10-K 1 c628-20131231x10k.htm 10-K 60dce8323e1b490

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2013

 

Commission File No. 000-53997

 

picture

 

CALPIAN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Texas

 

20-8592825

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

500 North Akard Street Suite 2850, Dallas, TX  75201

(Address of principal executive offices)

 

214-758-8600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act

None

 

Securities registered pursuant to Section 12(g) of the Exchange Act

Common Stock, Par Value $.001 Per Share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   No 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes   No 

 

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No     

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    No    

 

 


 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S‑K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer           Accelerated filer           Non-accelerated filer            Smaller reporting company      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No 

 

The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2013, was $27,200,619, computed as the average bid and asked price of such common equity as of the last business day of the registrant's most recently completed second fiscal quarter.  For purposes of the foregoing calculation, we have assumed that only directors, executive officers, and holders of 10% or more of the issuer’s common capital stock are affiliates.

 

The number of shares outstanding of the registrant’s common stock as of March 27, 2014 was 37,481,935.

 

 


 

Documents Incorporated By Reference

None

 

 

 

 


 

 

TABLE OF CONTENTS 

 

 

 

 

 

Introductory Comment 

- 5 -

Forward-Looking Statements 

- 5 -

PART I

 

 

Item 1 

Business

- 5 -

Item 1A 

Risk Factors

- 9 -

Item1B 

Unresolved Staff Comments

- 18 -

Item 2 

Properties

- 18 -

Item 3 

Legal Proceedings

- 18 -

Item 4 

Mine Safety Disclosures

- 19 -

PART II

 

 

Item 5 

Market For Registrant’s Common Equity, Related Stockholder Matters

And Issuer Purchases Of Equity Securities

- 19 -

Item 6 

Selected Financial Data

- 20 -

Item 7 

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

- 20 -

Item 7A 

Quantitative And Qualitative Disclosures About Market Risk

- 23 -

Item 8 

Financial Statements And Supplementary Data

- 24 -

Item 9 

Change In And Disagreements With Accountants On Accounting And Financial Disclosure

- 42 -

Item 9A 

Controls And Procedures

- 42 -

Item 9b 

Other Information

- 44 -

PART III

 

 

Item 10 

Directors, Executive Officers And Corporate Governance

- 44 -

Item 11 

Executive Compensation

- 47 -

Item 12 

Security Ownership Of Certain Beneficial Owners And Management And Related

Stockholder Matters

- 48 -

Item 13 

Certain Relationships And Related Transactions, And Director Independence

- 49 -

Item 14 

Principal Accountant Fees And Services

- 50 -

PART IV

 

 

Item 15 

Exhibits, Financial Statement Schedules

- 51 -

SIGNATURES 

- 52 -

Exhibit Index 

- 53 -

 

 

 

 

 


 

 

INTRODUCTORY COMMENT

 

In this Annual Report on Form 10-K, we refer to Calpian, Inc. as “Calpian,” “Company,” “we,” “us,” and “our.”

 

FORWARD-LOOKING STATEMENTS

 

When used in this Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding events, conditions and financial trends which may affect the Company’s future plans of operations, business strategy, operating results, and financial position. Such statements are not guarantees of future performance and are subject to risks and uncertainties and actual results may differ materially from those included within the forward-looking statements for various reasons, including those identified under “Risk Factors.”  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made.  Except as required under federal securities laws and the rules and regulations of the United States Securities and Exchange Commission, the Company does not undertake, and specifically declines, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

This Report contains certain estimates and plans related to us and the industry in which we operate, which assume certain events, trends, and activities will occur and the projected information based on those assumptions.  We do not know all of our assumptions are accurate.  In particular, we do not know what level of acceptance our strategy will achieve, how many acquisitions we will be able to consummate or finance, or the size thereof.  If our assumptions are wrong about any events, trends, or activities, then our estimates for future growth for our business also may be wrong.  There can be no assurances any of our estimates as to our business growth will be achieved.

 

PART I

 

ITEM 1BUSINESS

Organizational History

 

Calpian, Inc., a Texas corporation headquartered in Dallas, Texas, was incorporated on May 30, 2006, as Toyzap.com, Inc., and became a public company on May 7, 2008, through a self-underwritten registered public offering of 4,000,000 shares of $.001 par value common stock.  The offering raised $150,000 that was used to pursue a business strategy that never commenced operations.  The “shell company”, Toyzap.com, Inc., was acquired by members of the Company’s current management team, affiliates thereof, and certain other purchasers, on April 23, 2010, pursuant to purchase agreements whereby approximately 99% of the Company’s then issued and outstanding common stock was acquired.  At such time, the former management and Board of Directors resigned and a new management team and Board of Directors were appointed, who then redirected the business focus of the Company to the business plan described below.  On September 3, 2010, the Company changed its name to “Calpian, Inc.” pursuant to approval obtained at a meeting of our shareholders.  The Company’s common stock began trading in the over the counter (“OTC”) market on March 4, 2009, and it currently trades there under the symbol “CLPI.”

 

In March 2012, the Company began to acquire equity interests in Digital Payments Processing Limited (“DPPL”), a newly-organized company.  DPPL maintains an exclusive services agreement with My Mobile Payments Limited (“MMPL”).  Both companies are organized under the laws of India and headquartered in Mumbai, India.  MMPL is a contractual variable interest entity of DPPL.  As of December 31, 2013, the Company has acquired 49.9% of the outstanding common stock of DPPL.  The Company and DPPL have entered into an agreement by which the Company intends to acquire additional shares of common stock of DPPL to increase its equity percentage to 74% for an additional investment amount to be negotiated as future investments are made.  The acquisition of additional shares is subject to approval by the Indian government and regulations for foreign investment.

 

In March 2013, the Company formed a wholly-owned subsidiary, Calpian Commerce, Inc. (“CCI”), to own and operate the certain assets and liabilities of Pipeline Data, Inc. and its subsidiaries acquired in exchange for a cash payment of $9.75 million.  The acquisition was financed by expanding the Company's senior credit facility from $5 million to $14.5 million.

 

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Business Overview

 

The Company operates into two business segments: acquisitions of residual cash flows through Calpian, Inc. and an independent sales organization with merchant servicing revenue streams through our recent acquisition of CCI.   Once the Company attains a majority ownership of our equity method investee, DPPL, Calpian will add a third business segments, electronic payment processing in India.

 

Calpian – Residual Portfolio Acquisitions

 

We are in the business of acquiring recurring monthly residual income streams derived from credit card processing fees paid by retail merchants in the United States (“residual portfolios”).  We act not as a credit card processor, but simply as a purchaser of revenue streams resulting from the relationships between processors and independent sales organizations (“ISOs”).  In addition, we invest in payments-industry related opportunities.

 

Our purchases of residual portfolios are expected to range in size and complexity from one-time events involving a single portfolio to multiple events over an extended period covering the entire current, and possibly future, portfolios of an ISO.  Our aim is to acquire merchant residual portfolios directly from the ISOs that originated the processing contracts with the merchants.  In a residual portfolio purchase, we buy the rights to the residual revenue streams owned by the ISO for a negotiated amount.  Prior to the acquisition, we and the ISO notify the processors of the plan to acquire the rights to the residual portfolio and direct that all future residual payments should be paid to us.  Processors are required to approve the acquisition as a condition of closing.

 

Electronic Payment Processing Industry

We receive substantially all of our revenue from processing contracts with small- and medium-sized merchants for electronic payment (e.g., credit and debit card) processing services that have been sold by ISOs.  The merchants within the electronic payment processing industry are segmented into three groups: (i) large merchants, (ii) medium-sized merchants, and (iii) small merchants who typically generate less than $1.0 million in annual processing volume.

 

Payment processors focusing on large merchants including Elavon, Inc., Chase Paymentech Solutions, LLC, First Data Merchant Services Corporation, RBS Lynk, and National Processing Company (NPC/ Retriever Payment Systems, leverage their capital investment in processing infrastructure over the largest number of transactions to lower their marginal cost of processing a transaction.  This scale allows these large processors to sell services at low per-transaction cost to the largest merchants with high processing volumes.

 

The payment processors with a medium-sized merchant focus compete based on a similar ability to leverage their infrastructure, but typically focus on regional and smaller national merchants.  The small merchant segment is traditionally best served by the ISO sales channel. 

 

Independent Sales Organizations

ISOs are independent sales agents, or a group of agents, contractually authorized to sell credit card processing related services on behalf of one or more credit card processors that are typically too small for a large processor to effectively sell, service, or reach with its centralized, national sales force.  ISOs shepherd the merchant’s application for processing services through the labyrinth of approvals, credit checks, guarantees, etc. that are required before the merchant is approved to accept consumer credit cards for payment. 

 

ISOs have two primary sources of revenues and profitability:

·

Sales of credit card processing terminals to merchants represent a one-time profit opportunity.  Historically, terminal markups were the most important source of immediate cash flow for ISOs but, due to market saturation and the lack of replacement technology, this source has diminished significantly in recent years.

·

Credit card residual portfolios revenues provide an ongoing cash flow stream.  For every merchant an ISO signs up on behalf of a processor, the ISO receives revenues based on the fees the merchant subsequently pays to the processor.  The ISO sells credit card processing services at a retail price to the merchant and retains the difference between the retail price and the wholesale price paid to the processor.  That difference provides the ISO with monthly residual revenues (“residuals”) that are a contractual obligation of the processor.  The residuals vary month-to-month based on the merchant’s sales volume and remain in effect for as long as that merchant is a customer of the processor, but the right to receive them may terminated for a variety of reasons. 

 

Processors

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In addition to other tasks, processors handle credit card transactions originated by merchants and bill and collect the service fees from the merchant monthly.  During the subsequent month, processors send the ISO a report detailing merchant activity and residuals due the ISO along with a remittance of the funds thereby eliminating the need for the ISO to collect directly from the merchant.

 

Contracts for credit card processing services between the merchant and processor can be year-to-year with automatic renewals, but may have up to a three-year initial term.  Merchant processing, however, is a competitive business and merchants do change processors, usually for a lower rate or promise of better service.

 

Attrition occurs when a merchant leaves its processor, typically due to either moving to another provider of processing services or going out of business.  In exchange for the residual payment, the ISO is responsible for providing first-line customer service to the merchant on behalf of the processor.  Common support issues include, but are not limited to, addressing malfunctioning point of sale (“POS”) terminals, answering questions about billing statements, and providing training.  Most of these issues are successfully addressed by telephone and replacement terminals are commonly provided to merchants through overnight shipping services.  ISOs are sales-focused organizations almost exclusively devoted to selling POS terminals and processing services.

 

Calpian’s Residual Portfolio Business Model

The Company is in the business of acquiring ISO debit and credit processing residual revenue streams paid by transaction processors to ISOs.  We expect the acquisition process, from the incoming inquiry by an ISO to closing, may take 60 to 90 days.  We focus on, and take legal possession of, the residual stream.  When a residual stream is acquired, we take steps to ensure the processor pays future residuals directly to us instead of to the ISO.

 

The ISO market is segmented into two categories, each with defined financial needs:

·

Small ISOs with less than 2,000 merchants and financial requirements typically arising from the personal needs of the ISO’s owner (e.g., medical or educational); and

·

Larger ISOs with financial needs driven by business issues such as expansion funding, partnership splits, and exit plans.

 

Calpian’s target market encompasses ISOs selling processing services to small- and medium-sized businesses with less than $1.0 million in annual processing volume.  We do not expect to compete for larger volume accounts or plan to buy portfolios made up of very large merchants for several reasons, including the hypercompetitive pricing experienced in the large merchant segment and differing customer service needs.  In addition, we believe large merchants generally represent an unacceptable concentration of revenue risk.

 

Our strategy is to concentrate acquisition activity on ISOs contracting with a select group of our preferred processors.  In this way, we plan to build a merchant base of reliable, credit-worthy processors.  Our preferred processors include, but are not limited to: Elavon, Chase Paymentech, First Data Merchant Services, RBS Lynk, and National Processing Company (NPC)/ Retriever Payment Systems.  We currently have contracts with Elavon and Chase Paymentech, but there is no assurance we will succeed in focusing our acquisition activities among ISOs that utilize these major processors.

 

To inform the ISO community of our acquisition capabilities, we advertise in industry trade journals, including Transaction World Magazine having a March 2014 issue distribution of more than 16,000 copies.

 

Residual Portfolio Competition

We, and the ISOs from whom we intend to acquire portfolios, compete with a wide variety of processing service providers including, but not limited to, First Data Merchant Services, Elavon, Inc., a U.S. Bancorp subsidiary, JP Morgan Chase & Co. and its subsidiaries, NPC, Bank of America, Wells Fargo, RBS Lynk, iPayment, Innovative Merchant Services, an Intuit company, local and regional banks, and other ISOs.  In addition, we may face merchant processing service competition from other entrants such as Google, Yahoo, Paypal, and eBay. We also expect to face competition at the ISO level for proposed acquisitions from other industry players such as Blue Pay, Frontstream Payments, Century Bankcard, Cutter Financial, and Stream Cash, as well as several individuals active in the business of acquiring residual portfolios.  Because most of these competitors are larger than us and have significantly greater resources, we may not be able to successfully compete against them.

 

 

In operating our business, we expect to face competition on two levels: the small merchant level and the ISO level:

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·

The small merchant segment of the market is generally reached by ISOs and processors via telephone room sales and banks via walk-in branch sales.  We compete in this highly competitive environment primarily by aggregating the need for processing services across ISOs and securing processing contracts on terms more favorable to the ISOs than they can obtain on their own, and by securing more favorable contract terms between the merchant and the processor.

·

On the ISO level, we compete with other ISOs and payment processors active in the highly competitive payment processing service industry by offering competitive processing rates to our ISO partners through our processing service providers to enable them to resell those services to merchants at competitive rates.  In addition, ISOs considering a transaction with us may decide to seek financing instead from providers of loans to ISOs including RBL Capital, SuperG funding, or commercial banks.

While we may find ourselves competing on the small merchant or ISO level with payment processors with which we may contract as our payment processing service provider, we believe many of them may be unable to cost-effectively contract with small merchants unless they utilize an intermediary such as an ISO.  We also believe we have the opportunity to compete with processors for ISO resources as processors generally focus on specific markets or industries and, therefore, ISOs typically offer services from several different processors.

 

We compete for the acquisition of residual portfolios based on price, our ability to offer publicly traded stock, and the terms of our acquisition agreements which do not require merchants to change processors.  Most buyers of portfolios require merchants to change their existing processors to the buyer’s favored processors.

 

Digital Payments Processing Limited –ELECTRONIC PAYMENTS IN INDIA

 

Our equity investee, Digital Payments Processing Limited and My Mobile Payments Limited work together to deliver a payment processing service, owned by MMPL, known as “Money-on-Mobile” (“MoM”).  MoM allows individuals to use their cellular phones to make routine payments and to move money using simple text messaging (SMS technology).  The distributor, retailer, customer contracts, and the license to operate issued by the Reserve Bank of India are the property of MMPL which maintains custody of customers’ funds in accordance with India’s regulations.  DPPL owns and operates the customer support call center and sales support functions holding licenses from MMPL for all the intellectual property necessary to process transactions.

 

Calpian representatives Messrs. Montgomery and Arey are two of the four members of DPPL’s board of directors.  Mr. Montgomery is Chairman of the DPPL board with a tie-breaking vote.  Mr. Montgomery also is one of 6 members of MMPL’s board.  Mr. Shashank M. Joshi, a Calpian director, is a founder and managing director of both DPPL and MMPL. 

 

Indian Payment Processing Market

In India, the majority of personal payments are made in person with cash, and most routine services are paid in advance.  Effecting the simplest transactions (e.g., buying cell-phone minutes, paying for cable or satellite television time, and paying electric or water bills) can be both time consuming and inconvenient.  Typically each service has its own payment location meaning travel can be significant and waiting lines can be long.  In addition, workers moving from the country to the city find the process of sending money home in cash or by courier can be risky, uncertain, and expensive.  It is difficult to confirm receipt, and the recipient can experience significant delays in receiving the money.

 

India is the second largest mobile market in the world with about 400,000 telecom towers according to the “2011-12 Annual Report” of the Telecom Regulatory Authority of India.  According to the reports, as of March 31, 2012, India had 919.2 million cellular phone subscribers (64.8% urban – 35.2% rural), a year-over-year increase of 13.3%.

 

Currently in India, there are 15 cell and 6 “Direct to Home” (“DTH”) satellite television providers, and no one player is dominant in either market. Minutes of talk and viewing time are sold through company-owned or large retail stores.  The proliferation of vendors presents a problem for small retailers who would like to sell minutes for a profit.  In order to make sure they have minutes in inventory from the right provider, the retailer must have a relationship with each provider.  Stores face a major capital expense in establishing this relationship and maintaining multiple inventories.

 

Money-on-Mobile Business Model

MMPL launched its MoM service in April 2011 and currently has more than 85 million unique phone number users in a network of more than 180,000 retailers spanning almost every consumer market sector, and it processed over $156 million in transactions in 2013.

 

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MoM is a mobile wallet (“M-wallet”) similar to carrying a prepaid debit card on a mobile phone.  It can be used to pay for goods and services from the mobile phone as well as making other financial transactions such as sending or receiving money anytime and anywhere.  The user can have a single personal account or link to multiple family and friend accounts for gifting purposes or transferring funds.  All transactions are completed in real time.

 

For businesses, MoM acts as an intermediary, a single vendor providing minutes inventory from most cell and DTH providers, allowing a small retailer to sell minutes from any provider.  MoM provides faster payment processing, financial transaction security, and services such as customer loyalty programs, discount schemes, and special promotions.  MoM can compile up-to-date intelligence about its merchants’ prospective customers from the ever-growing volume of daily transactions it process allowing merchants to stay in touch with market trends and quickly make decisions about their promotion activities including mobile-based advertising.

 

MoM service uses cell telephone numbers to identify both the sender and the recipient.  The user loads virtual currency into the MoM system paying cash at any one of thousands of independent retailer stores.  To move funds from the user’s account to another account, a text message to MoM tells who and what amount to pay.  The amount is instantly deducted from the user’s account and credited to the recipient’s account, and both parties receive a confirmation within a few seconds. 

 

CALPIAN COMMERCE, INC. – INDEPENDENT SALES ORGANIZATION

 

Our wholly owned subsidiary, Calpian Commerce, Inc. (“CCI”), provides the general merchant community access to an integrated suite of third-party merchant payment processing services and its own related proprietary software enabling products delivering credit and debit card-based internet payments processing solutions to small- and mid-sized merchants operating in physical “brick and mortar” business environments, and in settings requiring wired as well as wireless mobile payment solutions.  It also operates as an ISO generating individual merchant processing contracts in exchange for future residual payments.

 

Employees

At December 31, 2013, Calpian and CCI employed 57 people.  During the year, we utilized independent consultants to assist with accounting, financial reporting, and administrative matters.  Our equity investee, DPPL, employed 382 full and part-time people. 

 

Calpian and our affiliates have no employment or collective bargaining agreements and we believe our employee and independent contractor relationships are satisfactory.

 

Intellectual Property

Among the assets acquired and comprising CCI are proprietary software products, trademarks, trade names, and other intellectual property together with the related patent and copyright filings and documents protecting such property.

 

Governmental Regulations

The industries in which we operate are subject to extensive governmental laws and regulations in the U.S.  There are numerous laws and regulations restricting the purchase, sale, and sharing of personal information about consumers, many of which are new and continue to evolve; accordingly, it is difficult to determine whether and how existing and proposed privacy laws may apply to our businesses in the future.  Also, there are numerous consumer statutes and regulations, including the Gramm-Leach-Bliley Act, regarding the possession of both consumer- and merchant-level data with which we must comply.

 

Payment system operators in India are subject to the Indian Payments and Settlement Systems Act 2007 and operate under the authority and board oversight of the Reserve Bank of India (“RBI”).  In the licensing process, the RBI reviews the licensee’s operations, systems, and processes and has the authority to revoke a license at any time should operations not continue to meet RBI standards, primarily those relating to the custody of, and accountability for, consumer funds.

 

ITEM 1ARISK FACTORS

 

The following risk factors could materially affect our business, financial condition, and results of operations.  These risk factors and other information in this Annual Report should be carefully considered in evaluating our business.  They are provided for investors as permitted by the Private Securities Litigation Reform Act of 1995.  It is not possible to identify or predict all such factors and, therefore, the following should not be considered to be a complete statement of all the uncertainties we face.

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Risks Relating To Our Business

 

We have limited operating history in the merchant residual and acquisition business and are operating at a loss.  There is no guarantee we will become profitable which makes it difficult to predict future results and raises questions as to our ability to successfully develop profitable business operations.

We revised our business model in 2010 to operate in the merchant acquisition industry and anticipate we will operate at a loss for some time.  We have two years of financial results on which our potential may be judged.  There can be no guarantee we will ever become profitable.

 

Our success will be dependent on our management team for the foreseeable future.

We believe our success depends on the continued service of our key executives.  Although we currently intend to retain our existing management, we cannot assure such individuals will remain with us.  We have no employment agreements with any individuals.  The unexpected loss of the services of one or more of our key executives, directors, or advisors, or our inability to find suitable replacements within a reasonable period of time following any such loss, could have a material adverse effect on our ability to execute our business plan and, therefore, have a material adverse effect on our financial condition and results of operations.

 

We may not be able to raise the additional capital necessary to execute our business strategy which could result in curtailment of our operations.

Our ability to raise additional capital is uncertain and dependent on numerous factors beyond our control including, but not limited to, economic conditions and availability or lack of availability of credit.  If we are unable to obtain additional financing, or if the terms thereof are too costly, we may be forced to curtail operations until such time as alternative financing is arranged which would have a material adverse impact on our planned operations.

 

Any new or changes made to laws, regulations, card network rules or other industry standards affecting our business may have an adverse impact on our financial results.

We are subject to numerous regulations that affect the electronic payments industry.  Regulation and proposed regulation of the payments industry has increased significantly in recent years.  Failure to comply with regulations may have an adverse effect on our business, including the limitation, suspension, or termination of services provided to, or by, third parties, and the imposition of penalties, including fines.  We are also subject to U.S. financial services regulations, numerous consumer protection laws, escheat regulations, and privacy and information security regulations, among others.  Changes to legal rules and regulations, or the interpretation or enforcement thereof, could have a negative financial effect on the Company.  We are also subject to the rules of Visa, MasterCard, and various other credit and debit networks.  Furthermore, we are subject to the Housing Assistance Tax Act of 2008, which requires information returns to be filed by merchant acquiring entities for each calendar year starting in 2011.

 

Interchange fees, which are typically paid by the acquirer to the issuer in connection with transactions, are subject to increasingly intense legal, regulatory, and legislative scrutiny.  In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law in July 2010, significantly changes the U.S. financial regulatory system, including by regulating and limiting debit card fees charged by certain issuer banks and allowing merchants to offer discounts for different payment methods, as well as other measures.  The impact of the Dodd-Frank Act on the Company is difficult to estimate, as it will take time for the market to react and adjust to regulations that have been implemented and because certain additional regulations have yet to be developed.

 

Regulatory actions such as these, even if not directed at us, may require us to make significant efforts to change our products and services and may require that we change how we price our services to customers.  Furthermore, regulatory actions may cause changes in business practices by us and other industry participants which could affect how we market, price and distribute our products and services. These regulations may materially and adversely affect the Company’s business or operations, either directly or indirectly.

 

We have faced, and may face in the future, significant chargeback liability and liability for merchant or customer fraud, which we may not be able to accurately anticipate.

We have potential liability for chargebacks associated with the transactions we process.  If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the merchant, the disputed transaction is “charged back” to the merchant’s bank and credited to the account of the cardholder.  If we or our sponsoring banks are unable to collect the chargeback from the merchant’s account, or, if the merchant refuses or is financially unable (due to bankruptcy or other

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reasons) to reimburse the merchant’s bank for the chargeback, we bear the loss for the amount of the refund paid to the cardholder’s bank.

 

We also have potential liability for losses caused by fraudulent card-based payment transactions.  Card fraud occurs when a merchant’s customer uses a stolen card (or a stolen card number in a card-not-present transaction) to purchase merchandise or services.  In a traditional card-present transaction, if the merchant swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the card against the paper receipt signed by the customer, the card issuing bank remains liable for any loss.  In a fraudulent card-not-present transaction, even if the merchant receives authorization for the transaction, the merchant is liable for any loss arising from the transaction.  Many of the small merchants that we serve are small businesses that transact a substantial percentage of their sales in card-not-present transactions over the Internet or in response to telephone or mail orders, which makes these merchants more vulnerable to customer fraud than larger merchants.  Because substantially all of the merchants we serve are small merchants, we experience chargebacks arising from cardholder fraud more frequently than providers of payment processing services that service larger merchants.

 

Merchant fraud occurs when a merchant, rather than a customer, knowingly uses a stolen or counterfeit card or card number to record a false sales transaction, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction.  Anytime a merchant is unable to satisfy a chargeback, we are responsible for that chargeback.  We have established systems and procedures to detect and reduce the impact of merchant fraud, but we cannot be sure that these measures are or will be effective.  It is possible that incidents of fraud could increase in the future.  Failure to effectively manage risk and prevent fraud could increase our chargeback liability.

 

We rely on bank sponsors, which have substantial discretion with respect to certain elements of our business practices, in order to process bankcard transactions.  If these sponsorships are terminated and we are not able to secure or successfully migrate merchant portfolios to new bank sponsors, we will not be able to conduct our business.

Because we are not a bank, we are unable to belong to and directly access the Visa and MasterCard bankcard associations.  Visa and MasterCard operating regulations require us to be sponsored by a bank in order to process bankcard transactions.  We are currently registered with Visa and MasterCard through the sponsorship of banks that are members of the card associations.

 

Our sponsoring banks may terminate their agreements with us if we materially breach the agreements and do not cure the breach within an established cure period, if our membership with Visa or MasterCard terminates, if we enter bankruptcy or file for bankruptcy, or if applicable laws or regulations, including Visa and MasterCard regulations, change to prevent either the applicable bank or us from performing services under the agreement.  If these sponsorships are terminated and we are unable to secure a bank sponsor, we will not be able to process bankcard transactions.  Furthermore, our agreements with our sponsoring banks provide the sponsoring banks with substantial discretion in approving certain elements of our business practices, including our solicitation, application and qualification procedures for merchants, the terms of our agreements with merchants, the processing fees that we charge, our customer service levels, and our use of sales agents.  We cannot guarantee that our sponsoring banks’ actions under these agreements will not be detrimental to us, nor can we provide assurance that any of our sponsoring banks will not terminate their sponsorship of us in the future.

 

If we or our bank sponsors fail to adhere to the standards of the Visa and MasterCard payment card associations, our registrations with these associations could be terminated, and we could be required to stop providing payment processing services for Visa and MasterCard.

Substantially all of the transactions we process involve Visa or MasterCard.  If we or our bank sponsors fail to comply with the applicable requirements of the Visa or MasterCard payment card associations, Visa or MasterCard could suspend or terminate our registration. The termination of our registration or any changes in the Visa or MasterCard rules that would impair our registration could prevent us from providing payment processing services.

 

We rely on third-party processors and service providers; if they fail or no longer agree to provide their services, our merchant relationships could be adversely affected and we could lose business.

We rely on agreements with several large payment processing organizations to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the merchants we serve.  We also outsource to third parties other services, such as reorganizing and accumulating daily transaction data on a merchant-by-merchant and card issuer-by-card issuer basis and forwarding the accumulated data to the relevant bankcard associations.  Many of these organizations and service providers are our competitors, and we do not have long-term contracts with most of them.  Typically, our contracts with these third parties are for one-year and are subject to cancellation upon limited notice by either party.  The termination by our service providers of their arrangements with us or their failure to perform their services

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efficiently and effectively may adversely affect our relationships with the merchants whose accounts we serve and may cause those merchants to terminate their processing agreements with us.

 

Changes in credit card association or other network rules or standards could adversely affect the Company’s business.

 The Company and many of its customers are subject to card association and network rules that could subject the Company or its customers to a variety of fines or penalties that may be levied by the card associations or networks for certain acts or omissions by the Company, acquirer customers, processing customers and merchants. Visa, MasterCard and other networks, some of which are the Company’s competitors, set the standards with respect to which the Company must comply. The Company’s status as a certified service provider, or any changes in card association or other network rules or standards, including interpretation and implementation of the rules or standards, that increase the cost of doing business or limit the Company’s ability to provide services to or through the Company’s customers, could have an adverse effect on the Company’s business, results of operations and financial condition.

 

Unauthorized disclosure of merchant and cardholder data, whether through breach of our computer systems or otherwise, could negatively impact our operations and expose us to protracted and costly litigation.

As part of our business, we operate a proprietary payment gateway that collects and stores certain cardholder data related to transactions processed through the gateway, including credit card and debit card numbers and cardholder addresses. We also maintain a database of similar cardholder data relating to specific transactions not processed through our proprietary gateway for purposes of processing such transactions and for fraud prevention and other internal processes.  In addition, we collect and store on our servers data about merchants and their principal owners, including names, addresses, social security numbers, driver’s license numbers, checking and savings account numbers, and payment history records.  Although plans and procedures are in place to protect this sensitive data, we cannot be certain that our measures will be successful and will be sufficient to counter all current and emerging technology threats designed to breach our systems in order to gain access to confidential information. A security breach or other misuse of this data could harm our reputation and deter existing and prospective customers from using our products and services, increase our operating expenses in order to contain and remediate the breach, expose us to unbudgeted or uninsured liability, disrupt our operations (including potential service interruptions), increase our risk of regulatory scrutiny, result in the imposition of penalties and fines under state, federal and foreign laws or by the card networks, and adversely affect our continued card network registration and financial institution sponsorship.

 

Although we generally require that our agreements with our sales agent and other service providers who may have access to merchant and customer data include confidentiality obligations that restrict these parties from using or disclosing any customer or merchant data except as necessary to perform their services under the applicable agreements, we cannot assure you that these contractual measures will prevent the unauthorized disclosure of merchant or customer data by the sales agent or service providers. In addition, our agreements with financial institutions (as well as card association requirements) require us to take certain protective measures to ensure the confidentiality of merchant and consumer data.  The costs of systems and procedures associated with such protective measures may increase and could adversely affect our ability to compete effectively. Any failure to adequately comply with these protective measures could result in fees, penalties, and/or protracted and costly litigation.

 

Our reputation could be damaged as a result of negative publicity.

We depend upon our reputation to compete for agents, merchants, and employees.  Unfavorable publicity can damage our reputation and negatively impact our economic performance.

 

We have been the subject of legal proceedings which could have had a material adverse effect on our business, financial condition or operating results.

We are not party to any unsettled legal proceedings other than routine claims and lawsuits arising in the ordinary course of our business. We do not believe such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business. For more information about the Company’s legal proceedings, see “Legal Proceedings.”

 

Risks Relating to Industry

 

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If we fail to comply with the applicable requirements of the processing agreements, some or all of the card brands with which we do business could seek to fine us, suspend us, or terminate our registrations.  Fines could have an adverse effect on our operating results and financial condition, and, if these registrations are terminated, we would not be able to conduct our business.

If we are unable to comply with processing agreement requirements, the card brands with which we do business could seek to fine us, suspend our processors from processing transactions.  The termination of registration or any changes in the card brands’ rules that would impair our registration could make it impossible for us to conduct our business.

 

The payments industry is highly competitive and we expect to compete with larger firms having greater financial resources.  Such competition could increase and adversely influence our prices to merchants and our operating margins.

We compete in a highly competitive market with a wide variety of processing service providers including, but not limited to, First Data Merchant Services, Elavon, Inc., a U.S. Bancorp subsidiary, JP Morgan Chase & Co. and its subsidiaries, Vantiv, Bank of America, Wells Fargo, Worldpay, iPayment, Heartland Payment Systems, Global Payments, TSYS Merchant Solutions, Innovative Merchant Services, an Intuit company, local and regional banks, and other ISOs.  These and other providers have established a sizable market share in the small- and medium-size merchant processing sector.  Developing and maintaining our growth will depend on a combination of the continued growth in electronic payment transactions and our ability to increase our market share.  If competition causes us to reduce the prices we charge, we will have to aggressively control our costs in order to maintain acceptable results of operations. 

 

The primary competitive factors in our industry are the price of services rendered and the contractual terms between the merchant and the processor.  Our competitors that are financial institutions or subsidiaries of financial institutions do not incur the costs associated with being sponsored by a bank for registration with the card.  These competitors have substantially greater financial, technological, management, and marketing resources than we have.  This may allow them to offer more attractive fees to our current and prospective merchants, or offer other products or services that we do not.  This could result in a loss of customers, greater difficulty attracting new customers, and a reduction in the price we can charge for our services.

 

The market for credit and debit card processing services is highly competitive and has relatively low barriers to entry.  The level of competition has increased in recent years as other providers of processing services have established a sizable market share in the small merchant processing sector. Some of our competitors are financial institutions, subsidiaries of financial institutions or well-established payment processing companies that have substantially greater capital, technological, management and marketing resources than we have.  There are also a large number of small providers of processing services that provide various ranges of services to small and medium sized merchants.  This competition may effectively limit the prices we can charge and requires us to control costs aggressively in order to maintain acceptable profit margins.  Further, if the use of cards other than Visa or MasterCard, such as American Express, grows, or if there is increased use of certain debit cards, our average profit per transaction could be reduced.  In addition, our competitors in recent years have consolidated as large banks merged and combined their networks.  This consolidation may also require that we increase the consideration we pay for future acquisitions and could adversely affect the number of attractive acquisition opportunities presented to us.  Our future competitors may develop or offer services that have price or other advantages over the services we provide.  If they do so and we are unable to respond adequately, our business, financial condition, and results of operations could be materially adversely affected.

 

Risks Relating To Acquisitions

 

Revenues and profits generated by acquired businesses or account portfolios may be less than anticipated, resulting in losses or a decline in profits, as well as potential impairment charges.

In evaluating and determining the purchase price for a prospective acquisition, we estimate the future revenues and profits from that acquisition based on the historical revenue of the acquired provider of payment processing services or portfolio of merchant accounts.  Following an acquisition, it is customary to experience some attrition in the number of merchants serviced by an acquired provider of payment processing services or included in an acquired portfolio of merchant accounts.  Should the rate of post-acquisition merchant attrition exceed the rate we forecasted, the revenues and profits generated by the acquired providers of payment processing services or portfolio of accounts may be less than we estimated, which could result in losses or a decline in profits, as well as potential impairment charges.

 

We may fail to uncover all liabilities of acquisition targets through the due diligence process prior to an acquisition, exposing us to potentially significant, unanticipated costs.

Prior to the consummation of any acquisition, we perform a due diligence review of the business or portfolio of merchant accounts that we propose to acquire.  Our due diligence review, however, may not adequately uncover all of the contingent

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or undisclosed liabilities we may incur as a consequence of the proposed acquisition.  For example, in the past we may have been obligated to fund certain credits and charge-backs after discovering that a merchant account from an acquired merchant processing portfolio was in substantial violation of the Visa and MasterCard card association rules. In the future we may make acquisitions that may obligate us to make similar payments resulting in potentially significant, unanticipated costs.

 

We may not be able to integrate recently acquired companies or potential future acquisitions into our company, and resources available to assist our acquired companies may be insufficient. 

We have made strategic acquisitions and we intend to continue to make such acquisitions in accordance with our business plan.  Each acquisition involves a number of risks, including:

1.

the diversion of our management’s attention to the assimilation and ongoing assistance with the operations and personnel of the acquired business, which could strain management’s resources;

2.

the potential for our affiliated companies to grow rapidly and adversely affect our ability to assist our affiliated companies as intended;

3.

possible adverse effects on our results of operations and cash flows;

4.

possible inability by us to achieve our intended objective or goals of the acquisition;

5.

possible inability by acquisition to retain and maintain strategic vendors or contacts; and

6.

our inability to assist our affiliated companies as intended or to acquire and integrate businesses under our business plan could negatively impact our operations, financial results and cash flows.

 

Risks Relating To Government Regulation

 

We may find our business operations are regulated by current privacy laws, such as the Gramm-Leach Bliley Act, and that we are not in compliance with such laws and regulations as it applies to consumer information we may process and collect.

The laws governing privacy generally remain unsettled; however, even in areas where there has been some legislative action such as the Gramm-Leach-Bliley Act (the “Act”) and other consumer statutes, it is difficult to determine whether and how existing privacy laws apply to our business.  For example, the Act requires nonaffiliated third-party service providers to financial institutions to take certain steps to ensure the privacy and security of financial information; however, the law is new and there have been few rulings interpreting its provisions.  We may be mistaken in our belief that our activities fall under exceptions to the consumer notice and opt-out requirements contained in the Act and find that we are not in compliance with these laws, or that we may not be able to become compliant, if at all, without significant time and expense.  The cost of compliance or limitation on our business operations if we must restrict our access to and use of consumer information could adversely affect our ability to provide the services we intend to offer to our merchants or could impair the value of these services.

 

New and potential governmental regulations designed to reduce, regulate, or change interchange costs, network access fees or any other fee charged to a merchant or the terms of merchant contracts, or to require specified data security levels on transactions, or the enactment of any other additional regulations or modifications of existing regulations could adversely affect our results of operations.

Due to changing regulations at various levels of government, we are unable to determine the potential outcomes of the regulations.  For example, the “Durbin Amendment” legislation was enacted to regulate the basis on which interchange rates for debit card transactions are made so as to ensure that interchange rates are “reasonable and proportionate to costs.”  The amendment could limit the debit card interchange fees paid by retailers to ISOs and potentially limit the revenue we could derive from interchange fee markups.  The likelihood of future similar legislation is uncertain.  In addition, federal or state legislation could be enacted requiring ISOs like our Company to be responsible for data security with respect to transactions in which it is involved despite never having access to, or being in possession of, any consumer data.  Such regulations would have an adverse impact on our economic results due to both reduction in revenues and increases in operating expenses.

 

Governments experiencing budget deficits may impose taxes on us or our service providers we cannot pass on to or merchants which would increase our operating costs.

We and our service providers may become subject to additional U.S., state, or local taxes that, by regulation, cannot be passed through to our merchants which would increase our operating costs.

 

New and potential governmental regulations designed to protect or limit access to consumer information could adversely affect our ability to provide, or the value of, the services we currently provide to our merchants.

Due to the increasing public concern over consumer privacy rights, governmental bodies in the United States and abroad have adopted, and are considering adopting, additional laws and regulations restricting the purchase, sale and sharing of personal information about customers.  For example, the Gramm-Leach-Bliley Act requires non-affiliated third-party service

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providers to financial institutions to take certain steps to ensure the privacy and security of consumer financial information.  We believe our present activities fall under exceptions to the consumer notice and opt-out requirements contained in this law for third-party service providers to financial institutions.  However, the laws governing privacy generally remain unsettled.  Even in areas where there has been some legislative action, such as the Gramm-Leach-Bliley Act and other consumer statutes, it is difficult to determine whether and how existing and proposed privacy laws or changes to existing privacy laws will apply to our business.  Limitations on our ability to access and use customer information could adversely affect our ability to provide the services we currently offer to our merchants or impair the value of these services.

 

Several states have proposed legislation that would limit the use of personal information gathered using the Internet.  Some proposals would require proprietary online service providers and website owners to establish privacy policies.  Congress has also considered privacy legislation that could further regulate the use of consumer information obtained over the Internet or in other ways.  Our compliance with these privacy laws and related regulations could materially affect our operations.

 

Changes to existing laws or the passage of new laws could:

1.

create uncertainty in the marketplace that could reduce demand for our services; 

2.

restrict or limit our ability to sell certain products and services to certain customers; 

3.

limit our ability to collect and to use merchant and cardholder data; 

4.

increase the cost of doing business as a result of litigation costs or increased operating costs; or

5.

in some other manner have a material adverse effect on our business, results of operations and financial condition.

 

Any change in the regulatory environment could have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to federal and state laws regarding anti-money laundering, including the Patriot Act, and if we break any of these laws we could be subject to significant fines and/or penalties, and our ability to conduct business could be limited.

 We are subject to U.S. federal anti-money laundering laws and the requirements of the Office of Foreign Assets Control (OFAC), which prohibit us from transmitting money to specified countries or on behalf of prohibited individuals.  The money transfer business has been subject to increased scrutiny following the events of September 11, 2001.  The Patriot Act, enacted following those events, mandates several new anti-money laundering requirements.  The federal government or the states may elect to impose additional anti-money laundering requirements.  Changes in laws or regulations that impose additional regulatory requirements, including the Patriot Act, could increase our compliance and other costs of doing business, and therefore have an adverse effect on our results of operation.

 

Failure to comply with the laws and regulatory requirements of federal and state regulatory authorities could result in, among other things, revocation of required registrations, loss of approved status, termination of contracts with banks, administrative enforcement actions and fines, class action lawsuits, cease and desist orders and civil and criminal liability.  The occurrence of one or more of these events could materially adversely affect our business, financial condition and results of operations.

 

If we were to inadvertently transmit money on behalf of, or unknowingly conduct business with, a prohibited individual, we could be required to pay significant damages, including fines and penalties.  Likewise, any intentional or negligent violation of anti-money laundering laws by our employees could lead to significant fines and/or penalties, and could limit our ability to conduct business in some jurisdictions.

 

Risks Relating To Our Common Stock

 

Our issuance of preferred stock could adversely affect the value of our common stock.

Our Certificate of Formation provides for the issuance of up to 1.0 million shares of what is commonly referred to as “blank check” preferred stock.  Such stock may be issued by our Board of Directors from time to time, without shareholder approval, as one or more separate series of shares as designated by resolution of our Board setting forth the relative rights, privileges, and preferences of the series, including, if any, the: (i) dividend rate; (ii) price, terms, and conditions of redemption; (iii) voluntary and involuntary liquidation preferences; (iv) provisions of a sinking fund for redemption or repurchase; (v) terms of conversion to common stock, including conversion price; and (vi) voting rights. The issuance of such shares, with superior rights and preferences, could adversely affect the interests of holders of our common stock and potentially the value of our common stock.  Our ability to issue such preferred stock also could give our Board of Directors the ability to hinder or discourage any attempt to gain control of us by a merger, tender offer at a control premium price, proxy contest, or otherwise.

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Our common stock is deemed “penny stock” and, therefore, subject to special requirements making the trading of our common stock more difficult than for stock of a company that is not deemed “penny stock.”

A “penny stock” as defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934 is a stock: (i) trading at a price of less than five dollars ($5.00) per share; (ii) not traded on a “recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer having net tangible assets of less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.

 

Section 15(g) of the Exchange Act, and Rule 15g-2 promulgated thereunder, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.  Moreover, Rule 15g-9 promulgated under the Exchange Act requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.  This procedure requires the broker-dealer to: (i) obtain information concerning the investor’s financial situation, investment experience, and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience, and investment objectives.

Compliance with the foregoing requirements may make it more difficult for investors in our common stock to resell their shares to third parties or to otherwise dispose of them.

 

We do not have any independent directors.

We have no “independent directors” as defined in Rule 5605(a)(2) of the Listing Rules of the NASDAQ Stock Market and our Board of Directors may never have a majority of independent directors.  In the absence of a majority of independent directors, our existing directors, who also are significant shareholders, could establish policies and enter into transactions without independent review and approval.

 

Our executive officers, directors, and major shareholders hold a majority of our common stock and may be able to prevent other shareholders from influencing significant corporate decisions.

Our directors and executive officers beneficially own a significant portion of our outstanding common stock.  As a result, acting together they would be able to influence many matters requiring shareholder approval, including the election of directors and approval of mergers and other significant corporate transactions.  This concentration of ownership may have the effect of delaying, preventing, or deterring a change in control, and could deprive our shareholders of an opportunity to receive a premium for their shares of common stock as part of a sale of our company and may affect the market price of our stock.

 

The price of our common stock may be volatile, which could cause our investors to incur trading losses and fail to resell their shares at or above the price they paid for them.  Our securities are currently quoted on the OTC and, thus, your ability to sell your shares in the secondary market may be limited.

 We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock.  The failure to achieve and maintain an active and liquid market for our common stock means that you may not be able to dispose of your common stock in a desirable manner and the price for our shares may fluctuate greatly.

 

Moreover, some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them.  If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s attention and resources.  This could have a material adverse effect on our business, results of operations and financial condition.

 

Risks Relating To Our Equity Investment In India

 

We lack overseas investing experience.

DPPL is our first investment outside of the U.S. and our management team has limited international investing experience.  We could misunderstand regulatory, cultural, or other pervasive aspects of doing business in India that could negatively impact our investment or our results of operations.

 

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We will need to raise additional capital in order to complete our investment in DPPL, and failure to do so will limit the benefits we seek to attain from a significant equity interest.

Although we plan to raise additional capital through the sale of equity or debt securities, or a combination thereof, there is no assurance we will be able to raise such funds on terms acceptable to us in a timely manner, or at all.  If we are unable to raise the capital when needed, we could be limited to a minority equity position in DPPL and the benefits we seek through a larger percentage ownership will not be attained.

 

DPPL’s services agreement with MMPL is its sole source of revenue and many risks associated with one are equally applicable to the other.

DPPL’s sole source of revenues is from providing services to MMPL; consequently, matters impacting MMPL will also impact DPPL, and general business and economic risks identified with one apply equally to the other.

 

We anticipate the industry in which MMPL operates will be subject to intense competition.

There are several direct competitors to MMPL currently conducting business in India, and some have access to large markets of existing phone subscribers.  Once these companies fully implement their strategies, the competition in India for the services being provided by MMPL may intensify significantly.

 

The payments industry in India is subject to extensive regulation.

Payment system operators like MMPL are subject to the Indian Payments and Settlement Systems Act 2007 and operate under the authority and board oversight of the Reserve Bank of India (“RBI”).  Although the RBI has reviewed the operations, systems, and processes of MMPL, and has licensed it to operate a payments system in India through October 24, 2018, the RBI has the authority to revoke this license at any time should MMPL's operations not continue to meet standards primarily relating to the custody of, and accountability for, consumer funds.  Such revocation would seriously and negatively affect the value of our investment in DPPL.  In addition, increased regulatory focus could result in additional obligations or restrictions with respect to the services MMPL provides.

 

MMPL is subject to the risks faced by new businesses.

MMPL is an early-stage company with a limited operating history and is, therefore, subject to many of the risks and uncertainties faced by new enterprises.  There is no assurance MMPL will be able to manage its business effectively, identify, employ, and retain any needed management or technical personnel, further develop and implement its services, obtain third-party contracts or financing, or achieve the other components of its business plan.

 

MMPL's services may not gain wide acceptance in the market.

Because the majority of personal payments in India have historically been made in person, in cash, and in advance, there is no assurance the services provided by MMPL will be generally accepted by the Indian consumer.

 

Evolving products and technological changes could make MMPL's services obsolete.

We anticipate the services being offered by MMPL will continue to evolve and be subject to technological change.  Accordingly, MMPL's ability to maintain a competitive advantage and build its business requires it to continually invest in research and development.  Many of the companies we expect to compete with MMPL have greater capital resources, research and development staffs, and facilities than MMPL.  MMPL's services could be rendered obsolete by the introduction and market acceptance of competing services, technological advances by current or potential competitors, or other approaches.

 

MMPL's technology platform will require upgrades.

MMPL's processing technology platform will require upgrades to meet the company's business plan, and new problems or delays could develop and limit MMPL’s ability to grow.

 

Political, economic, social, and other factors in India may adversely affect businesses.

The ability for businesses to grow may be adversely affected by political, economic, and social factors or changes in Indian law or regulations or the status of India’s relations with other countries.  In addition, there may be significant differences between the Indian and U.S. economies such as the rate of gross domestic product growth, the rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments positions.

 

Government actions in the future could have a significant effect on the Indian economy and have a material adverse effect on the ability of DPPL and MMPL to achieve their business objectives.

 

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Terrorist attacks and other acts of violence or war within India or involving India and other countries could adversely affect the financial markets and businesses.

Terrorist attacks and other acts of violence could have the direct effect of destroying property causing a loss and interruption of business.  For example, India has, from time to time, experienced civil unrest and hostilities with neighboring countries such as Pakistan.  The longstanding dispute with Pakistan over the border Indian states of Jammu and Kashmir remains unresolved.  If the Indian government is unable to control the violence and disruption associated with these tensions, the results could destabilize the economy and, consequently, adversely affect businesses.

 

Since early 2003, there also have been military hostilities and civil unrest in the Mideast and other Asian countries.  Also, India has seen an increase in politically motivated insurgencies and a fairly active communist following.  Any hostilities or civil unrest could adversely influence the Indian economy and, as a result, negatively affect businesses.

 

Changes in the exchange rate of the Indian rupee versus the U.S. dollar result in earnings volatility and could negatively impact our reported earnings and the ultimate return on our investment.

DPPL's functional currency is the Indian rupee, and its financial statements must be converted to U.S. dollars when preparing our financial statements.  Changes in the exchange rate between the two currencies can cause reported financial results to fluctuate and a weakening rupee relative to the U.S. dollar would negatively impact our earnings.  Additionally, the return on our investment in DPPL, if any, may be less than expected if the exchange rates are less favorable at the time of realization.

 

Exchange controls in India may limit DPPL’s ability to utilize its cash flow effectively.

We expect to be subject to India’s rules and regulations on currency conversion with respect to our investments in DPPL.  In India, the Foreign Exchange Management Act ("FEMA") regulates the conversion of the Indian rupee into foreign currencies.  Today, companies in many industries are permitted to operate in India without any special restrictions, effectively placing them on par with wholly, Indian-owned companies.  Foreign exchange controls also have been substantially relaxed.  However, the Indian foreign exchange market is not yet fully developed, and there is no assurance the Indian authorities will not revert to regulating companies and imposing new restrictions on the convertibility of the Indian rupee.  Any future restrictions on currency exchanges may limit our ability to repatriate DPPL’s earnings or receive distributions on our investment.

 

We may have difficulty effecting service of process or enforcing judgments obtained in the U.S. against MMPL.

MMPL is organized in India and all of its assets are located in India.  As a result, in the event of a dispute between MMPL and us, we may be unable to effect service of process upon MMPL outside of India.  In addition, we may be unable to enforce against MMPL judgments obtained in U.S. courts.

 

ITEM 1BUNRESOLVED STAFF COMMENTS

None.

 

ITEM 2PROPERTIES

 

Our leased office facilities are listed in the following table.  We believe our current facilities have the capacity to meet our needs for the foreseeable future and alternate or additional space is readily available near our current locations should we need to move or acquire additional space.

 

 

 

Approximate

Location

Square Feet

Calpian, Inc.

 

Dallas, Texas

6,000

Calpian Commerce, Inc.

 

Alpharetta, Georgia

3,320

Digital Payments Processing Limited

 

Mumbai, India

3,500

 

ITEM 3LEGAL PROCEEDINGS

 

On September 18, 2012, National Bankcard Systems, Inc. ("NBS") filed suit in the District Court of Dallas County, Texas against Calpian Residual Partners V, LP (“CRPV”) and Calpian alleging breach of the Residual Purchase Agreement dated November 4, 2008, between CRPV and NBS and certain other improprieties by CRPV.  Plaintiff has alleged damages on the

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date the suit was filed of $729,000 including unpaid merchant servicing fees, compensation for residuals added after Calpian acquired the portfolio, and attorney fees.  Plaintiff further alleges that damages continue to grow, but will not specify an amount.  Craig Jessen, our President, and Harold Montgomery, our CEO, are members of our Board of Directors and substantial shareholders of Calpian, and are executive officers of CRPV, but CRPV is not otherwise an affiliate of Calpian.  Each of the Residual Purchase Agreement and the related alleged improprieties of CRPV arose prior to Calpian's acquisition of the underlying residual portfolio on December 31, 2010.  On October 23, 2013, a final settlement agreement was reached in the amount of $250,000 ($100,000 payable within ten business days of date of final settlement agreement and $30,000 per month thereafter).  As of December 31, 2013, $100,000 of the settlement has been paid and the remaining $150,000 is accrued in 'Accrued expenses' on the Company's balance sheet.    

 

ITEM 4MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Calpian common stock is traded in the over the counter (“OTC”) market under the symbol “CLPI.”  Our stock is thinly traded, and a robust, active trading market may never develop.  The market for the Company’s common stock has been limited, volatile, and sporadic and could be subject to a number of risk factors (see “Risks Relating To Our Common Stock” in Item 1A of this Annual Report).

 

The transfer agent for our common stock is Securities Transfer Corporation, 2591 Dallas Parkway Suite102, Frisco, Texas 75034 Telephone: 469-633-0101 Website: www.stctransfer.com

 

The following table sets forth the high and low bid prices of our common stock as reported by Nasdaq.com.  They reflect inter‑dealer prices without retail mark‑up, mark‑down, or commissions, and may not necessarily reflect actual transactions.

 

 

 

 

 

 

 

 

 

High

Low

    2013

 

 

First Quarter

$2.58

$1.02

Second Quarter

 2.12

 1.10

Third Quarter

 2.01

 0.88

Fourth Quarter

 2.01

 1.10

    2012

 

 

First Quarter

$3.25

$3.25

Second Quarter

 3.25

 3.25

Third Quarter

 3.25

 2.00

Fourth Quarter

 2.65

 1.01

 

The last price of our common stock as reported by Nasdaq.com on March 25, 2014, was $1.50.

 

Common Shareholders

 

On March 25, 2014, we had approximately 463 shareholders of record.

 

Dividends

 

We have not paid any dividends on our common stock since our inception and we do not anticipate paying dividends in the foreseeable future as earnings we realize, if any, will be retained in the business for further development and expansion.  Provisions of our term loan facility preclude paying dividends and preferred stock issued in the future, if any, might prohibit us from paying common stock dividends unless certain conditions are met.

 

19

 


 

Shares Authorized For Issuance Under Equity Compensation Plans

 

The following table provides information about the number of shares of our common stock that may be issued on exercise of outstanding stock options or purchased under our 2011 Equity Incentive Plan as of December 31, 2013.

 

 

 

 

 

(A)

(B)

(C)

 

Number Of Securities

 

Number Of Securities Remaining

 

To Be Issued Upon

Weighted-Average

Available For Future Issuance

 

Exercise Of

Exercise Price Of

Under Equity Compensation

 

Outstanding Options,

Outstanding Options,

Plans (Excluding Securities

Equity Compensation Plan Category

Warrants And Rights

Warrants And Rights

Reflected In Column (A))

 

 

 

 

Plans Approved By Security Holders

900,000

$1.38

1,100,000

Plans Not Approved By Security Holders

-

-

-

Total

900,000

$1.38

1,100,000

 

Equity Securities Sold 

During the fourth quarter of the period covered by this Annual Report, the Company completed additional closings of its private placement of equity pursuant to which it sold 863,477 shares of its common stock at a price ranging from $1.40 to $1.50 per share in connection with issuing total 482,071 warrants resulting in gross proceeds to the Company of $1,299,001, all of which was invested in DPPL.  During the same period, the Company:

·

Issued 31,250 shares common stock at an exercise price of $1.60 per share for service;

·

Issued five-year warrants to purchase up to 106,000 shares common stock for consulting services.

·

Issued stock options for 400,000 shares of common stock

 

No underwriters were involved in the transactions described above.  The Company’s issuance of common stock, convertible debt, and warrants, and any common stock issuable upon conversion or exercise thereof, was, or will be, exempt from registration under the Securities Act of 1933 pursuant to exemptions from registration provided by Rule 506 of Regulation D and Sections 4(2) of the Securities Act of 1933, insofar as such securities were issued only to “accredited investors” within the meaning of Rule 501 of Regulation D.  The recipients of these securities took such securities for investment purposes without a view to distribution.  Furthermore, they each had access to information concerning the Company and its business prospects.  There was no general solicitation or advertising for the purchase of the securities and the securities are restricted pursuant to Rule 144.

 

Equity Securities Repurchased

 

None.

 

ITEM 6SELECTED FINANCIAL DATA     

 

A smaller reporting company is not required to provide the information required by this Item.

 

 

ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

This Item 7 should be read in the context of the information included elsewhere in this Annual Report including our financial statements and accompanying notes in Item 8 of this Annual Report.

 

OVERVIEW

 

Calpian, Inc. (“CLPI”) is in the business of acquiring recurring monthly residual income streams derived from credit card processing fees paid by retail merchants in the United States (“residual portfolios”).  We act not as a credit card processor, but simply as a purchaser of revenue streams resulting from the relationships between processors and independent sales organizations (“ISOs”).  In addition, we invest in payments-industry related opportunities.

20

 


 

In March 2013, the Company formed a wholly-owned subsidiary, Calpian Commerce, Inc. (“CCI”), to own and operate the certain assets and liabilities of Pipeline Data, Inc. and its subsidiaries acquired in exchange for a cash payment of $9.75 million.  CCI  provides the general merchant community access to an integrated suite of third-party merchant payment processing services and its own related proprietary software enabling products delivering credit and debit card-based internet payments processing solutions to merchants operating in physical “brick and mortar” business environments, and in settings requiring wired as well as wireless mobile payment solutions.  It also operates as an ISO generating individual merchant processing contracts in exchange for future residual payments.

 

2013 COMPARED TO 2012

 

The significant increases in 2013 revenues, gross profit, and general and administrative expenses are largely attributable to CCI’s operations which commenced on March 15, 2013.  Interest and financing costs for 2013 was $2.6 million.  We recognized $2.4 million in losses from our equity investment in 2013, while $0.8 million was recognized in 2012 following our March 2012 initial investment.  We had net losses of $7.5 million, or $0.28 per share in 2013 compared to $4.3 million, or $0.20 per share in 2012.  The results for our two business segments were as follows:

 

 

 

 

 

 

 

 

Year Ended

 

December 31,

 

2013

 

2012

Revenues:

 

 

 

Calpian, Inc.

$        3,064,033

 

$        3,438,898

Calpian Commerce, Inc.

17,971,853 

 

 -

 

$      21,035,885

 

$        3,438,898

 

 

 

 

Gross profit:

 

 

 

Calpian, Inc.

$        1,855,997

 

$        2,226,955

Calpian Commerce, Inc.

3,951,326 

 

 -

 

$        5,807,323

 

$        2,226,955

 

 

 

 

General and administrative expenses:

 

 

 

Calpian, Inc.

$        4,734,885

 

$        2,966,358

Calpian Commerce, Inc.

3,485,169 

 

 -

 

$        8,220,054

 

$        2,966,358

 

 

 

 

CLPI’s revenues in 2013 were lower than in 2012 due to normal portfolio attrition.  Gross profits were 63% of CLPI’s revenues in the 2013 and 65% in 2012.  CCI’s profit margins are lower compared to CLPI’s as CCI incurs interchange fees and processing and servicing costs, not associated with the portfolios purchased by CLPI.

 

As of December 31, 2013, CLPI reached a final settlement agreement of $250 thousand to settle in mediation litigation referred to in Note 8 of the notes to our financial statements in Part I, Item 8 of this Report.  This $250 thousand accrual is the major cause of the increase in its general and administrative expenses (“G&A”) in 2013 over 2012.  Other CLPI 2013 G&A increases included (in thousands): $262 and $272, respectively, in management equity awards, independent contractor compensation due to greater utilization of consultants as the complexity of our operations has increased; $333 of consulting fees; $240 of costs incurred seeking additional equity and debt financing; $145 for additional legal services largely associated with the previously referred to litigation; $81 is related to additional advertising expense; and $381k is related to amortization of consulting fees. 

 

CCI’s most significant G&A expenses in 2013 were $1.8 million in employee compensation and $365 thousand in connection with an interim services agreement with an affiliate of the predecessor company which expired in July 2013, but is being extended month-to-month on a limited basis.

 

Deferred financing cost amortization declined significantly when we refinanced our senior debt facility in November 2012 and expensed the remaining $526 thousand associated with the old facility.  Also, the financing costs incurred in connection

21

 


 

with the new facility are being amortized over 43 months compared to 24 months under the old facility.  In mid-2012 the maturity dates of the subordinated notes payable were extended resulting in a longer time period and lower monthly amortization.  More interest expense was incurred in 2013 due to additional senior note and subordinated debt borrowings.

 

We have been increasing our March 2012 initial equity investment interest in DPPL in a step acquisition of its share capital, and we are recognizing its losses and the effects of foreign currency exchange rate changes in our financial statements in proportion to our increasing ownership percentages.  However, we have accepted a temporary dilution of our ownership stake in DPPL for the reasons and as described in Note 4 of the notes to our financial statements in Part II, Item 8 of this Report.  As a result of completing the fair value appraisal of the assets and liabilities of DPPL and MMPL in March 2013, we have retrospectively adjusted our financial statements for the year ended December 31, 2012, as described in Note 1 of the notes to our financial statements to account for the differences between their appraised fair values and our preliminary estimates.

 

Due to net losses, we had no current federal tax provision in either 2013 or 2012 and deferred tax benefits of cumulative net operating losses and other temporary tax differences have been offset by valuation allowances.  State income taxes are assessments not offset by operating losses.  In the second quarter of 2013, we wrote off the $385 thousand deferred tax asset, and related valuation allowance, which exceeded the tax benefit from the exercise of a warrant.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash used by consolidated operating activities in the year ended December 31, 2013, amounted to $1,159, of which $438 thousand being contributed by CCI since it commenced operations on March 15, 2013, and $1,597 thousand being used by CLPI in 2013.  CLPI’s increased general and administrative expenses accounted for most of the cash used in its operations. The $10.2 million borrowing under the senior credit facility in 2013 financed loan costs and our $9.75 million business acquisition which included $250 thousand in unrestricted cash that was included in the assets transferred to CCI.  The $1.3 million balance remaining at December 31, 2013, under the $14.5 million facility is restricted to the acquisition of additional credit card residuals in the U.S.  Proceeds from sales of our common stock and warrants in private placements and subordinated debt borrowings in 2013 totaled $6.6 million, of which $5.5 million was used to increase our equity investment in DPPL with the balance used in operations. 

 

Our primary sources of liquidity are cash flows from operating activities, sales of our common stock in private placements, and subordinated debt borrowings not restricted to specific investing activities.  We anticipate these funds and acquisition of additional residual portfolios funded by the senior credit facility and restricted subordinated debt borrowings will be sufficient to meet our operating needs for the foreseeable future.  However, there are no assurances we can sell more common stock, issue additional subordinated debt, or acquire additional portfolios on acceptable terms. 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements.

 

CRITICAL ACCOUNTING POLICIES

 

We use estimates throughout our statements and changes in estimates could have a material impact on our operations and financial position.  We consider an accounting estimate to be critical if: (1) the estimate requires us to make assumptions about matters that are highly uncertain at the time the estimate is made or (2) changes in the estimate are reasonably likely to occur from period to period, or use of different estimates we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

 

We believe the critical accounting policies described below involve the more significant judgments and estimates used in the preparation of our consolidated financial statements:

 

·

Valuation of warrants and options

·

Amortization of residual portfolios

·

Goodwill impairment

 

As our operations expand, we may identify additional critical accounting policies in the future.

 

22

 


 

Valuation of Warrants and Options

Warrants and options are accounted for in accordance with Accounting Standards Codification (“ASC”) 505-10 “Costs of an Equity Transaction” or 505-50 "Equity-Based Payments to Non-Employees", depending upon the nature of the transaction and the relationship with the recipient.  The Company’s warrants and options are settled in physical delivery of unregistered shares.  As such, the warrants and options are recorded upon issuance as permanent equity at fair value based upon a valuation using the Black-Scholes option pricing model on grand date and subsequent changes in fair value are not recognized.

 

 

Amortization of Residual Portfolios Acquired

The Company amortizes its investment in residual portfolios based upon the future expected cash flows derived from each individual portfolio acquired as each portfolio is underwritten separately and may reflect unique cash flow patterns.  The future expected cash flow is re-evaluated periodically and the future amortization is adjusted prospectively in accordance with ASC 350, “Determination of the Useful Life of Intangible Assets.”  During 2013 and 2012, the Company recognized $1,950,744 and $1,103,734 in amortization of residual portfolios, respectively.

 

Goodwill impairment

As a result of our acquisitions on March 15, 2013, which is described in Note 3 of the notes to our financial statements in Part II, Item 8 of this Report, a significant portion of our total assets consist of goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

 

At December 31, 2013, our goodwill totaled $2,341,928. We assess the impairment of goodwill of our reporting units annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.  Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. As of December 31, 2013, we determined that no events or circumstances from March 15, 2013 through December 31, 2013 indicated that a further assessment was necessary.

 

ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our primary market risk is to residual portfolio post-acquisition attrition.

 

Residual portfolio attrition, a normal part of the payment processing industry, results from a number of factors including the merchant’s pricing of its products or services, the merchant moving to another processor, and the merchant ceasing operations.  As a residual portfolio’s attrition rate inversely impacts future cash flows, in underwriting residual portfolios we acquire we endeavor to conservatively estimate the portfolio’s future attrition rate based on its current attrition rate, its long-term historical attrition rate, the attrition rate of comparable portfolios, and the experience of our executives in valuing and acquiring residual portfolios (see “Business Experience” in Item 10 of Part III of this Annual Report).

 

Our executives’ experience is that long-term attrition rates of acquired portfolios, while they cannot be predicted, typically range between 1.2% and 1.8% per month.  Within any given year, attrition rates can display some seasonality with rates moving upward toward the year-end holiday season and, thereafter, usually returning to the long-term trend.  There have been atypical instances of short-term fluctuations caused by factors other than seasonality.

 

23

 


 

ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Calpian, Inc.

 

We have audited the accompanying consolidated balance sheets of Calpian, Inc. and subsidiary as of December 31, 2013 and the related consolidated statements of comprehensive income, cash flows and shareholders’ equity for the year ended December 31, 2013. Calpian, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Calpian, Inc. and subsidiary as of December 31, 2013 and the results of their operations and their cash flows for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

 

The financial statements of the Calpian, Inc. as of December 31, 2012 and for the year ended December 31, 2012, were audited by other auditors whose report dated March 31, 2014, expressed an unmodified opinion on those statements.

 

 

 

Plano, Texas

March 31, 2014

 

 

 

24

 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of

Calpian, Inc.

 

 

We have audited the accompanying balance sheet of Calpian, Inc. (the “Company”), as of December 31, 2012, and the related statements of comprehensive loss, cash flows, and shareholders’ equity for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2012, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

 

 

Dallas, Texas

March 31, 2014

 

 

25

 


 

 

 

 

 

 

 

 

CALPIAN, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

December 31,

 

December 31,

 

2013

 

2012

 

 

 

Adjusted -

ASSETS

 

 

Note 1

 

 

 

 

Current Assets

 

 

 

Cash and equivalents

$           438,367

 

$        314,309

Accounts receivable

42,082 

 

35,461 

Restricted cash

302,994 

 

270,000 

Other current assets

1,006,052 

 

70,298 

Total current assets

1,789,495 

 

690,068 

 

 

 

 

Property and Equipment

418,602 

 

 -

 

 

 

 

Other Assets

 

 

 

Residual portfolios

9,609,659 

 

5,253,592 

Equity investment

10,124,831 

 

6,854,004 

Deferred financing costs

954,231 

 

244,902 

Goodwill

2,341,928 

 

 -

Other intangible assets

39,115 

 

10,000 

Total other assets

23,069,764 

 

12,362,498 

Total assets

$      25,277,861

 

$   13,052,566

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

Accounts payable

$           362,595

 

$          51,225

Accrued expenses

599,355 

 

60,565 

Interest payable

122,000 

 

39,617 

Current portion of long term debt

5,780,400 

 

-

Notes payable

20,864 

 

7,570 

Deferred compensation of officers, directors, and executives

106,000 

 

125,000 

Accrued expenses payable to officers, directors, and affiliates

720,273 

 

395,001 

Total current liabilities

7,711,487 

 

678,978 

 

 

 

 

Other Liabilities

 

 

 

Senior credit facility, net of current portion

11,589,600 

 

3,000,000 

Subordinated notes payable, net of current portion

1,000,000 

 

3,300,000 

Convertible subordinated notes, net of current portion

 -

 

850,000 

Discount on subordinated notes

(199,260)

 

(368,262)

Total other liabilities

12,390,340 

 

6,781,738 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

Preferred stock, par value $0.001, 1,000,000 shares authorized, none issued

 -

 

 -

Common stock, par value $0.001, 200,000,000 shares authorized,

 -

 

 -

28,213,835 and 23,898,306 shares issued and outstanding

 

 

 

at December 31, 2013 and 2012, respectively

29,589 

 

23,898 

Additional paid-in capital

22,073,606 

 

13,703,153 

Accumulated deficit

(16,957,037)

 

(7,980,212)

Accumulated other comprehensive loss

29,876 

 

(154,989)

Total shareholders' equity

5,176,034 

 

5,591,850 

26

 


 

Total liabilities and shareholders' equity

$      25,277,861

 

$   13,052,566

 

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

 

 

 

 

 

 

 

 

 

 

CALPIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

Year Ended

 

December 31,

 

2013

 

2012

 

 

 

Adjusted -

Revenues

 

 

Note 1

Residual portfolios

$           16,419,309

 

$             3,438,898

Processing fees

3,056,280 

 

 -

Other

1,560,296 

 

 -

 

21,035,885 

 

3,438,898 

Cost of revenues

 

 

 

Residual portfolio amortization

2,022,665 

 

1,103,734 

Interchange fees

8,212,788 

 

 -

Processing and servicing

4,547,246 

 

88,950 

Other

445,864 

 

19,259 

Total cost of revenues

15,228,563 

 

1,211,943 

Gross profit

5,807,322 

 

2,226,955 

 

 

 

 

General and administrative expenses

8,220,054 

 

2,966,358 

Operating loss

(2,412,732)

 

(739,403)

 

 

 

 

Other expenses

 

 

 

Interest

2,636,922 

 

2,858,135 

Total other expenses

2,636,922 

 

2,858,135 

Loss before items below

(5,049,654)

 

(3,597,538)

Income tax expense (benefit)

 -

 

(18,190)

Equity investment loss

3,927,172 

 

718,161 

Net loss

(8,976,826)

 

(4,297,509)

Other comprehensive loss:

 

 

 

Currency translation adjustments

184,865 

 

(154,989)

Total comprehensive loss

$           (8,791,961)

 

$           (4,452,498)

 

 

 

 

Net loss per share, basic and diluted

($0.34)

 

($0.20)

Weighted average number of shares outstanding, basic and diluted

26,582,735 

 

21,517,015 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

27

 


 

 

 

 

 

 

 

 

CALPIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

Year Ended

 

December 31,

 

2013

 

2012

OPERATING ACTIVITIES

 

 

 

Net loss

$            (8,976,826)

 

$   (4,297,509)

 

 

 

 

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

Equity investment loss

3,927,173 

 

718,161 

Deferred financing cost amortization

185,671 

 

1,591,016 

Residual portfolio amortization

2,022,665 

 

1,103,734 

Subordinated note discount amortization

316,136 

 

465,177 

Deferred consulting fee amortization

378,220 

 

390,375 

Depreciation

98,408 

 

 -

Management equity awards

147,815 

 

10,510 

Equity awards issued for services

120,425 

 

 -

Deferred income taxes

11,659 

 

 -

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

100,846 

 

 -

Other assets

(544,209)

 

(10,400)

Deferred compensation of officers, directors, and executives

(19,000)

 

(235,000)

Accrued expenses payable to officers, directors, and affiliates

325,273 

 

192,651 

Accounts payable

310,937 

 

27,810 

Accrued expenses

470,392 

 

24,855 

Interest payable

82,383 

 

14,117 

Net cash used in operating activities

(1,042,032)

 

(4,503)

 

 

 

 

INVESTING ACTIVITIES

 

 

 

Business acquisition, net of cash acquired

(9,500,000)

 

 -

Contribution to equity method investment

(5,524,000)

 

(4,081,000)

Purchase of residual portfolios

 -

 

(492,000)

Purchases of property and equipment

(182,641)

 

 -

Proceeds from sale of fixed as50sets

21,306 

 

 -

Net cash used in investing activities

(15,185,335)

 

(4,573,000)

 

 

 

 

FINANCING ACTIVITIES

 

 

 

Borrowings on senior notes

10,170,000 

 

3,000,000 

Senior note repayment

 -

 

(2,700,000)

Borrowings on subordinated notes

1,950,000 

 

1,600,000 

Issuance of common stock and warrants

4,638,447 

 

2,805,000 

Restricted cash

273,973 

 

155,000 

Payments on note payable

(110,994)

 

(33,349)

Payments on deferred financing costs

(570,000)

 

(302,500)

Net cash provided by financing activities

16,351,426 

 

4,524,151 

 

 

 

 

Increase (decrease) in cash and equivalents

124,058 

 

(53,352)

Cash and equivalents, beginning of year

314,309 

 

367,661 

Cash and equivalents, end of period

$                438,367 

 

$        314,309 

 

 

 

 

SUPPLEMENTAL INFORMATION

Interest paid

$             2,052,732 

 

$        787,825 

Noncash investing and financing  transactions:

 

 

 

Common stock issued to acquire equity investment

1,476,924 

 

3,646,155 

Common stock issued as stock-based compensation for  equity awards and services

605,521 

 

456,000 

Common stock issued in exchange for residual portfolios

 -

 

40,845 

28

 


 

Warrants issued as part of debt and equity financings

421,042 

 

69,000 

Subordinated debt converted to common stock

950,699 

 

 -

Notes payable for insurance premiums

124,287 

 

33,383 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CALPIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

19,303,800 

 

$   19,304

 

$      6,680,238

 

$    (3,682,703)

 

$                    -

 

$  3,016,839

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of residual portfolios

27,230 

 

27 

 

40,818 

 

 -

 

 -

 

40,845 

Common stock issued as contribution to equity method investee

2,430,770 

 

2,431 

 

3,643,724 

 

 -

 

 -

 

3,646,155 

Common stock issued

1,832,506 

 

1,832 

 

2,746,917 

 

 -

 

 -

 

2,748,749 

Common stock issued for services

304,000 

 

304 

 

455,696 

 

 -

 

 -

 

456,000 

Financing transaction warrants

 -

 

 -

 

125,250 

 

 -

 

 -

 

125,250 

Equity awards to management

 -

 

 -

 

10,510 

 

 -

 

 -

 

10,510 

Net loss

 -

 

 -

 

 -

 

(4,341,303)

 

 -

 

(4,341,303)

Currency translation adjustments

 -

 

 -

 

 -

 

 -

 

(9,272)

 

(9,272)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

Previously reported

23,898,306 

 

$   23,898

 

$    13,703,153

 

$    (8,024,006)

 

$            (9,272)

 

$  5,693,773

Equity investment retrospective

 

 

 

 

 

 

 

 

 

 

 

 adjustment - Note 1

 -

 

 -

 

 -

 

43,794 

 

(145,717)

 

(101,923)

As adjusted

23,898,306 

 

23,898 

 

13,703,153 

 

(7,980,212)

 

(154,989)

 

5,591,850 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued as contribution to equity method investee

1,230,770 

 

1,231 

 

1,475,693 

 

 -

 

 -

 

1,476,924 

Common stock issued to purchase residual portfolios

10,941 

 

11 

 

14,869 

 

 -

 

 -

 

14,880 

Common stock issued

2,560,142 

 

2,560 

 

1,949,098 

 

 -

 

 -

 

1,951,658 

Common stock issued in exchange for conversion of subordinated debt

633,800 

 

634 

 

950,065 

 

 -

 

 -

 

950,699 

Warrants issued as part of financing

 -

 -

 -

 

2,741,693 

 

 -

 

 -

 

2,741,693 

Warrants exercised

391,920 

 

392 

 

(392)

 

 -

 

 -

 

 -

Stock based compensation

18,100 

 

18 

 

174,947 

 

 -

 

 -

 

174,965 

Common stock issued for services

431,250 

 

431 

 

513,944 

 

 -

 

 -

 

514,375 

Common stock issued to convert Series B Preferred shares

414,249 

 

414 

 

550,537 

 

 -

 

 -

 

550,951 

Net loss

 -

 -

 -

 

 -

 

(8,976,826)

 

 -

 

(8,976,826)

Currency translation adjustments

 -

 -

 -

 

 -

 

 -

 

184,865 

 

184,865 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

29,589,478 

 

$   29,589

 

$    22,073,607

 

$  (16,957,038)

 

$           29,876

 

$  5,176,034

 

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

 

 

 

29

 


 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 - OVERVIEW      

 

The CompanyIn these consolidated financial statements, references to “Calpian,” “Company,” “we,” “us,” and “our” refer to Calpian, Inc. (“CLPI”) and its subsidiary, Calpian Commerce, Inc. (“CCI”), unless the context requires otherwise.

 

We are in the business of acquiring recurring monthly residual income streams derived from credit card processing fees paid by retail merchants in the United States (“residual portfolios”). Small and medium-sized retail merchants typically buy their credit card processing and acquiring services from independent sales organizations (“ISOs”). ISOs are sales agents authorized by one or more credit card processors to sell processing and acquiring services on their behalf. ISOs facilitate the merchant’s application for processing and acquiring services through approvals, credit checks, guarantees, etc. that are required before the merchant can be approved to accept consumer credit card payments. We act as a purchaser of revenue streams resulting from the relationships between processors and ISOs.

 

The acquisition of CCI (Note 3) allowed us to expand into an integrated provider of merchant payment processing services and related software products throughout the United States. The Company delivers credit and debit card-based payment processing solutions primarily to small and medium-sized merchants who operate either in physical business environment, over the Internet, or in mobile or wireless settings via cellular-based wireless devices that the Company sells.

 

Basis of Presentation

Our financial statements include the accounts of the Company and its wholly-owned subsidiary, which acquired a business on March 15, 2013, (Note 3), and the operations of Transaction World Magazine, Inc. (“TWM”), a non-owned but wholly-controlled entity.  TWM is a wholly-owned subsidiary of ART Holdings, Inc. (“ART”) whose two founders, controlling shareholders, directors, and executive officers are directors, executive officers, and significant shareholders of Calpian.  Intercompany accounts and transactions have been eliminated in consolidation. 

 

As a result of completing the fair value appraisal of the assets and liabilities of our equity investee, Digital Payments Processing Limited (“DPPL”), in March 2013, we have retrospectively adjusted our financial statements for the year ended December 31, 2012, to account for the differences between appraised fair values and our preliminary estimates.  The retrospective adjustments reduced our 2012 net loss by $43,794 with increases in our 2012 second and third quarter net losses of $4,965 and $13,745, respectively.  Comprehensive income for 2012 has been retrospectively decreased by $145,717 with the second quarter being decreased by $300,728 and the third quarter being increased by $598,916.  The adjustments decreased the carrying amount of our equity investment, accumulated deficit, and 2012 net loss with no effect on our net loss per share or cash flows. 

 

Use of Estimates

The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles requires us, on an ongoing basis, to make significant estimates and judgments that affect the reported values of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions we believe are reasonable under the circumstances, the results of which form the basis for our conclusions.  Actual results may differ from these estimates under different assumptions or conditions.  Such differences could have a material impact on our future financial position, results of operations, and cash flows.  Significant estimates include future cash flows used in our calculation of residual portfolio amortization, fair values of warrants and equity awards granted, fair value of asset and liabilities acquired in our business acquisition, and the valuation allowance on deferred tax assets and liabilities. 

 

Reclassifications

Certain previously reported amounts have been reclassified to conform to the current presentation.

 

Foreign Currency Translation

The functional currency of our equity investee is the Indian rupee.  Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at each balance sheet date, revenues and expenses are translated at quarterly average exchange rates and resulting translation gains or losses are accumulated in other comprehensive loss as a separate component of shareholders’ equity.

 

2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

30

 


 

 

Recent Accounting Pronouncements

There have been no new accounting pronouncements issued that have had, or are expected to have, a material impact on our results of operations or financial condition.

 

Fair Values

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.  We believe the carrying values of cash and equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, and interest payable approximate their fair values.  We believe the carrying value of our senior notes, subordinated notes, and note payable approximate the estimated fair value for debt with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings.

 

Cash and Equivalents

We consider cash, deposits, and short-term investments with original maturities of three months or less as cash and equivalents.  Amounts designated by management for specific purposes, including withholdings from merchants to collateralize their contingent liabilities and processing reserves, and by contractual terms of debt agreements are considered restricted cash.  Our deposits at financial institutions at times exceed amounts covered by U.S. Federal Deposit Insurance Corporation insurance.

 

Residual Portfolios

Residual portfolios represent investments in recurring monthly residual income streams derived from credit card processing fees paid by merchants in the United States.  We acquire portfolios as long-term investments and expect to hold them to the point in time when a portfolio’s cash flows become nominal. Residual portfolios are recorded at cost and amortized into cost of revenues based on cash received.  Although history within the industry indicates the cash flows from such income streams are reasonably predictable, the future cash flows are predicated on consumers continued use of credit and debit cards to purchase goods and services from merchants having our service to accept electronic payments.  Each residual portfolio is amortized based on the future cash flows expected to be derived.  Quarterly, we reevaluate our cash flow estimates and prospectively adjust future amortization.

 

Equity Investment

The Company holds investments in equity method investees. Investments in equity method investees are those for which the Company has the ability to exercise significant influence but does not control and is not the primary beneficiary. Significant influence typically exists if the Company has a 20% to 50% ownership interest in the venture unless predominant evidence to the contrary exists. Under this method of accounting, the Company records its proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. Cash payments to equity method investees such as additional investments, loans and advances and expenses incurred on behalf of investees, as well as payments from equity method investees such as dividends, distributions and repayments of loans and advances are recorded as adjustments to investment balances. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.

 

Revenue Recognition

We recognize residual portfolio revenue based on actual cash receipts.

 

Generally, we report revenues at the time of sale on a gross basis where we are the primary obligor in the arrangement, have latitude in establishing the price of the services, change the product and perform part of the service, have discretion in supplier selection, have latitude in determining the product and service specifications to meet our clients’ needs and assume credit. Revenues generated by certain portfolios are reported net of interchange, where we may not have credit risk, or the ultimate responsibility for the merchant accounts.

 

We also derive revenues from the electronic processing of credit, charge and debit card transactions that are authorized and captured through third-party networks. Typically merchants are charged for these processing services 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 transaction and may also be charged miscellaneous fees, including fees for handling chargebacks, monthly minimums, equipment rentals, sales or leasing and other miscellaneous services. Revenues are reported gross of amounts paid to sponsor banks as well as interchange and assessments paid to credit card associations under revenue sharing agreements pursuant to which such parties received payments based primarily on processing volume for particular groups of merchants. Included in cost of goods and services sold are the expenses covering interchange and

31

 


 

bank processing directly attributable to the furnishing of transaction processing and other services to our merchant customers and are recognized simultaneously with the recognition of revenue.

 

The Company recognizes residual portfolio revenue based on actual cash receipts.  For the year ended December 31, 2013, approximately 76% of consolidated revenues were attributable to merchant customer transactions processed by three third-party vendors.

 

Income Taxes

Deferred income taxes are recognized for the future income tax effects of differences in the carrying amounts of assets and liabilities for financial reporting and income tax return purposes, including undistributed foreign earnings and losses, using enacted tax laws and rates. A valuation allowance is recognized if it is more likely than not that some or all of a deferred tax asset may not be realized. Tax liabilities, together with interest and applicable penalties included in the income tax provision, are recognized for the benefits, if any, of uncertain tax positions in the financial statements which, more likely than not, may not be realized.

 

Equity Transaction Fair Values

The estimated fair value of our common stock issued in share-based payments is measured by the more relevant of: (i) the prices received in private placement sales of our stock or; (ii) its publically-quoted market price.  We estimate the fair value of warrants, other than those included in common stock unit purchases, and stock options when issued or vested using the Black-Scholes option-pricing model which requires the input of highly subjective assumptions.  Recognition in shareholders’ equity and expense of the fair value of stock options awarded to employees is on the straight-line basis over the requisite service period and, for grants to nonemployees, when the options vest.  The fair value of exercisable warrants on the date of issuance issued in connection with debt financing transactions or for services are deferred and expensed over the term of the debt or as services are performed.

 

Inventories

Inventories consist of point-of-sales terminal equipment held for sale to merchants, resellers and distributors. Inventories are valued at the lower of cost or market price. Cost is arrived at using the first-in, first-out method. Market price is estimated based on current sales of equipment.

 

Advertising

Advertising costs are expensed as incurred.

 

3  - BUSINESS ACQUISITION

 

On March 15, 2013, the Company acquired certain assets and liabilities of Pipeline Data, Inc. and its subsidiaries, all of which were contributed to and are operated by CCI, in exchange for a cash payment of $9.75 million: 

 

 

 

 

Borrowings on senior credit facility

$   9,750,000

Issuance of common stock

 -

Issuance of warrants

 -

Total purchase price

$   9,750,000

 

The acquisition is expected to build value for our shareholders with a goal of achieving a higher EBITDA multiple in the U.S. equity markets by participating in this segment of the payments industry.  As a result of the acquisition, CCI is providing the general merchant community access to an integrated suite of third-party merchant payment processing services and its own propriety related software and hardware enabling products delivering credit and debit card-based payments processing solutions to merchants operating in physical “brick and mortar” business environments, over the internet, and in settings requiring wired as well as wireless mobile payment solutions.  The acquisition also provides us with a sales organization generating individual merchant processing contracts in exchange for future residual payments.

 

The following presents the estimated fair values of the net assets acquired following an appraisal of certain assets based on assumptions we believe unrelated market participants would use based on observable and unobservable marketplace factors:

 

 

 

 

Cash

$      250,000

Restricted cash

306,967 

Current assets

37,287 

32

 


 

Fixed assets

355,636 

Residual portfolios

6,379,000 

Intangibles

29,115 

Goodwill

2,341,928 

Accrued Revenue Receivable

107,467 

Liabilities

(57,400)

Net assets

$   9,750,000

 

The residual portfolios are being amortized over 10 years.   

 

4 - RESIDUAL PORTFOLIOS

 

As of December 31, 2013, we expect annual amortization in each of the next five years to be as shown below with the remainder ranging over the succeeding 8 years.  No residual value is likely.

 

 

 

 

 

 

 

 

 

2014

2015

2016

2017

2018

Thereafter

Total

1,894,233

1,605,856

1,340,561

1,117,821

933,004

2,790,106

9,681,580

 

 

 

5 - EQUITY INVESTMENT

 

In March 2012, the Company began acquiring common stock of Digital Payments Processing Limited (“DPPL”), a newly-organized company based in Mumbai, India, in cash and issuance of Company stock.  As of December 31, 2013 and 2012, the Company owned 49.9% and 26.5% respectively, of the outstanding common stock of DPPL. 

 

In 2012, DPPL entered into a services agreement with My Mobile Payments Limited (“MMPL”), also based in Mumbai, India.  The Company does not hold a direct equity interest in MMPL.  Together, DPPL and MMPL operate the Money-on-Mobile enterprise, which offers a mobile wallet service, similar to carrying a prepaid debit card, on a mobile phone, which can be used to pay for goods and services from the mobile phone as well as making other financial transactions such as sending or receiving money.

 

Under the services agreement, DPPL has a right to trigger an acquisition of MMPL, upon approval by the Indian government.  This approval was obtained in December 2014, but a merger has not be triggered as of this report date.  DPPL has a contractual variable interest in MMPL and is the primary beneficiary of the arrangement.  As such, the following accounts of DPPL and MMPL are presented on a combined basis.

 

The combined balance sheets and results of operations of DPPL and MMPL as of December 31, 2013 and for the year then ended are summarized as follows:

 

 

 

 

 

 

 

December 31,

 

2013

2012

 

 

 

Current Assets

$      7,119,174

$  1,896,749

Long Term Investments

367,041 
2,119,105 

Total Assets

7,486,215 
4,015,854 

Current Liabilities

2,921,909 
1,305,808 

Long Term Liabilities

205,249 
61,576 

Total Liabilities

3,127,158 
1,367,384 

Capital

4,359,057 
2,648,470 

Total Liabilities and Capital

7,486,215 
4,015,854 

 

 

 

 

 

 

 

 

 

Year Ended

33

 


 

 

December 31,

 

2013

2012

 

 

 

Total Revenues

33,119,945 
30,073,746 

Gross Profit

322,116 
427,159 

Total Expenses

1,119,342 
1,283,041 

Net Income

(1,022,449)
(1,023,727)

 

Due to limitations of the Indian government, the Company is prohibited from acquiring additional common stock of the DPPL until its investment contribution meets certain thresholds prescribed the Indian government.   The Company has made additional cumulative investments of $8,377,419 in DPPL beyond its common stock received, as subscribed stock.  Subscribed stock does not participate in voting or distributions of earnings.

 

 

 

 

 

 

 

December 31,

 

2013

2012

 

 

 

Carrying value of investment

10,124,831 
6,854,004 

 

The Company DPPL agreement provides for acquiring an equity interest of approximately 74% for $9.7 million to be paid in quarterly tranches through January 2014 and the issuance of 6.1 million shares of our common stock. The investment agreement provides for acquiring an equity interest of approximately 74% (subject to temporary dilution as described below) of DPPL for $9.7 million to be paid in tranches through January 2014 together with the issuance of a cumulative 6.1 million shares of our common stock. 

 

There have been several prior period corrections for the first three quarters of 2013.  The change was due to improved information from DPPL as well as a better methodology of calculating ownership and currency translation adjustments.   The Company determined that the adjustments would have an immaterial effect to the Company’s consolidated financial statements for the quarterly periods in the year ended December 31, 2013, based on management’s qualitative and quantitative analysis relative to its materiality consistent with the applicable accounting guidance.   The adjustments are shown in the table below:

 

(in thousands of dollars)

Balances as of the date indicated

12/31

9/30

6/30

3/31

Equity Investment Balance

 

 

 

 

Previous reported

10,125 
8,942 
9,014 
7,857 

Revised balance

10,125 
10,256 
11,063 
8,291 

Difference

                         - 

(1,314)
(2,049)
(434)

 

 

 

 

 

Accumulated Other Comprehensive Income balance

 

 

 

 

Previous reported

(30)
2,688 
1,775 
90 

Revised balance

(30)
(30)
(23)
(1)

Difference

                         - 

2,718 
1,798 
91 

 

 

 

 

 

 

 

6 - DEBT

 

Senior Credit Facility

As of December 31, 2013 and 2012, the outstanding balance under the senior credit facility was as follows:

34

 


 

 

 

 

 

 

2013

2012

 

 

 

Borrowings on senior credit facility

$
13,170,000 
$
3,000,000 

Less: debt discount

-

-

Net senior credit facility

$
13,170,000 
$
3,000,000 

 

 

In April 2011, the Company secured an $8.0 million credit facility, bearing interest of 16% per year.  The Company paid origination, commitment and administration fees, and expenses totaling $323,639 and issued the lender warrants to acquire up to 804,467 shares of our common stock at $1.00 per share.  Unamortized deferred financing costs of $525,936 were charged to interest expense when the facility was repaid and closed in November 2012.  There are no related warrants outstanding as of December 31, 2013.

In November 2012, the Company entered into a  $5.0 million senior credit facility, amended in March 2013 to $14.5 million.  Outstanding balances under the senior credit facility accrue interest at an annual rate of 13.2%, payable monthly in arrears. Interest only is payable through August 2014; thereafter, principal is payable at a monthly through maturity, September 2016.  A prepayment penalty of 4% is in effect through March 16, 2014.  In addition, the facility is subject to a facility growth fees of 4% of new borrowings arranged by the lender and 2% if arranged by others.  During the years ended December 31, 2013 and 2012, interest expense related to the senior credit facility, exclusive of accretion of debt discount and amortization of loan origination fees, was $396,000 and $428,000, respectively.

 

Additional borrowings under the senior credit facility are limited to the acquisition of credit card residuals in the United States.  Qualifying borrowing amounts are also limited by 16 times the expected monthly gross cash flow of the residuals, as measured immediately following the acquisition.  The senior credit facility is secured by substantially all of the Company’s assets.  The facility requires maintaining a minimum of $200,000 in cash and equivalents and meeting certain financial covenants.  As of December 31, 2013, the Company was in compliance with all covenants.

 

In March 2013, the Company issued 500,000 warrants to the senior credit facility.  The aggregate fair value of the warrants, determined on the date of issuance using a Black Scholes valuation model, as of December 31, 2013 was $325,000

 

As of December 31, 2013 and 2012, the Company has paid $815,000 and $255,000, respectively, in loan origination fees related to the senior credit facility that are being amortized in to interest expense through the facility maturity.  For the years ended December 31, 2013 and 2012, amortized loan origination fees included in interest expense were $185,671 and $1,568,516, respectively

 

Subordinated Debt

The Company’s subordinated debt has been issued pursuant to a $3 Million Subordinated Debt Offering, a $2 Million Subordinated Debt Offering,  2012 $3 Million Notes Offering, and a 2012 Convertible Notes Offering, each exempt from registration under Rule 506 of Regulation D of the Securities and Exchange Commission (“SEC”), as described in the Current Reports on Form 8-K filed with the SEC on January 6, 2011, and August 10, 2012, and incorporated herein by reference.  The notes are secured by a first lien on substantially all of the Company’s assets, but are subordinated to the senior credit facility.  The notes bear interest at a rate of 12% annually paid monthly in arrears.

 

Subordinated Notes Payable 

At December 31, 2013 and 2012, the outstanding balances on subordinated notes payable were as follows:

 

 

 

 

 

2013

2012

 

 

 

Borrowings on subordinated notes payable

$
4,800,000 
$
3,300,000 

Less: debt discount

(198,510)
(302,904)

Net subordinated notes payable

$
4,601,490 
$
2,997,096 

 

For the years ended December 31, 2013 and 2012, interest expense related to the subordinated notes payable, exclusive of debt discount accretion, was $554,167 and $362,550, respectively.

 

35

 


 

At issuance, the lenders received warrants to acquire shares of our common stock at $2.00 to $2.50 per share.   140,000 and 335,425 warrants were issued during the years ended December 31, 2013 and 2012, respectively.  The aggregate fair value of the warrants, determined on the date of issuance using a Black Scholes valuation model, as of December 31, 2013 and 2012 was $96,434 and $-0-, respectively.  The debt discount accreted into interest expense during the years ended December 31, 2013 and 2012 were $176,828 and $461,535, respectively.  At December 31, 2013, future accretion of related debt discounts is expected to be $179,892 for 2014, $18,618 for 2015 and 2016, respectively.

 

Convertible Subordinated Notes 

At December 31, 2013 and 2012, the outstanding balances on convertible subordinated notes payable were as follows:

 

 

 

 

 

2013

2012

 

 

 

Borrowings on convertible subordinated notes

$
1,300,000 
$
850,000 

Less: debt discount

(750)
(65,358)

Less: notes converted

(900,000)

-

Net convertible subordinated notes

$
399,250 
$
784,642 

 

 

For the years ended December 31, 2013 and 2012, interest expense related to the subordinated notes payable, exclusive of debt discount accretion, was $554,167 and $362,550, respectively.

 

The notes can be converted shares of the Company’s common stock at a conversion rate of $1.50 per share at the option of the note holders.  In July 2014, any outstanding balances automatically will automatically convert.  During the year ended December 31, 2013, outstanding convertible subordinated note balances of $900,000 were converted into 600,001 shares of common stock.  No amounts were converted for the year ended December 31, 2012.

 

In connection with the conversion, we issued an additional 33,800 shares of stock having a $50,700 fair value based on publicly-quoted market prices and expensed $42,408 of the fair value of warrants previously deferred. 

 

At issuance, the lenders received warrants to acquire shares of our common stock at $2.00 to $2.30 per share.   40,000 and 50,000 warrants were issued during the years ended December 31, 2013 and 2012, respectively.  The aggregate fair value of the warrants, determined on the date of issuance using a Black Scholes valuation model, as of December 31, 2013 and 2012 was $93,000 and $69,000, respectively.  The debt discount accreted into interest expense during the years ended December 31, 2013 and 2012 were $139,308 and $3,642, respectively.  At December 31, 2013, future accretion of related debt discounts is expected to be $750 for 2014.

 

Note Payable

We have financed insurance premiums with promissory notes bearing interest at rates between 6.0% and 7.0% per annum payable in monthly installments over periods of less than one year.  As of December 31, 2013 and 2012, outstanding balances on notes payable were $20,864 and $7,570, respectively. 

 

 

 

 

 

 

 

 

 

2014 
2015 
2016 

Total

Senior notes payable

2,195,000 
6,585,000 
4,390,000 
13,170,000 

Subordinated notes payable

3,800,000 

 -

1,000,000 
4,800,000 

Convertible subordinated notes

400,000 

 -

 -

400,000 

Note payable

20,864 

 -

 -

20,864 

 

6,415,864 
6,585,000 
5,390,000 
18,390,864 

 

 

7 - CAPITAL STOCK

 

We have not agreed to register any of our common stock or warrants for resale under the Securities Act of 1933, as amended; however, warrants to acquire 100,000 shares of our common stock and 216,664 shares of our common stock issuable on conversion of our convertible subordinated notes have customary “piggy back” registration rights in the event we register shares of our common stock in the future.

 

36

 


 

Preferred Stock 

On October 3, 2013, the Company issued 550,000 shares of newly created Series B Convertible Preferred Stock (“Series B Preferred Stock”) pursuant to a subscription agreement for the purchase of up to 650,000 Series B Preferred Stock entered into with an accredited investor. The gross proceeds from the sale of 550,000 Series B Preferred Stock were $550,000.   At December 31, 2013, all of the Series B shares had converted to common stock.

 

In November and December 2013, all 550,000 shares of Series B Preferred Stock converted into 414,249 shares of common stock and the rights and preferences of the Series B Preferred were of no further effect.

 

Common Stock

Our common stock trades on the OTC® under the symbol “CLPI.”  Holders of our common stock are entitled to one vote per share and receive dividends or other distributions when, and if, declared by our Board of Directors.  We have reserved 6,874,160 shares for issuance on conversion of convertible subordinated notes, exercise of warrants, and equity incentive awards.

 

We have issued common stock for the acquisition of residual portfolios and our equity investment in DPPL (Note 4).  In 2012, we sold 1,832,506 shares in private placements for $2,805,000, including the $56,250 fair value of 112,500 warrants as part of unit subscriptions.  Also in 2012, a total of 304,000 shares with a fair value of $456,000 based on common stock private placements were issued for consulting, financial,  international acquisition advisory, and public relations services. In 2013, 2,560,142 shares were sold in private placements for $4,089,000, including the $1,261,036 fair value of 2,078,737 warrants as part of unit subscriptions, 391,920 shares were issued in the cashless exercise of 804,467 warrants, equity awards totaling 431,250 shares for consulting and other services having a total fair value of $550,441, and equity awards totaling 18,100 shares to certain DPPL employees having a $27,150 fair value. 

 

 

Warrants 

A total of 4,657,496 warrants for our common stock with exercise prices ranging from $1.00 to $3.00 per share ($1.82 weighted average) have been issued in connection with our financing transactions and expire as follows: 2015 – 617,501; 2016 – 500,000; 2017 – 527,925 and 2018 – 3,012,070.  On exercise, the warrants will be settled in delivery of unregistered shares of our common stock. Warrants for 253,333 shares having a total fair value of $199,361 were issued in 2013 for financial consulting services.

 

The following table summarizes the changes in Warrants for the years ended December 31, 2013 and 2012.

 

 

 

 

Shares

Outstanding  at December 31, 2011

1,946,968 

Granted

502,925 

Exercised

                    -

Expired/canceled

                    -

Outstanding  at December 31, 2012

2,449,893 

Granted

3,012,070 

Exercised

(391,920)

Expired/canceled

(412,547)

Outstanding  at December 31, 2013

4,657,496 

 

 

One of the warrants for 500,000 shares is exercisable only if the Company: (i) does not raise at least $3.0 million in equity financing before April 2014; or, (ii) does not extend the maturity dates of subordinated notes payable to December 31, 2016 and raise equity financing before April 2014 of $1.0 million, or $1.5 million if the attrition rate of CCI’s residual portfolios exceeds an average of 1.4% during the three-month periods ending June and September 2014.  As of this report date, management estimates that one or more of these conditions will be achieved and these warrants will not be exercisable.  As such, no amounts have been recorded related to these contingent warrants.

 

During 2013, we estimates the fair value of warrant granted using the Black-Scholes option valuation model .The expected life of warrant represents the term of warrant. The expected stock volatility is based on the average of historical volatility of the Company’s common stock and other subjective factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time awards are granted, and the expected dividend rate takes into account the absence of any historical payments and management’s intention to retain all earnings for future operations and expansion.

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The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions for grants during fiscal 2013:

 

 

 

Warrants

2013

Risk-free interest rates

0.0123

Expected volatility

0.9138

Dividend yields

0.0000

Expected lives

5 years

 

 

2011 Equity Incentive Plan

The 2011 Equity Incentive Plan (“Plan”) provides for issuing equity awards for an aggregate of 2.0 million shares of our common stock in the form of grants of restricted shares, incentive stock options (employees only), nonqualified stock options, share appreciation rights, performance shares, and performance units.  The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors, and consultants, and to promote the long-term growth and profitability of the Company.  Stock option awards have a maximum contractual life of ten years and specific vesting terms and performance goals are addressed in each equity award grant.  Shares issued to satisfy awards may be from authorized but unissued or reacquired common stock.

 

Stock Options

Immediately exercisable stock options for 900,000 shares of our common stock ($582,920 grant date fair value) were awarded in 2013 and options for 200,000 were granted in 2012.    Exercisable options with a weighted-average exercise price of $2.00 per share for 400,000 shares and $1.38 for 900,000 shares were outstanding at December 31, 2012 and December 31, 2013, respectively.  Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option.  Because the fair value of the underlying stock was more than the exercise price at December 31, 2013, the options had $100,000 intrinsic value. At December 31, 2013, all outstanding options are fully vested and the weighted-average remaining contractual term was 9.2 years; however, if services are earlier terminated, 700,000 options become void 90 days after termination. 

 

We estimates the fair value of stock options granted using the Black-Scholes option valuation model .The expected life of options represents the period of time the options are expected to be outstanding and other subjective factors. The expected stock volatility is based on the average of historical volatility of the Company’s common stock and other subjective factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time awards are granted, and the expected dividend rate takes into account the absence of any historical payments and management’s intention to retain all earnings for future operations and expansion. No forfeiture is expected when stock option granted.

 

The fair value of each option granted was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions for grants during fiscal 2013 and 2012:

 

 

 

 

Option plan

2013

2012

Risk-free interest rates

0.0202

0.0030

Expected volatility

0.992

0.00001

Dividend yields

0  

0  

Expected lives

6 years

3 years

 

 

The following table summarizes the changes in Stock option for the years ended December 31, 2013 and 2012.

 

 

 

 

 

Shares

Outstanding  at December 31, 2011

200,000 

Granted

200,000 

Exercised

                    -

Expired

                    -

38

 


 

Outstanding  at December 31, 2012

400,000 

Granted

900,000 

Exercised

                    -

Expired

(400,000)

Forfeited

                    -

Outstanding  at December 31, 2013

900,000 

 

8 - LITIGATION

 

We may become involved in litigation from time to time in the ordinary course of business. At December 31, 2013, to the best of our knowledge, no such litigation exists or is threatened.

 

9  - BUSINESS SEGMENT INFORMATION

 

Each of our legal entities is a business segment measured by management based on pretax results of operations using accounting policies consistent in all material respects with those described in Note 2.  No inter-segment revenue is recorded.

 

Calpian, Inc. is in the business of acquiring recurring monthly residual income streams derived from credit card processing fees paid by retail merchants in the United States (“residual portfolios”).  We act not as a credit card processor, but simply as a purchaser of revenue streams resulting from the relationships between processors and independent sales organizations (“ISOs”).  In addition, we invest in payments-industry related opportunities.

 

Calpian Commerce, Inc., which commenced operations on March 15, 2013, provides the general merchant community access to an integrated suite of third-party merchant payment processing services and its own related proprietary software enabling products delivering credit and debit card-based internet payments processing solutions to merchants.  CCI also operates as an ISO selling individual third-party merchant processing contracts in exchange for future residual payments. 

 

The following presents operating information by segment, reconciled to our consolidated loss before income taxes and equity investment loss, and segment assets.  Information about our equity investee is included in Note 4.

 

 

 

 

 

 

 

Year Ended

 

December 31,

 

2013

 

2012

Revenues:

 

 

 

Calpian, Inc.

$        3,064,033

 

$        3,438,898

Calpian Commerce, Inc.

17,971,853 

 

 -

 

$      21,035,885

 

$        3,438,898

Operating profit (loss):

 

 

 

Calpian, Inc.

$        (2,878,888)

 

$           (739,403)

Calpian Commerce, Inc.

466,156 

 

 -

 

(2,412,732)

 

(739,403)

Financing costs

(2,636,922)

 

(2,858,135)

Loss before income taxes and equity investment loss

$        (5,049,654)

 

$        (3,597,538)

 

 

 

 

 

 

 

December 31,

 

December 31,

 

2013

 

2012

Total assets:

 

 

 

Calpian, Inc.

$      16,075,505

 

$      13,052,566

Calpian Commerce, Inc.

9,202,356 

 

 -

 

$      25,277,861

 

$      13,052,566

 

 

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Additional detail follows:

 

 

 

 

 

 

Year Ended

 

December 31,

 

2013

 

2012

Depreciation and amortization:

 

 

 

Calpian, Inc.

1,613,897 

 

3,159,927 

Calpian Commerce, Inc.

910,575 

 

 -

 

$        1,613,897

 

$        3,159,927