UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period  ended March 31, 2013

 

Commission File No. 000-53997

 

 

CALPIAN,  INC.

(Exact name of registrant as specified in its charter)

 

 

500 North Akard Street Suite 2850,  Dallas, TX  75201

(Address of principal executive offices)

 

214-758-8600

(Registrant’s telephone number, including area code)

 

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 preceding 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 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     

 

The number of shares outstanding of the registrant’s common stock as of May 24, 2013 was 25,596,576.

 

 

 

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TABLE OF CONTENTS

 

 

 

 

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INTRODUCTORY COMMENT

 

References in this Quarterly Report on Form 10-Q,  to “Calpian,” “Company,” “we,” “us,” and “our” refer to Calpian, Inc. and its subsidiary, unless the context requires otherwise.

 

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 included in our 2012 Annual Report on Form 10-K.  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.

 

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PART  I

ITEM 1 - FINANCIAL STATEMENTS

 

 

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

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

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

   

 

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

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CALPIAN, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1 - OVERVIEW      

 

Basis Of Presentation

In these 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.

 

The unaudited consolidated financial statements and related condensed notes of have been prepared pursuant to Article 8-03 of the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and information (consisting only of normal recurring accruals and retrospective adjustments as the result of obtaining detail information about the fair values of the assets and liabilities of our equity investee) considered necessary for a fair presentation have been included.

 

The preparation of our 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.

 

The year-end balance sheet was derived from the Company’s audited financial statements.  The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s audited financial statements included in its 2012 Annual Report on Form 10-K.  The results of operations for the periods reflected herein are not necessarily indicative of the results to be expected for the full year.

 

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

 

As a result of completing the fair value appraisal of the assets and liabilities of our equity investee, Digital Payments Processing Limited, in March 2013, we have retrospectively adjusted our financial statements for each of the three quarters 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.

 

Foreign Currency Translation

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

 

2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

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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.

 

We do not engage in hedging activities, and the Company has no derivative instruments in place.  We do not have any nonfinancial assets measured on a recurring basis.

 

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 are maintained primarily in two financial institutions and, 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 retail merchants in the United States.  We acquire portfolios as long-term investments and expect to hold them to maturity, the point in time when a portfolio’s cash flows become nominal.  Although history within the industry indicates the cash flows from such income streams are reasonably predictable, the future cash flows are predicated on the merchants making future credit card sales to their customers.  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

We use the equity method of accounting for investments in entities in which the Company can exercise significant influence but does not own a majority equity interest or otherwise control.  To the extent the amount invested exceeds the Company’s proportionate share of the investee’s net assets, the excess is allocated to its net assets based on their fair values and goodwill using the acquisition method of accounting.  The carrying value of our investment in the net assets, but not any related goodwill, is tested for other than temporary impairment when events or changes in circumstances indicate its carrying amount may not be recoverable.

 

Revenue Recognition

The Company recognizes residual portfolio revenue based on actual cash receipts.  In the first quarter of 2013, approximately 45% 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 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.  Subsequent changes in fair value are not recognized.

 

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.  The acquisition was financed by expanding the Company's senior credit facility from $5 million to $14.5 million and borrowing $10.2 million.  Fees and expenses paid for the amendment and additional borrowing totaled $560,000 and we issued a warrant to the lender for up to 500,000 shares of our common stock having a $625,000 fair value using the Black-Scholes option-pricing model.

 

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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 can provide the general merchant community 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 small- and mid-sized 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 preliminary estimated fair values of the net assets acquired pending obtaining an appraisal of certain assets based on assumptions we believe unrelated market participants would use based on observable and unobservable marketplace factors:

 

 

The residual portfolios are being amortized over 10 years.  The indefinite-lived intangible assets are not subject to amortization.

 

The revenues and earnings of the acquired net assets included in our financial statements and the pro forma amounts as if their acquisition had been included as of January 1, 2012 are as follows:

 

 

 

The pro forma losses include adjustments to reflect: (i) exclusion of the seller’s reorganization costs and operating expenses not related to CCI’s future business; (ii) depreciation and amortization assuming the fair value adjustments to fixed assets and the residual portfolios had been applied on January 1, 2012; (iii) the interest and deferred financing cost amortization related to the senior debt borrowing for the acquisition in both years; (iv) the lender expenses and acquisition related legal fees in 2012 rather than in 2013 general and administrative expenses; and, (v) the consequential tax effects.

 

4  - EQUITY INVESTMENT

 

In March 2012, the Company acquired an equity interest in Digital Payments Processing Limited (“DPPL”), a newly-organized company, and DPPL entered into a services agreement with My Mobile Payments Limited (“MMPL”).  Both companies are organized under the laws of India and headquartered in Mumbai, India.  MMPL is controlled by Indian residents and shareholders of DPPL other than Calpian. 

 

The investment agreement provides for acquiring an equity interest of approximately 74%  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.  As of March 31, 2013, we owned 45% of DPPL and had invested $5.5 million, issued 2.4 million shares of our stock valued at $3.6 million, and recognized a cumulative $1.2 million equity investment loss for a net carrying value of our 56%  economic interest in DPPL as summarized below.  The difference between the 45% and 56% interests represents advances made by the Company that have not yet been certificated by DPPL.

 

 

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The combined balance sheets of DPPL and MMPL as of March 31, 2013, and their results of operations for the three months then ended, based on the March 2012 fair values of their assets and liabilities using assumptions about observable and unobservable marketplace factors we believe unrelated market participants would use are summarized as follows:

 

 

 

 

 

 

5 - RESIDUAL PORTFOLIOS

 

The transactions in which we acquired our residual portfolios include customary terms including representations and warranties, covenants, confidentiality terms, indemnification provisions and, in  some instances, include performance metrics to be achieved over the next 9 to 28 months.  If the terms are not satisfied or the performance metrics are not achieved, we have the right to reacquire all or a portion of the shares of our common stock included in the consideration paid for some portfolios.

 

6 - DEBT

 

 

Senior Credit Facility

In November 2012, the Company entered into a $5.0 million senior credit facility and borrowed $3.0 million to pay the $2.7 million, 16% annual interest, balance outstanding under a 2011 credit facility and $255,000 in loan origination fees and expenses. 

 

In March 2013, the facility was expanded to $14.5 million and we borrowed $10.2 million to finance a business acquisition (Note 3).  Fees and expenses paid for the amendment and additional borrowing totaling $560,000 and we issued a warrant to the lender for up to 500,000 shares of our common stock having a $625,000 fair value using the Black-Scholes option-pricing model. 

 

The $1.3 million balance available under the facility is restricted to the acquisition of additional credit card residuals in the U.S.; provided, the outstanding loan balance after the acquisition will not exceed 16 times the expected monthly gross cash flow as measured immediately following the acquisition.  Interest only is payable through August 2014; thereafter, principal is payable at a monthly level rate to fully amortize the loan by its September 2016 maturity date.  The loan has an interest rate of 13.2% per year payable monthly in arrears, a prepayment penalty beginning at 4% and declining to 0% in February 2014, and facility growth fees of 4% of new borrowings arranged by the lender and 2% if arranged by others.  Deferred loan costs include the warrant’s fair value that will be expensed when, and if, it becomes exercisable (Note 7).  Other loan fees are being amortized over the loan term.

 

A first lien on all the Company’s assets has been pledged as collateral for the senior credit facility.  The facility requires maintaining a minimum of $200,000 in cash and equivalents, contains customary representations and warranties, and we have agreed to certain affirmative covenants.  The facility also limits our ability to engage in certain actions including: making loans or advances; extending credit; guaranteeing or incurring certain debt; engaging in certain asset acquisitions; making certain investments in other entities; making property transfers; changing our business or financial structure; and, paying dividends. 

 

Subordinated Debt

The Company’s subordinated debt has been issued pursuant to a $3 Million Subordinated Debt Offering, a $2 Million Subordinated Debt Offering,  a  2012 $3 Million Notes Offering, and a 2012 Convertible Notes Offering, each exempt from

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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 which precludes subordinated debt principal payments without the lender’s concurrence.  The notes bear interest at a rate of 12% annually paid monthly in arrears.

 

Subordinated Notes Payable

Principal payment of $3.8 million at a 16.6% annual effective interest rate is due December 31, 2014, and $1.0 million at a 14.9% annual effective interest rate is due December 31, 2016.

 

The aggregate $1,310,073 fair value of warrants to acquire up to 1,165,000 shares of our common stock was being amortized over the period from the dates of issuance to the original November 2012 to June 2014 principal due dates.  In August 2012, all maturity dates were extended to December 31, 2014, in consideration for issuance of an additional 252,925 warrants that, due to low interest rates and volatility in our shares, were determined using the Black-Scholes option-pricing model to have no current value.  The $366,000 modification-date debt fair value discount to a 16.6% annual effective rate was substantially equal to the unamortized balance of the original warrants and is being amortized over the remaining term of the debt. 

 

In 2013, notes for $1.5 million were issued with warrants for up to 140,000 shares of stock having a $153,600 fair value using the Black-Scholes option-pricing model which is being amortized over the term of the debt.  In the first three months of 2013 and 2012, interest expense was $122,167 and $77,550, respectively, and amortization totaled $45,249 and $171,054, respectively.

 

Convertible Subordinated Notes

Unless prepaid, the convertible notes automatically convert at $1.50 per share into 666,665 shares of our common stock between November 2013 and February 2014.  In 2013, a  note for $150,000  was issued with warrants for up to 40,000 shares of stock having a $54,000 fair value using the Black-Scholes option-pricing model.  The $117,800 fair value of warrants for up to 90,000 shares of our common stock granted in connection with certain of the notes is being amortized to the conversion dates resulting in an overall effective annual interest rate of 24.8%.  In 2013, interest expense was $27,700 and amortization totaled $24,000,  respectively.

 

Notes 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.

 

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 904,467 shares of our common stock and 666,665 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.

 

Preferred Sock

Our Board of Directors may designate shares of preferred stock to be issued in one or more series and with such designations, rights, preferences, and restrictions as specified in the requisite resolution(s) without shareholder approval.  If preferred stock is issued and the Company is subsequently liquidated or dissolved, the preferred stock holders may have preferential rights to a liquidating distribution.

 

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 5,814,058 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, 17,500 shares were sold in a private placement for $35,000, including the $8,750 fair value of 17,500 warrants as part of a unit subscription.

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Warrants

A total of 3,147,393 warrants for our common stock with exercise prices ranging from $1.00 to $3.00 per share ($1.46 weighted average) have been issued in connection with our financing transactions and expire as follows: 2015 – 617,501; 2016 – 1,304,467; 2017 – 527,925; 2018 – 697,500.  On exercise, the warrants will be settled in delivery of unregistered shares of our common stock.

 

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 is not at least an average of 1.4% during the three-month periods ending June and September 2014. 

 

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

Nonqualified stock options for 400,000 shares of our common stock with a weighted-average exercise price of $2.00 per share were outstanding and exercisable at March 31, 2013, and December 31, 2012.  At March 31, 2013, they had an intrinsic value of $110,000 and a weighted-average remaining contractual term of 8.7 years; however, 200,000 options become void if services are earlier terminated.

 

8 - LITIGATION

 

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 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 both 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.  The case is currently in the discovery phase and the matter is set for trial in September 2013.

 

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 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.  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.

 

 

 

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10  - INCOME TAXES

 

Our $3.4 million federal income tax net operating loss carryover expires over the period from 2026 through 2033.  Our federal and state income tax returns are no longer subject to examination for years before 2008.  We have taken no tax positions that, more likely than not, may not be realized.

 

Significant components of our income tax provisions were:

 

The losses before income taxes and equity investment loss at the 34% federal statutory tax rate reconciles to our tax provisions as follows:

 

 

11 - Earnings Per Share

 

Basic earnings per share are based on the weighted average number of shares of our common stock outstanding during the period.  Diluted earnings per share also include all potentially dilutive securities.  At the balance-sheet dates, potentially dilutive securities that would have had an antidilutive effect on our basic net losses per share were:

 

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12  - RELATED PARTIES

Support Services And Advances

ART has provided the Company since its startup period with certain support services.  It has been verbally agreed payment for these services would accrue interest-free and be paid at a future date to be agreed on by the parties.  At the most recent balance sheet date, unpaid expenses of $85,699 incurred in 2010 and reimbursement for subsequent payments by ART on our behalf totaled $159,545.    

 

 

Management Advisory Agreement

We  have a management advisory agreement with Cagan McAfee Capital Partners, LLC (“CMCP”), an investment company owned and controlled by Laird Q. Cagan, a member of our Board of Directors and a significant shareholder.  The nonexclusive agreement provides for CMCP advising the Company on an array of financial and strategic matters and provides for the services of Mr. Cagan as a member of our Board.  Pursuant to the agreement, CMCP is paid $14,500 plus expenses each month through December 2013.  The agreement continues month-to-month beyond that date and is thereafter terminable by either party with 30 days notice.  At the most recent balance sheet date, amounts payable to CMCP totaled $232,000 which is expected to be paid as available cash flow permits.

 

Affiliates’ Deferred Compensation

At the most recent balance sheet date, officers’, directors’, and other affiliates’ compensation deferred in 2010 remaining unpaid totaled $106,000.

 

 

This Item 2 should be read in the context of the information included in our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission and elsewhere in this Quarterly Report, including our financial statements and accompanying notes in Item 1 of this Quarterly Report.

 

BUSINESS

 

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.

 

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 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.

 

THREE MONTHS ENDED MARCH 31, 2013 COMPARED TO 2012

 

Our revenues were $1.8 million in 2013 and $0.9 million in 2012 with gross profit percentages of 43% and 50%, respectively.  General and administrative expenses for 2013 and 2012 were $1.0 million and $0.7 million, respectively, and we recognized a $0.4 million loss from our equity investment in 2013.  We had a $1.1 million net loss in 2013 and a $0.9 million net loss in 2012, or $.05 per share in both years.  Significant portions of the increases are attributed to CCI’s operations for the last 15 days of the quarter.  The results for our two business segments were as follows:

 

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CLPI’s 2013 revenues were off 6.0% compared to the lower than expected 2012 first quarter revenues due to normal portfolio attrition.  Because of the lower than expected revenues in 2012, residual portfolio amortization was adjusted in 2012 which resulted in a 50% gross profit percentage compared to the 66% in the first quarter of 2013.  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.

 

The $219 thousand increase in CLPI’s general and administrative expenses over the 2012 first quarter is attributable to: $85 thousand more costs incurred in seeking additional equity and debt financing; $59 thousand incurred in connection with the acquisition of assets of Pipeline Data, Inc.; $53 thousand relating to additional legal and auditing services; $40 thousand related to additional advertising expense and reduced magazine revenues; and, $33 thousand in employee compensation as Social Security tax rates increased.  Expenses in connection with our equity investment were $69 thousand more in 2012 when we were concluding the investment agreement.

 

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

 

We continue to increase 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.  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 each of the three quarters ended December 31, 2012, as described in Note 1  of the notes to our financial statements in Part I, Item 1 of this Report 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.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash used by consolidated operating activities in the three months ended March 31, 2013, amounted to $379 thousand, of which $309 thousand was due to CCI’s accounts receivable created during its first 15 days of operation as a new company.  CLPI’s increased general and administrative expenses accounted for most of the cash used in its operations.  The $10.2 million senior credit facility borrowing 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 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 $1.7 million,  of which $1.4 million was used to increase our equity investment in DPPL with the balance used in operations.    

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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.

 

There have been no changes in the critical accounting policies disclosed in our 2012 Annual Report on Form 10-K.

 

ITEM 3       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our primary market risk is to residual portfolio post-acquisition attrition.  There have been no changes during the quarter in management’s assessment of that risk as disclosed in our 2012 Annual Report on Form 10-K.

 

ITEM 4       CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time period specified in the SEC's rules and forms and is accumulated and communicated to the Company's management, as appropriate, in order to allow timely decisions in connection with required disclosure.

 

Evaluation of Disclosure Controls and Procedures 

The Company's principal executive officer and its principal financial officer carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2013, pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded the Company's disclosure controls and procedures as of March 31, 2013, were effective.

 

Changes In Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

The Company’s disclosure controls and procedures provide the Company’s Chief Executive Officer and Chief Financial Officer with reasonable assurances that the Company’s disclosure controls and procedures will achieve their objectives.  However, the Company’s management does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting can or will prevent all human error.  A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs.  Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company’s company are detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake.  Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization.  The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.

 

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We are a smaller reporting company and are required to comply with the internal control reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act.  Although we are working to comply with these requirements, we have limited financial personnel making compliance with Section 404 - especially with segregation of duty control requirements – very difficult, if not impossible, and cost prohibitive.  While the SEC has indicated it expects to issue supplementary regulations easing the burden of Section 404 requirements for small entities like us, such regulations have not yet been issued.

 

PART II

 

ITEM 1       LEGAL PROCEEDINGS

 

The description of the litigation in Note 8  of the Condensed Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report is incorporated herein by reference.

 

ITEM 1A    RISK FACTORS

 

In addition to the information in this Quarterly Report on Form 10-Q, consideration should be given to the risk factors in Part I, Item 1A, Risk Factors in our 2012 Annual Report on Form 10-K which could materially and adversely affect our business, financial condition, and results of operations.  There have been no significant changes in those risk factors.

 

ITEM  2       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the period covered by this report, the Company completed additional closings of its private placement of equity pursuant to which it sold 17,500 shares of its common stock at a price of $1.50 per share resulting in gross proceeds to the Company of $26,250, all of which was invested in DPPL.  During the same period, the Company:

 

No underwriters were involved in the transactions described above.  The Company’s issuance of common stock, subordinated 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.

 

ITEM 6       EXHIBITS

 

The Exhibit Index immediately preceding the exhibits required to be filed with this report is incorporate herein by reference.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

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EXHIBIT INDEX

 

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