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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Commission File No. 000-53997

 

 

 

CALPIAN, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Texas		20-8592825
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 North Akard Street, Suite 2850

Dallas, TX 75201

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(214) 758-8600

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x    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		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Issuer’s Common Stock, par value $.001 per share, as of August 13, 2012 was 20,244,367.

 

 

 

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PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

 

		Page
Unaudited Balance Sheets as of June 30, 2012 and December 31, 2011			2
Unaudited Statements of Operations for the three and six months ended June 30, 2012 and 2011			3
Unaudited Statement of Shareholders’ Equity for the period December 31, 2011 through June  30, 2012			4
Unaudited Statements of Cash Flows for the six months ended June 30, 2012 and 2011			5
Notes to Unaudited Financial Statements			6-13

 

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CALPIAN, INC.

UNAUDITED BALANCE SHEETS

 

		June 30, 2012				December 31, 2011
ASSETS
Current Assets
Cash and equivalents		$	410,498			$	367,661
Prepaid insurance			38,251				17,309
Other current assets			76,421				31,542
Total current assets			525,170				416,512
Cash restricted to acquisition of residuals			128,000				425,000
Residual portfolios acquired, net			5,690,396				5,824,481
Equity investment, at cost			1,910,000				—
Deferred financing costs			997,313				1,480,918
Intangible assets acquired, at cost			10,000				10,000
Total assets		$	9,260,879			$	8,156,911
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt, net		$	2,700,000			$	1,201,312
Deferred compensation of officers, directors, and executives			214,286				360,000
Accrued expenses payable to officers, directors, and affiliates			255,935				202,350
Accrued expenses			39,910				35,710
Accounts payable			39,774				23,415
Interest payable			69,000				25,500
Note payable			29,759				7,536
Total current liabilities			3,348,664				1,855,823
Senior notes payable			—				2,700,000
Subordinated notes payable			3,300,000				1,000,000
Discount on subordinated notes payable			(422,331	)			(415,751	)
Long-term debt			2,877,669				3,284,249
Commitments and contingencies
Shareholders’ Equity
Common stock, par value $0.001, 200,000,000 shares authorized, 20,244,367 and 19,303,800 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively			20,244				19,304
Additional paid-in capital			8,128,125				6,680,238
Accumulated deficit			(5,113,823	)			(3,682,703	)
Total shareholders’ equity			3,034,546				3,016,839
Total liabilities and shareholders’ equity		$	9,260,879			$	8,156,911

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

 

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CALPIAN, INC.

UNAUDITED STATEMENTS OF OPERATIONS

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2012				2011				2012				2011
Revenues
Residual portfolio revenues		$	892,786			$	419,143			$	1,763,149			$	844,919
Cost of revenues
Amortizations of residual portfolios acquired			173,804				123,461				582,083				256,744
Portfolio servicing costs			22,500				14,850				43,950				32,200
Other			3,276				38,213				12,511				138,189
Total costs of revenues			199,580				176,524				638,544				427,133
Gross profit			693,206				242,619				1,124,605				417,786
Operating expenses
General and administrative expenses			580,442				554,805				1,281,376				1,101,674
Total operating expenses			580,442				554,805				1,281,376				1,101,674
Operating income (loss)			112,764				(312,186	)			(156,771	)			(683,888	)
Amortization of deferred financing costs			285,172				291,851				567,570				291,851
Amortization of discount on subordinated notes payable			171,054				101,763				342,108				203,526
Interest expense, net			195,195				51,882				380,810				91,507
Total other expenses			651,421				445,496				1,290,488				586,884
Loss before taxes			(538,657	)			(757,682	)			(1,447,259	)			(1,270,772	)
Provision for income taxes (over provision)			(21,872	)			1,200				(16,139	)			2,180
Net loss		$	(516,785	)		$	(758,882	)		$	(1,431,120	)		$	(1,272,952	)
Loss per share, basic and diluted		$	(0.03	)		$	(0.04	)		$	(0.07	)		$	(0.07	)
Weighted average number of shares outstanding, basic and diluted			20,133,817				17,776,160				19,753,978				17,306,116

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

 

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CALPIAN, INC.

UNAUDITED STATEMENT OF SHAREHOLDERS’ EQUITY

For The Period December 31, 2011 Through June 30, 2012

 

		Common Stock								Additional Paid-In				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance, December 31, 2011			19,303,800			$	19,304			$	6,680,238			$	(3,682,703	)			3,016,839
Acquisition of residual portfolios			17,230				17				55,980				—				55,997
Common stock issuance			853,337				853				1,279,147				—				1,280,000
Common stock issued for services			70,000				70				104,930				—				105,000
Equity awards to management			—				—				7,830				—				7,830
Net loss			—				—				—				(1,431,120	)			(1,431,120	)
Balance, June 30, 2012			20,244,367			$	20,244			$	8,128,125			$	(5,113,823	)		$	3,034,546

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

 

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CALPIAN, INC.

UNAUDITED STATEMENTS OF CASH FLOWS

 

		Six Months Ended June 30,
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(1,431,120	)		$	(1,272,952	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Amortization of deferred financing costs			567,570				291,851
Amortization of residual portfolios acquired			582,083				256,744
Amortization of discount on subordinated notes payable			342,108				203,526
Amortization of deferred consulting fees			13,125				—
Equity awards to management			7,830				30,786
Changes in operating assets and liabilities:
Prepaid insurance			12,441				4,896
Other current assets			(5,504	)			6,210
Deferred compensation of officers, directors, and executives			(145,714	)			—
Accrued expenses payable to officers, directors, and affiliates			53,585				115,904
Accrued expenses			4,200				117,277
Accounts payable			16,359				71,363
Interest payable			43,500				(17,694	)
Net cash provided by (used in) operating activities			60,463				(192,089	)
CASH FLOWS FROM INVESTING ACTIVITIES
Residual portfolios acquired			(392,000	)			(972,500	)
Equity investment			(1,910,000	)			—
Net cash used in investing activities			(2,302,000	)			(972,500	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of subordinated notes payable			150,000				—
Proceeds from issuance of subordinated notes payable, restricted			600,000				—
Proceeds from issuance of common stock			1,280,000				—
Change in restricted cash			297,000				—
Payments on note payable			(11,160	)			(14,225	)
Deferred financing costs			(31,466	)			(323,639	)
Net cash provided by (used in) financing activities			2,284,374				(337,864	)
Increase (decrease) in cash and equivalents			42,837				(1,502,453	)
Cash and equivalents, beginning of period			367,661				1,735,521
Cash and equivalents, end of period		$	410,498			$	233,068
SUPPLEMENTAL DISCLOSURE INFORMATION
Interest paid		$	337,310			$	111,012
Income taxes paid		$	—			$	—
Noncash transactions:
Warrants issued in connection with senior debt		$	—			$	2,011,168
Common stock issued for services			105,000				—
Common stock issued for acquisition of residual portfolios			55,997				634,332
Insurance premium financed with note payable			33,383				33,234

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

 

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CALPIAN, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

In this Quarterly Report on Form 10-Q, we refer to Calpian Inc. as “Calpian” “Company,” “we,” “us” and “our.” Calpian was incorporated in 2006. The Company’s common stock (“Common Stock”) trades on the OTC^® under the symbol “CLPI.”

Headquartered in Dallas, Texas, we are in the business of acquiring recurring monthly residual income streams derived from credit card processing fees paid by retail merchants in the United States (“residual portfolios”). Small and medium-sized retail merchants typically buy their credit card processing and acquiring services from Independent Sales Organizations (“ISOs”). ISOs are sales agents authorized by contract with one or more credit card processors to sell processing and acquiring services on their behalf. ISOs shepherd the merchant’s application for processing and acquiring services through the labyrinth of approvals, credit checks, guarantees, etc. that are required before the merchant can be approved to accept consumer credit cards for payment. We act not as a credit card processor, but simply as a purchaser of revenue streams resulting from the relationships between processors and ISOs and other ISOs. In addition, we may also seek to acquire servicing rights with respect to residual portfolios acquired from ISOs.

(1) BASIS OF PRESENTATION AND DISCLOSURE

The unaudited interim financial statements and related notes of Calpian 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 the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments and information (consisting only of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented.

The year-end balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by U.S. GAAP. The accompanying unaudited interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The results of operations for the periods reflected herein are not necessarily indicative of the results to be expected for the full fiscal year.

Going Concern Uncertainty

The accompanying financial statements have been prepared in accordance with U.S. GAAP, which contemplates continuation of the Company as a going concern and is dependent upon the Company’s ability to establish itself as a profitable business. The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.

The Company has generated positive monthly cash since September 2011. Using that cash flow, along with funds available under the acquisition credit facility and funds remaining from the earlier issuances of equity and subordinated debt, the Company expects to acquire additional residual portfolios we anticipate will generate sufficient cash flow to meet our operating needs for the foreseeable future.

In August 2012, the maturity dates of all outstanding subordinated debt were modified to mature on December 31, 2014. As such, we believe the primary factor giving rise to a “going concern” opinion issued by our independent accountants included in our Form 10-K for the year ended December 31, 2011, has been eliminated. There can be no assurance other factors will not arise resulting in a similar opinion in the future.

 

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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

For the six months ended June 30, 2012, there were no new accounting pronouncements issued that have had, or are expected to have, a material impact on our results of operations or financial condition.

Cash and Equivalents

The Company considers cash deposits and all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains deposits, primarily in two financial institutions, which may, at times, exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.

Residual Portfolios Acquired

Residual portfolios acquired represent our investment in recurring monthly residual income streams derived from credit card processing fees paid by retail merchants in the United States. Such residual portfolios are acquired for long-term investment and are expected to be held-to-maturity defined as a point where cash flows generated by the portfolio are nominal. Although history within the industry indicates the cash flows from such residual income streams are reasonably predictable, at the point of acquisition, the Company’s right to receive cash flows is predicated upon future purchases by consumers at merchants included in the portfolio we acquired.

The Company amortizes its investment in residual portfolios based upon the future expected cash flows derived on each individual portfolio acquired as each portfolio is underwritten separately and may reflect unique cash flow patterns. The future expected cash flow is re-evaluated periodically by the Company and the future amortization is adjusted prospectively in accordance with ASC 350, “Determination of the Useful Life of Intangible Assets.” The expected amortization period of residual portfolios is between 10 and 12 years, and no residual value is likely.

Equity Investment

The Company’s equity investment is neither publicly traded, readily marketable, nor held for sale. As such, the Company accounts for this investment using the cost method whereby the investment is initially recorded at cost and the recorded value is tested periodically for other than temporary impairment. The Company expects to use the cost method until its ownership level increases to a point when another method (the equity method or consolidation) is appropriate.

Intangible Asset Acquired

The intangible asset acquired consists of the “Calpian” name and related trademark and domain name acquired from ART Holdings, Inc. (“ART”). The intangible asset has an indefinite life and is carried at cost and tested for impairment at least annually.

Fair Value of Assets and Liabilities

The Company does not engage in hedging activities and does not have any derivative instruments in place. The Company has no non-financial assets measured on a recurring basis.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability (exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We believe the current assets and current liabilities approximate their

 

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estimated fair values at the balance sheet dates, due to their short maturities. We believe the carrying value of our non-current liabilities approximate their estimated fair value at the balance sheet dates for debt with similar terms, interest rates, and remaining maturities currently available to companies with similar credit ratings.

Revenue Recognition

The Company recognizes revenue from its residual portfolios based upon actual cash receipts from residual portfolios acquired.

Earnings per Share

In calculating earnings per share (“EPS”) for the three and six months ended June 30, 2012, no recognition was given to warrants and options exercisable for 2,234,468 shares, respectively, of our Common Stock. In calculating EPS for the three and six months ended June 30, 2011, no recognition was given to 23,836 potentially dilutive convertible preferred shares (outstanding only until May 27, 2011, when they automatically converted into 2,383,600 shares of Common Stock), and no recognition was given to warrants exercisable for 1,646,968 shares of our Common Stock. Due to the net loss applicable to common shareholders in each period, such securities would have been anti-dilutive.

Income Taxes

Income taxes are provided for the tax effect of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences for financial and income tax reporting related to net operating losses that are available to offset future federal income taxes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if available evidence indicates it is more likely than not the position will be sustained on audit. The second step requires the Company to estimate the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company reevaluates its uncertain tax positions on a periodic basis based on factors such as changes in facts and circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.

Use of Estimates

The Company’s financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. 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 making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Warrants and Options

The Company’s warrants are settled in physical delivery of unregistered shares. As such, the warrants are recorded upon issuance as permanent equity at fair value based upon a valuation using the Black-Scholes option pricing model and subsequent changes in fair value are not recognized.

Transaction World Magazine

Due to its strategic value in marketing Calpian to the ISO community, we intend to maintain an administrative support, marketing, and advertising relationship with Transaction World Magazine and have funded all of the magazine’s expenses, net of advertising revenue, since March 2011. Such net expenses average approximately $22,000 per month. Transaction World Magazine, Inc. is a wholly-owned subsidiary of ART. Harold Montgomery and Craig Jessen, both directors, executive officers, and controlling shareholders of Calpian, are founders, controlling shareholders, directors, and executive officers of ART. As such, these financial statements include the revenue and expenses of Transaction World Magazine, the non-owned but wholly-controlled entity.

 

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Effective January 1, 2012, the Company no longer considers Transaction World Magazine to be a separate profit center. As such, its distribution costs, net of advertising revenues, are included within the Statements of Operations as General and Administrative expenses. Net expenses totaling $32,150 and $36,916 in the three and six months, respectively, ended June 30, 2011, have been reclassified accordingly to conform to the current presentation.

(3) RESIDUAL PORTFOLIOS ACQUIRED

During the six months ended June 30, 2012, the Company acquired residual portfolios in a series of transactions. In exchange for the right to receive cash in the form of residuals, the Company paid an aggregate of $392,000 in cash and issued an aggregate of 17,230 shares of Common Stock valued at $55,997. Each of the transactions include customary terms including representations and warranties, covenants, confidentiality terms, indemnification provisions, and performance metrics ranging from 24 to 42 months. If the terms are not satisfied or the performance metrics are not achieved, the Company has the right to re-acquire all or a portion of the shares.

(4) EQUITY INVESTMENT

Investment in Electronic Payments Company

On March 28, 2012, the Company invested $1.3 million and has agreed, in principle, to issue 1,845,385 shares of its Common Stock, in exchange for an approximate 15% equity interest in a newly formed company, Digital Payments Processing Limited (“DPPL”), a company organized under the laws of India and headquartered in Mumbai, India. The issuance of the shares is contingent upon the lead founder delivering certain assurances from the company’s existing shareholders. DPPL has entered into a services agreement with My Mobile Payments Limited (“MMPL”), a company organized under the laws of India and headquartered in Mumbai, India, which owns a payment processing service known as Money on Mobile (“MoM”) that allows individuals to use their cellular phone to make routine payments and to move money using simple text messaging (SMS technology).

Calpian has structured its investment in DPPL as an initial and second funding totaling $2.5 million, then quarterly tranches of approximately $1.2 million each occurring over the following 6 quarters and resulting in a total expected investment of $9.7 million, and a total of 6,123,077 shares of its Common Stock issued ratably over the 6 quarters. A total of 4,863,077 of the shares are subject to being reclaimed by Calpian if certain financial performance metrics are not achieved. To date, Calpian has raised approximately $2.1 million through issuing a combination of Common Stock and subordinated debt to meet the initial funding requirement, and expects to raise the remaining funds through additional private placements of its Common Stock. At the end of the investment series, Calpian expects to own approximately 74% of DPPL with the remainder held by its management team.

To fund its initial investment in DPPL on March 23, 2012, the Company completed a private placement pursuant to which it sold 733,336 shares of its Common Stock at a price of $1.50 per share resulting in proceeds to the Company of $1,100,000. On the same date, the Company issued $150,000 of subordinated notes payable pursuant to its $2 Million Subordinated Debt Offering as described in detail in a Current Report on Form 8-K filed January 6, 2011, and incorporated herein by reference. To fund additional investments in DPPL, the Company issued in June 2012 an additional $600,000 in subordinated notes payable and 120,000 shares of Common Stock at a price of $1.50 per share resulting in proceeds of $180,000.

The subordinated debt is secured by a first-priority lien on substantially all of the Company’s assets, but is subordinated to any thereafter-created senior debt. The subordinated debt bears interest at a rate of 12% annually, paid monthly in arrears, and all principal is due December 31, 2014. Holders of the debt received warrants of 30% of the face amount of the notes they acquired resulting in our issuance of 22,500 warrants on our Common Stock at an exercise price of $2.00 per share. Because the warrants were issued at an exercise price exceeding the most recent issuance price of our Common shares, current interest rates are low, and volatility of our share is low, the Black-Scholes model indicated the warrants had no value.

 

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A company who’s shareholders include Harold Montgomery, the Company’s Chairman and Chief Executive Officer, and members of his family, purchased all $150,000 of the subordinated debt issued in connection with the investment in DPPL and described above. In addition, David Pilotte, the Company’s Chief Financial Officer, purchased 16,667 shares of the Common Stock in the above private placement for a total price of $25,000.

(5) NOTE PAYABLE

On June 4, 2012, the Company entered into a promissory note with a non-affiliated third party in the amount of $33,383 to finance premiums for its directors and officers insurance. The note bears an interest rate of 7.0% per annum, and provides for payments of $3,818 per month through March 2013.

(6) DEBT

Subordinated Debt

On December 31, 2010, the Company issued $1,550,000 of subordinated notes payable in two separate private placement transactions, a $3 Million Subordinated Debt Offering and a $2 Million Subordinated Debt Offering, each exempt from registration under Rule 506 of Regulation D. In July 2011 and March 2012, the Company issued an additional $1.0 million and $150,000, respectively, of such subordinated notes payable pursuant to the $2 Million Subordinated Debt Offering. In June 2012, the Company issued an additional $600,000 of subordinated notes payable pursuant to the $2 Million Subordinated Debt Offering.

The subordinated notes are secured by a first-priority lien on substantially all of the Company’s assets, but are subordinated to any thereafter-created senior debt. The notes bear interest at a rate of 12% annually, paid monthly in arrears, and all principal is due December 31, 2014. Holders of the notes received warrants of either 50% or 30% of the face amount of the notes they acquired, depending upon the timing of their commitment and funding. See additional discussion of the warrants under Note (7) Capital Stock, herein.

In connection with the issuances of the subordinated notes payable, we issued to holders of the subordinated debt warrants to acquire up to 1,165,000 shares of our $.001 par value Common Stock valued at $1,310,073 using the Black-Scholes option pricing model. Such amount has been treated as a discount to the subordinated debt and will be amortized over the period the subordinated debt remains outstanding. See additional information regarding the warrants under Note (7) Capital Stock, herein.

Acquisition Credit Facility

On April 28, 2011, the Company secured an $8.0 million senior secured credit facility from an unrelated lender to acquire residual portfolios. Pursuant to the credit facility, the Company borrowed $2.7 million on August 26, 2011, and can borrow the remainder in up to three additional draws on or before August 26, 2012. When drawn, the promissory notes carry an interest rate of 16%. Interest only is paid monthly in arrears and all principal is due within 24 months of closing, with an option to extend for an additional 12 months. The credit facility includes up to a 4% prepayment penalty if amounts borrowed are repaid within the first 12 months, and is secured by a first lien on all current and after acquired assets of the Company. The Company paid to the lender origination and commitment fees totaling $280,000, paid the lender and third parties administrative fees and expenses totaling $43,639, and issued the lender warrants to acquire up to 804,467 shares of its Common Stock at $1.00 per share. The warrants, valued at $2,011,168 using the Black-Scholes option pricing model, were recorded as a part of the “Deferred Financing Costs” on the balance sheet, and are being amortized over the 24-month life of the underlying credit facility. The warrants expire in five years and shares acquired by exercise of the warrants have “piggy back” registration rights. The credit facility also contains representations, warranties, conditions, confidentiality terms, indemnification provisions and covenants that are typical for this type of credit facility, including that the Company maintain minimum cash balances and EBITDA amounts and generate minimum revenue, each measured monthly.

All principle amounts payable under the acquisition credit facility are due on April 28, 2013, and have been reclassified as “Current portion of long-term debt” on the balance sheet at June 30, 2012. It is the Company’s intent to replace the debt with another senior lender, and such discussions are underway. However, no assurance can be given that the Company will be able to replace its current lender on terms it deems acceptable. In the event the

 

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Company cannot replace its current lender, cash flow today is sufficient to sustain current operations for the foreseeable future, but the acquisition of additional residual portfolios could be curtailed.

(7) CAPITAL STOCK

Common Stock

As discussed below, we have issued warrants and options to purchase 2,234,468 shares of our Common Stock (see “Preferred Stock” and “Warrants” and “Options” below). We have not agreed to register any of our Common Stock, preferred stock or warrants for resale under the Securities Act of 1933, as amended, although the Common Stock issuable upon exercise of the warrants to acquire up to 804,467 shares of the Company’s Common Stock that are held by the lender described in Note (6) Debt, have “piggy back” registration rights.

In April 2012 and as consideration for international acquisition advisory services, we issued 35,000 shares of Common Stock valued at $52,500. Such value is being expensed ratably over the 12-month service period. In June 2012, as consideration for financial advisory services, we issued 35,000 shares of Common Stock valued at $52,500. Such value was recorded as a deferred financing fee to be expensed upon the earlier of closing a qualified financing transaction or termination of the advisory agreement.

Preferred Stock

At the Balance Sheets dates, the Company had 1,000,000 shares of preferred stock, par value $.001 per share, authorized (“Preferred Stock”), but no shares outstanding.

Warrants

During 2010, 2011, and 2012, in connection with the issuances of subordinated notes payable and obtaining an acquisition credit facility, the Company issued warrants exercisable for an aggregate of up to 2,034,468 shares of Common Stock. The exercise prices of the warrants range from $1.00 to $2.00 (weighted average of $1.08) and expire 5 and 7 years from the date of grant.

Options

2011 Equity Incentive Plan

On April 13, 2011, the Company adopted the 2011 Equity Incentive Plan (the “Plan”). 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. The Plan was subsequently approved by shareholders at the Annual Meeting of Shareholders on June 7, 2011.

Grant of Options under the 2011 Equity Incentive Plan

On April 13, 2011, the Company issued non-qualified stock options to purchase a total of 200,000 shares of Common Stock to David N. Pilotte, the Chief Financial Officer of the Company, pursuant to the Plan. The option was granted with an exercise price of $2.50 per share, vests in 48 equal monthly installments through 2015, and expires April 13, 2021. The value of the options vested is recognized at each vesting period using Black-Scholes option pricing model and included in General and Administrative expenses in the Statement of Operations. During the three and six months ended June 30, 2012, $7,830 of expense was recognized in connection with equity awards granted pursuant to the Plan.

(8) INCOME TAXES

The Company is a taxable corporation but, due to net losses, had no federal tax provision or liability in 2012 or 2011. State income tax provisions based on revenues net of compensation costs were reversed in June 2012 when it was determined the taxable threshold for previous periods had not been attained.

 

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At the most recent balance sheet date, the Company had an estimated $3,615,000 in net operating tax loss carry-forwards (“NOLs”) to offset future federal taxable income. Such NOLs expire beginning in 2030. Due to the Company’s continuing losses and uncertainty surrounding the Company’s ultimate ability to use the NOLs to offset future taxable income, the Company has provided a $1,669,000 valuation allowance reflecting 100% of all such NOLs and $440,000 of deferred tax items reversing in future years.

(9) RELATED PARTIES

Amounts Payable to Officers, Directors, and Affiliates

A tentative payout schedule has been developed for the amounts owed to officers, directors, executives, and affiliates that would extend the payout period of the following amounts through 2012.

Deferred Compensation of Officers, Directors, and Executives

During 2010, salaries, wages, and bonuses for our officers, directors, and executives were deferred. At the most recent balance sheet date, such amounts yet to be paid totaled $214,286.

Accrued Expenses Payable to Officers, Directors, and Affiliates

Expenses

ART, of which Messrs. Montgomery and Jessen are controlling shareholders, directors, and officers, has provided the Company since its startup period with certain support services. The Company and ART have verbally agreed that these amounts would accrue and be due and owing by the Company to ART, interest-free, to be paid at a future date to be agreed upon by the parties. At the most recent balance sheet date, such unpaid expenses totaled $128,851.

At the most recent balance sheet date, $25,584 was payable to officers, directors and their affiliates (collectively, “affiliates”) in the form of accumulated expense reports seeking reimbursement for service fees, travel and entertainment, and similar expenses incurred on behalf of the Company.

Management Advisory Agreement

On January 1, 2011, the Company entered into a management advisory agreement with Cagan McAfee Capital Partners, LLC (“CMCP”), a merchant bank owned and controlled by Mr. Laird Cagan, a member of the Company’s Board of Directors and a significant shareholder of the Company. The non-exclusive agreement provides that CMCP will advise the Company on an array of financial and strategic matters and provide for the services of Laird Cagan, as a member of the Company’s Board of Directors. Pursuant to the agreement, CMCP will be paid $14,500 plus expenses each month in arrears beginning January 2011 and continuing through December 2013. The agreement continues month-to-month beyond December 2013 and is thereafter terminable by either party upon 30 days notice. At the most recent balance sheet date, amounts owed to CMCP under the agreement totaled $101,500, and such amounts are expected to be paid as available cash flow permits.

Securities Purchased by Insiders

A company who’s shareholders include Harold Montgomery, the Company’s Chairman and Chief Executive Officer, and members of his family, purchased all $150,000 of the subordinated debt issued in connection with the investment in DPPL as described in Note (4) Equity Investment. In addition, David Pilotte, the Company’s Chief Financial Officer, purchased 16,667 shares of the Common Stock in the above private placement for a total price of $25,000.

 

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(10) SUBSEQUENT EVENTS

Threatened Litigation

On June 27, 2012, Calpian Residual Partners V, LP, Calpian Residual GP V, LLC (together “CRPV”), Craig A. Jessen (“Jessen”), and Calpian were notified of certain complaints by National Bankcard Systems, Inc. (“NBS”) alleging breach of the Residual Purchase Agreement dated November 4, 2008, between CRPV and NBS and certain other improprieties by CRPV. Jessen, who is our President, a member of our Board of Directors, and is a substantial shareholder of Calpian, is an executive officer of both CRPV and Calpian, but CRPV is not otherwise an affiliate of Calpian. Each of the Residual Purchase Agreement and the related improprieties were initiated by CRPV prior to Calpian’s acquisition of the underlying residual portfolio on December 31, 2010. NBS has not yet initiated formal action against Calpian with respect to its claims but in a demand letter alleges damages totaling approximately $729,000 including unpaid merchant servicing fees, compensation for residuals added after Calpian acquired the portfolio, and attorney fees. Calpian has retained legal counsel who is evaluating the situation and preparing a response.

Subordinated Debt Modification

In August 2012, the maturity date of all outstanding subordinated debt was modified to mature on December 31, 2014. As such, we believe the primary factor giving rise to a “going concern” opinion issued by our independent accountants and included in our Form 10-K for the year ended December 31, 2011, has been eliminated.

Common Stock Issued

In July 2012, the Company completed an additional closing of its ongoing private placement of equity pursuant to which it sold 433,334 shares of its Common Stock at a price of $1.50 per share resulting in gross proceeds to the Company of $650,000.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion and analysis provides information which management of the Company believes to be relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read together with the Company’s financial statements and the notes to the financial statements, which are included in this Report. This information should also be read in conjunction with the information contained (i) in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2012, including the audited financial statements and notes included therein, and (ii) in our registration statement on Form 10 filed with the SEC on May 27, 2010, as most recently amended on October 13, 2010. The reported results will not necessarily reflect future results of operations or financial condition.

Cautionary Notice Regarding Forward-Looking Statements

This Report contains a number of forward-looking statements that reflect management’s current views and expectations with respect to our business, strategies, products, future results and events and financial performance. All statements made in this Report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, statement related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below) and apply only as of the date of this Report. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward looking. These forward-looking statements are subject to certain risks and uncertainties, including, but are not limited to, those discussed in “Risk Factors” discussed in our previous and future filings with the SEC and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors that may affect our business.

Our actual results, performance, or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

Business Overview

Headquartered in Dallas, Texas, we are in the business of acquiring recurring monthly residual income streams derived from credit card processing fees paid by retail merchants in the United States (“residual portfolios”). Small and medium-sized retail merchants typically buy their credit card processing and acquiring services from Independent Sales Organizations (“ISOs”). ISOs are sales agents authorized by contract with one or more credit card processors to sell processing and acquiring services on their behalf. ISOs shepherd the merchant’s application for processing and acquiring services through the labyrinth of approvals, credit checks, guarantees, etc. that are required before the merchant can be approved to accept consumer credit cards for payment. We act not as a credit card processor, but simply as a purchaser of revenue streams resulting from the relationships between processors and ISOs and other ISOs. In addition, we may also seek to acquire servicing rights with respect to residual portfolios acquired from ISOs.

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

 

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The Company advertises in industry trade journals to inform the ISO industry of its acquisition capabilities, including Transaction World Magazine (a wholly-owned subsidiary of ART), and underwrites each potential deal using its own internal processes.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow from Operations

Cash inflows from existing residual portfolios acquired in 2012 and prior total approximately $300,000 per month. At the most recent balance sheet date, ongoing monthly cash expenses totaled approximately $225,000 per month (excluding time-discretionary payments to officers, directors, and executives of previously deferred amounts) thus causing the Company to be cash flow positive on an operating basis.

Sales of Unregistered Securities

The Company continues to sell shares of its Common Stock and issue subordinated debt to fund its investments in Digital Payments Processing Limited (“DPPL”) in India and acquire residual portfolios. For the year-to-date period through June 30, 2012, Calpian has raised approximately $2.1 million to fund its investment in DPPL, pay related expenses, and acquire residual portfolios, and the Company expects to raise additional funds through additional private placements of its Common Stock and subordinated debt.

Acquisition of Additional Residual Portfolios

The use of proceeds from the borrowings under the $8.0 million credit facility are limited to acquiring residual portfolios and the use of proceeds from the issuance of subordinated notes payable are limited to acquiring residual portfolios and investing in DPPL, and neither source of funds is available for general working capital. The time period during which the Company can make additional draws under the credit facility ends in August 2012, and the Company is searching for a replacement lender. Although we are in discussions with potential lenders, no assurance can be given that the Company will be able to replace its current lender on terms it deems acceptable. In the event the Company cannot replace its current lender, current cash flow is sufficient to sustain current operations for the foreseeable future, but the acquisition of additional residual portfolios could be curtailed.

MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Material Changes in Financial Condition

Cash Restricted to Acquisition of Residuals

During the six months ended June 30, 2012, the Company used $392,000 of the proceeds from the July 2011 issuance of subordinated notes to acquire additional residuals, and raised an additional amount of approximately $100,000 for future such acquisitions.

Equity Investment

During the six months ended June 30, 2012, the Company raised approximately $1.3 million in equity and $750,000 in subordinated debt to fund the initial equity investment in DPPL of $1.9 million, and pay related expenses of $136,690.

Other Changes

There have been no other material changes in the Company’s financial condition since December 31, 2011 other than amortization of assets reflected in the statement of cash flows, classification of senior notes payable due April 28, 2013 to current liabilities, and classification from current liabilities to long-term debt of subordinated notes payable as a result of maturity dates being extended to December 31, 2014.

 

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Comparison of Three-Months Ended June 30, 2012, and 2011

Revenues during the three months ended June 30, 2012, reflect cash collections on residual portfolios previously acquired by the Company. The increase from the comparable period in 2011 reflects additional acquisitions since that date. Costs of revenue include the amortization of residual portfolios acquired, portfolio acquisition costs, and servicing costs of merchant contracts acquired. The increase in revenues, amortization, portfolio acquisition costs, and servicing costs compared to the same period in the prior year reflects the additional residual portfolios acquired. Other costs of revenues decreased significantly from the comparable period in 2011 as 2011 included $29,450 in a residual lead-generation program later terminated.

Operating expenses during the three months ended June 30, 2012 and 2011 were comprised entirely of general and administrative expenses. General and administrative expenses of $580,442 for the three months ended June 30, 2012, were slightly more than the $554,805 incurred in same period in 2011 due to modest changes across a range of expense types and $30,786 less expense recorded for equity awards to management.

Amortization of discount on subordinated notes payable reflects multiple issuances of subordinated notes. Amounts were higher in the three-months ended June 30, 2012 compared to 2011 due to an additional $1,750,000 issued since the comparable 2011 period.

Interest expense for the three-months ended June 30, 2012, reflects the costs of funds for the $8.0 million acquisition credit facility of $108,000 and the subordinated notes of $87,000, and other. Interest expense for the comparable period in 2011 included $46,500 for subordinated notes.

Comparison of Six-Months Ended June 30, 2012, and 2011

Revenues during the six months ended June 30, 2012, reflect cash collections on residual portfolios previously acquired by the Company. The increase in the comparable period in 2011 reflects additional acquisitions since that date. Costs of revenue include the amortization of residual portfolios acquired, portfolio acquisition costs, and servicing costs of merchant contracts acquired. The increase in revenues, amortization, portfolio acquisition costs, and servicing costs compared to the same period in the prior year reflects the additional residual portfolios acquired. Other costs of revenues decreased significantly from the comparable period in 2011 as 2011 included $14,802 higher acquisition costs.

Operating expenses during the six months ended June 30, 2012 and 2011 were comprised entirely of general and administrative expenses. General and administrative expenses of $1,281,376 for the six months ended June 30, 2012, were larger than the $1,101,674 incurred in comparable period in 2011 due to $136,690 in expenses related to the equity investment in DPPL, $21,250 consulting fees for financial advisory services, and $19,109 higher travel costs; offset by $60,360 less in legal fees and $22,956 less in equity awards to management; and other minor increases and decreases across many additional expense types.

Amortization of discount on subordinated notes payable reflects multiple issuances of subordinated notes. Amounts were higher in the six-months ended June 30, 2012 compared to 2011 due an additional $1,750,000 of subordinated notes issued since the comparable 2011 period.

Interest expense for the six-months ended June 30, 2012, reflects the costs of funds for the $8.0 million acquisition credit facility of $216,000 and the subordinated notes of $164,550, and other. Interest expense for the comparable period in 2011 included $93,000 for subordinated notes offset by a minor amount of net interest income.

Off-Balance Sheet Arrangements

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no changes during the quarter in management’s assessment of the market risk we face in our operations.

 

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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

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) as of the end of the period covered by this quarterly report. Based on such evaluation, our management concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed under the Exchange Act are recorded, processed, summarized and reported, as and when required.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended June 30, 2012, that materially affected, either positively or negatively, 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.

PART II - OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

Threatened Litigation

On June 27, 2012, Calpian Residual Partners V, LP, Calpian Residual GP V, LLC (together “CRPV”), Craig A. Jessen (“Jessen”), and Calpian were notified of certain complaints by National Bankcard Systems, Inc. (“NBS”) alleging breach of the Residual Purchase Agreement dated November 4, 2008, between CRPV and NBS and certain other improprieties by CRPV. Jessen, who is our President, a member of our Board of Directors, and is a substantial shareholder of Calpian, is an executive officer of both CRPV and Calpian, but CRPV is not otherwise an affiliate of Calpian. Each of the Residual Purchase Agreement and the related improprieties were initiated by CRPV prior to Calpian’s acquisition of the underlying residual portfolio on December 31, 2010. NBS has not yet initiated formal action against Calpian with respect to its claims but in a demand letter alleges damages totaling approximately $729,000 including unpaid merchant servicing fees, compensation for residuals added after Calpian acquired the portfolio, and attorney fees. Calpian has retained legal counsel who is evaluating the situation and preparing a response.

 

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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 1, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011, 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

In July and August 2012, the Company completed additional closings of its ongoing private placement of equity pursuant to which it sold 433,334 shares of its Common Stock at a price of $1.50 per share resulting in gross proceeds to the Company of $650,000. All such amount was invested in DPPL.

The Company’s issuance of Common Stock and warrants, and any Common Stock issuable upon 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 3.

DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4.

MINE SAFETY DISCLOUSRES

Not applicable.

 

ITEM 5.

OTHER INFORMATION

None

 

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ITEM 6. EXHIBITS

 

Exhibit No.		Description
4.1		Form of Warrant Agreement, dated August 7, 2012(1)
4.2		Form of 2012 $3.0 Million Note(1)
10.1		Form of Note Modification Agreement, dated July 25, 2012 and effective August 7, 2012(1)
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 *
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 *
101.INS		XBRL Instance**
101.SCH		XBRL Taxonomy Extension Schema**
101.CAL		XBRL Taxonomy Extension Calculation**
101.DEF		XBRL Taxonomy Extension Definition**
101.LAB		XBRL Taxonomy Extension Labels**
101.PRE		XBRL Taxonomy Extension Presentation**

 

*	Filed herewith.

**

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1)	Filed as an exhibit to Current Report on Form 8-K filed with the Commission on August 10, 2012.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: August 14, 2012

 

 

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