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SSPC > SEC Filings for SSPC > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for SPENDSMART PAYMENTS CO

Form 10-Q for SPENDSMART PAYMENTS CO


15-May-2014

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this Quarterly Report and our other periodic reports filed with the Securities and Exchange Commission.

Overview and Financial Condition

Discussions with respect to our Company's operations included herein refer to our operating subsidiary, The SpendSmart Payments Company, a California Corporation ("SpendSmart-CA").

On February 11, 2014, we closed on the acquisition of substantially all of the assets of Intellectual Capital Management LLC d/b/a SMS Masterminds ("SMS Masterminds"). SMS Masterminds is a mobile loyalty solution focused on mobile marketing for small and medium sized businesses. We anticipate that our product suite will consist of various SpendSmart prepaid cards, prepaid program management and card management, mobile marketing and merchant kiosk services, and a financial literacy resource center. The results of operations below include SMS Masterminds from February 12 through March 31, 2014.

Results of Operations

Revenues

Our Company had total revenues of $888,558 and $1,115,608 for the three and six months ended March 31, 2014 ($298,686 and $546,182, for the three and six months ended March 31, 2013). Revenues consist of fees charged to licensees for kiosks, messaging, service setup, and ongoing maintenance. In addition, we charged to our customer prepaid cardholders for monthly maintenance fees, ATM fees, load fees and other insignificant revenues. We continue to not charge our cardholders for new card initiation fees. We charge maintenance fees on our issued cards ("ICs") to cardholders on a monthly basis pursuant to the terms and conditions in our cardholder agreements. We charge ATM fees to cardholders when they withdraw money or conduct other transactions at certain ATMs in accordance with the terms and conditions in our cardholder agreements. Other revenues (currently insignificant) consist primarily of fees associated with optional products or services, which we may offer to consumers during the card activation process.

Our aggregate new card fee revenues vary based upon the number of ICs activated and the activities associated therewith. Our aggregate monthly, bi-annual, and annual maintenance fee revenues vary primarily based upon the number of active cards in our portfolio and the average fee assessed per account. Our average monthly maintenance fee per active account depends upon the extent to which fees are waived based on promotional considerations. Our aggregate ATM fee revenues vary based upon the number of cardholder ATM transactions and the average fee per ATM transaction.

Our business strategy consists of delivering and managing:

(i) Payment products

a. Pre-Paid Debit Cards serving various market segments and consumer demographics

(ii) Payment platform

a. Pre-paid program manager

b. Card management platform

(iii) Enhancement services

a. Other services that we can sell

(iv) Mobile marketing and loyalty platforms

a. Merchant funded rewards

b. Cardholder loyalty

c. Mobile marketing for merchants and to cardholders

d. Mobile Apps

We plan to pursue these strategies across a broad range of consumer, business, for-profit and non-profit organization, and government/municipal sectors. In addition, we have partnered with various groups to develop strategic affinity/co-brand opportunities. We expect to continue such partnership programs with various global for-profit and non-profit organizations. We have also pursued an aggressive marketing and advertising strategy, including a celebrity endorsement program.

We plan to build up our existing customer base by aggressively marketing our prepaid cards and loyalty card programs to SMS Masterminds' current customer base. We also plan to work with SMS Masterminds' current merchant/licensee base to encourage specific loyalty programs which will be marketed in tandem with our prepaid cards; as well as selling our card programs into local organizations and businesses. Finally, we expect to offer a "SpendSmart Network" to all merchant partners which will support all product lines and additional products and feature functionality that is expected to be developed to expand the capabilities of the SpendSmart Network.

While we are optimistic about the prospects for our prepaid card products, there can be no assurance about whether or when they will turn out to be successful or if they will generate sufficient revenues to fund our operations over future periods.

Operating Expenses

In order to better represent our financial results and to make them comparable to leading companies in the prepaid card/mobile marketing industry, we classify our operating expenses into four major categories: 1) selling and marketing; 2) personnel related; 3) processing; and 4) general and administrative expenses. We do not allocate common expenses to any of these expense categories.

Selling and marketing expenses

Selling and marketing expenses totaled $134,192 and $338,972 for the three and six months ended March 31, 2014 ($323,677 and $4,978,625 for the three and six months ended March 31, 2013). This amounted to a decrease of $189,485 and $4,639,653 from fiscal 2013 to fiscal 2014 (58.5% and 93.2%, respectively). The following is a detail of the significant components of selling and marketing expenses for those periods.

Selling and marketing expenses

                                          Fiscal 2014                       Fiscal 2013                     Dollar Change                  Percentage Change
                                 Quarter 2       Year to Date      Quarter 2       Year to Date      Quarter 2      Year to Date      Quarter 2      Year to Date

Marketing consulting             $   18,584     $       55,028     $  154,767     $      261,606     $ (136,183 )   $    (206,578 )        -88.0 %           -79.0 %
Public relations                     23,663             56,838         58,425             97,070        (34,762 )         (40,232 )        -59.5 %           -41.4 %
Marketing programs                   91,945            227,106        110,485          4,619,949        (18,540 )      (4,392,843 )        -16.8 %           -95.1 %

Total                            $  134,192     $      338,972     $  323,677     $    4,978,625     $ (189,485 )   $  (4,639,653 )        -58.5 %           -93.2 %

Decreases in marketing consulting in the most recent quarter over the prior year's corresponding quarter's totals were due to decreased expenditures for marketing agencies in the current year. Our levels of direct marketing were substantially reduced in the current quarter while we focused more on our account engagement (e.g. revenue per card). Marketing programs expense dropped in the current year compared to last year due mainly to higher advertising spend and the $3,750,000 in endorsement-related expense.

Personnel related expenses

Personnel related expenses totaled $2,862,437 and $4,599,126 for the three and six months ended March 31, 2014 ($3,372,126 and $7,265,308 for the three and six months ended March 31, 2013). This amounted to a decrease of $509,689 and $2,666,182 from fiscal 2013 to fiscal 2014 (15.1% and 36.7%, respectively). More significant components of these expenses for the three and six months ended March 31, 2014 and 2013 were as follows.

Personnel related expenses
                                                Fiscal 2014                        Fiscal 2013                      Dollar Change                  Percentage Change
                                        Quarter 2       Year to Date       Quarter 2       Year to Date      Quarter 2      Year to Date      Quarter 2      Year to Date

Salaries and wages                     $   570,048     $      872,153     $   459,161     $      880,060     $  110,887     $      (7,907 )         24.1 %            -0.9 %
Stock based compensation                 2,208,633          3,476,940       2,501,729          5,499,232       (293,096 )      (2,022,292 )        -11.7 %           -36.8 %
Consulting and outside services             40,945             91,745         118,301            228,166        (77,356 )        (136,421 )        -65.4 %           -59.8 %
Other                                       42,811            158,288         292,935            657,850       (250,124 )        (499,562 )        -85.4 %           -75.9 %

Total                                  $ 2,862,437     $    4,599,126     $ 3,372,126     $    7,265,308     $ (509,689 )   $  (2,666,182 )        -15.1 %           -36.7 %

Overall decreases in personnel related expenses reflected the reduction of employees and consultants over the prior fiscal year related to card processing offset by additional personnel related expense related to the SMS acquisition. In addition, we had a favorable adjustment to our deferred compensation accrual for the quarter related to bonus adjustments. Stock based compensation was significantly lower due to fewer option and warrant grants vested in the current year. Other personnel related expenses include employer taxes, employee benefits and other employee related costs.

Processing expenses

Processing expenses totaled $490,384 and $655,690 for the three and six months ended March 31, 2014 ($554,822 and $942,176 for the three and six months ended March 31, 2013). This resulted in a decrease of $64,438 and $286,486, respectively, from fiscal 2013 to fiscal 2014 (11.6% or 30.4%, respectively). More significant components of these expenses for the three and six months ended March 31, 2014 and 2013 were as follows.

Processing expenses
                                              Fiscal 2014                       Fiscal 2013                      Dollar Change                  Percentage Change
                                     Quarter 2       Year to Date      Quarter 2       Year to Date      Quarter 2       Year to Date      Quarter 2      Year to Date

Card processing                      $   92,544     $      175,444     $  106,662     $      136,049     $  (14,118 )   $       39,395          -13.2 %            29.0 %
Settlement reversal                           -           (220,707 )            -                  -              -           (220,707 )          N/A               N/A
Card creation                            28,731             44,721         16,120             29,996         12,611             14,725           78.2 %            49.1 %
Account holder communications            15,995             20,441         12,363             24,411          3,632             (3,970 )         29.4 %           -16.3 %
Merchant credit card fees                52,242            110,035         67,851            145,925        (15,609 )          (35,890 )        -23.0 %           -24.6 %
Contracted software development         183,698            372,828        302,547            488,545       (118,849 )         (115,717 )        -39.3 %           -23.7 %
Customer service                         31,356             58,567         34,867             82,699         (3,511 )          (24,132 )        -10.1 %           -29.2 %
Other                                    85,818             94,361         14,412             34,551         71,406             59,810          495.5 %           173.1 %

                                     $  490,384     $      655,690     $  554,822     $      942,176     $  (64,438 )   $     (286,486 )        -11.6 %           -30.4 %

Decreases in processing expenses were the result of a decrease in our accrual related to the settlement with our previous card processor, significantly lowered usage of our contracted software developer. This was offset by costs related to our SMS acquisition. Our plan is to continue to reduce our costs on a per account basis over time. Customer service costs were reduced due to our bringing some of the customer service function in house (with the related personnel expense included in salaries and wages above).

Amortization of intangible assets

Amortization of intangible assets expenses totaled $41,384 for the three and six months ended March 31, 2014 ($0 for the three and six months ended March 31, 2013). This resulted in an increase of $41,384 from fiscal 2013 to fiscal 2014.

General and administrative expenses

General and administrative expenses totaled $517,912 and $830,297 for the three and six months ended March 31, 2014 ($459,102 and $773,748 for the three and six months ended March 31, 2013). This resulted in an increase of $58,810 and $56,549, respectively, from fiscal 2013 to fiscal 2014 (12.8% and 7.3%, respectively). The following is a detail of the significant components of general and administrative expenses for the respective periods.

General and administrative expenses
                                               Fiscal 2014                       Fiscal 2013                      Dollar Change                  Percentage Change
                                      Quarter 2       Year to Date      Quarter 2       Year to Date      Quarter 2       Year to Date      Quarter 2      Year to Date

Accounting                            $   50,568     $       85,320     $   13,821     $       69,245     $   36,747     $       16,075          265.9 %            23.2 %
Insurance                                 52,765            103,376         46,475             64,356          6,290             39,020           13.5 %            60.6 %
Investor relations / board related       162,345            169,105         88,372            121,523         73,973             47,582           83.7 %            39.2 %
Legal fees - general counsel             114,217            257,951        117,581            216,350         (3,364 )           41,601           -2.9 %            19.2 %
Rent                                      30,312             48,797         14,517             35,111         15,795             13,686          108.8 %            39.0 %
Travel and lodging related                49,129             60,142         39,812             82,063          9,317            (21,921 )         23.4 %           -26.7 %
Telecommunications                        11,937             18,511         20,166             41,484         (8,229 )          (22,973 )        -40.8 %           -55.4 %
Other                                     46,639             87,095        118,358            143,616        (71,719 )          (56,521 )        -60.6 %           -39.4 %

Total                                 $  517,912     $      830,297     $  459,102     $      773,748     $   58,810     $       56,549           12.8 %             7.3 %

Overall increases in accounting costs were the result of additional one-time professional expenses related to the SMS acquisition. In addition, we had compensation related to Board of Directors expense as well as additional rent expense related to the acquisition.

Total operating expenses

Total operating expenses for the three and six months ended March 31, 2014 and 2013, were $4,046,759 and $6,465,919, respectively ($4,709,727 and $13,959,857 for the three and six months ended March 31, 2013). The decrease in operating expenses of $662,968 and $7,493,938, respectively (14.1% and 53.7%, respectively, in percentage terms) over the previous comparable periods were noted in the previous sections. Included in the total operating expenses were noncash expenses (primarily for stock based compensation) totaling $3,476,940 and $5,499,232 for the six months ended March 31, 2014 and 2013, respectively.

Nonoperating Income and Expense

We recognized a loss from the change in the fair value of financial instruments of $94,209 and a gain of $176,981 for the three and six months ended March 31, 2014, compared to a loss of $178,739 and a gain of $8,408,551 for the comparable periods in fiscal 2013.

For the three and six months ended March 31, 2014, interest income totaled $650 and $1,280 ($1,132 and $2,176, respectively for fiscal 2013).

For the three and six months ended March 31, 2014, interest expense totaled $644 and $7,717 ($0 for fiscal 2013).

Net Loss and Net Loss per Share

For the three and six months ended March 31, 2014, our net loss totaled $3,300,680 and $5,228,043 ($4,588,649 and $5,002,948 for the three and six months ended March 31, 2013). Our basic and diluted net loss per share was $0.25 and $0.44 for the three and six months ended March 31, 2014 (a loss of $0.59 and $0.70 for the three and six months ended March 31, 2013). Common stock equivalents and outstanding options and warrants were not included in the calculations due to their anti-dilutive effects.

Liquidity and Capital Resources

We have primarily financed our operations to date through the sale of unregistered equity (accompanied by warrants to purchase shares of our common stock) and in prior years with the issuance of notes payable. At March 31, 2014, our total assets were $14,685,058, while we had working capital of $7,355,776. Total liabilities were $2,441,646 ($1,394,761 of which were current) and our stockholders' equity totaled $12,243,412.

We raised approximately $500,000 and $10,472,003 in net proceeds from our notes issuance and equity raise during the first and second fiscal quarters 2014, respectively

Our cash and cash equivalents balance at March 31, 2014 totaled $7,946,361. During the six months ended March 31, 2014, positive cash flows resulted from financing and investing activities of $9,978,206, offset by negative cash flows from operating activities totaling $3,102,593.

Plan of Operations

With the acquisition of substantially all of the assets of SMS Masterminds, we plan to add some additional staff to meet the needs of our business over the next twelve months. We expect however to continue to cut costs based on the shared infrastructure of combining our two businesses. We expect that our greatest cost to be incurred during fiscal 2014 will be in the area of customer account acquisition, marketing, and building our infrastructure.

Going Concern

As noted above (and by our independent registered public accounting firm in its report on our consolidated financial statements as of and for the year ended September 30, 2013), there exists substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not contain any adjustments related to the outcome of this uncertainty.

Critical Accounting Policies

Management's discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments and we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. There were no changes in our critical accounting policies during fiscal 2014.

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