UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10 – Q

 

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

 

For the quarterly period ended: September 30, 2017

 

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)
(I.R.S. 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)

 

Indicate by check mark whether the issuer (1) has 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 ☐

 

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 ☒     No ☐

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
(Do not check if smaller reporting company)     Emerging growth company

 

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

 

Number of shares outstanding of the issuer’s common stock as of the latest practicable date: 55,835,442 shares of common stock, $0.0001 par value per share as of November 14, 2017.

 

 

 

QPAGOS

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q 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, 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. 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, “QPAGOS,” the “Company,” “we,” “us” and “our” refer to QPAGOS and its direct and indirect subsidiaries, Qpagos Corporation, Qpagos S.A.P.I. de C.V. and Redpag S.A.P.I de C.V.

 

 

 

QPAGOS

 

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 6
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 9
Item 3. Defaults Upon Senior Securities 11
Item 4. Mine Safety Disclosures 11
Item 5. Other Information 11
Item 6. Exhibits 11

 

 

 

Item 1.

 

QPAGOS

 

TABLE OF CONTENTS

 

September 30, 2017

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 F-2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016, (as restated) (unaudited) F-3
Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity as of January 1, 2017 to September 30, 2017, (unaudited) F-4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, (as restated) (unaudited) F-5
Notes to the unaudited Condensed Consolidated Financial Statements F-6–F-31

 

 

 

QPAGOS

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,
2017
   December 31,
2016
 
   (Unaudited)     
Assets        
         
Current Assets          
Cash  $7,631   $46,286 
Accounts receivable   98,622    79,943 
Inventory   630,321    350,273 
Recoverable IVA taxes and credits   269,765    353,780 
Other current assets   399,932    279,878 
Total Current Assets   1,406,271    1,110,160 
           
Non-Current Assets          
Plant and equipment, net   171,118    231,328 
Intangibles, net   136,167    168,417 
Investment – related party   3,000    3,000 
Other assets   11,567    9,847 
Total Non-Current Assets   321,852    412,592 
Total Assets  $1,728,123   $1,522,752 
           
Liabilities and Stockholders’ (Deficit) Equity          
           
Current Liabilities          
Accounts payable  $381,087   $320,487 
Notes payable       323,462 
Notes payable – related parties   349,915    203,288 

Convertible debt, net of unamortized discount of $1,177,492 and $75,000, respectively

   674,232    1,180 
Convertible debt – related parties, net of unamortized discount of $115,202   146,075     
Derivative liability   2,194,641    113,074 
IVA and other taxes payable   3,557    166,108 
Advances from customers   212,510    132,133 
Total Current Liabilities   3,962,017    1,259,732 
           
Total Liabilities   3,962,017    1,259,732 
           
Stockholders’ (Deficit) Equity          
Preferred stock, $0.0001 par value, 25,000,000 shares authorized, and 0 shares issued and outstanding as of September 30, 2017 and December 31, 2016.          
Common stock, $0.0001 par value; 100,000,000 shares authorized, 55,835,442 and 55,454,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.    5,583    5,545 
Additional paid-in-capital   8,384,629    8,284,522 
Accumulated deficit   (11,084,321)   (8,757,197)
Accumulated other comprehensive income   460,215    730,150 
Total stockholder’s equity - controlling interest   (2,233,894)   263,020 
Non-controlling interest        
Total Stockholders’ (Deficit) Equity   (2,233,894)   263,020 
Total Liabilities and Stockholders’ (Deficit) Equity  $1,728,123   $1,522,752 

 

See notes to the unaudited condensed consolidated financial statements

 

F - 2

 

 

QPAGOS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   Three
Months Ended
September 30,
2017
   Three
Months Ended
September 30,
2016
   Nine
Months Ended
September 30,
2017
   Nine
Months Ended
September 30,
2016
 
       (As restated)       (As restated) 
                 
Net Revenue  $931,318   $769,897   $2,889,458   $2,026,248 
                     
Cost of Goods Sold   935,033    743,132    2,807,058    1,969,290 
                     
Gross (loss) profit   (3,715)   26,765    82,400    56,958 
                     
General and administrative   682,207    536,156    1,629,674    3,845,798 
Depreciation and amortization   17,311    18,957    55,784    57,214 
Total Expense   699,518    555,113    1,685,458    3,903,012 
                     
Loss from Operations   (703,233)   (528,348)   (1,603,058)   (3,846,054)
                     
Other (expense) income   (39,272)   636    (46,855)   4,651 
Interest expense, net   (792,676)   (3,025)   (1,264,383)   (9,008)
Derivative liability movements   165,196        283,668     
Foreign currency (loss) gain    (27,825)   (101,854)   303,504    (216,699)
Loss before Provision for Income Taxes   (1,397,810)   (632,591)   (2,327,124)   (4,067,110)
                     
Provision for Income Taxes                
                     
Net Loss   (1,397,810)   (632,591)   (2,327,124)   (4,067,110)
                     
Net loss attributable to non-controlling interest                
                     
Net Loss Attributable to Controlling Interest  $(1,397,810)  $(632,591)  $(2,327,124)  $(4,067,110)
                     
Net Loss Per Share - Basic and Diluted  $(0.03)  $(0.01)  $(0.04)  $(0.08)
                     
Weighted Average Number of Shares Outstanding - Basic and Diluted   55,736,849    55,344,870    55,555,930    54,226,382 
                     
Other Comprehensive Gain (Loss)                     
Foreign currency translation adjustment   18,397    55,418    (269,935)   147,577 
                     
Total Comprehensive loss   (1,379,413)   (577,173)   (2,597,059)   (3,919,533)
                     
Comprehensive loss attributable to non-controlling interest                
                     
Comprehensive Loss Attributable to Controlling Interest  $(1,379,413)  $(577,173)  $(2,597,059)  $(3,919,533)

 

See notes to the unaudited condensed consolidated financial statements

 

F - 3

 

 

QPAGOS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE PERIOD JANUARY 1, 2017 TO SEPTEMBER 30, 2017 (Unaudited)

 

                        Total       
                        Stockholders’       
                     Accumulated  (Deficit)     Total 
               Additional     Other  Equity  Non-  Stockholders’ 
   Preferred Stock  Common Stock  Paid-in  Accumulated  Comprehensive  Controlling   Controlling  (Deficit) 
   Shares  Amount  Shares  Amount  Capital  Deficit  Income  Interest  Interest  Equity 
Balance as of December 31, 2016     $   55,454,000  $5,545  $8,284,522  $(8,757,197) $730,150  $263,020  $  $263,020 
                                          
Conversion of debt to equity         381,442   38   100,107         100,145      100,145 
                                          
Translation adjustment                     (269,935)  (269,935)     (269,935)
                                          
net loss for the nine months ended September 30, 2017                  (2,327,124)     (2,327,124)     (2,327,124)
                                          
Balance as of September 30, 2017     $   55,835,442  $5,583  $8,384,629  $(11,084,321) $460,215  $(2,233,894) $  $(2,233,894)

 

See notes to unaudited condensed consolidated financial statements

 

F - 4

 

 

QPAGOS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine
Months Ended
September 30,
2017
   Nine
Months Ended
September 30,
2016
 
         (As restated) 
CASH FLOWS FROM OPERATING ACTIVITIES:        

 
Net loss attributable to the company  $(2,327,124)  $(4,067,110)
Less: loss attributable to non-controlling interest        
Net loss   (2,327,124)   (4,067,110)
Adjustment to reconcile net loss to net cash used in operating activities:          
Depreciation expense   80,648    83,547 
Amortization expense   32,250    32,788 
Provision for bad debts       103,888 
Derivative liability movements   (283,667)    
Amortization of debt discount   1,148,429     
Loss on conversion of debt to equity   44,464     
Equity based compensation charge       144,000 
Shares issued for services       2,032,275 

Non-cash investment in affiliates 

       (3,000)
Changes in Assets and Liabilities          
Accounts receivable   (23,195)   79,130 
Inventory   (304,605)   188,521 
Recoverable IVA taxes and credits   136,240    59,376 
Other current assets   (80,227)   (97,765)
Other assets   (398)   1,265 
Accounts payable and accrued expenses   55,205    198,786 
IVA and other taxes payable   (191,068)   (80,358)
Advances from customers   75,176    6,338 
Interest accruals   77,138    9,009 
CASH USED IN OPERATING ACTIVITIES   (1,560,734)   (1,309,310)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Reverse merger net liabilities       (1,547)
Purchase of property and equipment   (367)   (453)
NET CASH USED IN INVESTING ACTIVITIES   (367)   (2,000)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds on common stock issued       330,000 
Proceeds from short term notes and convertible notes   1,619,149    60,000 
Proceeds from short term notes and convertible notes – related parties   369,915     
Repayment of convertible notes   (235,000)    
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,754,064    390,000 
           
Effect of exchange rate changes on cash and cash equivalents   (231,618)   114,789 
           
NET DECREASE IN CASH   (38,655)   (806,521)
CASH AT BEGINNING OF PERIOD   46,286    832,159 
CASH AT END OF PERIOD  $7,631   $25,638 
           
CASH PAID FOR INTEREST AND TAXES:          
Cash paid for income taxes  $   $ 
Cash paid for interest  $57,172   $ 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Notes payable, including interest thereon, converted to convertible notes payable  $(592,623)  $ 
Convertible notes payable arising from conversion of notes payable  $592,623   $ 
Conversion of convertible debt to equity  $100,145      

 

See notes to the unaudited condensed consolidated financial statements

 

F - 5

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1 ORGANIZATION AND DESCRIPTION OF BUSINESS

 

  a) Organization

 

On May 12, 2016, QPAGOS, a Nevada corporation (“QPAGOS”), 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 QPAGOS (“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 QPAGOS common stock, par value $0.0001 per share (the “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. 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 represented approximately 91% of the outstanding Common Stock.

 

The Merger is being treated as a reverse acquisition of QPAGOS, 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 QPAGOS is treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that are reflected in this Quarterly Report on Form 10-Q and 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 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.

 

F - 6

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

1 ORGANIZATION AND DESCRIPTION OF BUSINESS

 

  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.

 

2 ACCOUNTING 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 consolidated 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 and nine months ended September 30, 2017 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 for the year ended December 31, 2016, included in the current report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2017.

 

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

 

  b) Principles of Consolidation

 

The unaudited condensed 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)

 

F - 7

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  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 period end and the results of operations at the average rate throughout the period. 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 unaudited condensed 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 unaudited condensed 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.

 

  e) Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur.

 

The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

F - 8

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  f) Fair Value of Financial Instruments

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash, accounts receivable, other current assets, other assets, accounts payable, accrued liabilities, and notes payable, approximate fair value due to the relatively short period to maturity for these instruments. The Company did not identify any other assets or liabilities that are required to be presented on the balance sheets at fair value in accordance with the accounting guidance.

 

ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

  g) 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 - 9

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  h) Recent Accounting Pronouncements

 

In July 2017, the FASB issued Accounting Standards Update No. (“ASU’’) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in this Update provide guidance about:

 

1.Accounting for certain financial instruments with down round features

 

2.Replacement of the indefinite deferral for mandatorily redeemable financial instruments of certain non-public entities and certain non-controlling interests

 

The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260).

 

The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.

 

The amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part 1 of this Update should be applied in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.

 

The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect.

 

The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

F - 10

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  h) Recent Accounting Pronouncements (continued)

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging, an amendment to Topic 815. The amendments in this Update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components 2 and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this Update require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.

 

The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the Update. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). The amendments in this ASU deals with the transition and effective dates of implementing to ASU 2014-09, Revenue from contracts with customers, ASU 2016-08, Revenue from contracts with customers, principal versus agent considerations, ASU 2016-10, revenues from contacts with customers; identifying performance obligations and licensing, ASU 2016-12, revenues from contacts with customers, narrow scope improvements and practical expedients, 2016-20, technical corrections and improvements and ASU 2017-05, other income, gains and losses from the derecognition of non-financial assets.

 

The transition provisions require adoption of Topic 606 for annual reporting periods commencing after December 15, 2017 and the adoption of Topic 842 for annual reporting periods beginning after December 15, 2018 for public business entities, if the requirements of a public business entity as defined in ASU 2017-122 are not met, may adopt Topic 606 for annual reporting periods commencing after December 15, 2018 and for Topic 842 for annual reporting periods commencing after December 15, 2019. Early adoption is permitted of both Topics. The Company is currently evaluating the impact this ASU will have on its consolidated 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.

 

  i) 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 September 30, 2017 and December 31, 2016, respectively, the Company had no cash equivalents.

 

The Company assesses 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 September 30, 2017 and December 31, 2016, cash balances in the United States did not exceed the federally insured limit.

 

F - 11

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  j) Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues, which may impact the collectability of these receivables or reserve estimates. Revisions to the allowance for doubtful accounts estimates are recorded as an adjustment to bad debt expense. Receivables deemed uncollectible are charged against the allowance for doubtful accounts at the time such receivables are written-off. Recoveries of receivables previously written-off are recorded as credits to the allowance for doubtful accounts. There were no recoveries during the nine months ended September 30, 2017.

 

  k) 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 operations and comprehensive loss. However, impairment charges are recognized in the condensed consolidated statement of operations and 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 September 30, 2017 and December 31, 2016.

 

  l) Inventory

 

The Company primarily values inventories at net realizable value 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.

 

  m) Advances received from customers

 

Other than the sale of kiosks to customers, the provision of services through our kiosks is conducted on a cash basis. Customers are required to deposit cash with the Company to meet anticipated demand for services provided through kiosks either owned or operated by them. The services provided through the customer owned or operated kiosks are deducted from the deposits held on their behalf, the Company requires that these deposits be replenished as and when the services are provided.

 

F - 12

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

2 ACCOUNTING POLICIES AND ESTIMATES (continued)

 

  n) 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 our 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

 

Fixed Assets

 

The Company reclassified certain kiosk assets used in the production of income, previously recorded in inventory as fixed assets and applied an appropriate depreciation policy to these kiosks.

 

The restated Unaudited Condensed Consolidated Balance Sheet as of September 30, 2016 and the related Consolidated Statements of Operations and Comprehensive loss and the Statement of Cash Flows for the three and nine months ended September 30, 2016, is presented below:

 

F - 13

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

CONDENSED CONSOLIDATED BALANCE SHEET

September 30, 2016

 

   As
Previously
Reported
   Adjustments   Notes   As
Restated
 
  (Unaudited)           (Unaudited) 
Assets                
                 
Current Assets                   
Cash  $25,638            $25,638 
Accounts receivable   59,059             59,059 
Inventory   480,046    (188,240)  (A)    291,806 
Recoverable IVA taxes and credits   358,521             358,521 
Other current assets   149,778             149,778 
Total Current Assets   1,073,042    (188,240)       884,802 
                    
Non-Current Assets                   
Plant and equipment, net   45,205    139,149   (A)    184,354 
Intangibles, net   179,167             179,167 
Investment   3,000             3,000 
Other assets   10,447             10,447 
Total Non-Current Assets   237,819    139,149        376,968 
Total Assets  $1,310,861   $(49,091)      $1,261,770 
                    
Liabilities and Stockholders’ Equity                   
                    
Current Liabilities                   
Accounts payable  $237,159            $237,159 
Notes payable   172,328             172,328 
IVA and other taxes payable   111,686             111,686 
Advances from customers   8,324             8,324 
Total Current Liabilities   529,497            529,497 
                    
Total Liabilities   529,497            529,497 
                    
Stockholders’ Equity                   
Common stock, $0.0001 par value; 100,000,000 shares authorized, 55,394,000 shares issued and outstanding as of September 30, 2016   5,540             5,540 
Additional paid-in-capital   8,239,527             8,239,527 
Accumulated deficit   (8,031,286)   (49,091)  (A)    (8,080,377)
Accumulated other comprehensive income   567,583             567,583 
Total stockholder’s equity - controlling interest   781,364    (49,091)       732,273 
Non-controlling interest                
Total Stockholders’ Equity   781,364    (49,091)       732,273 
Total Liabilities and Stockholders’ Equity  $1,310,861   $(49,091)      $1,261,770 

 

F - 14

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS

Three Months Ended September 30, 2016

                 
   As
Previously
Reported
   Adjustments   Notes   As
Restated
 
                 
Revenues                   
Airtime  $736,937            $736,937 
Kiosk sales   16,428             16,428 
Commissions on services   16,532             16,532 
Other                 
    769,897            769,897 
                    
Cost of Goods Sold                   
Airtime   723,137             723,137 
Kiosk sales   5,337             5,337 
Depreciation       7,111    (B)    7,111 
Other   7,547             7,547 
    736,021    7,111        743,132 
                    
Gross Profit   33,876    (7,111)       26,765 
                    
General and administrative   536,156             536,156 
Depreciation and amortization   19,345    (388)  (A)    18,957 
Total Expense   555,501    (388)       555,113 
Loss from Operations   (521,625)   (6,723)       (528,348)
                    
Other income   636            636 
Interest expense, net   (3,025)            (3,025)
Foreign currency loss   (101,854)            (101,854)
Loss before Provision for Income Taxes   (625,868)   (6,723)       (632,591)
                    
Provision for Income Taxes                
                    
Net Loss   (625,868)   (6,723)       (632,591)
                    
Net loss attributable to non-controlling interest                 
                    
Net Loss Attributable to Controlling Interest  $(625,868)  $(6,723)      $(632,591)
                    
Net Loss Per Share - Basic and Diluted  $(0.01)  $(0.00)      $(0.01)
                    
Weighted Average Number of Shares Outstanding - Basic and Diluted   55,344,870    55,344,870        55,344,870 
                    
Other Comprehensive income                   
Foreign currency translation adjustment   55,418            55,418 
                    
Total Comprehensive loss   (570,450)   (6,723)       (577,173)
                    
Comprehensive loss attributable to non-controlling interest                
                    
Comprehensive Loss Attributable to Controlling Interest  $(570,450)  $(6,723)      $(577,173)

 

F - 15

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Nine Months Ended September 30, 2016

                 
   As
Previously
Reported
   Adjustments   Notes   As
Restated
 
                 
Revenues                   
Airtime  $1,830,238            $1,830,238 
Kiosk sales   165,751             165,751 
Commissions on services   30,112             30,112 
Other   147             147 
    2,026,248            2,026,248 
                    
Cost of Goods Sold                   
Airtime   1,788,338             1,788,338 
Kiosk sales   129,005             129,005 
Depreciation       26,333    (B)    26,333 
Other   25,614             25,614 
    1,942,957    26,333        1,969,290 
                    
Gross Profit   83,291    (26,333)       56,958 
                    
General and administrative   3,845,798             3,845,798 
Depreciation and amortization   58,033    (820)  (A)    57,214 
Total Expense   3,903,831    (820)       3,903,012 
Loss from Operations   (3,820,540)   (25,513)       (3,846,054)
                    
Other income   4,651            4,651 
Interest expense, net   (9,008)            (9,008)
Foreign currency loss   (216,699)            (216,699)
Loss before Provision for Income Taxes   (4,041,596)   (25,513)       (4,067,110)
                    
Provision for Income Taxes                
                    
Net Loss   (4,041,596)   (25,513)       (4,067,110)
                    
Net loss attributable to non-controlling interest                 
                    
Net Loss Attributable to Controlling Interest  $(4,041,596)  $(25,513)      $(4,067,110)
                    
Net Loss Per Share - Basic and Diluted  $(0.08)  $(0.00)      $(0.08)
                    
Weighted Average Number of Shares Outstanding - Basic and Diluted   54,226,382    54,226,382        54,226,382 
                    
Other Comprehensive income                   
Foreign currency translation adjustment   147,577             147,577 
                    
Total Comprehensive loss   (3,894,019)   (25,513)       (3,919,533)
                    
Comprehensive loss attributable to non-controlling interest                
                    
Comprehensive Loss Attributable to Controlling Interest  $(3,894,019)  $(25,513)      $(3,919,533)

 

F - 16

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATED STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2016

                 
   As
Previously
Reported
   Adjustments   Notes   As
Restated
 
CASH FLOWS FROM OPERATING ACTIVITIES:                   
Net loss attributable to the company  $(4,041,597)  $(25,513)  (A)   $(4,067,110)
Less: loss attributable to non-controlling interest                 
Net loss   (4,041,597)   (25,513)       (4,067,110)
Adjustment to reconcile net loss to net cash used in operating activities:                   
Depreciation expense   25,246    58,301   (A)
(C)
    83,547 
Amortization expense   32,788             32,788 
Provision for bad debt   103,888             103,888 
Equity based compensation charge   144,000             144,000 
Shares issued for services   2,032,275             2,032,275 
Non- cash investment in affiliates   (3,000)            (3,000)
Changes in Assets and Liabilities                   
Accounts receivable   79,130             79,130 
Inventory   188,521             188,521 
Recoverable IVA taxes and credits   59,376             59,376 
Other current assets   (97,765)            (97,765)
Other assets   1,265             1,265 
Accounts payable and accrued expenses   198,786             198,786 
IVA and other taxes payable   (80,358)            (80,358)
Advances from customers   6,338             6,338 
Interest accruals   9,009             9,009 
CASH USED IN OPERATING ACTIVITIES   (1,342,098)   32,788        (1,309,310)
                    
CASH FLOWS FROM INVESTING ACTIVITIES:                   
Reverse merger net liabilities   (1,547)            (1,547)
Purchase of property and equipment   (453)            (453)
NET CASH USED IN INVESTING ACTIVITIES   (2,000)           (2,000)
                    
CASH FLOWS FROM FINANCING ACTIVITIES:                   
Proceeds on common stock issued   330,000             330,000 
Proceeds from loans payable   60,000             60,000 
NET CASH PROVIDED BY FINANCING ACTIVITIES   390,000            390,000 
                    
Effect of exchange rate changes on cash and cash equivalents   147,577    

32,788 

  

(C)

    114,789 
                    
NET DECREASE IN CASH   (806,521)            (806,521)
CASH AT BEGINNING OF PERIOD   832,159             832,159 
CASH AT END OF PERIOD  $25,638   $       $25,638 
                    
CASH PAID FOR INTEREST AND TAXES:                   
Cash paid for income taxes  $            $ 
Cash paid for interest  $            $ 

 

NOTES

 

  A. To correct an error in classifying kiosks acquired in 2015 as inventory and available for sale, to property and equipment, along with the recording of related accumulated depreciation and depreciation expense.
     

  B. To reclassify depreciation of kiosks utilized to generate revenues to cost of goods sold
     
  C. Foreign currency translation difference arising on depreciation calculated at average rates compared to the balance sheet depreciation calculated at closing rates.

 

 

 

F - 17

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4 GOING 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 $11,084,321 as of September 30, 2017 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 for one year from the issuance of the financial statements. 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 INVENTORY

 

Inventory consisted of the following:

 

    September 30,
2017
    December 31, 
2016
 
             
Kiosks and accessories   $ 630,321     $ 350,273  
    $ 630,321     $ 350,273  

 

6 PLANT AND EQUIPMENT

 

Plant and Equipment consisted of the following:

 

    September 30,
2017
    December 31,
2016
 
             
Kiosks   $ 267,073     $ 269,810  
Computer equipment     79,361       69,577  
Office equipment     10,708       9,430  
Leasehold improvement     9,301       8,192  
Total cost     366,443       357,009  
Less: accumulated depreciation and amortization     (195,325 )     (125,681 )
Plant and equipment, net   $ 171,118     $ 231,328  

 

Depreciation expense totaled $16,301 and $15,318 for the three months ended September 30, 2017 and 2016, respectively, and $80,648 and $83,547 for the nine months ended September 30, 2017 and 2016, respectively.

 

7 INTANGIBLES

 

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.

 

Intangibles consisted of the following:

 

    September 30,
2017
    December 31,
2016
 
             
Software Localization Agreement   $ 215,000     $ 215,000  
                 
Total cost     215,000       215,000  
Less: accumulated amortization     (78,833 )     (46,583 )
Intangibles, net   $ 136,167     $ 168,417  

 

Amortization expense was $10,750 and $10,750 for the three months ended September 30, 2017 and 2016, respectively and $32,250 and $32,788 for the nine months ended September 30, 2017 and 2016, respectively. 

 

F - 18

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8 NOTES PAYABLE

 

Notes payable consisted of the following:

 

    Interest     Maturity     September 30,     December 31,  
Description   Rate     Date     2017     2016  
                         
YP Holdings LLC   12%     December 31, 2015           $ 151,353  
Strategic IR   10%     January 1, 2017             146,575  
Joseph W and Patricia G Abrams   15%     June 13, 2017             25,534  
                             
Total notes payable               $     $ 323,462  

 

Interest expense totaled $0 and $3,025 for the three months ended September 30, 2017 and 2016, respectively, and $1,804 and $9,008 for the nine months ended September 30, 2017 and 2016, respectively.  

 

YP Holdings, LLC

 

On September 21, 2015, Qpagos Corporation borrowed $100,000 from YP Holdings LLC (“YP”), 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%. On May 26, 2017, the Company re-negotiated the loan with YP Holdings and exchanged the note with a convertible note in the Company, refer to note 9 below.

 

Strategic IR 

Effective October 14, 2016 the Company executed an unsecured promissory note for $50,000, for an advance that took place on September 29, 2016, which matured on February 13, 2017, bearing interest at 10% per annum. The maturity date of this loan was extended to May 19, 2017 and further extended to June 29, 2017 by the execution of Extension Agreements.

 

On June 29, 2017, the note, principal amount of $50,000 and accrued interest thereon of $3,740 was exchanged for a convertible note, refer to note 9 below.

 

On May 12, 2017, the Company executed an unsecured promissory note for $20,000 with an investor, bearing interest at 10% per annum payable on June 11, 2017. Effective June 11, 2017, the note, principal amount of $20,000 and accrued interest thereon of $164 was exchanged for a convertible note, refer note to 9 below.

 

On May 19, 2017, the Company executed a Secured Grid Note for advances totaling $110,000 which took place between December 12, 2016 and March 6, 2017, bearing interest at 10% per annum maturing on May 30, 2017 or earlier upon acceleration by Strategic IR. The Company entered into an extension agreement with Strategic IR extending the maturity date of the note to June 29, 2017.

 

On June 29, 2017, the note, principal amount of $110,000 and accrued interest thereon of $5,535 was exchanged for a convertible note, refer to note 9 below.

 

Joseph W and Patricia G Abrams 

Effective October 14, 2016, the Company executed an unsecured promissory note for $25,000 with an investor, bearing interest at 10% per annum payable on February 13, 2017. On February 13, 2017, the Company executed an amended and restated promissory note extending the maturity date to June 13, 2017 and increasing the interest rate to 15% per annum.

 

On June 13, 2017, the note, principal amount of $25,000 and accrued interest thereon of $1,247 was exchanged for a convertible note, refer to note 9 below.

 

F - 19

 

  

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consists of the following:

 

Description  Interest
rate
   Maturity Date  Principal   Accrued
interest
    Unamortized
debt discount
   September 30,
2017
Balance,
net
   December 31,
2016
Balance,
net
Power Up Lending Group  8%   September 30, 2017  $   $    $   $   1,180
   8%   November 30, 2017                  
   8%   February 10, 2018   33,000    1,143     (15,083)   19,060  
   8%   April 20, 2018   83,000    1,492     (59,035)   25,457  
   8%   June 30, 2018   63,000    221     (59,512)   3,709  
                             
Labrys Fund, LP  8%   July 27, 2017                  
                             
JSJ Investments, Inc.  8%   November 6, 2017                  
                             
Vista Capital Investment, LLC  8%   March 9, 2018                  
                             
Crossover Capital Fund II, LLC  8%   January 6, 2018   100,000    3,879     (35,636)   68,243  
                             
GS Capital Partners, LLC  8%   May 22, 2018   75,000    2,153     (48,082)   29,071  
   8%   June 16, 2018   112,500    2,614     (79,829)   35,285  
                               
YP Holdings, LLC  8%   May 26, 2018                  
                                
Strategic IR  12%   December 8, 2017   10,000    372     (3,722)   6,650  
   12%  December 8, 2017  20,164   736    (7,730)  13,170  
   8%   December 24, 2017   100,000    2,082     (44,992)   57,090  
   12%   December 26, 2017   53,740    1,643     (25,974)   29,409  
   12%   December 26, 2017   115,535    3,533     (55,842)   63,226  
   8%   January 22, 2018   117,000    1,692     (74,100)   44,592  
   8%   March 9, 2018   100,000    4,493     (43,836)   60,657  
   8%   August 24,2018   113,845    923     (102,305)   12,463  
   8%   August 31, 2018   88,847    584     (81,545)   7,886  
   8%   November 6, 2017   176,000    10,077     (23,854)   162,223  
   8%   September 18, 2018   69,047    182     (66,777)   2,452  
   8%   September 26, 2018   20,000    18     (19,781)   237  
   8%   September 28, 2018   246,000    108     (244,652)   1,456  
                               
Joseph W and Patricia G Abrams  12%   December 10, 2017   26,247    941     (11,482)   15,706  
   12%   January 27, 2018   3,753    75     (2,481)   1,347  
                               
Roman Shefer  12%   December 24, 2017   10,000    312     (5,900)   4,412  
                             
Crown Bridge Partners, LLC  8%   August 14, 2018   75,000    773     (65,342)   10,431  
                             
Total convertible notes payable         $1,811,678   $40,046    $(1,177,492)  $674,232 $ 1,180

  

Interest expense, together with amortized debt discount totaled $641,495 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $1,108,782 and $0 for the nine months ended September 30, 2017 and 2016, respectively.

 

The 12% convertible notes, above have a fixed conversion price of $0.20 per common share and certain investors who met a minimum investment requirement of $30,000 were issued three-year warrants convertible into common shares at a conversion price of; i) $0.20 per share if the convertible notes are converted prior to maturity date; and ii) $0.30 per share if the convertible notes are not converted prior to maturity date. These convertible notes have a beneficial conversion feature and attached warrants valued using a Black-Scholes valuation model, refer note 11 c) below, the value of the beneficial conversion feature of the notes were determined based on fair market price of the common stock at the date of the issuance of the note, the difference between the fair market value of the common stock and the conversion price was recorded as a debt discount with a corresponding credit to derivative financial liability.

 

The total value of the beneficial conversion feature and warrant value recorded as a debt discount during the nine months ended September 30, 2017 was $238,507.  

 

F - 20

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9CONVERTIBLE NOTES PAYABLE (continued)

 

Power Up Lending Group Ltd.

 On December 28, 2016, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $77,000 to Power Up Lending Group Ltd. The note had a maturity date of September 30, 2017 and a coupon of eight percent per annum. The Company has the right to prepay the note, provided it makes a payment to the purchaser as set forth in the note within 180 days of its issue date. The note provided that its outstanding principal amount was convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 58% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion.

 

On June 27, 2017, the Company prepaid this note for a total of $107,005, including accrued interest thereon and an early settlement penalty of 35% of the principal outstanding.

 

On February 21, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $53,000 to Power Up Lending Group Ltd. The note has a maturity date of November 30, 2017 and a coupon of eight percent per annum. The Company has the right to prepay the note, provided it makes a payment to the Purchaser as set forth in the note within 180 days of its issue date. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion.

 

On August 22, 2017, the Company prepaid this note for a total of $73,560, including accrued interest thereon and an early settlement penalty of 35% of the principal outstanding.

 

On April 25, 2017, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $33,000 to Power Up Lending Group Ltd. The note has a maturity date of February 10, 2018 and the Company has agreed to pay interest on the unpaid principal balance of the note at the rate of eight percent per annum from the date on which the note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the note in terms of agreement. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 60% of the average lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at September 30, 2017 was $19,060, net of unamortized discount of $15,083.

 

On July 10, 2017, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $83,000 to Power Up Lending Group Ltd. The note has a maturity date of April 20, 2018 and the Company has agreed to pay interest on the unpaid principal balance of the note at the rate of eight percent per annum from the date on which the note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the note in terms of agreement. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 58% of the average lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at September 30, 2017 was $25,457, net of unamortized discount of $59,035.

 

On September 14, 2017, the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $63,000 to Power Up Lending Group Ltd. The note has a maturity date of June 30, 2018 and the Company has agreed to pay interest on the unpaid principal balance of the note at the rate of eight percent per annum from the date on which the note is issued until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The Company has the right to prepay the note in terms of agreement. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the purchaser during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock at a conversion price equal to 58% of the average lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at September 30, 2017 was $3,709, net of unamortized discount of $59,512.

 

Labrys Fund, LP 

On January 27, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $105,000 to Labrys Fund, LP. The note had a maturity date of July 27, 2017 and a coupon of eight percent per annum. In connection with the issuance of the note, the Company was required to issue 150,000 shares of common stock as a commitment fee valued at $66,000. The shares were returnable to the Company if no Event of Default has occurred prior to the date the note is fully repaid. Management had determined that it is probable that the Company would meet the conditions under the note and therefore it more likely than not that the Company would not be in Default as defined in the note. As a result, management has concluded that it was probable that the shares would be returned and therefore the value of the 150,000 shares was not recorded.

 

The Company had the right to prepay the note within 180 days of its Issue Date. After the 180 days, the Company had no right to prepayment. The outstanding principal amount of the note was convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion.

 

On July 26, 2017, the Company repaid this note for a total of $109,142, including interest thereon. The 150,000 shares of common stock issued to Labrys Fund as a commitment fee for the convertible loan advanced have been returned to the Company and have been cancelled.

 

F - 21

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9CONVERTIBLE NOTES PAYABLE (continued)

 

JSJ Investments Inc. 

On February 6, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $200,000 to JSJ Investments Inc., (“JSJ”). The note has a maturity date of November 6, 2017 and a coupon of eight percent per annum. The Company has the right to prepay the note within 180 days of its issue date. After the 180 days, the Company has no right to prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion.

 

On August 10, 2017, JSJ converted $24,000 of the principal amount of the convertible note into equity at a conversion price of $0.11 per share for an aggregate 224,299 shares of common stock.

 

On August 31, 2017, Strategic IR entered into an agreement whereby the convertible note was acquired from JSJ for the remaining principal balance of $176,000 and accrued interest outstanding of $8,715. An additional payment of $88,847 was made by Strategic IR on behalf of the Company as compensation for the early settlement penalty and legal fees incurred on assigning the note to Strategic IR.

 

Vista Capital Investments, LLC 

On March 9, 2017, the Company entered into a Securities Purchase Agreement, pursuant to which the Company issued a Convertible Promissory Note in the aggregate principal amount of $100,000 to Vista Capital Investments, LLC., (“Vista”). The note has a maturity date of March 9, 2018 and a coupon of eight percent per annum. The Company has the right to prepay the note, provided it makes a payment to the Purchaser as set forth in the note through the maturity date. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 150 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the last two lowest trading bid prices during the fifteen trading days prior to conversion.

 

On September 18, 2017, Strategic IR entered into an agreement whereby the convertible note was acquired from Vista for the principal balance of $100,000 and accrued interest outstanding of $4,230. An additional payment of $60,770 was made by Strategic IR on behalf of the Company as compensation for the early settlement penalty and legal fees incurred on assigning the note to Strategic IR.

 

Crossover Capital Fund II, LLC 

On April 6, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $100,000 to Crossover Capital Fund II, LLC. The note has a maturity date of January 6, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the lowest trading bid price during the previous fifteen (15) trading days to the date of conversion. The balance of the note plus accrued interest at September 30, 2017 was $68,243, net of unamortized discount of $35,636.

 

GS Capital Partners, LLC 

On May 22, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $75,000 to GS Capital Partners, LLC. The note has a maturity date of May 22, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 62% of lowest trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $29,071, net of unamortized discount of $48,082.

 

On June 16, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $112,500 to GS Capital Partners, LLC. The note has a maturity date of June 16, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 62% of lowest trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $35,285, net of unamortized discount of $79,829.

  

YP Holdings, LLC 

YP Holdings forgave $19,553 of accrued interest on a note with a principal amount of $100,000 (refer note 8 above), with the remaining accrued interest of $43,759 and was issued in lieu thereof a convertible note with a principal amount of $143,759, bearing interest at 8% per annum, maturing on May 26, 2018. The Company has the right to prepay the note within 180 days of its issue date. The outstanding principal amount of the Note is convertible at any time and from time to time at the election of the Note holder during the period beginning on the date that is 180 days following the Issue Date. The note is convertible into shares of the Company’s common stock, at a conversion price equal to 70% of the average of the lowest three closing bid prices of the Company’s common stock for the ten prior trading days.

 

On June 12, 2017, YP Holdings converted a total of $11,556 of the principal and interest of the convertible note outstanding into 57,143 common shares of the Company at a net issue price of $0.202 per share. On June 22, 2107 a further $20,125 of the principal and interest of the convertible note outstanding was converted into 100,000 shares of common stock at a conversion price of $0.2013 per share.

 

On August 24, 2017, the Company utilized the proceeds of a further convertible note it received from Strategic IR to repay the note for an aggregate of $113,845. 

 

F - 22

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9CONVERTIBLE NOTES PAYABLE (continued)

 

Strategic IR

On June 11, 2017, the Company issued a convertible promissory note in the aggregate principal amount of $10,000 to Strategic IR (“Strategic”). The note bears interest at 12% per annum and matures on December 16, 2017. The note is convertible into common shares at a conversion price of $.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $6,650, net of unamortized discount of $3,722.

 

On June 11, 2017, the Company exchanged a note issued to Strategic with a principal amount of $20,000, together with accrued interest thereon of $164, totaling $20,164, for a convertible note, principal amount of $20,164, bearing interest at 12% per annum and maturing on December 8, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $13,170, net of unamortized discount of $7,730.

 

On June 27, 2017, a previously unclassified amount due to Strategic was classified as a Convertible Promissory Note in the aggregate principal amount of $100,000. The note has a maturity date of December 24, 2017 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days. The balance of the note plus accrued interest at September 30, 2017 was $57,090, net of unamortized discount of $44,992.

 

On June 29, 2017, the Company exchanged a note issued to Strategic with a principal amount of $50,000, together with accrued interest thereon of $3,740, totaling $53,740, for a convertible note, principal amount of $53,740, bearing interest at 12% per annum and maturing on December 26, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $29,409, net of unamortized discount of $25,974.

 

On June 29, 2017, the Company exchanged a note issued to Strategic with a principal amount of $110,000, together with accrued interest thereon of $5,535, totaling $115,535, for a convertible note, principal amount of $115,535, bearing interest at 12% per annum and maturing on December 26, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $63,226, net of unamortized discount of $55,842.

 

On July 26, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $117,000 to Strategic. The note has a maturity date of January 22, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $44,592, net of unamortized discount of $74,100.

 

On September 18, 2017, Strategic IR entered into an agreement whereby the convertible note held by Vista Capital Investments was acquired by Strategic for the aggregate principal balance of $100,000 and accrued interest thereon of $4,230. An additional payment of $60,770 was made by Strategic IR on behalf of the Company as compensation for the early settlement penalty and legal fees incurred on assigning the note to Strategic IR. The note has a maturity date of March 9, 2018 and a coupon of eight percent per annum. The Company has the right to prepay the note, provided it makes a payment to the Purchaser as set forth in the note through the maturity date. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 150 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the last two lowest trading bid prices during the fifteen trading days prior to conversion. The balance of the note plus accrued interest at September 30, 2017 was $60,657, net of unamortized discount of $43,836.

  

On August 24, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $113,845 to Strategic. The note has a maturity date of August 24, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note, provided it makes a pre-payment penalty as specified in the note. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $12,463, net of unamortized discount of $102,305.

 

F - 23

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9CONVERTIBLE NOTES PAYABLE (continued)

 

Strategic IR (continued)

On August 31, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $88,847 to Strategic. The note has a maturity date of August 31, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note without penalty for the first 180 days. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $7,886, net of unamortized discount of $81,545.

 

On August 31, 2017, Strategic purchased a convertible note from JSJ Investments, Inc. for an aggregate principal outstanding of $176,000 together with interest thereon of $8,715. The note has a maturity date of November 6, 2017 and a coupon of eight percent per annum. The Company has the right to prepay the note within 180 days of its issue date. After the 180 days, the Company has no right to prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the note holder during the period beginning on the date that is 180 days following the issue date into shares of the Company’s common stock, at a conversion price equal to 60% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days prior to conversion. The balance of the note plus accrued interest at September 30, 2017 was $162,223, net of unamortized discount of $23,854.

 

On September 18, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $69,047 to Strategic. The note has a maturity date of September 18, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note without penalty for the first 180 days. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $2,452, net of unamortized discount of $66,777.

  

On September 26, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $20,000 to Strategic. The note has a maturity date of September 26, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note without penalty for the first 180 days. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $237, net of unamortized discount of $19,781.

 

On September 28, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $246,000 to Strategic. The note has a maturity date of September 28, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note without penalty for the first 180 days. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received. The balance of the note plus accrued interest at September 30, 2017 was $1,456, net of unamortized discount of $244,652.

 

In connection with the convertible notes above, the Company issued warrants to purchase 997,195 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

Joseph W and Patricia G Abrams 

Effective June 13, 2017, the Company exchanged a note issued to Joseph W and Patricia G Abrams (“Abrams”) with a principal amount of $25,000, together with accrued interest thereon of $1,247, totaling $26,247, for a convertible note, principal amount of $26,247, bearing interest at 12% per annum and maturing on December 10, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $15,706, net of unamortized discount of $11,482.

 

On July 31, 2017, the Company issued a Convertible Promissory Note to Abrams in the aggregate principal amount of $3,753. The note has a maturity date of January 27, 2018 and a coupon of twelve percent (12%) per annum. The Company has the right to prepay the note without penalty. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price of $0.25 per share. The balance of the note plus accrued interest at September 30, 2017 was $1,347, net of unamortized discount of $2,481.

 

In connection with the Convertible note above, the Company issued a warrant to purchase 146,247 shares of common stock of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

Roman Shefer

On June 27, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $10,000. The note bears interest at 12% per annum and matures on December 16, 2017. The note is convertible into common shares at a conversion price of $.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $4,412, net of unamortized discount of $5,900.

 

F - 24

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  9 CONVERTIBLE NOTES PAYABLE (continued)

 

Crown Bridge Partners

On August 14, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $75,000 to Crown Bridger Partners. The note has a maturity date of August 14, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note for the first 180 days, subject to a penalty ranging from 10% to 35% of the prepayment, dependent upon the timing of the prepayment. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the lowest trading price during the previous fifteen (15) trading days. The balance of the note plus accrued interest at September 30, 2017 was $10,431, net of unamortized discount of $65,342.

  

  10 DERIVATIVE LIABILITY

 

Certain of the short-term convertible notes disclosed in note 9 above, have variable priced conversion rights with no fixed floor price and will re-price dependent on the share price performance over varying periods of time, due to the variable priced conversion rights, all convertible notes and any warrants attached thereto, issued subsequent to the variable priced conversion notes are valued and give rise to a derivative financial liability, which was initially valued at inception of the convertible notes using a Black-Scholes valuation model. The value of this derivative financial liability was re-assessed at September 30, 2017 and 2016, and $283,668 and $0 was credited to the statement of operations and comprehensive loss, respectively. The value of the derivative liability will be re-assessed at each financial reporting period, with any movement thereon recorded in the statement of operations in the period in which it is incurred.

 

The following assumptions were used in the Black-Scholes valuation model:

 

    Nine Months
Ended
September 30,
2017
    Year ended
December 31,
2016
 
Conversion price   $    0.08 to 0.40     $ 0.22 to 0.23  
Risk free interest rate        1.05 to 1.53 %     0.85 %
Expected life of derivative liability     9 to 36 months       9 months  
expected volatility of underlying stock     134.1 to 194.5 %     133.0 %
Expected dividend rate     0 %     0 %

 

The movement in derivative liability is as follows:

 

   September 30, 2017   December 31, 2016 
         
Opening balance  $113,074   $ 
Derivative financial liability arising from convertible note   2,365,235    77,000 
Fair value adjustment to derivative liability   (283,668)   36,074 
   $2,194,641   $113,074 

 

11 STOCKHOLDERS’ EQUITY

 

  a) Common Stock

 

The Company has 100,000,000 common shares with a par value of $0.0001 each authorized, has issued and outstanding 55,835,442 shares of common stock as of September 30, 2017 and 55,454,000 as of December 31, 2016.

 

On June 12, 2017, a convertible note holder converted debt and accrued interest thereon, totaling $11,556 into 57,143 shares of common stock, valued at $18,285 resulting in a loss on conversion of $6,730.

 

On June 22, 2017, a convertible note holder converted debt and accrued interest thereon, totaling $20,125 into 100,000 shares of common stock valued at $37,000 resulting in a loss on conversion of $16,875.

 

On August 10, 2017, a convertible note holder converted debt and accrued interest thereon, totaling $24,000 into 224,299 shares of common stock valued at $44,860 resulting in a loss on conversion of $20,860.

 

The Company has recorded an expense of $0 and $144,000 for the nine months ended September 30, 2017 and 2016, respectively, relating to restricted stock awards, which were fully vested in April 2016.

 

  b) Preferred Stock

 

The Company has authorized 25,000,000 shares of preferred stock with a par value of $0.0001 authorized, no preferred stock is issued and outstanding as of September 30, 2017.

 

F - 25

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11 STOCKHOLDERS’ EQUITY (continued)

 

  c) 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-QPAGOS Merger) units at $0.625 ($1.25 pre-QPAGOS Merger)) per unit, each consisting of 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 ($1.25 pre-QPAGOS Merger)) per share, giving a total of 1,435,200 (717,600 pre-QPAGOS Merger) warrants to purchase common shares at an exercise price of $0.625 ($1.25 pre-QPAGOS Merger)) per share if all placement agent warrants are exercised.

 

During the period June 8, 2017 to July 31, 2017, the Company issued warrants to the 12% convertible note holders, disclosed in note 9 above, to acquire 2,308,513 shares of common stock at a variable exercise price of; i) $0.20 per share if the convertible notes underlying the warrant issue are converted to common stock prior to maturity date; or ii) $0.30 per share if the convertible notes underlying the warrants are not converted to common stock prior to the maturity date. These warrants were issued to investors who had invested a cumulative minimum of $30,000 in convertible notes prior to August 31, 2017.

 

The Warrants were valued using a Black-Scholes valuation model and the proceeds received from the convertible notes were allocated based on the percentage of the value of the warrants to the total value of the debt securities in this offering, resulting in a total debt discount of $37,083. 

 

The following assumptions were used in the Black-Scholes valuation model:

 

  

Nine Months Ended September 30, 2017

 
Exercise price  $0.20 
Risk free interest rate   1.50 to 1.53%
Expected life of warrants   3 years 
expected volatility of underlying stock   159.7 to 168.7%
Expected dividend rate   0%

 

A summary of the Company’s warrant activity for the period January 1, 2016 to September 30, 2017, is as follows:

 

   No. of shares   Exercise
price per
share
   Weighted
average
exercise
price
 
             
Outstanding January 1, 2016   6,219,200   $0.625   $0.63 
Granted            
Forfeited/cancelled            
Exercised            
Outstanding December 31, 2016   6,219,200   $0.625    0.63 
Granted   2,308,513    0.20    0.20 
Forfeited/cancelled            
Exercised            
Outstanding September 30, 2017   8,527,713   $0.20 to 0.625   $0.51 

 

The warrants outstanding and exercisable at September 30, 2017 are as follows:

 

    Warrants outstanding   Warrants exercisable 
Exercise price   No. of shares   Weighted
average
remaining
years
   Weighted
average
exercise
price
   No. of shares  

Weighted

average
exercise

price

 
                           
$0.625    6,219,200    3.00         6,219,200      
$0.20    2,308,513    2.75         2,308,513      
                           
     8,527,713    2.94   $0.51    8,527,713   $0.51 

 

The warrants outstanding have an intrinsic value of $0 and $0 as of September 30, 2017 and December 31, 2016, respectively.

 

F - 26

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12 REVENUE

 

Revenue is derived from the following sources:

 

    Three Months
Ended September 30, 2017
    Three Months
Ended September 30, 2016
    Nine Months
Ended September 30, 2017
    Nine Months
Ended September 30, 2016
 
                         
Sales of services   $ 924,573     $ 736,967     $ 2,735,913     $ 1,830,238  
Payment processing fees     3,138       16,532       20,532       30,112  
Kiosk sales           16,428       113,921       165,751  
Other     3,607             19,092       147  
    $ 931,318      $ 769,897     $ 2,889,458     $ 2,026,248  

 

13 EQUITY BASED COMPENSATION

 

Equity based compensation is made up of the following:

 

   Nine
Months Ended
September 30,
2017
   Nine
Months Ended
September 30,
2016
 
         
Stock issued for services rendered  $   $2,032,275 
   $   $2,032,275 

 

14 NET 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 nine months ended September 30, 2017 and 2016, all convertible debt 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:

 

    Nine
Months Ended
September 30,
2017
(Shares)
    Nine
Months Ended
September 30,
2016
(Shares)
 
             
Convertible debt   21,491,850      —  
Warrants     8,527,713       6,219,200  
      30,019,563       6,219,200  

 

F - 27

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15 RELATED PARTY TRANSACTIONS

 

The following transactions were entered into with related parties:

 

NOTES PAYABLE

 

    Interest     Maturity     September 30,     December 31,  
Description   Rate     Date     2017     2016  
                         
Gibbs International Holdings – Equipment funding   N/A     November 1, 2017     $ 294,620        
Vladimir Skigin – Equipment funding   N/A     November 1, 2017       55,295        
Gibbs International Holdings   15%     June 13, 2017             50,986  
Cobbolo Limited   10%     May 30, 2017             101,466  
Delinvest Commercial LTD   15%     June 29, 2017             50,836  
                             
Notes payable – Related parties               $ 349,915     $ 203,288  

 

Interest expense totaled $0 and $3,025 for the three months ended September 30, 2017 and 2016, respectively, and $11,534 and $0 for the nine months ended September 30, 2017 and 2016, respectively. 

 

Jimmy Gibbs

Jimmy Gibbs is the principal and has control over Gibbs Investment Holdings and Gibbs International Holdings.

 

Gibbs International Holdings (“Gibbs”) – Inventory funding

The Company entered into an agreement with Gibbs, whereby the importation of kiosks and accessories was arranged and funded by Gibbs. In terms of the agreement entered into with Gibbs, a 5% margin has been added to the cost of the kiosks and accessories purchased and to the liability outstanding. The amount was due on November 1, 2017. The amount has not been paid to date. The agreement does not provide for any default provisions and management is currently negotiating the terms of repayment with Gibbs.

 

Gibbs International Holdings 

Effective October 20, 2016, the Company executed an unsecured promissory note for $50,000 with an investor, bearing interest at 10% per annum payable on February 19, 2017. On February 19, 2017, the Company executed an amended and restated promissory note extending the maturity date to June 19, 2017 and increasing the interest rate to 15% per annum.

 

Effective June 19, 2017, the note, principal amount of $50,000 and accrued interest thereon of $2,494 was exchanged for a convertible note, refer note to 9 below.

 

Vladimir Skigin

Vladimir Skigin is the principal and has control over Newvello Limited and Cobbolo Limited and has personally advanced the Company inventory funding.

 

Vladimir Skigin (“Skigin”) – Inventory funding

 

The Company entered into an agreement with Gibbs, whereby the importation of kiosks and accessories was arranged and funded by Gibbs, Skigin funded a portion of the kiosks and accessories purchased under the same terms and conditions of the agreement entered into with Gibbs. In terms of the agreement, a 5% margin has been added to the cost of the kiosks and accessories purchased and to the liability outstanding. The amount was due on November 1, 2017. The amount has not been paid to date. The agreement does not provide for any default provisions and management is currently negotiating the terms of repayment with Skigin.

 

Cobbolo Limited 

Between October 21, 2016 and November 25, 2016, the Company executed unsecured promissory notes totaling $100,000 with an investor, bearing interest at 10% per annum maturing between February 17, 2017 and March 25, 2017. The maturity date of these notes has been extended to May 30, 2017 and further extended to June 29, 2017.

 

On June 29, 2017, the notes; i) principal amount of $50,000 and accrued interest thereon of $3,438; and ii) principal amount of $50,000 and accrued interest thereon of $2,959, were exchanged for two convertible notes, refer to note 9 below.

 

Alex Motorin

Alex Motorin is the principal of Delinvest Commercial LTD.

 

Delinvest Commercial, LTD 

Effective October 31, 2016, the Company executed an unsecured promissory note for $50,000 with an investor, bearing interest at 10% per annum payable on March 1, 2017. On March 1, 2017, the Company executed an amended and restated promissory note extending the maturity date to June 29, 2017 and increasing the interest rate to 15% per annum.

 

On June 29, 2017, the note, principal amount of $50,000 and accrued interest thereon of $4,123 was exchanged for a convertible note, refer to note 9 below.

 

Viktoria Akhmetova 

On May 12, 2017, the Company executed an unsecured promissory note for $20,000 with an investor, bearing interest at 10% per annum payable on June 11, 2017.

 

Effective June 11, 2017, the note, principal amount of $20,000 and accrued interest thereon of $164 was exchanged for a convertible note, refer to note 9 below.

 

F - 28

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15 RELATED PARTY TRANSACTIONS (continued)

 

CONVERTIBLE NOTES PAYABLE

 

Description   Interest
rate
    Maturity Date   Principal     Accrued
interest
    Unamortized
debt discount
    September 30,
2017
Balance,
net
    December 31,
2016
Balance,
net
Delinvest Commercial, LTD   12%     December 16, 2017     20,000       677       (7,444 )     13,233    
    12%     December 26, 2017     54,123       1,655       (26,160 )     29,618    
                                               
Viktoria Akhmetova   12%     December 8, 2017     20,164       736       (7,716 )     13,184    
                                               
Gibbs International Holdings   12%     December 16, 2017     52,494       1,778       (22,456 )     31,816    
                                               
Cobbolo Limited   12%     December 26, 2017     53,438       1,634       (25,829 )     29,243    
    12%     December 26, 2017     52,959       1,619       (25,597 )     28,981    
                                               
Total convertible notes payable – Related parties    $ 253,178     $ 8,099     $ (115,202 )   $ 146,075   $

  

Interest expense, together with amortized debt discount totaled $135,514 and $0 for the three months ended September 30, 2017 and 2016, respectively, and $144,198 and $0 for the nine months ended September 30, 2017 and 2016, respectively.

 

The 12% convertible notes, above have a fixed conversion price of $0.20 per common share and certain investors who met a minimum investment requirement of $30,000 were issued three-year warrants convertible into common shares at a conversion price of; i) $0.20 per share if the convertible notes are converted prior to maturity date; and ii) $0.30 per share if the convertible notes are not converted prior to maturity date. These convertible notes have a beneficial conversion feature and attached warrants valued using a Black-Scholes valuation model, refer note 11 c) below, the value of the beneficial conversion feature of the notes were determined based on fair market price of the common stock at the date of the issuance of the note, the difference between the fair market value of the common stock and the conversion price was recorded as a debt discount with a corresponding credit to derivative financial liability.

 

The total value of the beneficial conversion feature and warrant value recorded as a debt discount during the nine months ended September 30, 2017 was $251,299. 

 

Alex Motorin

Alex Motorin is the principal of Delinvest Commercial LTD.

 

Delinvest Commercial, LTD.

On June 19, 2017, the Company issued Delinvest Commercial LTD. (“Delinvest”) a convertible promissory note in the aggregate principal amount of $20,000. The note bears interest at 12% per annum and matures on December 16, 2017. The note is convertible into common shares at a conversion price of $.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $13,233, net of unamortized discount of $7,444.

 

On June 29, 2017, the Company exchanged a Delinvest note with a principal amount of $50,000, together with accrued interest thereon of $4,123, totaling $54,123, for a convertible note, principal amount of $54,123, bearing interest at 12% per annum and maturing on December 26, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $29,618, net of unamortized discount of $26,160.

 

In connection with the convertible notes above, the Company issued warrants to purchase 370,616 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

F - 29

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15 RELATED PARTY TRANSACTIONS (continued)

 

Viktoria Akhmetova 

On June 11, 2017, the Company exchanged a note issued to Viktoria Akhmetova, with a principal amount of $20,000, together with accrued interest thereon of $164, totaling $20,164, for a convertible note, principal amount of $20,164, bearing interest at 12% per annum and maturing on December 8, 2017. The note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $13,184, net of unamortized discount of $7,716.

 

Jimmy Gibbs

Jimmy Gibbs is the principal and has control over Gibbs Investment Holdings and Gibbs International Holdings.

 

Gibbs International Holdings 

Effective June 19, 2017, the Company exchanged a note issued to Gibbs International Holdings with a principal amount of $50,000, together with accrued interest thereon of $2,494, totaling $52,494, for a convertible note, principal amount of $52,494, bearing interest at 12% per annum and maturing on December 16, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $31,816, net of unamortized discount of $22,456.

 

In connection with the Convertible note above, the Company issued a warrant to purchase 262,468 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

Vladimir Skigin

Vladimir Skigin is the principal and has control over Newvello Limited and Cobbolo Limited and has also personally advanced the Company inventory funding.

 

Cobbolo Limited 

On June 29, 2017, the Company exchanged a note issued to Cobbolo Limited with a principal amount of $50,000, together with accrued interest thereon of $3,438, totaling $53,438, for a convertible note, principal amount of $53,438, bearing interest at 12% per annum and maturing on December 26, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $29,243, net of unamortized discount of $25,829.

 

On June 29, 2017, the Company exchanged a note issued to Cobbolo Limited with a principal amount of $50,000, together with accrued interest thereon of $2,959, totaling $52,959, for a convertible note, principal amount of $52,959, bearing interest at 12% per annum and maturing on December 26, 2017. The convertible note is convertible into common shares of the Company at a conversion price of $0.20 per share. The balance of the note plus accrued interest at September 30, 2017 was $28,981, net of unamortized discount of $25,597.

 

In connection with the Convertible notes above, the Company issued a warrant to purchase 531,987 common shares of the Company at a variable exercise price of $0.20 per share, if the convertible note above is converted into common shares prior to its maturity date or $0.30 per share if the convertible note is not converted prior to its maturity date.

 

F - 30

 

 

QPAGOS

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16 COMMITMENTS AND CONTINGENCIES

 

The Company operates from an office facility in Mexico. The office is leased under a three (3) year non-cancellable operating lease, which ends on December 16, 2019. The lease calls for monthly rental payment, including maintenance, of $3,232, as adjusted for exchange rate changes. The Company also leases space on a month-to-month basis for its data servers at a monthly rate of $1,908. In addition, Qpagos leases warehouse space on a month-to-month basis for $1,227 per month.

 

The future minimum lease installments under the office facility lease agreement as of September 30, 2017 are $9,695 for the remainder of 2017 and $38,780 for each year 2018 and 2019, subject to exchange rate fluctuations.

 

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

 

The Company's 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  
       
2017     20,100  
2018     20,100  
2019     20,100  
2020     20,100  
2021 and thereafter     97,167  
    $ 177,567  

 

17SUBSEQUENT EVENTS

 

On October 3, 2017, Strategic IR entered into an agreement whereby a convertible note was acquired from Crossover Capital for the principal balance of $100,000 and accrued interest thereon of $4,000. An additional payment of $48,880 was made by Strategic IR on behalf of the Company as compensation for the early settlement penalty and legal fees incurred on assigning the note to Strategic IR.

 

On October 3, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $48,880 to Strategic. The note has a maturity date of October 3, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note without penalty for the first 180 days. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received.

 

On October 23, 2017, Anna Mosk, the Principal of Strategic IR, entered into an agreement whereby a convertible note was acquired from Power Up Lending Group for the principal balance of 33,000 and accrued interest thereon of $1,309. An additional payment of $14,298 was made by Strategic IR on behalf of the Company as compensation for the early settlement penalty and legal fees incurred on assigning the note to Strategic IR.

 

On October 23, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $14,298 to Strategic. The note has a maturity date of October 23, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note without penalty for the first 180 days. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received.

 

On October 11, October 12 and October 26, 2017, the Company received three instalments of $50,000 from Vladimir Skigin totaling $150,000 and issued a Convertible Promissory Note in the aggregate principal amount of $150,000 to him. The note has a maturity date of October 10, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note within the first 180 days at a premium of 110% of the sum of the accrued interest and principal. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received.

 

On October 31, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $50,000 to Viktoria Akhmetova. The note has a maturity date of October 20, 2018 and a coupon of eight percent (8%) per annum. The Company has the right to prepay the note within the first 180 days at a premium of 110% of the sum of the accrued interest and principal. The outstanding principal amount of the note is convertible at any time and from time to time at the election of the holder into shares of the Company’s common stock at a conversion price equal to 60% of the average of the lowest three trading bid prices during the previous ten (10) trading days, including the date the notice of conversion is received.

 

On October 26, 2017, the Company received conversion notices from five note holders to convert an aggregate of thirteen notes. The Company is currently evaluating whether these conversion notices can be acted upon.

 

Other than disclosed above, in accordance with ASC 855-10, the Company has analyzed its operations subsequent to September 30, 2017 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these unaudited condensed consolidated financial statements.

 

F - 31

 

 

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 our audited annual financial statements and the related notes thereto, each of which appear on Form 10-K filed with the SEC on April 17, 2017. 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. 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. The Management Discussion and Analysis of Financial Condition and Results of Operations below is based upon only the financial performance of Qpagos.

 

Overview and Financial Condition

 

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, 85% 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 third quarter of 2017 our platform had integrated over 137 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 nine months ended September 30, 2017, Qpagos Corporation generated net revenues of $2,889,458 from our operations in Mexico. Our primary sources of revenue are sales of prepaid services and payment processing fees. We also generate revenue from non-payment services such as kiosk sales. Qpagos Corporation currently has in excess of 137 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 September 30, 2017, we have deployed over 307 kiosks and terminals, and we service an additional 440 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.

 

Management Discussion and Analysis of financial condition

 

The discussion and analysis of our financial condition and results of operations is based upon the unaudited condensed consolidated financial statements as of September 30, 2017 and 2016, 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 us 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.

 

Results of Operations for the Three Months Ended September 30, 2017 and September 30, 2016

 

Net revenue

 

Net revenues in our Mexican operations were $931,318 and $769,897 for the three months ended September 30, 2017 and 2016 respectively, an increase of $161,421 or 21.0%. Our primary revenue generating operations are based in Mexico and our functional currency is the Mexican Peso. Our revenue in Mexican Pesos increased to MXN 16,597,642 from MXN 14,426,090 for the three months ended September 30, 2017 and 2016, respectively, an increase of MXN 2,171,552 or 15.1%. The increase in revenue in MXN terms is primarily due to an increase in the value of prepaid airtime sold of MXN 2,668,937, offset by a reduction in kiosk sales from MXN 307,831 in the prior period to MXN 0, no kiosks were sold during the current period, and a reduction in service sales from MXN 309,770 in the prior period to MXN 64,290 in the current period, due to a rationalization of the service providers using our kiosks. The earthquake recently experienced in Mexico had an adverse effect on our sales as mobile phone operators provided free minutes to customers for a limited time, impacting on our revenues. The average US$ exchange rate has weakened against the MXN over the prior comparable period, from $18.7377 to $17.8217 or 4.9%, which results in a higher revenue growth in US $ terms of $45,529.

  

1

 

 

 Cost of goods sold

 

Cost of goods sold in our Mexican operations were $935,033 and $743,132 for the three months ended September 30, 2017 and 2016, respectively, an increase of $191,901 or 25.8%. Our cost of sales from our Mexican operations, in Mexican Pesos increased to MXN 16,663,859 from MXN 13,791,347 for the three months ended September 30, 2017 and 2016, respectively, an increase of MXN 2,872,512 or 20.8%. The increase in cost of sales in MXN terms is primarily due to the increase in the value of prepaid airtime sold. Cost of goods consists primarily of services acquired from third parties, such as prepaid air time and the cost of the kiosks and any retrofitted components. Also included in cost of goods sold is repairs and maintenance expenditure which increased to MXN 86,176 from MXN 59,659 in the prior period, an increase of MXN 26,517 or 44.4%, due to a project undertaken for one of our customers. Also included in cost of goods sold is depreciation related to kiosks that are used in the production of income. Depreciation expense was $9,740 and $7,111, for the three months September 30, 2017 and 2016, respectively, an increase of $2,629. The average US $ exchange rate has weakened against the MXN over the prior period, from $18.7377 to $17.8217 or 4.9%, which results in a higher cost of sales in US $ terms of $45,710.

 

Gross (loss) profit

 

Gross (loss) profit in our Mexican operations was $(3,715) and $26,765 for the three months ended September 30, 2017 and 2016, respectively, a decrease of $30,480 or 113.9%. The components of gross (loss) profit are as follows:

 

  Gross profit on sales of services was $10,543 and $13,800, for the three months ended September 30, 2017 and 2016, respectively, a decrease of $3,257 or 23.6%. The decrease in gross profit is primarily due to the mix of revenues, we earn lower margins on airtime sold through third party owned kiosks as opposed to kiosks that we own and operate.
  Gross profit on kiosk sales was $0 and $11,091 for the three months ended September 30, 2017 and 2016, respectively, a decrease of $11,091.  We did not sell any kiosks during the current quarter.
  Commissions earned on services was $6,745 and $16,532 for the three months ended September 30, 2017 and 2016, respectively, a decrease of $9,787 or 59.2%, due to lower margins earned on the largest retailers.
  Other gross profit includes other cost of sales expense of $11,264 and $7,547 for the three months ended September 30, 2017 and 2016, respectively, an increase of $3,717 or 49.3%. The cost of sales expense consists primarily of repairs and maintenance expenditure on kiosks and has increased due to additional services offered to new customers as discussed under cost of goods sold above.
  Included in gross profit is depreciation related to those kiosks that are used in the production of income.  Depreciation expense was $9,740 and $7,111, for the three months ended September 30, 2017 and 2016, respectively, an increase of $2,629 or 37.0%.

 

Total expenses

 

Total expenses were $699,518 and $555,113 for the three months ended September 30, 2017 and 2016, respectively, an increase of $144,405 or 26.0%. We incur operating expenditure both in Mexico and in the US, where we maintain a corporate office and incur certain expenditure on consultants, licensing and public reporting activities.

 

Total expenses consisted primarily of the following:

 

a.General and administrative expenditure was $682,207 and $536,156 for the three months ended September 30, 2017 and 2016, respectively, an increase of $146,051 or 27.2%. The general and administrative expenditure is analyzed for both Mexican and US operations as follows:

 

  i. The general and administrative expenditure in Mexico decreased to MXN 3,407,886 ($191,221) from MXN 6,938,431 ($370,293) for the three months ended September 30, 2017 and 2016, respectively, a decrease of MXN 3,530,545 ($179,072) or 50.9%. The decrease is primarily due to a reduction in payroll expenses of MXN 664,498, lower marketing related expenses of MXN 1,317,551 a decrease in consulting expenses of MXN 1,525,000 and various other cost saving measures resulting in reductions of approximately MXN 1,016,602.

  

2

 

 

  ii. The general administrative expenses incurred in the US, during the three months ended September 30, 2017 and 2016 was $490,986 and $165,864, respectively, an increase of $325,122 or 196.0%, primarily made up as follows:

 

  Consulting fees of $60,000 and $0 for the three months ended September 30, 2017 and 2016, respectively, an increase of $60,000 or 100.0%, primarily due to management fees, previously paid out of Mexico now paid out of the US.
  Legal expenditure of $70,674 and $8,309 for the three months ended September 30, 2017 and 2016, respectively, an increase of $62,365 or 750.6%, primarily related to the S-1 filed during the current year.
  Debt raising fees of $182,728 incurred on funds raised through the issuance of convertible notes.

 

  b. Depreciation and amortization expense of $17,311 and $18,957 for the three months ended September 30, 2017 and 2016, respectively, a decrease of $1,646 or 8.6%. The decrease is primarily due to a slight reduction in depreciation expense in Mexican Pesos over the prior period and a weakening of the US$ against the Pesos during the current period, reducing the expense in US$ terms.

 

Other (expense) income

 

Other (expense) income was $(39,272) and $636 for the three months ended September 30, 2017 and 2016, respectively. Other expense included a charge of $37,735 on the conversion of debt to equity at below fair market value during the current period.

 

Interest expense, net

 

Interest expense was $792,676 and $3,025 for the three months ended September 30, 2017 and 2016, an increase of $789,651. The increase consists primarily of an increase in interest incurred on convertible notes of $55,580 and the amortization of debt discount of $721,430 related to convertible notes issued during the current period and the end of the prior year.

 

Derivative liability movements

 

Derivative liability movements were $165,196 and $0 for the three months ended September 30, 2017and 2016. The derivative liability arose due to the issuance of convertible securities with variable conversion prices and no floor conversion price. The credit during the current period represents the mark-to-market of the derivative liability outstanding as of September 30, 2017. There was no derivative liability as of September 30, 2016.

 

Foreign currency loss

 

The foreign currency loss was $27,825 and $101,854 for the three months ended September 30, 2017 and 2016, respectively, a decrease of $74,029. The decrease is primarily due to the mark to market of foreign currency assets and liabilities due to the movements in exchange rates. 

 

Net loss

 

We incurred a net loss of $1,397,810 and $632,591, for the three months ended September 30, 2017 and 2016, respectively, an increase of $765,519 or 121.0%, primarily due to the increase in operating expenses, related to the capital raising fees and legal fees discussed above and the amortization of debt discount discussed above, offset by the derivative liability movements.

 

Results of Operations for the Nine Months Ended September 30, 2017 and September 30, 2016

 

Net revenue

 

Net revenues in our Mexican operations were $2,889,458 and $2,026,248 for the nine months ended September 30, 2017 and 2016, respectively, an increase o