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PLPM > SEC Filings for PLPM > Form 10-K on 25-Mar-2013All Recent SEC Filings

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Form 10-K for PLANET PAYMENT INC


25-Mar-2013

Annual Report


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

You should read the following discussion and analysis in conjunction with the information set forth above under "-Selected consolidated financial data" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under "Item 1A. Risk factors" and elsewhere in this Annual Report on Form10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Business overview

We believe Planet Payment is a leading provider of international payment processing and multi-currency processing services. We provide our services to approximately 41,000 active merchant locations in more than 20 countries and territories across the Asia Pacific region, North America, the Middle East, Africa and Europe, primarily through our acquiring bank and processor customers, as well as through our own direct sales force. Our point-of-sale and e-commerce services help merchants sell more goods and services to consumers and enable our acquiring customers to process and reconcile payment transactions in multiple currencies, geographies and channels.

In 2012, we produced 56% of our revenue internationally and 44% in the United States through a recurring revenue model that generates fees every time a purchase is made across our network. We manage our business through two operating segments: our multi-currency processing services and our payment processing services. Our multi-currency processing services, which include Pay In Your Currency and Shop In Your Currency, enable merchants to offer customized pricing in multiple currencies. Our payment processing services comprise end-to-end authorization, capture, clearing and settlement services to our customers along with localized language support and online access to advanced reconciliation, reporting and analytics services. For the year ended December 31, 2012, our multi-currency processing services represented approximately 66% of our revenue and our payment processing services represented approximately 34% of our revenue.

For the years 2012, 2011 and 2010, our net revenue was $43.6 million, $41.9 million and $30.6 million, respectively. In the same periods, our net
(loss) income was $(4.5) million, $2.4 million and $(3.1) million, respectively, and our Adjusted EBITDA was $2.4 million, $5.9 million and $1.8million, respectively. Adjusted EBITDA is a financial measure not calculated in accordance with GAAP. For information on how we calculate Adjusted EBITDA, see "-Key metrics-Adjusted EBITDA."

Key trends

Our financial results have been and we believe will continue to be impacted by trends in the international payment processing industry, including the global shift toward electronic-based methods of payments and away from paper-based methods of payment, the increasing levels of international travel and commerce and the rapid adoption of e-commerce on a global scale. Our results are impacted by the changes in levels of international spending using electronic methods, and as a result, negative trends in the global economy may negatively impact the growth in total transaction volume processed using our platform. Since 2008, the United States and other global economies have been undergoing a period of economic uncertainty and stock markets are experiencing high levels of volatility, and it is difficult to predict how long this uncertainty and volatility will continue.

Despite these negative macro-economic trends, we plan to continue to grow our business by increasing the use of our services by the merchants of our existing and future acquiring bank and processor customers. If we are successful in increasing our share of this currently addressable market, as well as by adding new acquiring bank and processor customers and expanding into new geographies and business sectors, we would expect our revenue to continue to grow. In addition, based on the positive trends in the international payment processing industry noted above, we anticipate that as and when more payments are made using electronic methods, such as those that we offer, our revenue would also increase.


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We expect that our payment processing service fees, which primarily represent fees, interchange and assessments, will continue to rise as our revenue from direct acquiring customers increases. We also expect that our processing and service costs, which include expenses related to running our platform infrastructure, and our selling, general and administrative expense will increase, but at a rate of increase that is less than the growth of our revenue due to the leverage in our business model.

Key metrics

Our management relies on certain performance indicators to manage and assess our business. The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We believe that improvements in these metrics will result in improvements in our financial performance over time. We monitor our non-GAAP financial measures and other business statistics as a measure of operating performance in addition to net (loss) income and the other measures included in our consolidated financial statements.

The following is a table consisting of non-GAAP financial measures and certain other business statistics that management monitors:

                                                           Year ended December 31,
                                                 2012               2011               2010
KEY METRICS:
Consolidated gross billings(1)              $   117,945,131    $   102,439,474    $    64,653,725
Adjusted EBITDA (non-GAAP)(2)               $     2,425,570    $     5,923,149    $     1,815,478
Capitalized expenditures                    $     1,921,766    $     2,102,811    $     2,350,507
Total active merchant locations (at
period end)(3)                                       40,918             27,887             16,697
Multi-currency processing services
key metrics:
Active merchant locations (at
period end)(3)                                       22,015             16,347             12,157
Settled transactions processed(4)                11,883,366         10,801,177          6,980,010
Gross foreign currency mark-up(5)           $   103,174,205    $    87,820,070    $    52,073,798
Settled dollar volume processed(6)          $ 2,628,252,265    $ 2,339,615,142    $ 1,377,308,710
Average net mark-up percentage on
settled dollar volume processed(7)                     1.10 %             1.16 %             1.30 %
Payment processing services key metrics:
Active merchant locations (at
period end)(3)                                       18,921             11,552              4,603
Payment processing services revenue(8)      $    14,770,926    $    14,619,404    $    12,579,927



(1) Represents gross foreign currency mark-up (see footnote 5) plus payment processing services revenue (see footnote 8).

(2) We define Adjusted EBITDA as GAAP net (loss) income adjusted to exclude (1) interest expense, (2) interest income, (3) provision (benefit) for income taxes, (4) depreciation and amortization, (5) stock-based expense from options and warrants and (6) certain other items management believes affect the comparability of operating results. Please see "-Adjusted EBITDA" below for more information and for a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

(3) We consider a merchant location to be active as of a date if the merchant completed at least one revenue-generating transaction at the location during the 90-day period ending on such date. The total number of active merchant locations exceeds the total number of merchants, as merchants may have multiple locations. As of December 31, 2012, 2011 and 2010, there were 18, 12 and 63 active merchant locations, respectively, that used both our multi-currency processing services and our payment processing services.


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These amounts are included in multi-currency and payment processing active merchant locations but are not included in total active merchant locations.

(4) Represents settled transactions processed using our multi-currency processing services.

(5) Represents the gross foreign currency mark-up amount on settled dollar volume processed using our multi-currency processing services. Gross foreign currency mark-up represents multi-currency processing services net revenue plus amounts paid to acquiring banks and their merchants associated with such multi-currency processing transactions. Management believes this metric is relevant because it provides the reader an indication of the gross mark-up derived from multi-currency transactions processed through our platform during a given period. Refer to our revenue recognition policy in Note 2 and segment disclosure in Note 17 of our consolidated financial statements for information on our net revenue from multi-currency processing services.

(6) Represents the total settled dollar volume processed using our multi-currency processing services.

(7) Represents the average net mark-up percentage earned on settled dollar volume processed using our multi-currency processing services. The average net mark-up percentage on settled dollar volume processed is calculated by taking the reported total multi-currency processing services net revenue ($28.8 million, $27.2 million and $18.0 million for the years ended December 31, 2012, 2011 and 2010, respectively) and dividing by settled dollar volume processed (see footnote 6).

(8) Represents revenue earned and reported on payment processing services.

Adjusted EBITDA

This Annual Report on Form 10-K includes information about Adjusted EBITDA that is not prepared in accordance with GAAP. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. A reconciliation of this non-GAAP measure is included below.

Adjusted EBITDA is a non-GAAP financial measure that represents GAAP net (loss) income adjusted to exclude (1) interest expense, (2) interest income,
(3) provision (benefit) for income taxes, (4) depreciation and amortization,
(5) stock-based expense from options and warrants and (6) certain other items management believes affect the comparability of operating results.

Management believes that Adjusted EBITDA, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period growth. Adjusted EBITDA is presented because management believes it provides additional information with respect to the performance of our fundamental business activities and is also frequently used by securities analysts, investors and other interested parties in the evaluation of comparable companies. We also rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our company and our management team in connection with our executive compensation.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;


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non-cash compensation is and will remain a key element of our long-term incentive compensation for our employees, although we exclude it from Adjusted EBITDA when evaluating our ongoing performance for a particular period; and

Adjusted EBITDA does not include the impact of certain charges or gains resulting from matters we consider not to be indicative of our ongoing operations.

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplement to our GAAP results.

The following table sets forth the reconciliation of Adjusted EBITDA to net
(loss) income, our most directly comparable financial measure in accordance with GAAP:

                                               Year ended December 31,
                                          2012          2011           2010
ADJUSTED EBITDA:
Net (loss) income                     $ (4,452,305 ) $ 2,384,729   $ (3,064,787 )
Interest expense                            55,987       319,098      1,169,578
Interest and other expense (income)          7,503        (1,582 )         (429 )
Provision for income taxes                 147,111       331,903          3,219
Depreciation and amortization            2,831,379     2,416,873      1,769,650
Expensing of deferred IPO costs(1)       2,578,770             -              -
Stock-based expense                      1,135,047       570,810        829,733
Software licenses impairment(2)                  -             -      1,108,514
Convertible debt prepayment(3)                   -       601,318              -
Derecognition of note payable(4)                 -      (700,000 )            -
Acquisition deal costs                     122,078             -              -
Adjusted EBITDA (non-GAAP)            $  2,425,570   $ 5,923,149   $  1,815,478



(1) In July 2011 we filed our first registration statement on Form S-1. From July 2011 through August 2012 we continued to update and amend the Form S-1. During the quarter ended September 30, 2012, we determined that it is likely that our IPO will be postponed for a period in excess of 90 days and as a result deemed it to be an aborted offering in accordance with the guidance set forth in ASC 340-10-S99-1. For the three months ended September 30, 2012, we expensed previously deferred IPO costs of $2.3 million associated with our registration statement on Form S-1 as well as any IPO costs incurred in the third quarter to selling, general and administrative expenses. The total amount of the third quarter expense was $2.6 million.

(2) In the fourth quarter of 2010, due to our unsuccessful efforts to sell software licenses previously purchased for resale, we determined that the underlying undiscounted cash flow projections did not support the recorded value of the asset and wrote off the entire asset balance of $1.1 million to cost of revenue for the year ended December 31, 2010.

(3) In April 2011, the convertible debt holders converted the outstanding principal amount of $9.0 million under convertible notes issued in 2007 and 2008 into an aggregate of 4,049,776 shares of common stock. In addition, we issued 127,318 shares of common stock valued at $0.3 million in lieu of cash payments for accrued interest and 297,682 shares of common stock valued at $0.6 million as a prepayment fee negotiated at the time of conversion. The shares issued for the accrued interest and the prepayment fee were valued at the average closing price of our common stock on AIM under the symbol "PPTR" during the 10 trading day period ending two days prior to the conversion.

(4) In 2003, we entered into an agreement with First Horizon Merchant Services, Inc. ("FHMS") and First Tennessee Bank National Association ("FTB") and recorded a liability. Due to a breach of the contractual terms by FHMS and FTB, we did not believe we were liable to repay these amounts. As of March 31, 2011,


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the statute of limitations had expired on $0.66 million of the $0.7 million balance and as of September 30, 2011, the statute of limitations had expired on the remaining $40,000. For the year ended December 31, 2011, we recorded other income due to the derecognition of the note payable in the amount of $0.7 million.

Components of operating results

Sources of revenue

We derive our revenue principally through transaction fees earned under fixed contractual arrangements with customers who use our international payment and multi-currency processing services. We operate the business in two reportable segments:

Multi-currency processing services revenue. Revenue derived from foreign currency transaction fees earned on processing and converting a credit or debit card transaction from one currency into another currency. Foreign currency transactions fees earned under our agreements with our multi-currency processing services customers have traditionally been based on a fixed percentage applied to the net foreign currency margin earned, after deducting any merchant revenue and other contractual costs.

Payment processing services revenue. Revenue derived from transaction fees earned on processing services provided in facilitating the sale of goods and services by means of credit and debit cards and other electronic payments.

Geographic and customer concentration

We conduct our business primarily in three geographical regions: Asia Pacific, or APAC, North America, and Central Europe, Middle East and Africa, or CEMEA. The following table provides multi-currency processing services revenue concentration by geographical region. Revenue by region is based upon where the transaction originated. We conduct our payment processing services primarily in North America.

Analysis of revenue by segment and geographical region:

                                                   Year ended December 31,
                                             2012            2011            2010
Revenue:
APAC                                     $ 16,248,880    $ 18,337,513    $ 15,198,058
North America                               5,000,064       3,991,374       2,647,547
CEMEA                                       7,558,146       4,909,875         127,632
Total multi-currency processing
services revenue                           28,807,090      27,238,762      17,973,237
Payment processing services revenue        14,770,926      14,619,404      12,579,927
Net revenue                              $ 43,578,016    $ 41,858,166    $ 30,553,164

A significant portion of our revenue is derived from agreements with a limited number of customers. Specifically, for the year ended December 31, 2012, subsidiaries of Global Payments, Inc. represented 23% and of our revenue, and Network International, LLC represented 17% of our revenue.

Operating expenses

Cost of revenue. Cost of revenue primarily consists of two categories:
(1) payment processing services fees, which includes payment processing transactions fees such as sponsorship fees, interchange and card association fees and assessments; and (2) processing and service costs, which include expenses related to running our platform infrastructure, including: Internet connectivity, hosting and data storage expenses, amortization expense on acquired intangibles and capitalized software development costs, compensation and related benefits and a portion of general overhead expenses.


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Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of compensation and related benefits, facility costs, public company costs and professional service fees for our sales, marketing, customer service, administrative functions, and a portion of general overhead expenses.

In July 2011 we filed our first registration statement on Form S-1. From July 2011 through August 2012 we continued to update and amend the Form S-1. During the quarter ended September 30, 2012 we determined that it is likely that our IPO will be postponed for a period in excess of 90 days and as a result deemed it to be an aborted offering in accordance with the guidance set forth in ASC 340-10-S99-1. For the three months ending September 30, 2012, we expensed previously deferred IPO costs of $2.3 million associated with our registration statement on Form S-1 as well as any IPO costs incurred in the third quarter to selling, general and administrative expenses. The total amount of the third quarter expense was $2.6 million.

In October 2012, the east coast of the United States was hit by Hurricane Sandy, including the city of Long Beach, where the our corporate offices are located. The aftermath of this event caused temporary disruption to certain functions undertaken at that office and caused us to incur additional costs for repairs, temporary office space and other requirements to maintain or re-establish these functions. While we insure against such property damage and business interruption risks, such insurance may not adequately compensate us for losses incurred. For the year ended December 31, 2012 we recorded a selling, general and administration expense of $0.1 million primarily related to disposal of property and equipment that was damaged in the hurricane which was offset by a pre-funding insurance reimbursement of $0.1 million. Based on the information available we estimate that the future impact of such losses to be approximately $0.1 million. At no time were any of our transaction processing functions or systems affected by the storm and accordingly none of our customers suffered any loss of transactions.

We allocate overhead such as occupancy, telecommunication charges and depreciation expense based on headcount, as we believe this to be the most accurate measure. As a result, a portion of general overhead expenses is reflected in both our cost of revenue and selling, general and administrative expenses.

Other (expense) income, net

Other (expense) income, net, primarily consists of interest expense related to our capital leases, term debt and convertible debt and the derecognition of our note payable due to First Horizon Merchant Services and First Tennessee Bank.

Critical accounting policies and estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. These principles require us to make certain estimates and judgments that affect the amounts reported in our financial statements. We base our estimates on historical experience, future trends and other assumptions we believe to be reasonable under the circumstances. Because these accounting policies require significant judgment, our actual results may differ materially from our estimates.

We consider an accounting policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment, subjectivity and complexity on the part of management in its application. We believe the following to be our critical accounting policies.

Revenue recognition

We derive revenue principally through fees earned under fixed contractual arrangements with customers who use our international payment and multi-currency processing services. We have two revenue streams:

Multi-currency processing services revenue

Multi-currency processing services revenue is the foreign currency transaction fee earned on processing and converting of a credit or debit card transaction from one currency into another currency. Multi-currency transaction processing services revenue is recognized upon settlement of the transaction.


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Payment processing services revenue

We follow the requirements of EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, included in the Revenue Recognition Topic of Accounting Standards Codification ("ASC") topic 605, in determining its payment processing services revenue reporting. Generally, where we have merchant portability, credit risk and ultimate responsibility for the merchant, revenue is reported at the time of settlement on a gross basis equal to the full amount of the discount charged to the merchant. This amount may include interchange paid to card issuing banks and assessments paid to payment card associations.

Payment processing services revenue is transaction based and priced either as a fixed fee per transaction or calculated based on a percentage of the transaction value. The fees are charged for processing services provided in facilitating the sale of goods and services by means of credit, debit and prepaid cards and other electronic payments and do not include the gross sales price paid by the ultimate buyer. Payment processing services revenue is recognized upon settlement of the transaction.

Our revenue is presented net of a provision for sales credits, which is estimated based on historical results and established in the period in which services are provided. As of the periods presented, there were no such provisions.

Software development costs and amortization

We develop software that is used in providing payment processing services to customers. Capitalization of internally developed software, primarily associated with our operating platform, occurs when we have completed the preliminary project stage, management authorizes the project, management commits to funding the project, it is probable the project will be completed and the project will be used to perform the function intended. The preliminary project stage consists of the conceptual formulation of alternatives, the evaluation of alternatives, the determination of existence of needed technology and the final selection of alternatives.

We capitalize costs of materials and consultants, payroll and payroll-related costs incurred by employees involved in developing internal use computer software. Costs incurred during the preliminary project and post-implementation stages are charged to processing and service costs, which are included in cost of revenue as incurred. Software development costs are amortized to processing and service costs, which are included in cost of revenue on a straight-line basis over estimated useful lives of approximately three to five years. We perform periodic reviews to ensure that unamortized software costs remain recoverable from future cash flows. Capitalized software development costs, net, . . .

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