UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q/A

Amendment No. 1

 

xQUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2016

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 333-192877

        

QPAGOS

(Exact name of registrant as specified in its charter)

 

Nevada 33-1230229
(State or other jurisdiction of incorporation or
organization)
(IRS Employer Identification Number)

 

Paseo del la Reforma 404 Piso 15 PH
Col. Juarez, Del. Cuauhtemoc
Mexico, D.F. C.P. 06600

(Address of principal executive offices including zip code)

 

+52 (55)-110-110

(Registrant’s telephone number, including area code)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ¨  No  x * (Note : Prior to June 9, 2016, the registrant was a voluntary filer of reports under Section 13 or 15(d) of the Securities Exchange Act of 1934; however, the registrant has voluntarily filed during the preceding 12 months all reports it would have been required to file by Section 13 or 15(d) of the Securities Exchange Act of 1934 if the registrant had been subject to one of such Sections.)

 

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 (section 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 shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No  x

 

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. (Check one):

 

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company x

 

Number of shares outstanding of the issuer’s common stock as of the latest practicable date: 55,454,000 shares of common stock, $.0001 par value per share, as of December 12, 2016. 

 

   

 

 

Explanatory Note

 

Overview of Restatement

 

Qpagos (formerly known as Asiya Pearls, Inc.), together with its subsidiaries, the (“Company”) has prepared this Amendment No. 1 (this Amendment”) to its Quarterly Report on Form 10-Q for the period ended June 30, 2016 filed with the SEC on August 18, 2016 (the “Original Report”) to reflect :

 

In this Report on Form 10-Q, Qpagos (formerly known as Asiya Pearls, Inc.), together with its subsidiaries, the “Company”:

 

(a) restatement to its Consolidated Balance Sheet as of December 31, 2015 and June 30, 2016 and the related Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 and Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015;

 

(b) amendments to its Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as it relates to the three and six months ended June 30, 2016 and 2015;

 

(c) amendments to its Risk Factors as it relates to the three and six months ended June 30, 2016 and 2015.

 

To assist in your review of this filing, this Amendment sets forth the Original Report in its entirety.  However, this Amendment only amends and restates Item 1, Item 2 of Part I and Item 1A of Part II , in each case as a result of, and to reflect, the restatement and related matters.  No other information in the Original Report is amended hereby.  The foregoing items have not been updated to reflect other events occurring after the filing of the Original Report or to modify or update those disclosures affected by subsequent events.  In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Report has been amended to include currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the foregoing amended information, this Amendment continues to speak as of the date of the Original Report and the Company has not updated the disclosure contained herein to reflect events that occurred as of a later date.  Other events occurring after the filing of the Original Report or other disclosures necessary to reflect subsequent events have been or will be addressed in the Company’s reports filed with the SEC subsequent to the date of this filing.

 

Background on the Restatement

 

As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on November 3, 2016, the board of directors of the Company, upon the recommendation of the Company’s management and based upon discussions between management and the Company’s independent auditors, RBSM, LLP, concluded that because of errors identified in the Company’s previously issued financial statements for fiscal year December 31, 2015 and for the first two quarters of 2016, the Company would restate its previously issued financial statements, including (i) Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 18, 2016 , (ii) the Transition Report for the period December 31, 2015 through March 31, 2016 filed with the SEC on June 17, 2016 and the (iii) Current Report on Form 8-K filed with the SEC on May 13, 2016.

 

As a part of the Company’s analysis of its books and records, the Company management had discovered and discussed with the auditors a discrepancy in the recording of revenue in Mexico that has resulted in an overstatement of revenue, a corresponding overstatement of cost of goods sold and a net understatement of gross profit in the Company’s financial statements.

 

The adjustments made as a result of the restatement are more fully discussed in Note 3, Restatement of Previously Issued Financial Statements, of the Notes to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. To further review the effects of the accounting errors identified and the restatement adjustments, see Part I—Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report.

  

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q/A contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report Form 10-Q/A, including but not limited to, the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward-looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q/A. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

NOTE REGARDING COMPANY REFERENCES

 

Throughout this Quarterly Report on Form 10-Q/A, “QPAGOS,” the “Company,” “we,” “us” and “our” refer to QPAGOS.

 

   

 

 

QPAGOS

(FORMELRY KNOWN AS ASIYA PEARLS, INC.)

 

Index

 

    Page
PART I. FINANCIAL INFORMATION    
Item 1. Condensed Consolidated Financial Statements (unaudited)   F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   1
Item 3. Quantitative and Qualitative Disclosures About Market Risks   7
Item 4. Controls and Procedures   7
PART II. OTHER INFORMATION    
Item 1. Legal Proceedings   8
Item 1A. Risk Factors   8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   19
Item 3. Defaults Upon Senior Securities   19
Item 4. Mine Safety Disclosures   19
Item 5. Other Information   19
Item 6. Exhibits   20

 

   

 

 

Item 1.

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

 

TABLE OF CONTENTS

 

June 30, 2016

 

Condensed Consolidated Balance Sheets as of June 30, 2016 (as restated) (Unaudited) and December 31, 2015 (as restated) F-2
Condensed Consolidated Statements of Comprehensive Loss for the six months ended June 30, 2016 and 2015, (as restated) (Unaudited) F-3
Condensed Consolidated Statements of Changes in Stockholders’ Equity as of January 1, 2016 to June 30, 2016, (as restated) (Unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015, (as restated) (Unaudited) F-5
Notes to the unaudited Condensed Consolidated Financial Statements (as restated) F-6–F-25

 

   

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2016   2015 
   (As Restated)   (As Restated) 
   (Unaudited)     
Assets          
           
Current Assets          
Cash  $135,060   $832,159 
Accounts receivable   387,667    242,075 
Inventory   508,441    668,567 
Recoverable IVA taxes and credits   342,084    417,897 
Other current assets   24,745    52,014 
Total Current Assets   1,397,997    2,212,712 
           
Non-Current Assets          
Plant and equipment, net   53,800    70,537 
Intangibles, net   189,917    211,417 
Investment   3,000    - 
Other assets   12,131    11,712 
Total Non-Current Assets   258,848    293,666 
Total Assets  $1,656,845   $2,506,378 
           
Liabilities and Stockholders' Equity          
           
Current Liabilities          
Accounts payable  $142,185   $38,372 
Notes payable   109,307    103,320 
IVA and other taxes payable   88,195    192,044 
Advances from customers   70,342    1,986 
Total Current Liabilities   410,029    335,722 
           
Total Liabilities   410,029    335,722 
           
Stockholders' Equity          
Common stock, $0.0001 par value; 100,000,000 shares authorized, 55,254,000 and 44,784,000 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively.   5,526    4,478 
Additional paid-in-capital   8,134,541    5,735,861 
Accumulated deficit   (7,405,415)   (3,989,689)
Accumulated other comprehensive income   512,164    420,006 
Total stockholder's equity - controlling interest   1,246,816    2,170,656 
Non-controlling interest   -    - 
Total Stockholders' Equity   1,246,816    2,170,656 
Total Liabilities and Stockholders' Equity  $1,656,845   $2,506,378 

 

See notes to the unaudited condensed consolidated financial statements

 

  F- 2 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

   Three   Three   Six   Six 
   Months
Ended
   Months
Ended
   Months
Ended
   Months
Ended
 
   June 30,   June 30,   June 30,   June 30, 
   2016   2015   2016   2015 
   (As Restated)   (As Restated)   (As Restated)   (As Restated) 
                 
Net Revenue  $626,416   $105,427   $1,256,350   $161,470 
                     
Cost of Goods Sold   597,647    93,329    1,206,936    143,936 
                     
Gross Profit   28,769    12,098    49,414    17,534 
                     
General and administrative   615,936    363,647    3,309,638    793,371 
Depreciation and amortization   19,345    8,479    38,690    16,920 
Total Expense   635,281    372,126    3,348,328    810,291 
                     
Loss from Operations   (606,512)   (360,028)   (3,298,914)   (792,757)
                     
Other income   1,016    -    4,015    471 
Interest expense, net   (2,992)   -    (5,984)   - 
Foreign currency loss   (145,827)   (172,884)   (114,843)   (213,189)
                     
Loss before Provision for Income Taxes   (754,315)   (532,912)   (3,415,726)   (1,005,475)
Provision for Income Taxes   -    -    -    - 
                     
Net Loss   (754,315)   (532,912)   (3,415,726)   (1,005,475)
Net loss attributable to non-controlling interest   -    -    -    - 
                     
Net Loss Attributable to Controlling Interest  $(754,315)  $(532,912)  $(3,415,726)  $(1,005,475)
                     
Net Loss Per Share -  Basic and Diluted  $(0.01)  $(0.02)  $(0.06)  $(0.08)
                     
Weighted Average Number of Shares Outstanding - Basic and Diluted   52,762,601    21,477,682    53,660,993    13,152,412 
                     
Other Comprehensive Income                    
Foreign currency translation adjustment   49,176    47,236    92,158    106,252 
                     
Total Comprehensive loss   (705,139)   (485,676)   (3,323,568)   (899,223)
Comprehensive loss attributable to non-controlling interest   -    -    -    - 
                     
Comprehensive Loss Attributable to Controlling Interest  $(705,139)  $(485,676)  $(3,323,568)  $(899,223)

 

See notes to the unaudited condensed consolidated financial statements

 

  F- 3 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE PERIOD JANUARY 1, 2016 TO JUNE 30, 2016 (As Restated) (Unaudited)

 

                       Total         
                   Accumulated   Stockholders'         
           Additional       Other   Equity   Non-   Total 
   Common Stock   Paid-in   Accumulated   Comprehensive   Controlling   Controlling   Stockholders' 
   Shares   Amount   Capital   Deficit   Income   Interest   Interest   Equity 
Balance as of December 31, 2015 as previously reported   49,809,000   $4,981   $5,733,811   $(4,019,428)  $422,584   $2,141,948   $-   $2,141,948 
                                         
Correction of prior period errors   (5,025,000)   (503)   2,050    29,739    (2,578)   28,708    -    28,708 
                                         
Balance as of December 31, 2015, as restated   44,784,000    4,478    5,735,861    (3,989,689)   420,006    2,170,656         2,170,656 
                                         
Equity based compensation   -    -    144,000    -    -    144,000    -    144,000 
                                         
Shares issued for services   5,145,000    515    2,031,760    -    -    2,032,275    -    2,032,275 
                                         
Shares retained by accounting acquire in reverse merger transaction   5,025,000    503    (2,050)   -    -    (1,547)        (1,547)
                                         
Shares issued for cash   300,000    30    224,970    -    -    225,000    -    225,000 
                                         
Translation adjustment   -    -    -    -    92,158    92,158    -    92,158 
                                         
Net loss for the six months ended June 30, 2016   -    -    -    (3,415,726)   -    (3,415,726)   -    (3,415,726)
                                         
Balance as of June 30, 2016   55,254,000   $5,526   $8,134,541   $(7,405,415)  $512,164   $1,246,816   $-   $1,246,816 

 

See notes to unaudited condensed consolidated financial statements

 

  F- 4 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six   Six 
   Months
Ended
   Months
Ended
 
   June 30,   June 30, 
   2016   2015 
   (As Restated)   (As Restated) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss attributable to the company  $(3,415,726)  $(1,005,475)
Less: loss attributable to non-controlling interest   -    - 
Net loss   (3,415,726)   (1,005,475)
Adjustment to reconcile net loss to net cash used in operating activities:          
Depreciation expense   17,190    16,920 
Amortization expense   21,500    - 
Equity based compensation charge   144,000    - 
Shares issued for services   2,032,274    - 
Non- cash investment in affiliates   (3,000)   - 
Changes in Assets and Liabilities          
Accounts receivable   (145,592)   (57,754)
Inventory   160,126    85,558 
Recoverable IVA taxes and credits   75,813    (141,374)
Other current assets   33,298    46,357 
Other assets   (419)   (5,038)
Accounts payable and accrued expenses   94,783    23,556 
IVA and other taxes payable   (103,849)   35,437 
Advances from customers   68,357    18,982 
Interest accruals   5,987    - 
CASH USED IN OPERATING ACTIVITIES   (1,015,258)   (982,831)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (453)   (1,819)
NET CASH USED IN INVESTING ACTIVITIES   (453)   (1,819)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds on common stock issued   225,000    - 
Proceeds from loans payable   -    719,962 
NET CASH PROVIDED BY FINANCING ACTIVITIES   225,000    719,962 
           
Effect of exchange rate changes on cash and cash equivalents   92,158    106,252 
           
NET DECREASE IN CASH   (698,552)   (158,437)
CASH AT BEGINNING OF PERIOD   833,612    173,828 
CASH AT END OF PERIOD  $135,060   $15,391 
           
CASH PAID FOR INTEREST AND TAXES:          
Cash paid for income taxes  $-   $- 
Cash paid for interest  $-   $- 

 

See notes to the unaudited condensed consolidated financial statements

 

  F- 5 

 

 

 QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1ORGANIZATION AND DESCRIPTION OF BUSINESS

 

a)Organization

On May 12, 2016, Asiya Pearls, Inc., a Nevada corporation (“Asiya”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Qpagos Corporation, a Delaware corporation (“Qpagos Corporation”), and Qpagos Merge, Inc., a Delaware corporation and wholly owned subsidiary of Asiya (“Merger Sub”).  Pursuant to the Merger Agreement, on May 12, 2016, the merger was consummated and Qpagos Corporation and Merger Sub merged (the “Merger”), with Qpagos Corporation continuing as the surviving corporation of the Merger.

 

Pursuant to the Merger Agreement, upon consummation of the Merger, each share of Qpagos Corporation’s capital stock issued and outstanding immediately prior to the Merger was converted into the right to receive two shares of Asiya’s common stock, par value $0.0001 per share (the “Common Stock”). Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, Asiya assumed all of Qpagos Corporation’s warrants issued and outstanding immediately prior to the Merger, which are now exercisable for approximately 6,219,200 shares of Common Stock, respectively, as of the date of the Merger. Prior to and as a condition to the closing of the Merger, the then-current Asiya stockholder of 5,000,000 shares of Common Stock agreed to return to Asiya 4,975,000 shares of Common Stock held by such holder to Asiya and the then-current Asiya stockholder retained an aggregate of 25,000 shares of Common Stock and the other stockholders of Asiya retained 5,000,000 shares of Common Stock. Therefore, immediately following the Merger, Qpagos Corporation’s former stockholders held 49,929,000 shares of Asiya common stock which represented approximately 91% of the outstanding Common Stock.

 

The Merger is being treated as a reverse acquisition of Asiya, a public shell company, for financial accounting and reporting purposes. As such, Qpagos Corporation is treated as the acquirer for accounting and financial reporting purposes while Asiya is treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that will be reflected in the Company’s future financial statements filed with the United States Securities and Exchange Commission (“SEC”) will be those of Qpagos Corporation, and the Company’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of Qpagos Corporation.

 

Qpagos Corporation was incorporated on May 1, 2015 under the laws of Delaware under the name Qpagos Corporation as the holding company for two 99.99% owned operating subsidiaries, QPagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V. Each of these entities were incorporated in November 2013 in Mexico.

 

QPagos, S.A.P.I. de C.V. was formed to process payment transactions for service providers it contracts with, and Redpag Electrónicos S.A.P.I. de C.V. was formed to deploy and operate kiosks as a distributor.

 

On August 31, 2015, QPAGOS Corporation entered into various agreements with the shareholders of Qpagos and Redpag to give effect to a reverse merger transaction (the "Reverse Merger''). Pursuant to the Reverse Merger, the majority of the shareholders of Qpagos and Redpag effectively received shares in QPAGOS, through various consulting and management agreements entered into with QPAGOS and sold an effective 99.996% and 99.990% of the outstanding shares on Qpagos and Redpag, respectively to QPAGOS. The series of transactions closed effective August 31, 2015. Upon the close of the Reverse Merger, QPAGOS Corporation became the parent of Qpagos and Redpag and assumed the operations of these two companies as its sole business.

 

On May 27, 2016 Asiya changed its name to QPAGOS. QPAGOS and its direct and indirect subsidiaries Qpagos Corporation, QPagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V., will be referred to hereafter as “the Company”.

 

On June 1, 2016, the board of directors changed the Company’s fiscal year end from October 31 to December 31.

 

  b) Description of the business

QPAGOS, through its indirect subsidiaries QPagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V., provides physical and virtual payment services to the Mexican market. The Company provides an integrated network of kiosks, terminals and payment channels that enable consumers in Mexico to deposit cash, convert it into a digital form and remit the funds to any merchant in our network quickly and securely. The Company helps consumers and merchants connect more efficiently in markets and consumer segments, such as Mexico, that are largely cash-based and lack convenient alternatives for consumers to pay for goods and services in physical, online and mobile environments. For example, the Company’s licensed technology can be used to pay bills, add minutes to mobile phones, purchase transportation tickets, shop online or at a retail store, buy digital services or send money to a friend or relative.

 

  F- 6 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES

 

  a) Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, these unaudited condensed financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary, for a fair presentation of those financial statements. The results of operations and cash flows for the three months and six months ended June 30, 2016 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The information contained in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements of Qpagos Corporation included in the current report on Form 8-K as filed with the Securities and Exchange Commission (the “SEC”) on May 12, 2016.

 

All amounts referred to in the notes to the financial statements are in United States Dollars ($) unless stated otherwise.

 

  b) Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary and its indirect subsidiaries. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in these consolidated financial statements are as follows:

 

QPAGOS – Parent Company

QPAGOS Corporation – 100% owned

QPagos, S.A. P.I de C.V., a Mexican entity (99.996% owned)

Redpag Electrónicos, S.A. P.I. de C.V., a Mexican entity (99.990% owned)

 

  c) Mexican Operations

The financial statements of the Company’s Mexican operations are measured using local currencies as their functional currencies.

 

The Company translates the assets and liabilities of its Mexican subsidiaries at the exchange rates in effect at year end and the results of operations at the average rate throughout the year. The translation adjustments are recorded directly as a separate component of stockholders’ equity, while transaction gains (losses) are included in net income (loss). All sales to customers are in Mexico.

 

  d) Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, which are evaluated on an ongoing basis, that affect the amounts reported in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and judgments. In particular, significant estimates and judgments include those related to: the estimated useful lives for plant and equipment, the fair value of warrants and stock options granted for services or compensation, estimates of the probability and potential magnitude of contingent liabilities, derivative liabilities, the valuation allowance for deferred tax assets due to continuing operating losses, those related to revenue recognition and the allowance for doubtful accounts.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.

 

  F- 7 

 

 

 QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  2 ACCOUNTING POLICIES AND ESTIMATES (continued

  

  e) Risks and Uncertainties

The Company's operations will be subject to significant risk and uncertainties including financial, operational, regulatory and other risks associated, including the potential risk of business failure. The recent global economic crisis has caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These conditions not only limit the Company’s access to capital, but also make it difficult for its customers, vendors and the Company to accurately forecast and plan future business activities.

 

The Company’s operations are carried out in Mexico. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in Mexico and by the general state of that economy. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

 

  f) Recent Accounting Pronouncements

In April 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) No. 2016 – 10 “Revenue from Contract with Customers (Topic 606): identifying Performance Obligations and Licensing “. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. We are currently evaluating the impact of adoption of ASU No. 2016-10 on our financial statements.

 

Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

 

  g) Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. At June 30, 2016 and December 31, 2015, respectively, the Company had no cash equivalents.

 

The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution in the United States. The balance at times may exceed federally insured limits. At December 31, 2015, the Company had cash balances in the United States, which exceeded the federally insured limits by $531,238. At June 30, 2016, cash balances in the United States did not exceed the federally insured limit.

 

  h) Cost Method Investments

Investee companies not accounted for under the consolidation or the equity method are accounted for under the cost method of accounting. Under this method, the Company’s share of earnings or losses of such investee companies is not included in the condensed consolidated balance sheet or statement of comprehensive loss. However, impairment charges are recognized in the condensed consolidated statement of comprehensive loss. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded. There is no impairment of investment at June 30, 2016.

 

  F- 8 

 

 

  QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  2 ACCOUNTING POLICIES AND ESTIMATES (continued)

   

  i) Inventory

The Company primarily values inventories at the lower of cost or market applied on a first-in, first-out basis. The Company identifies and writes down its excess and obsolete inventories to net realizable value based on usage forecasts, order volume and inventory aging. With the development of new products, the Company also rationalizes its product offerings and will write-down discontinued product to the lower of cost or net realizable value.

 

  j) Revenue Recognition

 

The Company’s revenue recognition policy is consistent with the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605, Revenue Recognition (ASC 605). In general, the Company records revenue when it is realized, or realizable and earned. The Company considers revenue to be realized, or realizable and earned when, persuasive evidence of an arrangement exists, the products or services have been approved by the customer after delivery and/or installation acceptance or performance of services; the sales price is fixed or determinable within the contract; and collectability is reasonably assured.

 

The Company has the following sources of revenue which is recognized on the basis described below.

 

·Revenue from the sale of services.

 

Prepaid services are acquired from providers and is sold to end-users through kiosks that the Company owns or kiosks that are owned by third parties. The Company recognizes the revenue on the sale of these services when the end-user deposits funds into the terminal and the prepaid service is delivered to the end-user. The revenue is recognized at the gross value, including margin, of the prepaid service to the Company, net of any value-added tax which is collected on behalf of the Mexican Revenue Authorities.

 

·Payment processing provided to end-users

 

The Company provides a secure means for end-users to pay for certain services, such as utilities through its kiosks. The Company earns either a fixed per-transaction fee or a fixed percentage of the service sold. The Company acts as a collection agent and recognizes the payment processing fee, net of any value-added taxes collected on behalf of the Mexican Revenue Authorities, when the funds are deposited into the kiosk and the customer has settled his liability or has acquired a prepaid service.

 

·Revenue from the sale of kiosks.

 

The Company imports, assembles and sell kiosks that are used to generate the revenues discussed above. Revenue is recognized on the full value of the kiosks sold, net of any valued added taxation collected on behalf of the Mexican Revenue Authorities, when the customer takes delivery of the kiosk and all the risks and rewards of ownership are passed to the customer.

 

The Company does not enter into any leasing of kiosks arrangements with customers and the Company does not generate any revenues from merchants who access its terminals as yet.

 

  3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

Revenues, Cost of Goods Sold and Gross Profit

 

The Company has restated its consolidated financial statements as of June 30, 2016 and December 31, 2015 and for the three months and six months ended June 30, 2016 and 2015. As a part of the Company’s analysis of its books and records, the Company management had discovered a discrepancy in the recording of revenue in its Mexican operations that had resulted in an overstatement of revenue, a corresponding overstatement of cost of goods sold and a net understatement of the gross profit in the Company’s financial statements.

 

  F- 9 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

The Company has the following sources of revenue:

 

·Revenue from the sale of services.

 

Prepaid services are acquired from providers and is sold to end users through kiosks that the Company owns or kiosks owned by third parties. The Company recognizes the revenue on the sale of these services when the end-user deposits funds into the terminal and the prepaid service is delivered to the end-user. The revenue is recognized at the gross value, including margin of the prepaid service to the company, net of value added tax and the full value of the service acquired as cost of goods sold.

 

An error in recording this revenue, in the Company’s Mexican operations, resulted in the cost of goods sold recorded as equal to revenues recorded. The gross profit on these revenue transactions whereby the risks and rewards of ownership had passed to end-users remained on its balance sheet in prepayments it had made to its service providers. This error has been corrected by the reduction in the Company’s cost of goods sold expenditure, with a corresponding increase in the gross profit earned and the restatement of Mexican Value Added Taxation related to these entries.

 

Certain expenses directly related to cost of goods sold were previously reflected as Other Expense have been correctly reclassified as cost of goods sold in the restated financial statements.

 

·Revenue in the form of payment processing fees.

 

The company provides a secure means for end-users to pay for certain services, such as utilities through our kiosks.

 

This revenue was previously recorded at gross value, the full value of the transaction was recorded as revenue and the full value of the service provided to the Company’s end users was recognized as cost of goods sold. The value-added taxation on both the revenue and cost of goods sold was recorded as due to and due from, the Mexican revenue authorities, respectively. The Restated financial statements reversed the difference between the gross revenue recorded and the payment processing fee actually earned and the cost of goods sold entries recorded were reversed. The value-added taxation recorded has been restated and the Company has brought this restatement to the attention of the Mexican revenue authorities and are in the process of correcting our tax returns.

 

·Revenue from the sale of kiosks.

 

The company imports and sells kiosks. to customers and distributors, who then make use of its technology to provide services to end-users whereby prepaid services can be acquired and other transactions can be performed utilizing the convenience of its kiosks and payment gateway. The company recognizes the full value of the revenue on the sale of these kiosks and the full value of the cost of the kiosks sold. These transactions were correctly recorded and no restatement was necessary.

 

Organization – Reverse Merger

 

The reverse merger transaction and the shares retained by the existing shareholders in Asiya Pearls, Inc. (now known as QPAGOS) were originally pushed back to the earliest period presented, this has been restated to reflect the reverse merger transaction as of the date of the reverse merger, May 12, 2016, whereby the shares retained by the existing shareholders of Asiya Pearls, Inc. were recorded as a share issuance on the effective date of the reverse merger, May 12, 2016.

 

The balance sheet has been restated to eliminate the effects of pushing back the reverse merger transaction to the opening balance of the earliest period presented.

 

The restated Consolidated Balance Sheet as of June 30, 2016 and December 31, 2015 and the related Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 and Cash Flows for the six months ended June 30, 2016 and 2015, are presented below:

 

  F- 10 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS

CONDENSED CONSOLIDATED BALANCE SHEET

June 30, 2016

 

   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
   (Unaudited)          (Unaudited) 
Assets               
Current Assets                  
Cash  $135,060           $135,060 
Accounts receivable   387,667            387,667 
Inventory   508,441            508,441 
Recoverable IVA taxes and credits   286,282    55,802   (A), (B)   342,084 
Other current assets   1,667    23,078   (B)   24,745 
Total Current Assets   1,319,117    78,880       1,397,997 
                   
Non-Current Assets                  
Plant and equipment, net   53,800            53,800 
Intangibles, net   189,917            189,917 
Investment   3,000            3,000 
Other assets   12,131            12,131 
Total Non-Current Assets   258,848    -       258,848 
Total Assets  $1,577,965   $78,880      $1,656,845 
                   
Liabilities and Stockholders' Equity                  
                   
Current Liabilities                  
Accounts payable  $142,185           $142,185 
Notes payable   109,307            109,307 
IVA and other taxes payable   23,727    64,468   (A), (B)   88,195 
Advances from customers   110,468    (40,126)      70,342 
Total Current Liabilities   385,687    24,342       410,029 
                   
Total Liabilities   385,687    24,342       410,029 
                   
Stockholders' Equity                  
Common stock, $0.0001 par value; 100,000,000 shares authorized, 55,254,000 shares issued and outstanding as of June 30, 2016.   5,526            5,526 
Additional paid-in-capital   8,134,541            8,134,541 
Accumulated deficit   (7,463,276)   57,861       (7,405,415)
Accumulated other comprehensive income   515,487    (3,323)  (C)   512,164 
Total stockholder's equity - controlling interest   1,192,278    54,538       1,246,816 
Non-controlling interest   -    -       - 
Total Stockholders' Equity   1,192,278    54,538       1,246,816 
Total Liabilities and Stockholders' Equity  $1,577,965   $78,880      $1,656,845 

 

 

  F- 11 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS
CONSOLIDATED BALANCE SHEET
December 31, 2015
                
   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
Assets                  
                   
Current Assets                  
Cash  $833,612    (1,453)  (D)  $832,159 
Accounts receivable   242,075            242,075 
Inventory   668,567            668,567 
Recoverable IVA taxes and credits   412,143    5,754   (A), (B)   417,897 
Other current assets   20,509    31,505   (B)   52,014 
Total Current Assets   2,176,906    35,806       2,212,712 
                   
Non-Current Assets                  
Plant and equipment, net   70,537            70,537 
Intangibles, net   211,417            211,417 
Other assets   11,712            11,712 
Total Non-Current Assets   293,666    -       293,666 
Total Assets  $2,470,572   $35,806      $2,506,378 
                   
Liabilities and Stockholders' Equity                   
                   
Current Liabilities                  
Accounts payable  $41,372    (3,000)  (D)  $38,372 
Notes payable   103,320            103,320 
IVA and other taxes payable   181,946    10,098   (A), (B)   192,044 
Advances from customers   1,986            1,986 
Total Current Liabilities   328,624    7,098       335,722 
                   
Total Liabilities   328,624    7,098       335,722 
                   
Stockholders' Equity                  
Common stock, $0.001 par value; 100,000,000 shares authorized, 44,784,000 shares issued and outstanding as of December 31, 2015.   4,981    (503)  (D)   4,478 
Additional paid-in-capital   5,733,811    2,050   (D)   5,735,861 
Accumulated deficit   (4,019,428)   29,739       (3,989,689)
Accumulated other comprehensive income   422,584    (2,578)  (C)   420,006 
Total stockholder's equity - controlling interest   2,141,948    28,708       2,170,656 
Non-controlling interest   -    -       - 
Total Stockholders' Equity   2,141,948    28,708       2,170,656 
Total Liabilities and Stockholders' Equity  $2,470,572   $35,806      $2,506,378 

 

  F- 12 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended June 30, 2016
                
   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
Revenues                  
Sales of services  $914,358   $(319,041)  (A)  $595,317 
Kiosk sales   18,351            18,351 
Payment processing fees   12,602            12,602 
Other   146            146 
    945,457    (319,041)      626,416 
Cost of Goods Sold                  
Sales of services   914,358    (333,044)  (A), (B)   581,314 
Kiosk sales   10,311            10,311 
Other   1,094    4,928   (E)   6,022 
    925,763    (328,116)      597,647 
                   
Gross Profit   19,694    9,075   (B)   28,769 
                   
General and administrative   615,936            615,936 
Depreciation and amortization   19,345            19,345 
Total Expense   635,281    -       635,281 
                   
Loss from Operations   (615,587)   9,075       (606,512)
                   
Other (expense) income   (3,912)   4,928   (E)   1,016 
Interest expense, net   (2,992)           (2,992)
Foreign currency loss   (145,827)           (145,827)
                   
Loss before Provision for Income Taxes   (768,318)   14,003       (754,315)
Provision for Income Taxes   -    -       - 
                   
Net Loss   (768,318)   14,003       (754,315)
Net loss attributable to non-controlling interest   -            - 
                   
Net Loss Attributable to Controlling Interest  $(768,318)  $14,003      $(754,315)
                   
Net Loss Per Share -  Basic and Diluted  $(0.01)  $0.00      $(0.01)
                   
Weighted Average Number of Shares Outstanding - Basic and Diluted   52,762,601    52,762,601       52,762,601 
                   
Other Comprehensive Income                  
Foreign currency translation adjustment   50,525    (1,349)      49,176 
                   
Total Comprehensive loss   (717,793)   12,654       (705,139)
Comprehensive loss attributable to non-controlling interest   -    -       - 
                   
Comprehensive Loss Attributable to Controlling Interest  $(717,793)  $12,654      $(705,139)

 

  F- 13 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended June 30, 2015
                
   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
Revenues                  
Sales of services  $127,001   $(54,038)  (A)  $72,963 
Kiosk sales   26,426            26,426 
Payment processing fee   6,038            6,038 
Other   -            - 
    159,465    (54,038)      105,427 
Cost of Goods Sold                  
Sales of services   128,618    (60,151)  (A), (B)   68,467 
Kiosk sales   19,749            19,749 
Other   2,603    2,510   (E)   5,113 
    150,970    (57,641)      93,329 
                   
Gross Profit   8,495    3,603   (B)   12,098 
                   
General and administrative   363,647            363,647 
Depreciation and amortization   8,479            8,479 
Total Expense   372,126    -       372,126 
                   
Loss from Operations   (363,631)   3,603       (360,028)
                   
Other (expense) income   (2,510)   2,510   (E)   - 
Interest expense, net   -            - 
Foreign currency loss   (172,884)           (172,884)
                   
Loss before Provision for Income Taxes   (539,025)   6,113       (532,912)
Provision for Income Taxes   -    -       - 
                   
Net Loss   (539,025)   6,113       (532,912)
Net loss attributable to non-controlling interest   -            - 
                   
Net Loss Attributable to Controlling Interest  $(539,025)  $6,113      $(532,912)
                   
Net Loss Per Share -  Basic and Diluted  $(0.03)  $0.00      $(0.02)
                   
Weighted Average Number of Shares Outstanding - Basic and Diluted   21,477,682    21,477,682       21,477,682 
                   
Other Comprehensive Income                  
Foreign currency translation adjustment   47,422    (186)      47,236 
                   
Total Comprehensive loss   (491,603)   5,927       (485,676)
Comprehensive loss attributable to non-controlling interest   -    -       - 
                   
Comprehensive Loss Attributable to Controlling Interest  $(491,603)  $5,927      $(485,676)

 

  F- 14 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Six Months Ended June 30, 2016
                
   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
Revenues                  
Sales of services  $1,669,898   $(576,597)  (A)  $1,093,301 
Kiosk sales   149,323            149,323 
Payment processing fee   13,580            13,580 
Other   146            146 
    1,832,947    (576,597)      1,256,350 
Cost of Goods Sold                  
Sales of services   1,669,919    (604,719)  (A), (B)   1,065,200 
Kiosk sales   123,668            123,668 
Other   6,344    11,724   (E)   18,068 
    1,799,931    (592,995)      1,206,936 
                   
Gross Profit   33,016    16,398   (B)   49,414 
                   
General and administrative   3,309,638            3,309,638 
Depreciation and amortization   38,690            38,690 
Total Expense   3,348,328    -       3,348,328 
                   
Loss from Operations   (3,315,312)   16,398       (3,298,914)
                   
Other (expense) income   (7,709)   11,724   (E)   4,015 
Interest expense, net   (5,984)           (5,984)
Foreign currency loss   (114,843)           (114,843)
                   
Loss before Provision for Income Taxes   (3,443,848)   28,122       (3,415,726)
Provision for Income Taxes   -    -       - 
                   
Net Loss   (3,443,848)   28,122       (3,415,726)
Net loss attributable to non-controlling interest   -            - 
                   
Net Loss Attributable to Controlling Interest  $(3,443,848)  $28,122      $(3,415,726)
                   
Net Loss Per Share -  Basic and Diluted  $(0.06)  $0.00      $(0.06)
                   
Weighted Average Number of Shares Outstanding - Basic and Diluted   53,660,993    53,660,993       53,660,993 
                   
Other Comprehensive Income                  
Foreign currency translation adjustment   92,903    (745)      92,158 
                   
Total Comprehensive loss   (3,350,945)   27,377       (3,323,568)
Comprehensive loss attributable to non-controlling interest   -    -       - 
                   
Comprehensive Loss Attributable to Controlling Interest  $(3,350,945)  $27,377      $(3,323,568)

 

  F- 15 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Six Months Ended June 30, 2015
                
   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
Revenues                  
Sales of services  $181,530   $(73,994)  (A)  $107,536 
Kiosk sales   45,195            45,195 
Payment processing fee   8,739            8,739 
Other   -            - 
    235,464    (73,994)      161,470 
Cost of Goods Sold                  
Sales of services   186,749    (82,826)  (A), (B)   103,923 
Kiosk sales   32,779            32,779 
Other   2,603    4,631   (E)   7,234 
    222,131    (78,195)      143,936 
                   
Gross Profit   13,333    4,201   (B)   17,534 
                   
General and administrative   793,371            793,371 
Depreciation and amortization   16,920            16,920 
Total Expense   810,291    -       810,291 
                   
Loss from Operations   (796,958)   4,201       (792,757)
                   
Other (expense) income   (4,160)   4,631   (E)   471 
Interest expense, net   -            - 
Foreign currency loss   (213,189)           (213,189)
                   
Loss before Provision for Income Taxes   (1,014,307)   8,832       (1,005,475)
Provision for Income Taxes   -    -       - 
                   
Net Loss   (1,014,307)   8,832       (1,005,475)
Net loss attributable to non-controlling interest   -            - 
                   
Net Loss Attributable to Controlling Interest  $(1,014,307)  $8,832      $(1,005,475)
                   
Net Loss Per Share -  Basic and Diluted  $(0.08)  $0.00      $(0.08)
                   
Weighted Average Number of Shares Outstanding -  Basic and Diluted   13,152,412    13,152,412       13,152,412 
                   
Other Comprehensive Income                  
Foreign currency translation adjustment   106,460    (208)      106,252 
                   
Total Comprehensive loss   (907,847)   8,624       (899,223)
Comprehensive loss attributable to non-controlling interest   -    -       - 
                   
Comprehensive Loss Attributable to Controlling Interest  $(907,847)  $8,624      $(899,223)

 

  F- 16 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended  June 30, 2016
                
   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
CASH FLOWS FROM OPERATING ACTIVITIES:                  
Net loss attributable to the company  $(3,443,848)  $28,122   (B)  $(3,415,726)
Less: loss attributable to non-controlling interest   -            - 
Net loss   (3,443,848)   28,122       (3,415,726)
Adjustment to reconcile net loss to net cash used in operating activities:                  
Depreciation expense   17,190            17,190 
Amortization expense   21,500            21,500 
Equity based compensation charge   144,000            144,000 
Shares issued for services   2,032,274            2,032,274 
Non- cash investment in affiliates   (3,000)           (3,000)
Changes in Assets and Liabilities                  
Accounts receivable   (145,592)           (145,592)
Inventory   160,126            160,126 
Recoverable IVA taxes and credits   125,861    (50,048)  (A), (B)   75,813 
Other current assets   24,872    8,426   (B)   33,298 
Other assets   (419)           (419)
Accounts payable and accrued expenses   94,783            94,783 
IVA and other taxes payable   (158,219)   54,370   (A), (B)   (103,849)
Advances from customers   108,482    (40,125)  (B)   68,357 
Interest accruals   5,987            5,987 
CASH USED IN OPERATING ACTIVITIES   (1,016,003)   745       (1,015,258)
                   
CASH FLOWS FROM INVESTING ACTIVITIES:                  
Purchase of property and equipment   (453)           (453)
NET CASH USED IN INVESTING ACTIVITIES   (453)   -       (453)
                   
CASH FLOWS FROM FINANCING ACTIVITIES:                  
Proceeds on common stock issued   225,000            225,000 
Proceeds from loans payable   -            - 
NET CASH PROVIDED BY FINANCING ACTIVITIES   225,000    -       225,000 
                   
Effect of exchange rate changes on cash and cash equivalents   92,903    (745)  (C)   92,158 
                   
NET DECREASE IN CASH   (698,552)           (698,552)
CASH AT BEGINNING OF PERIOD   833,612            833,612 
CASH AT END OF PERIOD  $135,060   $-      $135,060 
                   
CASH PAID FOR INTEREST AND TAXES:                  
Cash paid for income taxes  $-   $-      $- 
Cash paid for interest  $-   $-      $- 

 

  F- 17 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

QPAGOS

CONSOLIDATED STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2015

 

   As            
   Previously          As 
   Reported   Adjustments   Notes  Restated 
CASH FLOWS FROM OPERATING ACTIVITIES:                  
Net loss attributable to the company  $(1,014,308)  $8,833   (B)  $(1,005,475)
Less: loss attributable to non-controlling interest   -            - 
Net loss   (1,014,308)   8,833       (1,005,475)
Adjustment to reconcile net loss to net cash used in operating activities:                  
Depreciation expense   16,920            16,920 
Amortization expense   -            - 
Equity based compensation charge   -            - 
Shares issued for services   -            - 
Non- cash investment in affiliates   -            - 
Changes in Assets and Liabilities                  
Accounts receivable   (57,754)           (57,754)
Inventory   85,558            85,558 
Recoverable IVA taxes and credits   (144,061)   2,687   (A), (B)   (141,374)
Other current assets   48,479    (2,122)  (B)   46,357 
Other assets   (5,038)           (5,038)
Accounts payable and accrued expenses   23,556            23,556 
IVA and other taxes payable   36,743    (1,306)  (A), (B)   35,437 
Advances from customers   26,866    (7,884)  (B)   18,982 
Interest accruals   -            - 
CASH USED IN OPERATING ACTIVITIES   (983,039)   208       (982,831)
                   
CASH FLOWS FROM INVESTING ACTIVITIES:                  
Purchase of property and equipment   (1,819)           (1,819)
NET CASH USED IN INVESTING ACTIVITIES   (1,819)   -       (1,819)
                   
CASH FLOWS FROM FINANCING ACTIVITIES:                  
Proceeds on common stock issued   -            - 
Proceeds from loans payable   719,962            719,962 
NET CASH PROVIDED BY FINANCING ACTIVITIES   719,962    -       719,962 
                   
Effect of exchange rate changes on cash and cash equivalents   106,460    (208)  (C)   106,252 
                   
NET DECREASE IN CASH   (158,437)           (158,437)
CASH AT BEGINNING OF PERIOD   173,828            173,828 
CASH AT END OF PERIOD  $15,391   $-      $15,391 
                   
CASH PAID FOR INTEREST AND TAXES:                  
Cash paid for income taxes  $-           $- 
Cash paid for interest  $-           $- 

 

  F- 18 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

NOTES

 

A.Management noted an error in the recording of transactions related to a consumer’s use of kiosks to pay for certain services such as utilities through our kiosks.

 

In these transactions, the Company earns a payment processing fee as an agent, on either a percentage of transaction value or a fixed fee per transaction basis.

 

This revenue was previously recorded at gross value, the full value of the transaction was recorded as revenue and the full value of the service provided to our end users was recognized as cost of goods sold. The value-added taxation on both the revenue and cost of goods sold was recorded as due to and due from, the Mexican revenue authorities, respectively.

 

The Restated financial statements reversed the difference between the gross revenue recorded and the payment processing fee actually earned on these transactions; and the cost of goods sold entries originally recorded were reversed. The value-added taxation recorded has been restated and we have brought this restatement to the attention of the Mexican revenue authorities and are in the process of correcting our tax returns.

 

B.Management noted an error in recording of cost of goods sold of prepaid services sold to end users.

 

Purchases of prepaid services from providers are recorded as a prepaid asset, which is subsequently expensed to cost of goods sold when the service is sold and the risks and rewards of ownership passed to end users.

 

The cost of goods sold was incorrectly recorded as equal to revenue on all service sales. The gross profit on these revenue transactions was earned but remained on our balance sheet in prepaid expenditure.

 

The restated financial statements reduced the costs of goods sold recorded by the gross profit earned on these transactions with a corresponding reduction in prepaid expenditure. The net value added tax effect on these transactions was restated and we have brought this restatement to the attention of the Mexican revenue authorities and are in the process of correcting our tax returns.

 

C.Represents the restatement of the foreign currency translation adjustment directly related to the restatement of revenues and cost of goods sold discussed in A and B above.

D.To reflect the adjustments necessary to record the effect of the acquisition of the net assets and liabilities and the common shares retained by the shareholders of Asiya Pearls, Inc., on the effective date of the transaction, May 12, 2016, previously this was disclosed effective the earliest date presented in our financial statements.

 

E.To reclass certain lease payments to retailers for the lease of floor space for the placement of kiosks on their premises from other (expense) income to cost of goods sold.

 

  F- 19 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4GOING CONCERN

 

These financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred a loss since inception resulting in an accumulated deficit of $7,405,415 as of June 30, 2016 and has not generated sufficient revenue to cover its operating expenditure, raising substantial doubt about the Company's ability to continue as a going concern. In addition to operational expenses, as the Company executes its business plan, additional capital resources will be required. The Company will need to raise capital in the near term in order to continue operating and executing its business plan. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company’s plan is to expand its market penetration by deploying more kiosks through various channels, thereby increasing revenues. In addition, the Company intends to raise additional equity or loan funds to meet its short term working capital needs. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

  5 ACQUISITION

 

On May 12, 2016, QPAGOS (formerly known as Asiya Pearls, Inc.), a Nevada corporation entered into the Merger Agreement with Qpagos Corporation and Merger Sub.  Pursuant to the Merger Agreement, on May 12, 2016, the Merger was consummated and Qpagos Corporation continuing as the surviving corporation of the Merger.

 

Pursuant to the Merger Agreement, upon consummation of the Merger, each share of Qpagos Corporation’s capital stock issued and outstanding immediately prior to the Merger was converted into the right to receive two shares of Asiya’s common stock, par value $0.0001 per share (the “Common Stock”). Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, Asiya assumed all of Qpagos Corporation’s warrants issued and outstanding immediately prior to the Merger, which are now exercisable for approximately 6,219,200 shares of Common Stock, respectively, as of the date of the Merger. Prior to and as a condition to the closing of the Merger, the then-current Asiya stockholder of 5,000,000 shares of Common Stock agreed to return to Asiya 4,975,000 shares of Common Stock held by such holder to Asiya and the then-current Asiya stockholder retained an aggregate of 25,000 shares of Common Stock and the other stockholders of Asiya retained 5,000,000 shares of Common Stock. Therefore, immediately following the Merger, Qpagos Corporation’s former stockholders held 49,929,000 shares of Asiya common stock which is approximately 91% of the Company Common Stock outstanding.

 

The Merger is being treated as a reverse acquisition of Asiya, a public shell company, for financial accounting and reporting purposes. As such, Qpagos Corporation is treated as the acquirer for accounting and financial reporting purposes while Asiya is treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that will be reflected in the Company’s future financial statements filed with the United States Securities and Exchange Commission (“SEC”) will be those of Qpagos Corporation, and the Company’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of Qpagos Corporation.

 

Qpagos Corporation was incorporated on May 1, 2015 under the laws of Delaware under the name Qpagos Corporation as the holding company for two wholly owned operating subsidiaries, QPagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V. Each of these entities were incorporated in November 2013 in Mexico.

 

QPagos, S.A.P.I. de C.V. was formed to process payment transactions for service providers it contracts with, and Redpag Electrónicos S.A.P.I. de C.V. was formed to deploy and operate kiosks as a distributor.

 

On August 31, 2015, QPAGOS Corporation entered into various agreements with the shareholders of Qpagos and Redpag to give effect to a reverse merger transaction (the "Reverse Merger''). Pursuant to the Reverse Merger, the majority of the shareholders of Qpagos and Redpag effectively received shares in QPAGOS, through various consulting and management agreements entered into with QPAGOS and sold an effective 99.996% and 99.990% of the outstanding shares on Qpagos and Redpag, respectively to QPAGOS. The series of transactions closed effective August 31, 2015. Upon the close of the Reverse Merger, QPAGOS Corporation became the parent of Qpagos and Redpag and assumed the operations of these two companies as its sole business.

 

  F- 20 

 

 

 QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6INVESTMENT

 

On February 11, 2016, the Company entered into a consulting agreement with a newly formed Delaware corporation, Yogipay Corporation (“Yogipay”), in terms of the consulting agreement the Company will provide access to its considerable expertise in the payments services business to Yogipay in exchange for 3,000,000 shares of the newly formed entity which represents a 15% ownership interest in Yogipay at the date of entering into the agreement. The shares were valued at $3,000 at the date of the agreement and approximates it fair value at June 30, 2016. The investment is accounted for under the cost method of accounting.

 

  7 INVENTORY

 

Inventory consisted of the following:

  

   June 30, 2016   December 31, 2015 
         
Kiosks and accessories  $508,441   $668,567 
   $508,441   $668,567 

 

8PLANT AND EQUIPMENT

 

Plant and Equipment consisted of the following:

 

   June 30, 2016   December 31, 2015 
         
Computer equipment  $108,383   $107,929 
Office equipment   14,712    14,712 
Leasehold improvement   12,375    12,375 
Total cost   135,470    135,016 
Less: accumulated depreciation and amortization   (81,670)   (64,479)
Plant and equipment, net  $53,800   $70,537 

 

Depreciation expense totaled $17,190 and $16,920 for the six months ended June 30, 2016 and 2015, respectively.

 

9INTANGIBLES

 

License

 

Localization and implementation of the different software and technology modules is supported through a Localization Agreement. Under this agreement, at a cost of $215,000, the licensor allocated engineering and programming resources to the Company. The cost is being amortized over 5 years.

 

On May 1, 2015, Qpagos Corporation entered into a renewable ten-year license with the Licensor for the non-exclusive right to license technology to provide payment services. Subsequently, on November 1, 2015, the Company and the Licensor concluded an additional amendment to the License Agreement by which the Licensor agreed to the exclusivity to the Mexican market subject to the payment of $20,000 per year payable in quarterly installments, the first two such installments payable December 1, 2015. The agreement may be terminated early by the Licensor if Qpagos Corporation fails to comply with its terms and conditions. The quarterly payments are recorded as a prepaid expense and is amortized over the period to which it relates.

 

  F- 21 

 

 

 QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9INTANGIBLES (continued)

 

Intangibles consisted of the following:

 

   June 30,
2016
   December 31,
2015
 
         
Software Localization Agreement  $215,000   $215,000 
           
Total cost   215,000    215,000 
Less: accumulated amortization   (25,083)   (3,583)
Intangibles, net  $189,917   $211,417 

 

Amortization expense was $21,500 and $0 for the six months ended June 30, 2016 and 2015, respectively.

 

10NOTES PAYABLE

 

Notes payable consisted of the following:

 

Description  Interest
Rate
   Maturity   June 30,
2016
   December 31,
2015
 
                 
YP Holdings LLC                    
Principal   12%   December 31, 2015    100,000    100,000 
Accrued interest             9,307    3,320 
                     
Total notes payable            $109,307   $103,320 

 

YP Holdings LLC

 

On September 21, 2015, Qpagos Corporation borrowed $100,000 from YP Holdings LLC, pursuant to an unsecured loan agreement. The unpaid balance and any accrued interest was due on December 31, 2015. The loan bears interest at a rate of 12%. The debt remains outstanding as of the date of this report and is expected to be settled during the current year.

 

11STOCKHOLDERS’ EQUITY

 

a)Common Stock

 

The Company has authorized 100,000,000 common shares with a par value of $0.0001 each, and issued and has outstanding 55,254,000 shares of common stock as of June 30, 2016.

 

The following common shares were issued by the Company during the six months ended June 30, 2016:

 

i.On February 16, 2016, the Company entered into consulting agreements with Gibbs Investment Holdings, Gibbs International, Eurosa, Inc. and Robert Skaff, in terms of which the parties have provided consulting services to the Company and continue to provide such services and were issued a total of 2,572,500 common shares of Qpagos Corporation, which were subsequently converted to 5,145,000 shares of the Company.

 

  ii.

During May and June 2016, in terms of a subscription agreement entered into, the Company issued 300,000 shares to a shareholder for gross proceeds of $225,000.

 

  F- 22 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11STOCKHOLDERS’ EQUITY

 

a)Common Stock (continued)

 

Included in common stock is restricted stock which vested on April 30, 2016.

 

    Restricted Stock Granted   Restricted Stock Vested 
Grant date Price   Number
Granted
   Weighted
Average
Fair Value per
Share
   Number
Vested
   Weighted
Average
Fair Value per Share
 
$0.10    2,880,000   $0.10    2,880,000   $0.10 
$0.10    1,440,000   $0.10    1,440,000   $0.10 
      4,320,000   $0.10    4,320,000   $0.10 

 

The Company has recorded an expense of $144,000 and $0 for the six months ended June 30, 2016 and 2015, respectively, relating to the restricted stock awards.

 

b)Warrants

 

In connection with the Merger, outstanding Qpagos Corporation warrants were assumed by QPAGOS and converted to QPAGOS warrants at a ratio of two QPAGOS warrants for each Qpagos Corporation warrant issued.

 

During the period June 2015 to December 2015, pursuant to the private placement agreement and individual Securities Purchase Agreements entered into, new, qualified investors, acquired 4,784,000 (2,392,000 pre-merger) common units of the Company at a price of $0.625 ($1.25 pre-merger) per unit, each unit consisting of one share of Common Stock and a five year warrant exercisable for one share of common stock at an exercise price of $0.625 ($1.25 pre-merger) per share.

 

The placement agent was also issued, in terms of a placement agent agreement, five year warrants to purchase 717,600 (358,800 pre-merger) units at $0.625 ($1.25 pre-merger) per unit (the First Warrant”), each consisting of one warrant to purchase one share of Common stock and an additional five year warrant exercisable for one share of Common Stock at an exercise price of $0.625 per share (the Second Warrant”), upon exercise of the First Warrant, giving a total of 1,435,200 (717,600 pre-merger) warrants to purchase common shares at an exercise price of $0.625 per share.

 

The warrants outstanding and exercisable at June 30, 2016 are as follows:

 

    Warrants Outstanding   Warrants Exercisable 
Exercise
Price
   Number
Outstanding
   Weighted
Average
Remaining
Contractual
life in years
   Weighted
Average
Exercise
Price
   Number
Exercisable
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
life in years
 
                                 
$0.625    6,219,200    4.26   $0.625    6,219,200   $0.625    4.26 

 

The warrants outstanding have an intrinsic value of $0 and $0 as of June 30, 2016 and December 31, 2015, respectively.

  F- 23 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11STOCKHOLDERS’ EQUITY (continued)

 

c)Reverse merger transaction

On May 12, 2016, QPAGOS (formerly known as Asiya Pearls, Inc.), a Nevada corporation entered into the Merger Agreement with QPAGOS Corporation and Merger Sub.  Pursuant to the Merger Agreement, on May 12, 2016 the Merger was consummated and Qpagos Corporation and Merger Sub merged with Qpagos Corporation continued as the surviving corporation of the Merger.

 

Pursuant to the Merger Agreement, upon consummation of the Merger, each share of Qpagos Corporations’ capital stock issued and outstanding immediately prior to the Merger was converted into the right to receive two shares of QPAGOS Common Stock. Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, QPAGOS assumed all of Qpagos Corporation’s warrants issued and outstanding immediately prior to the Merger, which are now exercisable for approximately 6,219,200 shares of Common Stock, respectively, as of the date of the Merger. Prior to and as a condition to the closing of the Merger, the then-current QPAGOS stockholder of 5,000,000 shares of Common Stock agreed to return to QPAGOS 4,975,000 shares of Common Stock held by such holder to QPAGOS and the then-current QPAGOS stockholder retained an aggregate of 25,000 shares of Common Stock and the other stockholders of QPAGOS retained 5,000,000 shares of Common Stock. Therefore, immediately following the Merger, Qpagos Corporation’s former stockholders held 49,929,000 shares of QPAGOS common stock which is approximately 91% of the QPAGOS Common Stock outstanding. The common shares in issue by Qpagos Corporation prior to the consummation of the reverse merger transaction have been retroactively adjusted to reflect the number of shares outstanding as if the merger had taken place on the earliest date presented. Although the Merger Agreement was only consummated on May 12, 2016, the effects of the merger have been retroactively applied to these interim financial statements.

  

12REVENUE

 

Revenue is derived from the following sources:

 

   Three   Three   Six   Six 
   Months
Ended
   Months
Ended
   Months
Ended
   Months
Ended
 
   June 30,   June 30,   June 30,   June 30, 
   2016   2015   2016   2015 
                 
Sales of services  $595,317   $72,963   $1,093,301   $107,536 
Payment processing fees   18,351    26,426    149,323    45,195 
Kiosk sales   12,602    6,038    13,580    8,739 
Other   146    -    146    - 
   $626,416    105,427   $1,256,350   $161,470 

 

13EQUITY BASED COMPENSATION

 

Equity based compensation is made up of the following:

 

   Six
Months Ended
June 30, 2016
   Six
Months Ended
June 30, 2015
 
         
Restricted stock awards  $144,000   $- 
Stock issued for services rendered   2,032,274    - 
   $2,176,274   $- 

 

  F- 24 

 

 

QPAGOS

(FORMERLY KNOWN AS ASIYA PEARLS, INC.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14NET LOSS PER SHARE

 

Basic loss per share is based on the weighted-average number of common shares outstanding during each period. Diluted loss per share is based on basic shares as determined above plus common stock equivalents. The computation of diluted net loss per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share. For the six months ended June 30, 2016 and 2015, all unvested restricted stock awards and warrants, were excluded from the computation of diluted net loss per share. Dilutive shares which could exist pursuant to the exercise of outstanding stock instruments and which were not included in the calculation because their affect would have been anti-dilutive are as follows:

 

   Six
Months Ended
June 30, 2016
(Shares)
   Six
Months Ended
June 30, 2015
(Shares)
 
         
Restricted stock awards – unvested   -    4,320,000 
Warrants to purchase shares of common stock   6,219,200    - 
    6,219,200    4,320,000 

 

15COMMITMENTS AND CONTINGENCIES

 

Qpagos Corporation operates from an office facility in Mexico. The office is leased under a three (3) year non-cancellable operating lease, which ends on December 15, 2016. The monthly rental expense, including maintenance expenditure is $2,729.

 

The future minimum lease installments under this agreement as of June 30, 2016 is approximately $16,371.

  

16SUBSEQUENT EVENTS

 

During the period, July 7, 2016 to October 17, 2016, the Company issued an additional 200,000 shares of common stock for gross proceeds of $150,000 to an investor in terms of executed Securities Purchase Agreements.

 

On September 15, 2016, the Company executed a revolving line of credit note for $100,000 with our Chief Executive Officer pursuant to the terms of a Revolving Line of Credit Agreement. The note bears interest at 6% and is due and payable 6 months from the effective date. Provided the borrower is not in default, the borrower may extend and renew the note for an additional 6 month term. As of December 12, 2016, the outstanding balance under the revolving line of credit was $20,000.

 

Between September 29, 2016 and November 23,2016, the Company executed six unsecured promissory notes totaling $275,000, with investors, each promissory note bearing interest at 10% per annum and maturing between February 13,2017 and November 23, 2017.

 

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2016 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements.

 

  F- 25 

 

 

Item 2.

 

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, Qpagos Corporation’s audited annual financial statements and the related notes thereto, each of which are included as an exhibit to our Current Report on Form 8-K/A filed with the SEC on December 12, 2016. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “Forward-Looking Statements” in this Quarterly Report on Form 10-Q/A. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see the disclosure under the heading “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q/A. The Management Discussion and Analysis of Financial Condition and Results of Operations below is based upon only the financial performance of Qpagos Corporation.

 

For information regarding the financial results of QPAGOS (formerly known as Asiya Pearls, Inc.), you should refer to Asiya’s Annual Report on Form 10-K for the year ended October 31, 2015, filed with the SEC on December 10, 2015, and its Quarterly Report on Form 10-Q for the quarter ended January 31, 2016, filed with the SEC on February 19, 2016. As a result of the Merger that was consummated on May 12, 2016, the Company changed its fiscal year end to December 31 and filed a transition report on December 12, 2016 on form 10-Q/A for the period ended March 31, 2016. The Merger was treated as a reverse acquisition for financial accounting and reporting purposes. As such, Qpagos Corporation was treated as the acquirer for accounting and financial reporting purposes while Asiya Pearls, Inc. was treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that are reflected in the Company’s financial statements filed with the SEC are those of Qpagos Corporation and the Company’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of Qpagos Corporation. Accordingly, for clarity and continuity, we are presenting the historical financial statements for Qpagos Corporation for the periods presented. The financial statements presented in the Current Report on Form 8-K/A filed on May 12, 2016, the Transition Report on Form 10-Q/A filed on June 17, 2016 and this Quarterly Report on form 10-Q/A for the quarter ended June 30, 2016 are those of Qpagos Corporation and therefore, a review of the financial statements in our Annual Report on Form 10-K for the year ended October 31, 2015, filed with the SEC on December 10, 2015, and our Quarterly Report on Form 10-Q for the quarter ended January 31, 2016, filed with the SEC on February 19, 2016 may not be meaningful on a quantitative or qualitative basis.

 

Overview of Restatement

 

In this Report on Form 10-Q/A, Qpagos (formerly known as Asiya Pearls, Inc.), together with its subsidiaries, the “Company”:

 

(a) restates its Consolidated Balance Sheet as of December 31, 2015 and June 30, 2016 and the related Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 and Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015;

 

(b) amends its Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as it relates to the three and six months June 30, 2016 and 2015;

 

(c) amends its Risk Factors as it relates to the six months ended June 30, 2016 and 2015.

 

Background on the Restatement

 

As previously disclosed in the Company’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission (“SEC”) on December 12, 2016, the board of directors of the Company, upon the recommendation of the Company’s management and based upon discussions between management and the Company’s independent auditors, RBSM, LLP, concluded that because of errors identified in the Company’s previously issued financial statements for fiscal year December 31, 2015 and for the first two quarters of 2016, the Company would restate its previously issued financial statements, including (i) Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC on August 18, 2016 , (ii) the Transition Report for the period December 31, 2015 through March 31, 2016 filed with the SEC on June 17, 2016 and the (iii) Current Report on Form 8-K filed with the SEC on May 13, 2016.

 

As a part of the Company’s analysis of its books and records, the Company management had discovered and discussed with the auditors a discrepancy in the recording of revenue in its Mexican operations that has resulted in an overstatement of revenue, a corresponding overstatement of cost of goods sold and a net understatement of gross profit in the Company’s financial statements.

 

The adjustments made as a result of the restatement are more fully discussed in Note 3, Restatement of Previously Issued Financial Statements, of the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. The effects of the accounting errors identified and the restatement adjustments have been reflected in this section - Part I—Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report.

 

  1 

 

    

Overview and Financial Condition

 

QPAGOS

 

We are a provider of next generation physical and virtual payment services that we introduced to the Mexican market in the third quarter of 2014.

 

We provide an integrated network of kiosks, terminals and payment channels that enable consumers to deposit cash, convert it into a digital form and remit the funds to any merchant in our network quickly and securely. We help consumers and merchants connect more efficiently in markets and consumer segments, such as Mexico, that are largely cash-based and lack convenient alternatives for consumers to pay for goods and services in physical, online and mobile environments. For example, we license technology that can be used to pay bills, add minutes to mobile phones, purchase transportation tickets, shop online, buy digital services or send money to a friend or relative.

 

Our current focus is on Mexico which remains a cash-dominated society for retail consumer payments with approximately 80% of the value of personal payments exchanged in cash (Bank of Mexico). The penetration of electronic payment services, such as credit and debit cards and point of sale terminals, significantly lags behind more developed economies. We believe that opportunities for our services in Mexico are vast. With over 107 million mobile subscribers in Mexico, 88% of which are under prepaid plans, mobile top-up alone, was a $12 billion business in 2014 as reported by PwC Telecom in Mexico 2015, America Móvil 4Q’15. We believe that there is opportunity for growth in the Mexican market and have expanded our service providers beyond the mobile telephone operators to service providers of electricity, transportation, utilities, municipal services and taxes, consumer credit installments, insurance premiums, and many more. Altogether as of the second quarter of 2016 our platform had integrated 160 such services.

 

Our primary strategy in Mexico to date has been the attraction of service providers as well as the deployment of kiosks through Redpag Electrónicos S.A.P.I. de C.V., our kiosk management subsidiary. During the twelve months ended December 31, 2015 and for the six months ended June 30, 2016, Qpagos Corporation generated net revenues of $1,127,944 and $1,256,350, respectively, from our operations in Mexico. Our primary source of revenue are fees. Qpagos Corporation receives for processing payments made by consumers to service providers. We also generate revenue from non-payment services such as kiosk rentals and sales. Qpagos Corporation currently has in excess of 160 service providers integrated into its payment gateway, which includes all mobile phone providers in Mexico as well as most utility companies, financial services, entertainment venues and others. As of August 1, 2016, we have deployed over 292 kiosks and terminals, and we service an additional 413 kiosks of an independent distributor. Our kiosks and terminals can be found at convenience stores, next to metro stations, retail stores, airport terminals, education centers, and malls in major urban centers, as well as many small and rural towns.

 

In addition, we have developed an electronic wallet which should enable consumers to hold balances in its kiosks for future use or to receive change. Launched in the first quarter of 2016 customers can now use cash and/or stored value in order to pay for goods and services across physical or virtual environments interchangeably. Also in the first quarter of 2016, we launched our mobile app by which smart phone users can now access the exact menu of services available in our kiosks and make payments from the convenience of their phones. Cash is uploaded to the electronic wallet app via kiosks.

 

We believe that our platform provides simple and intuitive user interfaces, convenient access and best-in-class services. We run our network and process its transactions using a proprietary, advanced technology platform that leverages the latest virtualization, analytics and security technologies to create a fast, highly reliable, secure and redundant system. We believe that the breadth and reach of our network, along with the proprietary nature of its technology platform, differentiate us from our competitors and allow us to effectively manage and update our services and realize significant operating leverage with growth in volumes.

 

Management Discussion and Analysis of financial condition

  

The discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements as of June 30, 2016 and 2015, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires QPAGOS to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis we review our estimates and assumptions. The estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions.

 

  2 

 

 

Results of Operations for the Three Months Ended June 30, 2016 and June 30, 2015

 

Net revenue

 

Net revenues were $626,416 and $105,427 for the three months ended June 30, 2016 and 2015 respectively, an increase of $520,989 or 494.2%. Qpagos Corporation operates in Mexico and its functional currency is the Mexican Peso. Qpagos Corporation’s revenue in Mexican Pesos increased to MXN 11,338,341 from MXN 1,616,785 for the three months ended June 30, 2016 and 2015, respectively, an increase of MXN 9,721,556 or 601.3%. The increase in revenue in MXN terms is primarily due to an increase in the volume of prepaid services sold from MXN 1,118,939 for the three months ended June 30, 2015 to MXN 10,775,425 for the three months ended June 30, 2016 the increased deployment of kiosks during the current period, and we also increased the number of our customers over the prior year. The average US $ exchange rate has strengthened against the MXN over the prior period, from $15.3356 to $18.1003 or 18.0%, which results in a lower revenue growth in US $ terms of $112,930.

  

Cost of goods sold

 

Cost of goods sold was $597,647 and $93,329 for the three months ended June 30, 2016 and 2015, respectively, an increase of $504,318 or 540.4%. Qpagos Corporation’s cost of sales in Mexican Pesos increased to MXN 10,817,588 from MXN 1,431,263 for the three months ended June 30, 2016 and 2015, respectively, an increase of MXN 9,386,325 or 655.8%. The increase in cost of sales in MXN terms is primarily due to the increase in the volume of prepaid services sold. Cost of goods sold consists primarily of services acquired from third parties, such as prepaid services and the cost of the kiosks and any retrofitted component. The average US $ exchange rate has strengthened against the MXN over the prior period, from $15.3356 to $18.1003 or 18.0%, which results in a lower cost of sales in US $ terms of approximately $107,743.

 

Gross profit

 

Gross profit was $28,769 and $12,098 for the three months ended June 30, 2016 and 2015, respectively, an increase in profit of $16,671 or 137.8%. The decrease in gross profit as a percentage of revenue to 4.6% from 11.5% for the three months ended June 30, 2016 and 2015, respectively is primarily due to the volume of service sales which is at low margins due to the growth in our wholesale customer base, which offsets the higher margins we earn on our kiosk sales.

 

Total expenses

 

Total expenses were $635,281 and $372,126 for the three months ended June 30, 2016 and 2015, respectively, an increase of $263,155 or 70.7%.

 

Total expenses consisted primarily of the following:

  

·General and administrative expenditure was $615,936 and $363,647 for the three months ended June 30, 2016 and 2015, respectively, an increase of $252,289 or 69.4%. QPAGOS has operations in Mexico and a US holding company presence which incurs some expenditure.

§The general and administrative expenditure in Mexico was $323,985 and $363,647 for the three months ended June 30, 2016 and 2015, respectively, a decrease of $39,662 or 10.9%, of this decrease, of which $58,408 can be attributed to foreign currency movements. The expenses in Mexican Pesos increased to MXN 5,864,219 from MXN 5,576,753 for the three months ended June 30, 2016 and 2015, respectively, an increase of MXN 287,466 or 5.2%. The increase is primarily due to:

oAn increase in payroll expenses of approximately MXN 384,589 as our headcount grew to support the growth and anticipated growth in revenues.

  o An overall reduction in minor overhead expenses.

 

  § The general and administrative expenditure in the US was $291,951 and $0 for the three months ended June 30, 2016 and 2015 respectively, there was no US infrastructure in the prior year. The US expenditures are primarily due to:

  o Audit fees of $57,000 relating to the audit for the year ended December 31, 2015 and 2014.

  o Legal fees of $40,889 related to the reverse merger of the Company

  o Consulting fees of $99,299 related to our information technology.

  o Restricted stock awards of $36,000 related to the value of restricted stock issued to management in the prior year which was fully vested on April 30, 2016.

 

  · Depreciation and amortization was $19,345 and $8,479 for the three months ended June 30, 2016 and 2015, respectively, an increase of $10,866 or 128.2%, the increase is primarily due to the amortization of the software license agreements entered into which have an estimated useful life of 5 years.

 

  3 

 

 

Other income 

 

Other income was $1,016 and $0 for the three months ended June 30, 2016 and 2015, respectively.

 

Interest expense, net

 

Interest expense of $2,992 during the three months ended June 30, 2016 consists primarily of interest on a loan due to YP Holdings. This loan with a principal balance of $100,000 remains outstanding and earns interest at 12% per annum.

 

Foreign currency loss

 

The foreign currency loss was $145,827 and $172,884 for the three months ended June 30, 2016 and 2015, respectively, a decrease of $27,057. The decrease is primarily due to the conversion of US Dollar denominated loans in the prior year into equity prior to the current quarter. We continue to experience foreign currency losses on other US$ denominated liabilities, such as intercompany balances due to the strengthening of the US $ exchange rate from an average of $15.3356 for the quarter ended June 30, 2015 to $18.1003 for the quarter ended June 30, 2016, a strengthening of 18%.

 

Net loss

 

We incurred a net loss of $754,315 and $532,912, for the three months ended June 30, 2016 and 2015, respectively, an increase of $221,403 or approximately 41.5%, primarily due to the increased operating expenses discussed above.

 

Results of Operations for the Six Months Ended June 30, 2016 and June 30, 2015

 

Net revenue

 

Net revenues were $1,256,350 and $161,470 for the six months ended June 30, 2016 and 2015 respectively, an increase of $1,094,880 or 678.1%. Qpagos Corporation operates in Mexico and its functional currency is the Mexican Peso. Qpagos Corporation’s revenue in Mexican Pesos increased to MXN 22,689,495 from MXN 2,469,908 for the six months ended June 30, 2016 and 2015, respectively, an increase of MXN 20,219,587 or 818.6%. The increase in revenue in MXN terms is primarily due to an increase in the volume of prepaid services sold from MXN 1,645,224 in the six months ended June 30, 2015 to MXN 19,748,910 in the six months ended June 30, 2016 the increased deployment of kiosks during the current year, and we also increased the number of our customers over the prior year. The average US $ exchange rate has strengthened against the MXN over the prior period, from $15.2791 to $18.0600 or 18.2%, which results in a lower revenue growth in US $ terms of $228,652.

  

Cost of goods sold

 

Cost of goods sold was $1,206,936 and $143,936 for the six months ended June 30, 2016 and 2015, respectively, an increase of $1,063,000 or 738.5%. Qpagos Corporation’s cost of sales in Mexican Pesos increased to MXN 21,796,730 from MXN 2,171,451 for the six months ended June 30, 2016 and 2015, respectively, an increase of MXN 19,625,279 or 903.8%. The increase in cost of sales in MXN terms is primarily due to the increase in the volume of prepaid services sold. Cost of goods sold consists primarily of services acquired from third parties, such as prepaid air time and the cost of the kiosks and any retrofitted component. The average US $ exchange rate has strengthened against the MXN over the prior period, from $15.2791 to $18.0600 or 18.2%, which results in a lower cost of sales in US $ terms of approximately $219,636.

 

Gross profit

 

Gross profit was $49,414 and $17,534 for the six months ended June 30, 2016 and 2015, respectively, an increase in profit of $31,880 or 181.8%. The decrease in gross profit as a percentage of revenue to 3.9% from 10.9% for the six months ended June 30, 2016 and 2015, respectively is primarily due to the volume of service sales which is at low margins due to the growth in our wholesale customer base, which offsets the higher margins we earn on our kiosk sales.

 

  4 

 

 

Total expenses

 

Total expenses were $3,348,328 and $810,291 for the six months ended June 30, 2016 and 2015, respectively, an increase of $2,538,037 or 313.2%.

 

Total expenses consisted primarily of the following:

  

  · General and administrative expenditure was $3,309,638 and $793,371 for the six months ended June 30, 2016 and 2015, respectively, an increase of $2,516,267 or 317.2%. Qpagos has operations in Mexico and a US holding company presence which incurs some expenditure.

§The general and administrative expenditure in Mexico was $682,203 and $793,371 for the six months ended June 30, 2016 and 2015, respectively, a decrease of $111,168 or 14.0%, of this decrease, $124,073 relates to foreign currency movements. The expenses in Mexican Pesos increased to MXN 12,319,167 from MXN 12,118,220 for the six months ended June 30, 2016 and 2015, respectively, an increase of MXN 200,947 or 1.7%. The increase is primarily due to:

oa reduction in importation expenses of approximately MXN 150,717 primarily due to the timing of shipments of kiosks and accessories;

  o offset by an increase in payroll expenses of approximately MXN 264,320 as our headcount grows to support the growth and anticipated growth in revenues.

 

§The general and administrative expenditure in the US was $2,627,436 and $0 for the six months ended June 30, 2016 and 2015 respectively, there were no US infrastructure in the prior year. The increase is primarily due to:
oConsulting fees expensed of $2,032,275 relating to consulting agreements entered into with various parties to assist us in developing the Mexican market, these consulting fees were settled by the issue of 2,572,500 shares of common stock of Qpagos Corporation which were exchanged for 5,145,000 shares of our Common Stock upon consummation of the reverse merger.
oExecutive salaries and consulting fees related to our information technology of $99,299.
oAudit fees of $57,000 relating to the audit for the year ended December 31, 2015 and 2014.
oRestricted stock awards of $144,000 related to the value of restricted stock issued to management in the prior year which was fully vested on April 30, 2016.

 

·Depreciation and amortization was $38,690 and $16,920 for the six months ended June 30, 2016 and 2015, respectively, an increase of $21,770 or 128.7%, the increase is primarily due to the amortization of the license agreements entered into which have an estimated useful life of 5 years.

 

Other income

 

Other income was $4,015 and $471 for the six months ended June 30, 2016 and 2015, respectively.

 

Interest expense, net

 

Interest expense of $5,984 during the six months ended June 30, 2016 consists primarily of interest on a loan due to YP Holdings. This loan with a principal balance of $100,000 remains outstanding and earns interest at 12% per annum.

 

Foreign currency loss

 

The foreign currency loss was $114,843 and $213,189 for the six months ended June 30, 2016 and 2015, respectively, a decrease of $98,346. The decrease is primarily due to the conversion of US Dollar denominated loans in the prior year into equity prior to the current quarter. The Company continues to experience foreign currency losses on other US$ denominated liabilities, such as intercompany balances due to the strengthening of the US $ exchange rate from an average of $15.2791 for the six months ended June 30, 2015 to $18.0600 for the six months ended June 30, 2016, a strengthening of 18.2%.

 

Net loss

 

We incurred a net loss of $3,415,726 and $1,005,475, for the six months ended June 30, 2016 and 2015, respectively, an increase of $2,410,251 or approximately 239.7%, and which consist of the various items discussed above.

 

  5 

 

 

Liquidity and Capital Resources

 

To date, our primary sources of cash have been funds raised from the sale of its securities and the issuance of debt as well as revenue derived from operations.

 

We incurred an accumulated deficit of $7,405,415 through June 30, 2016 and incurred negative cash flow from operations of $1,015,258 for the six months ended June 30, 2016. We have spent, and need to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development effort and will be required to raise additional funding.

 

We will need to generate additional revenue from operations and/or obtain additional financing to pursue our business strategy or to take advantage of opportunities that may arise. To meet our financing needs, we are considering multiple alternatives, including, but not limited to, additional equity financings and, debt financings and/or funding from partnerships. There can be no assurance that we will be able to complete any such transactions on acceptable terms or otherwise.

 

At June 30, 2016, we had cash of $135,060 and a working capital of $987,968. We believe that the current cash balances together with revenue anticipated to be generated from operations will not be sufficient to meet our current working capital needs and we will need to raise additional funds as either loan funds or additional equity funds to continue our operations.

 

We utilized $1,015,258, and $982,831 of cash in operating activities for the six months ended June 30, 2016 and 2015, respectively, an increase of $32,427 or 3.3%. The increase was primarily due to an increase in operating expenditure of $215,207 offset by a decrease in working capital expenditure of $182,781.

 

We had minimal investment in property and equipment of $453 and $1,819 for the six months ended June 30, 2016 and 2015.

 

We funded our operations by utilizing our cash balances and raising an additional $225,000 by the issue of common securities to certain investors in a private placement.

 

We have minimal commitments which include a lease of premises, with a future commitment of $16,371 for the year ending December 31, 2016.

 

We entered into an additional ten-year licensing agreement with the Licensor on May 1, 2015, whereby we are committed to pay an annual license fee, in quarterly instalments of $5,000 ($20,000 per annum) to the Licensor for an exclusive license for the Mexican market of certain revenue payment services.

 

Our primary financial commitments as of the date hereof are payments owed under the License Agreement. The minimum commitments due under the license agreement is summarized as follows:

 

   Amount 
     
2016  $10,100 
2017   20,100 
2018   20,100 
2019   20,100 
2020 and thereafter   107,167 
   $177,567 

 

  6 

 

 

Off Balance Sheet Arrangements

 

None.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risks

 

None.

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that due to a lack of segregation of duties and insufficient controls over review and accounting for certain complex transactions, that the Company’s disclosure controls and procedures as of June 30, 2016 were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The Company intends to retain additional individuals to remedy the ineffective controls. We have begun to take actions that we believe will substantially remediate the material weaknesses identified. In response to the identification of our material weaknesses, we are in the process of expanding our finance and accounting staff. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.

 

(b) Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

  7 

 

 

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Item 1A. Risk Factors

 

Investing in our Company involves a high degree of risk. In addition to the risks related to our business set forth in this Quarterly Report on Form 10-Q/A, you should carefully consider the risks described below before investing in us. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations.

 

Risks Related to our Business

 

Risks Relating to Our Business and Industry

 

We have had limited operations to date.

 

Qpagos’ Corporation’s subsidiaries were incorporated in November 2013 and began deploying kiosks in Mexico in November 2014. As such, we have a very limited operating history. We have yet to demonstrate our ability to overcome the risks frequently encountered in the payment services industry and are still subject to many of the risks common to early stage companies, including the uncertainty as to our ability to implement our business plan, market acceptance of our proposed business and services, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources and uncertainty of our ability to generate revenues. There is no assurance that our activities will be successful or will result in any revenues or profit, and the likelihood of our success must be considered in light of the stage of our development. There can be no assurance that we will be able to consummate our business strategy and plans, or that financial, technological, market, or other limitations may force us to modify, alter, significantly delay, or significantly impede the implementation of such plans. We have insufficient results for investors to use to identify historical trends. Investors should consider our prospects in light of the risk, expenses and difficulties we will encounter as an early stage company. Our revenue and income potential is unproven and our business model is continually evolving. We are subject to the risks inherent to the operation of a new business enterprise, and cannot assure you that we will be able to successfully address these risks.

  

The condensed consolidated financial statements of QPAGOS have been prepared assuming that it will continue as a going concern.

 

QPAGOS’ operating losses, negative cash flows from operations and limited alternative sources of revenue raise substantial doubt about its ability to continue as a going concern.  The condensed consolidated financial statements of QPAGOS for the three months and six months ended June 30, 2016 do not include any adjustments that might result from the outcome of this uncertainty.  If we or Qpagos Corporation cannot raise adequate capital on acceptable terms or generate sufficient revenue from operations, we and Qpagos Corporation will need to revise our business plans.

 

We may continue to generate operating losses and experience negative cash flows and it is uncertain whether we will achieve profitability.

 

For the six months ended June 30, 2016 and for the years ended December 31, 2015, we incurred a net loss of $3.4 million and $2.5 million, respectively. We have an accumulated deficit of $7.4 million through June 30, 2016. We expect to continue to incur operating losses until such time, if ever, as we are able to achieve sufficient levels of revenue from operations. There can be no assurance that we will ever generate significant sales or achieve profitability. Accordingly, the extent of future losses and the time required to achieve profitability, if ever, cannot be predicted at this point.

 

We also expect to experience negative cash flows for the foreseeable future as we fund our operating losses. As a result, we will need to generate significant revenues or raise additional financing in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability would likely negatively impact the value of our securities and financing activities.

 

  8 

 

 

The payment services industry is highly competitive, and we have a number of competitors that are larger and have greater financial and other resources.

 

The payment services industry is highly competitive, and our continued growth depends on our ability to compete effectively. Although we do not face direct competition from any competitor in exactly the same line of business, we face competition from a variety of financial and non-financial business groups. These competitors include retail banks, non-traditional payment service providers, such as retailers and mobile network operators, traditional kiosk and terminal operators and electronic payment system operators, as well as other companies that provide various forms of payment services, including electronic payment and payment processing services. Competitors in our industry seek to differentiate themselves by features and functionalities such as speed, convenience, network size, accessibility, hours of operation, reliability and price. A significant number of our competitors have greater financial, technological and marketing resources than we have, operate robust networks and are highly regarded by consumers.

 

There is uncertainty as to market acceptance of our technology and services.

 

We have conducted our own research into the markets for our services; however, because we are a new entrant into the market, we cannot guarantee market acceptance of our services and have somewhat limited information on which to estimate our anticipated level of sales. Our services require consumers and service providers to adopt our technology. Our industry is susceptible to rapid technological developments and there can be no assurance that we will be able to match any new technological advances. If we are unable to match the technological changes in the needs of our customers the demand for our products will be reduced.

 

The technology upon which our business is dependent is licensed from a third party under the terms of a ten year license agreement, which if terminated, would result in the cessation of our business operations.

 

The license with Janor Enterprises Ltd. (Janor) is for the rights to use three software programs upon which our business is completely dependent. The agreement is for a term of ten years, and may be extended for an additional ten years but may be terminated early by Janor if we fail to comply with its terms and conditions or make certain payments. The rights to the licensed programs terminate upon expiration or termination of the agreement. We have no guarantee that Janor will renew our agreement upon expiration of the extended term. If we are not able to maintain this license, we would have to cease operations unless we have developed or secured the rights to technology that would provide the same functionality and we are able to reconfigure our installed base of kiosks, terminals and other system infrastructure to work with the new technology. These hurdles would be extremely expensive and time consuming, and it is unlikely that we would be able stay in business.

 

Our exclusive right to the technology that we license is subject to forfeiture if we fail to make certain quarterly payments.

 

The technology that we license from Janor is licensed pursuant to the terms of a license agreement. Subject to us making quarterly payments of $5,000 per quarter, Janor has agreed that neither it nor any of its subsidiary or affiliated entity will install a terminal and/or kiosk that incorporates the Programs or a technology having the same or a similar effect nor will they provide any person or entity with the right to install a terminal and/or kiosk in Mexico that incorporates the Programs or a technology having the same or a similar effect; provided; however, If we should fail to make the quarterly payments, there is no prohibition from Janor licensing the same technology to another entity in Mexico that could compete with us. If Janor were to license the same technology to a third party our competitive position in Mexico could be substantially harmed.

 

We rely on one outside vendor for the supply of key kiosk parts and the partial or complete loss of this supplier could cause customer supply or production delays and as a result potentially a loss of revenues.

 

We rely on one outside vendor based outside Mexico to manufacture substantial portions of critical hardware that are used with or included in our kiosks. Although there are other suppliers that could supply the hardware required for the kiosks, we do not have a contract with such other suppliers and therefore, if our present vendor was to delay or terminate its performance, our business would likely be disrupted.

 

Our reliance on this vendor is expected to continue and involves other risks, including our limited control over the availability of components, delivery schedules, pricing and product quality. We may experience delays, additional expenses and lost sales as a result of our dependency upon this vendor. Although we expect that other existing vendors would be able to supply us with any needed products if this vendor was to cease or interrupt production or otherwise fail to supply us with an adequate supply of required parts, if these other existing vendors were unable to supply us in a timely manner, or on comparable terms, our business could be materially adversely impacted.  

 

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Our reliance on outside suppliers for our kiosk hardware involves several risks, including the following:

  

·our suppliers of required parts may cease or interrupt production or otherwise fail to supply us with an adequate supply of required parts for a number of reasons, including contractual disputes with our supplier or adverse financial developments at or affecting the supplier;

 

·we have reduced control over the pricing of third party-supplied materials, and our supplier may be unable or unwilling to supply us with required materials on commercially acceptable terms, or at all;

 

·we have reduced control over the timely delivery of third party-supplied materials; and

 

·our suppliers may be unable to develop technologically advanced products to support our growth and development of new systems.

 

Disruptions in international trade and finance or in transportation also may have a material adverse effect on our business, financial condition and results of operation.  Any significant disruption in our operations for any reason, such as regulatory requirements, scheduling delays, quality control problems, loss of certifications, power interruptions, fires, hurricanes, war or threats of terrorism, labor strikes, contract disputes, could adversely affect our sales and customer relationships. In addition, in the event of a breach of law by a vendor based outside of Mexico or a breach of a contractual obligation that has an adverse effect upon our operations, we may have little or no recourse because all of our vendors’ assets could be located in a foreign country, such as Russia, Italy, Germany, Canada or the People’s Republic of China where it may not be possible to effect service of process and uncertainty exists as to whether the courts in such foreign jurisdiction would recognize or enforce a judgment of a Mexican court obtained against the vendor.

 

We are subject to the economic risk and business cycles of our merchants and agents and the overall level of consumer spending.

 

The payment services industry depends heavily on the overall level of consumer spending. We are exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. Economic factors such as employment levels, business conditions, energy and fuel costs, interest rates, and inflation rate could reduce consumer spending or change consumer purchasing habits. A reduction in the amount of consumer spending could result in a decrease in our revenue and profits. If our merchants make fewer sales of their products and services using our services or consumers spend less money per transaction, we will have fewer transactions to process at lower amounts, resulting in lower revenue. Weakening in the Mexican economy could have a negative impact on our merchants, as well as consumers who purchase products and services using our payment processing systems, which could, in turn, negatively impact our business, financial condition and results of operations, particularly if the recessionary environment disproportionately affects some of the market segments that represent a larger portion of our payment processing volume. In addition, these factors could force some of our merchants and/or agents to liquidate their operations or go bankrupt, or could cause our agents to reduce the number of their locations or hours of operation, resulting in reduced transaction volumes. We also have a certain amount of fixed costs, including salaries and rent, which could limit our ability to adjust costs and respond quickly to changes affecting the economy and our business.

 

We do not control the rates of the fees levied by Qpagos Corporation’s agents on consumers.

 

Qpagos Corporation’s agents pay it an agreed fee using a portion of the fees levied by them on consumers. The fee paid to Qpagos Corporation by the agent is based on a percentage of the value of each transaction that Qpagos Corporation’s processes or a fixed rate per transaction. However, in most cases the amount of fees levied by an agent on a consumer for each particular transaction is determined by such agent at its own discretion. Qpagos Corporation usually does not cap the amount of such fees or otherwise control it. We believe that the fees set by agents are market-driven, and that our interests and Qpagos Corporation’s agents’ interests are aligned with a view to maintaining fees at a level that would simultaneously result in our agents’ profitability and customer satisfaction. However, we can provide no assurance that agents will not raise fees to a level that will adversely affect the popularity of our services among consumers. At the same time, if Qpagos Corporation is forced to cap customer fees to protect the strength of our brand or otherwise, it may lose a significant number of agents, which would reduce the penetration of our physical distribution network. In limited instances, we have introduced such caps at the request of our merchants. No assurance can be made that this trend will not increase. Material increases in customer fees by our agents or the imposition of caps on the rates of such fees by us could have an adverse effect on the business, financial condition and results of operations.

 

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If consumer confidence in our business deteriorates, our business, financial condition and results of operations could be adversely affected.

 

Our business is built on consumers’ confidence in our brands, as well as our ability to provide fast, reliable payment services. As a consumer business, the strength of our brand and reputation are of paramount importance to us. A number of factors could adversely affect consumer confidence in our brand, many of which are beyond our control, and could have an adverse impact on our results of operations. These factors include:

 

·any regulatory action or investigation against us;

 

·any significant interruption to our systems and operations; and

 

·any breach of our security system or any compromises of consumer data.

 

In addition, we are largely dependent on our agents and, in the future, will be dependent, on franchisees to which we license our products to maintain the reputation of our brand. Despite the measures that we put in place to ensure their compliance with our performance standards, our lack of control over their operations may result in the low quality of service of a particular agent or franchisee being attributed to our brand, negatively affecting our overall reputation. Furthermore, negative publicity surrounding any assertion that our agents and/or merchants are implicated in fraudulent transactions, irrespective of the accuracy of such publicity or its connection with our current operations or business, could harm our reputation. Any event that hurts our brand and reputation among consumers as a reliable payment services provider could have a material adverse effect on our business, financial condition and results of operations.

 

A decline in the use of cash as a means of payment may result in a decline in the use of our kiosks and terminals.

 

Substantially all of our operations are in Mexico where a substantial part of the population relies on cash payments rather than credit and debit card payments or electronic banking. We believe that consumers making cash payments are more likely to use our kiosks and terminals than where alternative payment methods are available. As a result, we believe that our profitability depends on the use of cash as a means of payment. There can be no assurance that over time, the prevalence of cash payments in Mexico will not decline as a greater percentage of the population adopts credit and debit card payments and electronic banking. The shift from cash payments to credit and debit card payments and electronic banking could reduce our market share and payment volumes and may have a material adverse effect on our business, financial condition and results of operations.

 

Our business operations are geographically concentrated and could be significantly affected by any adverse change in the regions in which we operate.

 

Our business operations are located substantially in Mexico. While Qpagos Corporation recently invested in a company performing similar services in the United States and we may expand our business to new geographic regions, we are and will continue to still be highly concentrated in Mexico. Because to date we derive all of our total revenues from our operations in Mexico and expect to continue to derive a significant portion of our revenue from operations in Mexico for the near future, our business is exposed to adverse regulatory and competitive changes, economic downturns and changes in political conditions in Mexico. Moreover, due to the concentration of our businesses in Mexico, our business is less diversified and, accordingly, is subject to greater regional risks than some of our competitors.

 

We are not currently subject to extensive government regulation; however, we could be subject to extensive government regulation, and there can be no guarantee that new regulations applicable to our business will not be enacted.

 

Currently our business is not impacted by government regulation; however, we may be subject to a variety of regulations aimed at preventing money laundering and financing criminal activity and terrorism, financial services regulations, payment services regulations, consumer protection laws, currency control regulations, advertising laws and privacy and data protection laws and therefore experience periodic investigations by various regulatory authorities in connection with the same, which may sometimes result in monetary or other sanctions being imposed on us. Many of these laws and regulations are constantly evolving, and are often unclear and inconsistent with other applicable laws and regulations making compliance challenging and increasing our related operating costs and legal risks. In particular, there has been increased public attention and heightened legislation and regulations regarding money laundering and terrorist financing. We may have to make significant judgment calls in applying anti-money laundering legislation and risk being found in non-compliance with such laws.

 

If local authorities in Mexico choose to enforce specific interpretations of the applicable legislation that differ from ours or enact new laws, we may be found to be in violation and subject to penalties or other liabilities. This could also limit our ability in effecting such payments going forward and may increase our cost of doing business.

 

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In addition, there is significant uncertainty regarding future legislation on taxation of electronic payments in Mexico, including the place of taxation. Subsequent legislation and regulation and interpretations thereof, litigation, court rulings, or other events could expose us to increased costs, liability and reputational damage that could have a material adverse effect on our business, financial condition and results of operations.

 

We may not be able to complete or integrate successfully any potential future acquisitions, partnerships or joint ventures.

 

From time-to-time, we may evaluate possible acquisition transactions, partnerships or joint ventures, some of which may be material. Potential future acquisitions, partnerships and joint ventures may pose significant risks to our existing operations if they cannot be successfully integrated. These projects would place additional demands on our managerial, operational, financial and other resources, create operational complexity requiring additional personnel and other resources and require enhanced control procedures. In addition, we may not be able to successfully finance or integrate any businesses, services or technologies that we acquire or with which we form a partnership or joint venture. Furthermore, the integration of any acquisition may divert management’s time and resources from our core business and disrupt our operations. Moreover, even if we were successful in integrating newly acquired assets, expected synergies or cost savings may not materialize, resulting in lower than expected benefits to us from such transactions. We may spend time and money on projects that do not increase our revenue. Additionally, when making acquisitions it may not be possible for us to conduct a detailed investigation of the nature of the assets being acquired due to, for instance, time constraints in making the decision and other factors. We may become responsible for additional liabilities or obligations not foreseen at the time of an acquisition. In addition, in connection with any acquisitions, we must comply with various antitrust requirements. It is possible that perceived or actual violations of these requirements could give rise to regulatory enforcement action or result in us not receiving all necessary approvals in order to complete a desired acquisition. To the extent we pay the purchase price of any acquisition in cash, it would reduce our cash reserves, and to the extent the purchase price is paid with our stock, it could be dilutive to our stockholders. To the extent we pay the purchase price with proceeds from the incurrence of debt, it would increase our level of indebtedness and could negatively affect our liquidity and restrict our operations. All of the above risks could have a material adverse effect on our business, results of operations, financial condition, and prospects.

 

As our business develops we will need to implement enhanced compliance processes, procedures and controls with respect to the rules and regulations that apply to our business.

 

Our success requires significant public confidence in our ability to handle large and growing payment volumes and amounts of consumer funds, as well as comply with applicable regulatory requirements. Any failure to manage consumer funds or to comply with applicable regulatory requirements could result in the imposition of fines, harm our reputation and significantly diminish use of our products. In addition, if we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities and/or officials (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, results of operations and prospects.

 

If we cannot keep pace with rapid developments and change in our industry and provide new services to our clients, the use of our services could decline, reducing our revenues.

 

The payment services industry in which we operate is characterized by rapid technological change, new product and service introductions, evolving industry standards, changing customer needs and the entrance of more established market players seeking to expand into these businesses. In order to remain competitive, we continually seek to expand the services we offer and to develop new projects, including, for example, the electronic wallet. These projects carry risks, such as delays in delivery, performance problems and lack of customer acceptance. In our industry, these risks are acute. Any delay in the delivery of new services or the failure to differentiate our services or to accurately predict and address market demand could render our services less desirable, or even obsolete, to consumers. In addition, if alternative payment mechanisms become widely available, substituting our current products and services, and we do not develop and offer similar alternative payment mechanisms successfully and on a timely basis, our business and prospects could be adversely affected. Furthermore, we may be unable to recover the costs we have incurred in developing new services. Our development efforts could result in increased costs and we could also experience a loss in business that could reduce our earnings or could cause a loss of revenue if promised new services are not timely delivered to our clients, are not able to compete effectively with our competitors’ or do not perform as anticipated. If we are unable to develop, adapt to or access technological changes or evolving industry standards on a timely and cost effective basis, our business, financial condition and results of operations could be materially adversely affected.

 

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Our systems and our third party providers’ systems may fail due to factors beyond our control, which could interrupt our service, cause us to lose business and increase our costs.

 

We depend on the efficient and uninterrupted operation of numerous systems, including our computer systems, software and telecommunications networks, as well as the data centers that we lease from third parties. We only have one data center in central Mexico that controls our operations and hosts our main equipment. Our systems and operations, or those of our third party providers, could be exposed to damage or interruption from, among other things, fire, flood, natural disaster, power loss, telecommunications failure, vendor failure, unauthorized entry, improper operation and computer viruses. Substantial property and equipment loss, and disruption in operations, as well as any defects in our systems or those of third parties or other difficulties could expose us to liability and materially adversely impact our business, financial condition and results of operations. In addition, any outage or disruptive efforts to our data center would result in the failure of our computers and kiosks to operate and would, if for an extensive period of time, adversely impact our reputation, brand and future prospects.

 

Unauthorized disclosure of data, whether through cybersecurity breaches, computer viruses or otherwise, could expose us to liability, protracted and costly litigation and damage our reputation.

 

We store and/or transmit sensitive data, such as mobile phone numbers, and we have ultimate liability to our consumers for our failure to protect this data. If breaches occur our encryption of data and other protective measures may not prevent unauthorized disclosure of data. Unauthorized disclosure of data or a cybersecurity breach could harm our reputation and deter clients from using electronic payments as well as kiosks and terminals generally and our services specifically, increase our operating expenses in order to correct the breaches or failures, expose us to uninsured liability, increase our risk of regulatory scrutiny, subject us to lawsuits, result in the imposition of material penalties and fines by state authorities and otherwise materially adversely affect our business, financial condition and results of operations.

 

Customer complaints or negative publicity about our customer service could affect attractiveness of our services adversely and, as a result, could have an adverse effect on our business, financial condition and results of operations.

 

Customer complaints or negative publicity about our customer service could diminish consumer confidence in, and the attractiveness of, our services. Breaches of our consumers’ privacy and our security systems could have the same effect. We sometimes take measures to combat risks of fraud and breaches of privacy and security, such as freezing consumer funds, which could damage relations with our consumers. These measures heighten the need for prompt and attentive customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense, and this expense, if not managed properly, could impact our profitability significantly. Any inability by us to manage or train our customer service representatives properly could compromise our ability to handle customer complaints effectively. If we do not handle customer complaints effectively, our reputation may suffer, and we may lose our customers’ confidence, which could have a material adverse effect on our business, financial condition and results of operations.

 

Qpagos Corporation’s agreements with our agents and our merchants do not include exclusivity clauses and may be terminated unilaterally at any time or upon short notice.

 

Qpagos Corporation normally does not include exclusivity clauses in its agreements with agents or merchants, which is standard in the payment services industry. Accordingly, merchants and agents do not have any restrictions on dealings with other providers and can switch from Qpagos Corporation’s payment processing system to another without significant investment. The termination of contracts with existing agents or merchants or a significant decline in the amount of business we do with them as a result of contracts not having exclusivity clauses could have a material adverse effect on our business, financial condition and results of operations.

 

Our payment system might be used for fraudulent, illegal or improper purposes, which could expose us to additional liability and harm our business.

 

Despite measures we have taken and continue to take, our payment system remains susceptible to potentially illegal or improper uses. These may include use of our payment services in connection with fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud and prohibited sales of restricted products. In the past there have been news articles on how organized crime groups have used other payment services to transfer money in the course of illegal transactions.

 

Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. It is possible that incidents of fraud could increase in the future. Our risk management policies and procedures may not be fully effective to identify, monitor and manage these risks. We are not able to monitor in each case the sources for our counterparties’ funds or the ways in which they use them. Increases in chargebacks or other liability could have a material adverse effect on our business, financial condition and results of operations. Furthermore, an increase in fraudulent transactions or publicity regarding chargeback disputes could harm our reputation and reduce consumer confidence in the use of our kiosks and electronic wallets.

 

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We are subject to fluctuations in currency exchange rates.

 

We are exposed to currency risks. Our financial statements are expressed in U.S. dollars, while its revenues and expenses are in Mexican pesos. Accordingly, its results of operations and assets and liabilities are exposed to fluctuations in exchange rates between the U.S. dollar and the Mexican peso. In addition, changes in currency exchange rates also affect the carrying value of assets on the balance sheet, which may result in a decline in the dollar amount of our total assets on the balance sheet. During the year ended December 31, 2015, we incurred a foreign currency loss of ($ 466,920) attributable to the deterioration of the Mexican Peso against the US Dollar. However, during the six months ended June 30, 2016, we had a foreign currency loss of $(114,843).

 

We may not be able to successfully protect the intellectual property we license and may be subject to infringement claims.

 

We rely on a combination of contractual rights, copyright, trademark and trade secret laws to establish and protect our proprietary technology. We customarily require our employees and independent contractors to execute confidentiality agreements or otherwise to agree to keep our proprietary information confidential when their relationship with us begins. Typically, our employment contracts also include clauses requiring our employees to assign to us all of the inventions and intellectual property rights they develop in the course of their employment and to agree not to disclose our confidential information. Nevertheless, others, including our competitors, may independently develop similar technology to that licensed by us, duplicate our services or design around our intellectual property. Further, contractual arrangements may not prevent unauthorized disclosure of our confidential information or ensure an adequate remedy in the event of any unauthorized disclosure of our confidential information. Because of the limited protection and enforcement of intellectual property rights in Mexico, our intellectual property rights may not be as protected as they may be in more developed markets such as the United States. We may have to litigate to enforce or determine the scope or enforceability of our intellectual property rights (including trade secrets and know-how), which could be expensive, could cause a diversion of resources and may not prove successful. The loss of intellectual property protection could harm our business and ability to compete and could result in costly redesign efforts, discontinuance of certain service offerings or other competitive harm. Additionally, we do not hold any patents for our business model or our business processes, and we do not currently intend to obtain any such patents in Mexico, the United States or elsewhere.

 

We may also be subject to costly litigation in the event our services or the technology that we license are claimed to infringe, misappropriate or otherwise violate any third party’s intellectual property or proprietary rights. Such claims could include patent infringement, copyright infringement, trademark infringement, trade secret misappropriation or breach of licenses. We may not be able to successfully defend against such claims, which may result in a limitation on our ability to use the intellectual property subject to these claims and also might require us to redesign affected services, enter into costly settlement or license agreements, pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain of our services. In such circumstances, if we cannot or do not license the infringed technology on reasonable terms or substitute similar technology from another source, our revenue and earnings could be adversely impacted. Additionally, in recent years, non-practicing entities have been acquiring patents, making claims of patent infringement and attempting to extract settlements from companies in our industry. Even if we believe that such claims are without merit and successfully defend these claims, defending against such claims is time consuming and expensive and could result in the diversion of the time and attention of our management and employees.

 

We may use open source software in a manner that could be harmful to our business.

 

We use open source software in connection with our technology and services. The original developers of the open source code provide no warranties on such code. Moreover, some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. The use of such open source code may ultimately require us to replace certain code used in our products, pay a royalty to use some open source code or discontinue certain products. Any of the above requirements could be harmful to our business, financial condition and operations.

 

We do not have and may be unable to obtain sufficient insurance to protect ourselves from business risks.

 

The insurance industry in Mexico is not yet fully developed, and many forms of insurance protection common in more developed countries are not yet fully available or are not available on comparable or commercially acceptable terms. Accordingly, while we hold certain mandatory types of insurance policies, we do not currently maintain insurance coverage for business interruption, property damage or loss of key management personnel, as we have been unable to obtain these on commercially acceptable terms. We do not hold insurance policies to cover for any losses resulting from counterparty and credit risks or fraudulent transactions. We also do not generally maintain separate funds or otherwise set aside reserves for most types of business-related risks. Accordingly, our lack of insurance coverage or reserves with respect to business-related risks may expose us to substantial losses, which could materially adversely affect our business, financial condition and results of operations.

 

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In a dynamic industry like ours, the ability to attract, recruit, retain and develop qualified personnel is critical to our success and growth.

 

Our business functions at the intersection of rapidly changing technological, social, economic and regulatory developments that require a wide ranging set of expertise and intellectual capital. In order for us to compete and grow successfully, we must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our capital needs. This is particularly true with respect to qualified and experienced software engineers and IT staff, who are highly sought after and are not in sufficient supply in Mexico. The market for such personnel is highly competitive, and we may not succeed in recruiting additional personnel or may fail to replace effectively current personnel who depart with qualified or effective successors. Our efforts to retain and develop personnel may result in significant additional expenses, which could adversely affect our profitability. We cannot assure you that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on our business, financial condition and results of operations.

 

If we cannot establish profitable operations, we will need to raise additional capital to fully implement our business plan, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment.

 

Achieving and sustaining profitability will require us to increase our revenues and manage our operating and administrative expenses. We cannot guarantee that we will be successful in achieving profitability. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations and in order to fully implement our business plan. To date, we have raised an aggregate of $6,500,187 from the sale of debt and equity securities. We estimate that we will need approximately $3,000,000 in order to implement our current business plan. If we do not generate such revenue from operations, we may be forced to limit our expansion. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders, may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving profitability, and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease its operations, which could result in the loss to investors of their investment in our securities.

 

The substantial share ownership position of ten of our largest stockholders may limit your ability to influence corporate matters.

 

As of the date of this Quarterly Report, 10 stockholders own 32,080,199 shares of our Common Stock, representing approximately 58% of the voting power of our issued share capital. As a result of this concentration of share ownership, the 10 stockholders have sole discretion over certain matters submitted to our stockholders for approval that require a simple majority vote and has significant voting power on all matters submitted to our stockholders for approval that require a qualified majority vote, including the power to veto them. This concentration of ownership could delay, deter or prevent a change of control or other business combination, which could negatively impact the value of our shares. The interests of these 10 stockholders may not always coincide with the interests of our other stockholders.

 

Certain of our officers may have a conflict of interest.

 

Certain of our officers are currently working for our company on a part-time basis. One such officer also works at other jobs and has discretion to decide what time he devotes to our activities, which may result in a lack of availability when needed due to responsibilities at other jobs.

 

Risks Relating to Doing Business in Mexico

 

Emerging markets, such as Mexico, are subject to greater risks than more developed markets, including significant legal, economic and political risks.

 

Investors in emerging markets, such as Mexico, should be aware that these markets are subject to greater risk than more developed markets, including in some cases significant legal, economic and political risks. Investors should also note that emerging economies are subject to rapid change and that the information set out herein may become outdated relatively quickly. Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved, and investors are urged to consult with their own legal and financial advisors before making an investment in our securities.

 

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Mexican federal governmental policies or regulations, as well as economic, political and social developments in Mexico, could adversely affect our business, financial condition, results of operations and prospects.

  

Substantially all of our assets and operations are located in Mexico. As a result, we are subject to political, legal and regulatory risks specific to Mexico, which can have a significant impact on our business, results of operations and financial condition. The Mexican federal government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican federal governmental actions, fiscal and monetary policy could have an impact on Mexican private sector entities, including our company, and on market conditions. We cannot predict the impact that political conditions will have on the Mexican economy. Furthermore, our business, financial condition, results of operations and prospects may be affected by currency fluctuations, price instability, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico, over which we have no control. We cannot assure potential investors that changes in Mexican federal governmental policies will not adversely affect our business, financial condition, results of operations and prospects. Mexico has recently experienced periods of violence and crime due to the activities of drug cartels. In response, the Mexican government has implemented various security measures and has strengthened its police and military forces. Despite these efforts, drug-related crime continues to exist in Mexico. These activities, their possible escalation and the violence associated with them may have a negative impact on the Mexican economy or on our operations in the future. The social and political situation in Mexico could adversely affect the Mexican economy, which in turn could have a material adverse effect on our business, results of operations and financial condition.

 

We are subject to the risks of doing business internationally.

 

We currently offer our services in Mexico and therefore our business is subject to risks associated with doing business internationally, including:

  

·trade restrictions and changes in tariffs;

 

  · the impact of business cycles and downturns in economies outside of the United States;

 

  · unexpected changes in regulatory requirements that may limit its ability to export its products or sell into particular jurisdictions;

 

  · import and export license requirements and restrictions;

 

  · difficulties in maintaining effective communications with employees and customers due to distance, language and cultural barriers;

 

  · disruptions in international transport or delivery;

 

  · difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent as do the laws and practices of the United States;

 

  · difficulties in enforcing agreements through non-U.S. legal systems;

 

  · longer payment cycles and difficulties in collecting receivables; and

 

  · potentially adverse tax consequences.

 

If any of these risks materialize, our operations could suffer.

 

Risks Relating to our Securities

 

There is currently a limited public trading market for our common stock and one may never develop.

 

There currently is a limited public trading market for our securities, and it is not assured that any such public market will develop in the foreseeable future. While this is true of any small cap company, the fact that one of our services are provided solely in Mexico, may make the path to a listing on an exchange or actively traded in the over-the-counter market more problematic. Moreover, there can be no assurance that even if our common stock is approved for listing on an exchange or is quoted in the over-the-counter market in the future, that an active trading market will develop or be sustained. Therefore, we cannot predict the prices at which our common stock will trade in the future, if at all. As a result, our investors may have limited or no ability to liquidate their investments.

 

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Trading in our common stock is conducted on the OTCQB, as we currently do not meet the initial listing criteria for any registered securities exchange.  The OTCQB and OTC Markets are less recognized markets than the registered securities exchanges and is often characterized by low trading volume and significant price fluctuations.  These and other factors may further impair our stockholders’ ability to sell their shares when they want to and/or could depress our stock price. As a result, stockholders could find it difficult to dispose of, or obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited.  If a public market for our common stock does develop, these factors could

 

The market price of our common stock may be highly volatile and such volatility could cause you to lose some or all of your investment.

 

The market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:

 

the announcement of new products or product enhancements by us or our competitors;

 

  developments concerning intellectual property rights;

  

  changes in legal, regulatory, and enforcement frameworks impacting our services;

 

  variations in our and our competitors’ results of operations;

 

  fluctuations in earnings estimates or recommendations by securities analysts, if our common stock is covered by analysts;

 

  the results of intellectual property lawsuits;

 

  future issuances of common stock or other securities;

 

  the addition or departure of key personnel; and

 

  general market conditions and other factors, including factors unrelated to our operating performance.

 

Further, the stock market has recently experienced extreme price and volume fluctuations. The volatility of our common stock could be further exacerbated due to low trading volume. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock and the loss of some or all of our investors’ investment.

 

Some or all of the “restricted” shares of our common stock held by our stockholders, including, but not limited to, shares issued in connection with: (i) our incorporation in 2013 and (ii) our 2015 private placements may be offered from time to time in the open market pursuant to an effective registration statement under the Securities Act, or without registration pursuant to Rule 144 promulgated thereunder, and these sales may have a depressive effect on the market price of our common stock.

 

Because our common stock may be a “penny stock,” it may be more difficult for investors to sell shares of our common stock, and the market price of our common stock may be adversely affected.

 

Our common stock may be a “penny stock” if, among other things, the stock price is below $5.00 per share, it is not listed on a national securities exchange, or it has not met certain net tangible asset or average revenue requirements. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. This risk-disclosure document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their accounts with such broker-dealer a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase and get their money back.

 

If applicable, the penny stock rules may make it difficult for stockholders to sell their shares of our common stock. Because of the rules and restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of our common stock may be adversely affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, stockholders may not always be able to resell their shares of our common stock publicly at times and prices that they feel are appropriate.

 

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Because we became public by means of a reverse Merger, we may not be able to attract the attention of brokerage firms .

 

Additional risks may exist because we became public through a “Reverse Merger.” Securities analysts of brokerage firms may not provide coverage of our company since there is little incentive for brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct secondary offerings on our behalf in the future.

 

Compliance with the reporting requirements of federal securities laws can be expensive.

 

We are a public reporting company in the United States, and accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002.  The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to stockholders are substantial. If we do not provide current information about our company to market makers, they will not be able to trade our stock. Failure to comply with the applicable securities laws could result in private or governmental legal action against us or our officers and directors, which could have a detrimental impact on our business and financials, the value of our stock, and the ability of stockholders to resell their stock.

 

Our investors’ ownership may be diluted in the future.

 

In the future, we may issue additional authorized but previously unissued equity securities, resulting in the dilution of ownership interests of our present stockholders. We expect to need to issue a substantial number of shares of common stock or other securities convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, raising additional capital in the future to fund our operations, and other business purposes. Additional shares of common stock issued by us in the future, including shares issued upon exercise of the warrants, will dilute an investor’s investment in the Company.

 

Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that our stockholders do not consider to be in their best interests.

 

As of the date of this Quarterly Report on Form 10-Q/A, our directors, executive officers, principal stockholders and affiliated entities beneficially own, in the aggregate, approximately 71% of our outstanding voting securities as of the date hereof. As a result, if some or all of them acted together, they would have the ability to exert substantial influence over the election of our board of directors and the outcome of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company that may be favored by other stockholders. This could prevent transactions in which stockholders might otherwise recover a premium for their shares over current market prices. This concentration of ownership and influence in management and board decision-making could also harm the price of our capital stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our capital stock (whether by making a tender offer or otherwise) or otherwise attempting to obtain control of our company.

 

Our board of directors has historically had significant control over us and we have yet to establish committees comprised of independent directors.

 

We only have three directors. Because of such limited number of directors, each of our board members had significant control over all corporate issues. In addition, two of our three directors also held officer positions in Qpagos Corporation. The third director is the manager of an entity that provides consulting services to us. We could not establish board committees comprised of independent members, and we did not have an audit or compensation committee comprised of independent directors. Our three directors performed these functions, despite not all being independent directors. Thus, there was potential conflict in that two of our directors were also engaged in management and participated in decisions concerning management compensation and audit issues that may affect management and our performance.

  

We have identified material weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. We have historically operated as a private company and the number and qualifications of our finance and accounting staff have not been consistent with those of a public company. We have identified material weaknesses in our internal controls with respect to our segregation of duties and review and accounting of certain complex transactions.

 

We have begun to take actions that we believe will substantially remediate the material weaknesses identified. In response to the identification of our material weaknesses, we: (i) have retained a part-time Chief Financial Officer to segregate the duties of Chief Executive Officer and Chief Financial Officer; (ii) are in the process of establishing a review process for key aspects of our financial reporting process, including the accounting for complex transactions; and (iii) will seek to establish better operating controls and involve our board of directors in our internal controls process, which will involve establishing formal procedures to communicate deficiencies in internal controls on a timely basis, and encourage our board of directors to more actively participate in guiding management as it relates to internal controls matters. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future. Regardless, following the completion of this offering we will be required to expend time and resources to further improve our internal controls over financial reporting, including by expanding our finance and accounting staff.

 

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Investors in our Common Stock may have limited recourse against us, our directors and executive officers because we conduct our operations outside the United States and our current directors and executive officers reside outside the United States.

 

Our presence outside the United States may limit investors’ legal recourse against us. Our operating subsidiaries are incorporated under the laws of Mexico and all of our current directors and senior officers reside outside the United States, principally in Mexico. Substantially all of our assets and the assets of our current directors and executive officers are located outside the United States, principally in Mexico. As a result, investors may not be able to effect service of process within the United States upon our company or its directors and executive officers or to enforce U.S. court judgments obtained against our company or its directors and executive officers in Mexico or other jurisdictions outside the United States, including actions under the civil liability provisions of U.S. securities laws. In addition, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions outside the United States, liabilities predicated upon U.S. securities laws.

 

We do not expect to pay dividends on our Common Stock in the foreseeable future.

 

We do not expect to pay dividends on our Common Stock for the foreseeable future, and we may never pay dividends.  Consequently, the only opportunity for investors to achieve a return on their investment may be if a trading market develops, and investors are able to sell their shares for a profit or if our business is sold at a price that enables investors to recognize a profit, neither of which we can guarantee will ever take place. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, and growth plans.

 

We do not have an independent compensation committee, which presents the risk that compensation and benefits paid to those executive officers who are board members and other officers may not be commensurate with its financial performance.

 

A compensation committee consisting of independent directors is a safeguard against self-dealing by company executives. Our board of directors, is comprised of two executive officers and one other director, and absent an independent compensation committee currently determines the compensation and benefits of our executive officers, administers our employee stock and benefit plans, and reviews policies relating to the compensation and benefits of our employees Our lack of an independent compensation committee presents the risk that our executive officers on the board may have influence over their personal compensation and benefits levels that may not be commensurate with its financial performance.

 

Limitations on director and officer liability and indemnification of our officers and directors by it may discourage stockholders from bringing suit against an officer or director.

 

Our certificate of incorporation and by-laws provide, with certain exceptions as permitted by Nevada law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director or officer, unless the director or officer committed both a breach of fiduciary duty and such breach was accompanied by intentional misconduct, fraud or knowing violation of law. These provisions may discourage stockholders from bringing suit against a director or officer for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of us against a director or officer.

 

We are responsible for the indemnification of our officers and directors.

 

Should our officers and/or directors require us to contribute to their defense in an action brought against them in their capacity as such, we may be required to spend significant amounts of our capital. Our certificate of incorporation and by-laws also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for the six months ended June 30, 2016

 

During May 2016 and June 2016, we sold an aggregate of 300,000 shares of common stock to a certain investor for gross proceeds of $225,000. The issuances of the common stock were made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act and had adequate access, through employment, business or other relationships, to information about us.

 

Item 3. Defaults upon senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

EXHIBIT INDEX

 

Exhibit    
Number   Description of Exhibit
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and I5d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document    

 

SIGNATURES

 

Pursuant to the requirements 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.

 

  QPAGOS
   
Date: December 12, 2016 By: /s/ Gaston Pereira
  Gaston Pereira
  Chief Executive Officer
  (Principal Executive Officer)

 

  QPAGOS
   
Date: December 12, 2016 By: /s/ Mark Korb
  Mark Korb
  Chief Financial Officer
  (Principal Financial Officer)

 

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