 )
Net income (loss) for segment $ 485,897 $ 227,197 $ (1,313,728 ) $ (1,039,411 )
Goodwill 6,671,750 2,972,002 - 9,643,752
Other segment assets 14,122,542 310,973 - 14,433,515
Total segment assets $ 20,794,292 $ 3,282,975 $ - $ 24,077,267
North American International
Transaction Transaction Corp Exp &
Nine months ended September 30, 2020 Solutions Solutions Eliminations Total
Net revenues $ 44,204,134 $ 2,086,415 $ - $ 46,290,549
Cost of revenues 37,923,749 1,473,635 - 39,397,384
Gross Margin 6,280,385 612,780 - 6,893,165
Gross margin % 14 % 29 % - 15 %
Selling, general and administrative 2,406,843 742,492 2,199,482 5,348,817
Non-cash compensation - - 1,135,013 1,135,013
Provision for bad debt 1,065,340 2,948 - 1,068,288
Depreciation and amortization 2,281,517 19,801 - 2,301,318
Interest expense 1,041,913 - 8,023 1,049,936
Other (income) expense (17,846 ) 2,333 64,232 48,719
Net loss for segment $ (497,382 ) $ (154,794 ) $ (3,406,750 ) $ (4,058,926 )
Goodwill 6,671,750 1,009,436 - 7,681,186
Other segment assets 14,491,982 399,399 - 14,891,381
Total segment assets $ 21,163,732 $ 1,408,835 $ - $ 22,572,567
North American International
Transaction Transaction Corp Exp &
Nine months ended September 30, 2019 Solutions Solutions Eliminations Total
Net revenues $ 46,025,308 $ 2,328,871 $ - $ 48,354,179
Cost of revenues 38,627,147 1,613,607 - 40,240,754
Gross Margin 7,398,161 715,264 - 8,113,425
Gross margin % 16 % 31 % - 17 %
Selling, general and administrative 1,972,596 813,887 4,296,238 7,082,721
Non-cash compensation 48,433 - 1,987,422 2,035,855
Provision for bad debt 913,351 (7,474 ) - 905,877
Depreciation and amortization 2,327,487 27,065 - 2,354,552
Interest expense (income), net 767,676 - - 767,676
Other expense (income) 324,913 (1,328,629 ) (277,645 ) (1,281,361 )
Net income (loss) for segment $ 1,043,705 $ 1,210,415 $ (6,006,015 ) $ (3,751,895 )
Goodwill 6,671,750 2,972,002 - 9,643,752
Other segment assets 14,122,542 310,973 - 14,433,515
Total segment assets $ 20,794,292 $ 3,282,975 $ - $ 24,077,267
25--------------------------------------------------------------------------------
Table of Contents
Results of Operations for the Three Months Ended
We reported a net loss attributable to common stockholders of approximately$2.3 million or$0.52 per share loss for the three months endedSeptember 30, 2020 as compared to a net loss of approximately$1.0 million or$0.24 per share loss for the three months endedSeptember 30, 2019 . The increase in net loss attributable to stockholders of approximately$1.3 was primarily due to an increase in non-cash compensation of approximately$1.1 million and an increase in bad debt expense of approximately$200,000 . The following tables set forth our sources of revenues, cost of revenues and the respective gross margins for the three months endedSeptember 30, 2020 and 2019. Three Three Months Ended Months Ended Increase / Source of Revenues September 30, 2020 Mix September 30, 2019 Mix (Decrease) North American Transaction Solutions $ 16,072,518 96.0 %
$ 15,923,805 94.7 %
661,856 4.0 % 895,881 5.3 % (234,025 )
Total $ 16,734,374 100.0 % $ 16,819,686 100.0 % $ (85,312 )
Three Three
Months Ended % of Months Ended % of Increase /
Cost of Revenues September 30, 2020
revenues
84.2 % $ 669,115
International Transaction Solutions 476,741 72.0 % 664,907 74.2 % (188,166 )
Total $ 14,560,190 87.0 % $ 14,079,241 83.7 % $ 480,949
Three Three
Months Ended % of Months Ended % of Increase /
Gross Margin September 30, 2020
revenues
1,989,069 12.4 % $ 2,509,471 15.8 % $ (520,402 )
International Transaction Solutions 185,115 28.0 % 230,974 25.8 % (45,859 )
Total $ 2,174,184 13.0 % $ 2,740,445 16.3 % $ (566,261 )
Net revenues consist primarily of service fees from transaction processing. Net
revenues were approximately $16.8 million for each of the three months ended
September 30, 2020 and 2019
Cost of revenues represents direct costs of generating revenues, including
commissions, mobile operator fees, interchange expense, processing, and
non-processing fees. Cost of revenues for the three months ended September 30,
2020 were approximately $14.6 million as compared to approximately $14.1 million
for the three months ended September 30, 2019
The gross margin for the three months ended September 30, 2020 was approximately
$2.2 million , or 13.0% of net revenues, as compared to approximately $2.7
million , or 16.3% of net revenues, for the three months ended September 30,
2019 . The primary reason for the decrease in the overall gross margin
percentage was primarily the result of the competitive pressure in our industry,
relating to costs that can be passed through to our merchants.
26--------------------------------------------------------------------------------
Table of Contents Operating Expenses Analysis: Operating expenses were approximately$4.1 million for the three months endedSeptember 30, 2020 , as compared to$3.6 million for three months endedSeptember 30, 2019 . Operating expenses for the three months endedSeptember 30, 2020 primarily consisted of selling, general and administrative expenses of approximately$1.6 million , non-cash compensation of approximately$1.1 million , bad debt expense of approximately$600,000 and depreciation and amortization expense of approximately$750,000 . Operating expenses for the three months endedSeptember 30, 2019 primarily consisted of selling, general and administrative expenses of approximately$2.4 million , bad debt expense of approximately$400,000 , and depreciation and amortization expense of approximately$750,000 . The increase in operating expenses was primarily related to the increase in non-cash compensation, partially offset by a decrease in selling, general, and administrative due to the reduction of the labor force and the reduction of compensation of certain employees and executives of the Company, as compared to the previous corresponding quarter.
The components of our selling, general and administrative expenses are reflected in the tables below.
Selling, general and administrative expenses for the three months ended
Three months ended
2020
North American International Corporate
Transaction Transaction Expenses &
Category Solutions Solutions Eliminations Total
Salaries, benefits, taxes and
contractor payments $ 563,948 $ 95,254 $ 84,688 $ 743,890
Professional fees 91,468 29,523 251,262 372,253
Rent 16,664 16,183 10,568 43,415
Business development 42,198 2,500 2,929 47,627
Travel expense 1,306 12,396 39,506 53,208
Filing fees - - 18,916 18,916
Transaction gains - 12,641 - 12,641
Office expenses 65,208 2,961 18,091 86,260
Communications expenses 33,387 32,210 25,707 91,304
Insurance expense - - 46,772 46,772
Other expenses 2,561 2,065 126,684 131,310
Total $ 816,740 $ 205,733 $ 625,123 $ 1,647,596 Three months ended
2019
North American International Corporate
Transaction Transaction Expenses &
Category Solutions Solutions Eliminations Total
Salaries, benefits, taxes and
contractor payments $ 304,391 $ 124,921 $ 729,426 $ 1,158,738
Professional fees 125,713 58,478 486,984 671,175
Rent - 23,048 51,795 74,843
Business development 75,414 540 18,707 94,661
Travel expense 36,337 10,553 18,466 65,356
Filing fees - - 37,213 37,213
Transaction losses - 7,169 - 7,169
Office expenses 91,051 4,460 12,093 107,604
Communications expenses 39,530 61,428 17,710 118,668
Insurance expense - - 42,418 42,418
Other expenses 15,073 1,672 4,196 20,941
Total $ 687,509 $ 292,269 $ 1,419,008 $ 2,398,786
Variance
North American International Corporate
Transaction Transaction Expenses &
Category Solutions Solutions Eliminations Total
Salaries, benefits, taxes and
contractor payments $ 259,557 $ (29,667 ) $ (644,738 ) $ (414,848 )
Professional fees (34,245 ) (28,955 ) (235,722 ) (298,922 )
Rent 16,664 (6,865 ) (41,227 ) (31,428 )
Business development (33,216 ) 1,960 (15,778 ) (47,034 )
Travel expense (35,031 ) 1,843 21,040 (12,148 )
Filing fees - - (18,297 ) (18,297 )
Transaction gains - 5,472 - 5,472
Office expenses (25,843 ) (1,499 ) 5,998 (21,344 )
Communications expenses (6,143 ) (29,218 ) 7,997 (27,364 )
Insurance expense - - 4,354 4,354
Other (income) expenses (12,512 ) 393 122,488 110,369
Total $ 129,231 $ (86,536 ) $ (793,885 ) $ (751,190 )
27-------------------------------------------------------------------------------- Salaries, benefits, taxes and contractor payments decreased by approximately$0.4 million on a consolidated basis for the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . This was primarily due to the staffing reductions necessary and the reduction of compensation of certain employees and executives of the Company, due to the effects of the COVID-19 pandemic on our operations. Salaries and Salaries and benefits for benefits for the three the three months ended months ended September 30, September 30, Increase / Segment 2020 2019 (Decrease)
North American Transaction Solutions
$ 259,557 International Transaction Solutions 95,254 124,921 (29,667 ) Corporate Expenses & Eliminations 84,688 729,426 (644,738 ) Total$ 743,890 $ 1,158,738 $ (414,848 )
Professional fees decreased by approximately
Three months ended
North American International Corporate
Transaction Transaction Expenses &
Professional Fees Solutions Solutions Eliminations Total
General Legal $ - $ 941 $ - $ 941
SEC Compliance Legal Fees - - 89,147 89,147
Accounting and Auditing - - 98,223 98,223
Tax Compliance and Planning - - - -
Consulting 91,468 28,582 63,892 183,942
Total $ 91,468 $ 29,523 $ 251,262 $ 372,253 Three months ended
North American International Corporate
Transaction Transaction Expenses &
Professional Fees Solutions Solutions Eliminations Total
General Legal $ 554 $ 1,681 $ 173,115 $ 175,350
SEC Compliance Legal Fees - - 43,393 43,393
Accounting and Auditing - - 98,051 98,051
Tax Compliance and Planning - - 13,800 13,800
Consulting 125,159 56,797 158,625 340,581
Total $ 125,713 $ 58,478 $ 486,984 $ 671,175
Variance
North American International Corporate
Transaction Transaction Expenses & Increase /
Professional Fees Solutions Solutions Eliminations (Decrease)
General Legal $ (554 ) $ (740 ) $ (173,115 ) $ (174,409 )
SEC Compliance Legal Fees - - 45,754 45,754
Accounting and Auditing - - 172 172
Tax Compliance and Planning - - (13,800 ) (13,800 )
Consulting (33,691 ) (28,215 ) (94,733 ) (156,639 )
Total $ (34,245 ) $ (28,955 ) $ (235,722 ) $ (298,922 ) All other operating expenses were relatively in line with the previous
comparable quarter, with the exception of the decreases in general legal and
consulting fees which totalled approximately
28--------------------------------------------------------------------------------
Table of Contents
Other Income and Expenses Delineated in the Condensed Consolidated Statements of Operations and Comprehensive Loss:
Non-cash compensation expense was approximately$1.1 million for the three months endedSeptember 30, 2020 as compared to$15,000 for the three months endedSeptember 30, 2019 . During the three months endedSeptember 30, 2020 , the Board of Directors approved and authorized the issuance of 151,597 shares of our common stock pursuant to the 2013 Plan which were allocated to certain executives, employees, and consultants of the Company resulting in compensation expense of approximately$1.1 million . Bad Debt Expense Analysis: We reflected a bad debt expense on the accompanying consolidated statements of operations, which represents uncollected fees of approximately$592,000 for the three months endedSeptember 30, 2020 , compared to bad debt expense, representing uncollected fees of approximately$423,000 for the three months endedSeptember 30, 2019 . The increase in bad debt expense was primarily due to billing adjustments relating to chargebacks made by our processors due to the to the effects of the COVID-19 pandemic on our merchants.
Depreciation and Amortization Expense:
Depreciation and amortization expense consists primarily of the amortization of merchant portfolios in connection with residual buyout arrangements and client acquisition costs. Depreciation and amortization expense was approximately$750,000 for each of the three months endedSeptember 30, 2020 andSeptember 30, 2019 . Interest Expense:
Interest expense for the three months ended
Three months Three months
ended September ended September Increase /
Funding Source 30, 2020 30, 2019 (Decrease)
RBL Notes $ 328,165 $ 262,289 $ 65,876
Other 32,338 7,752 24,586
Total $ 360,503 $ 270,041 $ 90,462 Total interest expense increased primarily due to additional borrowings from RBL.
Other Income (Expense):
Other losses were approximately
29--------------------------------------------------------------------------------
Table of Contents
Results of Operations for the Nine Months Ended
We reported a net loss attributable to common stockholders of approximately$4.0 million or$0.94 per share loss for the nine months endedSeptember 30, 2020 as compared to a net loss of approximately$3.7 million or$0.91 per share loss for the nine months endedSeptember 30, 2019 . The increase in net loss attributable to stockholders was primarily due to a decrease in net revenues of approximately$2.0 million , which was partially offset by decreases in selling, general, and administrative expenses of approximately$1.7 million and non-cash compensation of approximately$0.9 million during the nine months endedSeptember 30, 2020 Also, interest expense increased approximately$0.3 million which was combined with a decrease of approximately$1.3 million in other income due to recognizing other income of approximately$1.1 million relating to merchant reserves recorded in a previous year, deemed not to be an obligation during the nine months endedSeptember 30, 2019 . The following tables set forth our sources of revenues, cost of revenues and the respective gross margins for the nine months endedSeptember 30, 2020 and 2019. Nine Nine Months Ended Months Ended Increase / Source of Revenues September 30, 2020 Mix
$ 46,025,308 95.2 %
2,086,415 4.5 % 2,328,871 4.8 % (242,456 )
Total $ 46,290,549 100.0 % $ 48,354,179 100.0 % $ (2,063,630 )
Nine Nine
Months Ended % of Months Ended % of Increase /
Cost of Revenues September 30, 2020
revenues
83.9 % $ (703,398 )
International Transaction Solutions 1,473,635 70.6 % 1,613,607 69.3 % (139,972 )
Total $ 39,397,384 85.1 % $ 40,240,754 83.2 % $ (843,370 )
Nine Nine
Months Ended % of Months Ended % of Increase /
Gross Margin September 30, 2020
revenues
6,280,385 14.2 % $ 7,398,161 16.1 % $ (1,117,776 )
International Transaction Solutions 612,780 29.4 % 715,264 30.7 % (102,484 )
Total $ 6,893,165 14.9 % $ 8,113,425 16.8 % $ (1,220,260 )
Net revenues consist primarily of service fees from transaction processing. Net
revenues were approximately $46.3 million for the nine months ended September
30, 2020 as compared to approximately $48.4 million for the nine months ended
September 30, 2019 . The decrease in net revenues for the comparable period was
primarily due to the adverse impact of the COVID-19 pandemic on our end-to-end
payment volumes and gateway transactions.
Cost of revenues represents direct costs of generating revenues, including
commissions, mobile operator fees, interchange expense, processing, and
non-processing fees. Cost of revenues for the nine months ended September 30,
2020 were approximately $39.4 million as compared to approximately $40.2 million
for the nine months ended September 30, 2019 . This decrease is in line with the
decrease in revenues for the nine months ended September, 30, 2020.
The gross margin for the nine months ended September 30, 2020 was approximately
$6.9 million , or 14.9% of net revenues, as compared to approximately
$8.1 million , or 16.8% of net revenues, for the nine months ended September 30,
2019 . The decrease in gross margin was primarily the result of the competitive
pressure in our industry, relating to costs that can be passed through to our
merchants.
30--------------------------------------------------------------------------------
Table of Contents Operating Expenses Analysis: Operating expenses were approximately$9.9 million for the nine months endedSeptember 30, 2020 , as compared to$12.4 million for nine months endedSeptember 30, 2019 . Operating expenses for the nine months endedSeptember 30, 2020 primarily consisted of selling, general and administrative expenses of approximately$5.3 million , non-cash compensation of approximately$1.1 million , bad debt expense of approximately$1.0 million and depreciation and amortization expense of approximately$2.3 million . Operating expenses for the nine months endedSeptember 30, 2019 primarily consisted of selling, general and administrative expenses of approximately$7.1 million , non-cash compensation of approximately$2.0 million , bad debt expense of approximately$0.9 million , and depreciation and amortization expense of approximately$2.4 million .
The components of our selling, general and administrative expenses are reflected in the table below.
Selling, general and administrative expenses for the nine months endedSeptember 30, 2020 and 2019 consisted of operating expenses not otherwise delineated in our Condensed Consolidated Statements of Operations and Comprehensive Loss, as follows:
© Edgar Online, source
