UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal period ended December 31, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

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 No.)

Paseo del la Reforma 404 Piso 15 PH
Col. Juarez, Del. Cuauhtémoc

Mexico, D.F. C.P. 06600
(Address of principal executive offices) (Zip Code)
+52 (55) 55 - 110 - 110

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Name of each exchange on which registered

(Title of Class)

 

None

Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $0.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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 large accelerated filer, an accelerated file, a non-accelerated file, 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 a 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. ☐

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

The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant as of June 30, 2017, (the last business day of the registrants most recently completed second quarter) was approximately $17,635,566 based on $0.32, the price at which the registrants common stock was last sold on June 30, 2017.

As of April 13, 2018, the issuer had 77,383,966 shares of common stock outstanding.

Documents incorporated by reference: None

 

 

FORM 10-K

TABLE OF CONTENTS

      Page
  PART I.    
Item 1. Business   1
Item 1A. Risk Factors   7
Item 1B. Unresolved Staff Comments   7
Item 2. Properties   7
Item 3. Legal Proceedings   7
Item 4. Mine Safety Disclosures   7
  PART II.    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   8
Item 6. Selected Financial Data   9
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   15
Item 8. Financial Statements and Supplementary Data   16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   17
Item 9A. Controls and Procedures   17
Item 9B. Other Information   17
  PART III.    
Item 10. Directors, Executive Officers and Corporate Governance   18
Item 11. Executive Compensation   20
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   22
Item 13. Certain Relationships and Related Transactions, and Director Independence   24
Item 14. Principal Accountant Fees and Services   29
  PART IV.    
Item 15. Exhibits and Financial Statement Schedules   31
Item 16. Form 10-K Summary   32
       
SIGNATURES   33

 

 

PART I

Special Note Regarding Forward-Looking Statements

Many of the matters discussed within this Annual Report on Form 10-K (“Annual Report”) contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Part 1. “Business”, and Part II, Item 7”, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations”, but are also contained elsewhere. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Qpagos,” refer to Qpagos and its subsidiaries. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.

Item 1. Business

Company Overview

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 have a ten-year renewable exclusive license agreement for the use of technology that can be used to perform services that are similar to services that have been successfully deployed with this technology in several European, Asian, North and South American countries.

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 109 million mobile subscribers in Mexico, 85% of which are under prepaid plans, the mobile sector was a $13 billion business in 2017 as reported by the Competitive Intelligence Unit (the “CIU”). We believe that there is opportunity for growth in the Mexican market and we have expanded to 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 end of the first quarter of 2018 our platform had integrated over 140 such services, including the National Lottery’s; Pronosticos. 

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 and the sale of kiosks to the country’s leading financial institutions and retailers. During the years ended December 31, 2017 and 2016, we generated net revenues of $3,941,273 and $2,691,896, respectively, an increase of 1,249,397 or 46.4% from our operations in Mexico. Our primary source of revenue are fees we receive for processing payments made by consumers to service providers. We also generate revenue from non-payment services such as kiosk sales. We currently have in excess of 140 service providers integrated into our payment gateway, which includes all mobile phone providers in Mexico as well as most utility companies, and several financial and entertainment services as well as government payments. As of December 31, 2017, QPAGOS had deployed over 216 kiosks and terminals and service an additional 440 kiosks of an independent distributor. QPAGOS kiosks and terminals can be found at convenience stores, next to metro stations, retail stores, municipalities airport, education centers, shopping malls, in large cities as well as many small and rural towns. 

 

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

1

 

QPAGOS Corporate History and Background

Our current corporate structure is as follows:

(GRAPHIC) 

QPAGOS was incorporated on September 25, 2013 under the laws of the State of Nevada originally under the name Asiya Pearls, Inc. On May 27, 2016, Asiya Pearls, Inc. filed a Certificate of Amendment to its Articles of Incorporation to change its name from Asiya Pearls, Inc. to QPAGOS.

Qpagos Corporation was incorporated on May 1, 2015 under the laws of Delaware under the name Qpagos Corporation as the holding company for its two 99.9% owned operating subsidiaries, QPagos, S.A.P.I. de C.V. and Redpag Electrónicos S.A.P.I. de C.V. Each of these entities were incorporated in November 2013 in Mexico.

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

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

On May 12, 2016, Qpagos Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with QPAGOS and QPAGOS Merge, Inc., a Delaware corporation and wholly owned subsidiary of QPAGOS (“Merger Sub”). Pursuant to the Merger Agreement, on May 12, 2016 Qpagos Corporation and Merger Sub merged (the “Merger”), and Qpagos Corporation continued as the surviving corporation of the Merger and became a wholly owned subsidiary of QPAGOS. As a result of the Merger, each outstanding share of Qpagos Corporation common stock was converted into the right to receive two shares of QPAGOS common stock as set forth in the Merger Agreement. Under the terms of the Merger Agreement, we issued, and Qpagos Corporation stockholders received in a tax-free exchange, shares of our common stock such that Qpagos Corporation stockholders owned approximately 91% of our company immediately after the Merger. In addition, each outstanding warrant of Qpagos Corporation was assumed by us and converted into a warrant to acquire a number of shares of our common stock equal to twice the number of shares of common stock of Qpagos Corporation subject to the warrant immediately before the effective time of the Merger at an exercise price per share of Company common stock equal to 50% of the warrant exercise price for Qpagos Corporation common stock. There are no outstanding stock options of Qpagos Corporation.

Our principal offices are located at Paseo del la Reforma 404 Piso 15 PH, Col. Juarez, Del. Cuauhtémoc, Mexico, D.F. C.P. 06600, and our telephone number at that office is +52 (55) 55–110–110. We also have offices in the United States that are located at 1900 Glades Road, Suite 280, Boca Raton, Florida 33431. We maintain an Internet website at www.qpagos.com. Neither this website nor the information on this website is included or incorporated in, or is a part of, this prospectus or any supplement to the prospectus.

 

2

 

Our Strategy

Our mission is to leverage the experience and success of other global companies in our industry, and establish ourselves as the leading developer and supplier of state-of-the-art electronic payment solutions to Mexican merchants and service providers across all consumer services sectors, such as: fixed and mobile telephone operators, internet services providers, cable, entertainment, public and municipal services such as electricity, water and gas, financial and travel services. Our near-term strategy includes:

  Positioning ourselves as the leading consumer payment solutions provider for all service providers that rely on electronic payments for their collection needs.

 

  Establishing a successful distributor network based on a competitive distribution model for entrepreneurs that look at our self-service kiosks as a profitable business opportunity, as well as retail chains and retail banks that need to expedite electronic payments that are clogging teller lines through the assistance of self-service kiosks.

 

  Supporting distributors and franchisees through training, point of sale marketing materials, and an ever-increasing amount of payment services, many of which are regional in nature.

 

  Developing a Franchising Model through the creation and expansion of one-stop payment services stores which cater to the vast need for a digital payment solution in Mexico.

 

  Developing a motivated and effective management team.

Implications of Being an Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and therefore we intend to take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an “emerging growth company.” In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year: (a) following the fifth anniversary of the completion of this offering; (b) in which we have total annual gross revenue of at least $1.07 billion; or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th , and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. References herein to “emerging growth company” have the meaning associated with that term in the JOBS Act.

Our Business Model

Our primary source of revenue are fees we receive for processing payments.

During 2017 we processed approximately 2,102,065 payment transactions, compared to 1,624,931 in 2016, an increase of 29.4%.

For the year ended December 31, 2017, these transactions generated $3,941,273 in net revenue, of which approximately $3,343,833 (2016: 2,182,907) is net revenue derived from the operations of QPagos S.A.P.I. de C.V. and $597,440 (2016: $508,989) is net revenue derived from the operations of Redpag. We earn a gross profit of approximately 5.9% (2016: 7.5%) on airtime sales on kiosks operated by Redpag and approximately 0.1% gross profit on wholesale operations by which we provide air time and services to other non-kiosk distributors. We also earn commissions on payment services we provide to end-users through our kiosks and kiosks operated by third parties. This fee is either a transactional based fee of between USD$0.50 and USD$0.75 per transaction or a percentage of the transaction value. Certain service providers require that we receive the entire fee solely from the customers.

Our agents (our distributors) buy kiosks or terminals from us for approximately $6,000. The agent retains a portion of the fees that we derive from the service providers for services performed at the kiosks. Typically, 65% to 70% of the fees we receive from service providers are shared with the agent that has purchased the kiosk, and we retain 30–35% of such fees.

In addition, for certain high traffic public areas, such as malls and shopping centers, government agencies and large retailers who want to monetize high traffic areas, we pay the owner of the space a rental fee for the use of the space, and revenue share a smaller % of the commission, typically 10%. We also generate monthly rental fees for collocating our kiosks in municipal offices and integrating their services into our platform.

3

 

Additionally, when a distributor integrates their services into QPagos platform, for transactions done at their kiosks we may charge a transaction fee that may average $0.10, while that same transaction may generate up to $0.50 when done in other kiosks in Qpagos network.

4

 

Partners-Service Providers

Our current focus has been on the prepaid mobile telephone market. In Mexico, 85% of the more than 109 million mobile subscribers are under prepaid programs, thus millions of people make payments into these plans on a frequent basis. We currently have integrated over 140 service providers, including all principal mobile operators in Mexico, major utilities and the national lottery system “Pronosticos”. Among these. Also, QPagos, S.A.P.I. de C.V has integrated 9 of Mexico’s 32 states in its payment platform, and citizens of these states can now pay at our kiosks, municipal services, such as car registration, property taxes, traffic tickets, etc.

Our Distribution Network

QPagos, S.A.P.I. de C.V is developing a distribution network along several verticals, principally: (i) an agent network of independent businesses with high customer traffic in which our kiosks can be deployed; (ii) retailers that seek to decongest teller lines and shift service payments to self-service kiosks, (iii) banks and other financial intermediaries that want to extend geographic collection points to their customers, while also improving the experience of their customers when making payments at branches, (iv) government municipalities that want to bring service payments closer to their citizens; (v) other electronic payments distributors who we wholesale our services to, and (vi) our own distributor Redpag Electrónicos with its growing network in Mexico City and adjoining states.

Agents who own kiosks and terminals are responsible for placing, operating and servicing them in high-traffic, convenient retail locations. Several of our agents are mid-sized businesses which we believe provides them with insight into local market dynamics. The agency agreements that we enter into are usually for an indefinite term and may be unilaterally terminated by either party. Our agent contracts do not have exclusivity clauses. We usually cap these fees, and normally award the agents a percentage of the merchant fees. No one agent represented a material amount of our revenue, and we do not view ourselves as being dependent upon any one agent.

Our retail and institutional clients and prospects include large retail and convenience store chains, whose tellers are being congested by service payments and who would like to move these frequent transactions to the front of their stores. We are also in field trials with large financial institutions that want to expedite collections of their financial services as well as expand their hours of operation and geographic reach; and state, government and local municipalities that want to provide their citizens easy access to payments. We recently concluded our trials with a 1,900 plus branch financial institution who is seeking to reduce transaction costs, and improve customer experience by reducing lines with our kiosks. We look forward to consolidating this market opportunity during 2018.

Research and Development Expenditure

We continuously develop our product offering and make technical improvements to our software, these expenses are incurred primarily as consulting fees paid to third party developers. In this area for example we have developed mobile applications to allow customers to access the same menu of service payments in our kiosks through their mobile devices as well as developing complex applications such as the National Lottery’s Pronosticos. We have spent approximately $80,000 for each of the years ended December 31, 2017 and 2016 on research and new product development.

 

Marketing

We participate in several local events and exhibitions and provide promotional materials to distributors and retailers. We have also engaged in public relations campaigns geared towards corporate and institutional businesses, which has resulted in discussions with large box retailers such as Walmart, OXXO, Casa Ley, 7-Eleven, Circle K and several others. We have participated frequently in several International Franchising Exhibitions in Mexico City, Guadalajara, Puebla, Ciudad Juarez and Monterrey, and yearly in ANTAD Guadalajara Exhibition, the association that groups the country’s mayor retail chains.

Our Technology

We run our network and process our transactions using the proprietary, advanced technology platform that we license, which leverages the latest virtualization, analytics and security technologies to create a fast, highly reliable, secure and redundant system. We believe that the breadth and reach of our network, along with the proprietary nature of the technology platform that we license, differentiates us from our competitors and allow us to effectively manage and update our services and realize significant operating leverage with growth in volumes.

We have adapted our technology to be device agnostic and today consumers can access our payment services through multiple devices, such as POS, Mobile, PC and self-service kiosks.

Competition

The payment services industry is highly competitive, and our continued growth depends on our ability to compete effectively. Although we do not face direct competition in exactly the same line of business, as no major self-service electronic payment kiosk vendors with a payments platform exists in Mexico today, we do face competition from teller-assisted operations at a variety of financial and non-financial business groups, including a few small regional players. These competitors include retail banks, non-traditional payment service providers, such as retailers and mobile network operators, traditional kiosk and terminal operators and electronic payment system operators, as well as other companies that provide various forms of payment services, including electronic payment and payment processing services. Competitors in our industry seek to differentiate themselves by features and functionalities such as speed, convenience, network size, accessibility, hours of operation, reliability and price. A significant number of our competitors have greater financial, technological and marketing resources than we have, operate robust networks and could decide to develop their own self-service kiosks solutions instead of buying from Qpagos.

5

 

We believe that the most serious competition comes from bricks and mortar locations since the bulk of the mobile top-up business is done at major retail chains such as Walmart, Soriana, Chedraui and convenience stores such as OXXO and 7-Eleven. For example, Monterrey-based OXXO, owned by Coca-Cola bottler FEMSA, with over 14,000 stores is the largest retailer network in Mexico with daily visits of over 8 million people. Because of this high concentration of customers, OXXO has become one of the primary destinations to top up prepaid phones as well as paying utility bills and other services. These brick and mortar retailers are also our key target market for QPAGOS as they are experiencing congestion at their in-person teller operations and are also exploring the alternative of expediting payments through the use of self-service kiosks. We are currently in dialogues with several of these retailers which want to address teller congestion caused by the large number of customers seeking to make bill payments which affects both their customers and their core business as a retailer.

Seasonality

We do not expect that our business will experience significant seasonality.

Government and Environmental Regulation and Laws

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

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

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

Employees

As of December 31, 2017, QPAGOS had 2 full time employees, which are its chief executive officer and chief operating officer, and 27 full-time contractors provided to it by an outsourcing company and designated to perform services for its Mexican subsidiaries Qpagos and Redpag. Qpagos Corporation had no part-time employees. None of these employees are subject to collective bargaining agreements. Qpagos Corporation does not have employment agreements with any employees other than its Chief Executive Officer, Gaston Pereira and its Chief Operating Officer, Andrey Novikov. See “Executive Compensation.” Qpagos Corporation also enters into consulting arrangements for IT and operational services.

Corporate Information

Our principal offices are located at Paseo del la Reforma 404 Piso 15 PH, Col. Juarez, Del. Cuauhtémoc, Mexico, D.F. C.P. 06600, and our telephone number at that office is +52 (55) 55–110–110. We also have offices in the United States that are located at 1900 Glades Road, Suite 265, Boca Raton, Florida 33431. We maintain an Internet website at www.qpagos.com. Neither this website nor the information on this website is included or incorporated in, or is a part of, this Form 10-K.

Available Information

Our principal offices are located at Paseo del la Reforma 404 Piso 15 PH, Col. Juarez, Del. Cuauhtémoc, Mexico, D.F. C.P. 06600, and our telephone number at that office is +52 (55) 55–110–110. We also have offices in the United States that are located at 1900 Glades Road, Suite 280, Boca Raton, Florida 33431. We maintain an Internet website at www.qpagos.com. We have included our website address as a factual reference and do not intend it to be an active link to our website. We make available on our website, www.qpagos.com our Annual Reports on Form 10-K, quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after those reports are filed with the SEC. 

 

6

 

 

Item 1A. Risk Factors

As a smaller reporting company, we are not required to provide disclosure regarding risk factors.

 

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Qpagos leases approximately 1,600 square feet in Mexico City at Paseo de la Reforma 404, where its corporate offices are located. The lease is for a term of 36 months with a three-month termination clause. The current lease commenced in December 16, 2016, expires in December 16, 2019 and provides for an aggregate annual rent of approximately $40,519 per annum. We also lease space on a month-to month basis for our data servers at a monthly rate of $1,680. In addition, Qpagos leases warehouse space on a month-to-month basis for $625 per month. We believe these facilities are in good condition and adequate to meet our current and anticipated requirements.

Item 3. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

Item 4. Mine Safety Disclosures

Not applicable.

7

 

 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities

From November 3, 2014 to July 4, 2016, our common stock has been traded on the OTC Pink Markets under the symbol “ASYP” but no trading took place during this time. Since July 5, 2016 our common stock has traded on the OTCQB and our symbol was changed to “QPAG” on June 2, 2016. The range of high and low sales prices for the period from July 5, 2016 thru March 31, 2018 is presented below:

   High   Low 
YEAR ENDED DECEMBER 31, 2016        
First Quarter  $   $ 
Second Quarter  $   $ 
July 5, 2016 (Third Quarter)  $1.31   $0.55 
Fourth quarter  $0.94   $0.25 
YEAR ENDED DECEMBER 31, 2017          
First Quarter  $0.55   $0.18 
Second Quarter  $0.49   $0.285 
Third Quarter  $0.40   $0.13 
Fourth Quarter  $0.35   $0.15 
YEAR ENDED DECEMBER 31, 2018          
First Quarter  $.0.25   $0.13 
Second Quarter through April 13, 2018  $0.40   $0.18 

The last reported sale price of our common stock on the OTCQB on April 13, 2018, was $0.40 per share. As of April 13, 2018, there were approximately 49 holders of record of our common stock.

Dividend Policy

We have not paid any cash dividends on our common stock to date, and we have no intention of paying cash dividends in the foreseeable future. Whether we declare and pay dividends is determined by our Board of Directors at their discretion, subject to certain limitations imposed under Nevada corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

Equity Compensation Plan Information

See Item 11 – Executive Compensation for equity compensation plan information.

Recent Sales of Unregistered Securities

Other than as set forth below or as previously disclosed in our filings with the Securities and Exchange Commission, we did not sell any equity securities during the year ended December 31, 2017 in transactions that were not registered under the Securities Act.

On October 3, 2017, we issued a Convertible Promissory Note in the aggregate principal amount of $48,880 to Strategic IR Corp. (“Strategic”) The note has a maturity date of October 3, 2018 and a coupon of eight percent (8%) per annum. We have 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 our 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, we received three installments of $50,000 each 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 8% per annum. We have 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 our 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, we 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. We have 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 our 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, we 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. We have 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 our 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.

 

8

 

On November 14, 2017, we 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 August 30, 2018 and a coupon of eight percent (8%) per annum. We have 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 our 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 November 29, 2017, we issued a Convertible Promissory Note in the aggregate principal amount of $75,000 to JSJ Investments, Inc. The note has a maturity date of November 29, 2018 and a coupon of eight percent (8%) per annum. We have 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 our 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 November 27,2017 and December 13, 2017, we issued 203,516 and 168,466 shares of our common stock upon conversion of notes. The issuance was exempt from registration pursuant to section 3(a)(9) of the Securities Act. The shares were issued in exchange for the notes and no compensation was paid by the security holder in connection with the solicitation of the exchange.

On December 14, 2017, we issued a Convertible Promissory Note in the aggregate principal amount of $78,000 to Labrys Fund, LP. The note has a maturity date of June 14, 2018 and a coupon of eight percent (8%) per annum. In connection with the issuance of the note, we were required to issue 231,931 shares of common stock as a commitment fee valued at $76,537. The shares are returnable to us if no Event of Default has occurred prior to the date the note is fully repaid. Management had determined that it is probable that we would meet the conditions under the note and therefore it is more likely than not that we 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 231,931 shares was not recorded. We have 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 our 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.

 

Except as otherwise stated, the issuances of the securities were made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder for the offer and sale of securities not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act and had adequate access, through employment, business or other relationships, to information about us.

The issuance of the common stock was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act for the offer and sale of securities not involving a public offering, promulgated under the Securities Act.

Issuer Purchases of Equity Securities

There were no issuer purchases of equity securities during the fiscal year ended December 31, 2017.

Item 6. Selected Financial Data

Not applicable because we are a smaller reporting company.

Item 7. Management’s 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 elsewhere in this Report on Form 10-K. This discussion contains certain forward-looking statements that involve risks and uncertainties, as described under the heading “About Forward-Looking Statements” in this Report on Form 10-K. 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 Report on Form 10-K. 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 have a ten-year renewable exclusive license agreement for the use of technology that can be used to perform services that are similar to services that have been successfully deployed with this technology in several European, Asian, North and South American countries.

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 third parties.

9

 

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 109 million mobile subscribers in Mexico, 85% of which are under prepaid plans, mobile top-up alone, was a $13 billion business in 2017 as reported by the Competitive Intelligence Unit (the “CIU”). We believe that there is opportunity for growth in the Mexican market and has expanded to service providers beyond the mobile telephone operators to service provides of electricity, transportation, utilities, municipal services and taxes, consumer credit installments, insurance premiums, and many more. Altogether as of the first quarter of 2018 our platform had integrated over140 such services, including the National Lottery’s Pronosticos.

Our primary strategy in Mexico to date has been the attraction of service providers as well as the deployment of kiosks through Redpag Electrónicos, our kiosk management subsidiary. During the years ended December 31, 2017 and 2016, we generated net revenues of $3,941,273 and $2,691,896, respectively, from our operations in Mexico, a 46.4% increase. Our primary source of revenue are fees we receive for processing payments made by consumers to service providers. We also generate revenue from non-payment services such as kiosk sales. Qpagos Corporation currently has in excess of 140 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 December 31, 2017, Qpagos Corporation deployed over 228 kiosks and terminals and we service an additional 440 kiosks of independent distributors. 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 are based upon the consolidated financial statements as of December 31, 2017 and 2016, of QPAGOS, 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 years Ended December 31, 2017 and December 31, 2016

Net revenues in Qpagos Corporation were $3,941,273 and $2,691,896 for the year ended December 31, 2017 and 2016 respectively, an increase of $1,249,377 or 46.4%. Qpagos Corporation operates in Mexico and its functional currency is the Mexican Peso. Qpagos Corporation’s revenue in Mexican Pesos increased to MXN 74,516,037 from MXN 50,308,314 for the year ended December 31, 2017 and 2016, respectively, an increase of MXN 24,207,723 or 48.1%. The increase in revenue in MXN terms is primarily due to an increase in the volume of prepaid airtime sold, directly attributable to the increased activity in its wholesale payments business and we also increased the number of our customers over the prior year. The average US$ exchange rate has strengthened against the MXN over the prior year, from $18.6692 to $18.9066 or 1.3%, which results in a lower revenue growth in US $ terms of approximately $50,116.

Cost of goods sold

Cost of goods sold in Qpagos Corporation was $3,913,953 and $2,595,012 for the years ended December 31, 2017 and 2016, respectively, an increase of $1,318,941 or 50.8%. Qpagos operates in Mexico and its functional currency is the Mexican Peso. Qpagos Corporation’s cost of sales in Mexican Pesos increased to MXN 73,999,501 from MXN 48,467,539 for the year ended December 31, 2017 and 2016, respectively, an increase of MXN 25,531,962 or 52.7%. The increase in cost of sales in MXN terms is primarily due to the increase in the volume of prepaid airtime sold which is directly attributable to the increased activity of its wholesale business during the current year. 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 sales is depreciation related to those kiosks that are used in the production of income. Depreciation expenses was $36,518 and $37,244, for the years ended December 31, 2017 and 2016, respectively, a decrease of $726. The average US $ exchange rate has strengthened against the MXN over the prior year, from $18.6692 to $18.9066 or 1.3%, which results in a lower cost of sales in US $ terms of approximately $49,762.

Gross profit

Gross profit was $27,320 and $96,884 for the years ended December 31, 2017 and 2016, respectively, a decrease of $69,564 or 71.8%. Qpagos Corporations operates in Mexico and our functional currency is the Mexican Peso. The components of gross profit are as follows:

  Gross profit on sales of services decreased from a gross profit of $54,749 to a gross profit of $38,759, for the years ended December 31, 2016 and 2017, respectively, a decrease of $15,990. The decrease in gross profit is primarily due to the mix of our business shifting towards wholesale customers at lower margins and lower growth in our own managed kiosk business.

 

10

 

 

  Gross profit on kiosk sales decreased from a gross profit of $80,858 to a gross profit of $3,990 for the years ended December 31, 2016 and 2017, respectively, a decrease of $76,868. The decrease is primarily attributable to a delay in an expected order from a large financial institution to 2018.

 

  Gross (loss) profit other increased from a gross loss of ($1,479) to a gross profit of $21,089 for the years ended December 31, 2016 and 2017, respectively, an increase of $22,568. The improvement in the gross profit is due to once-off maintenance expenditure incurred on kiosks in the prior year.

 

  Included in gross profit is depreciation related to those kiosks that are used in the production of income. Depreciation expenses was $36,518 and $37,244, for the years ended December 31, 2017 and 2016, respectively, a decrease of $726.

Total expenses

Total expenses in Qpagos Corporation were $2,268,522 and $4,380,182 for the years ended December 31, 2017 and 2016, respectively, a decrease of $2,111,660 or 48.2%.

Total expenses consisted primarily of the following:

  a. General and administrative expenditure was $2,196,213 and $4,312,107 for the years ended December 31, 2017 and 2016, respectively, a decrease of $2,115,894 or 49.1%. Qpagos Corporation has operations in Mexico and a US holding company presence which incurs some expenditure.

 

  i. The general and administrative expenditure in Mexico decreased to MXN 14,837,629 from MXN 22,731,911 for the years ended December 31, 2017 and 2016, respectively, a decrease of MXN 7,894,282 or 34.7%. The decrease is primarily due to a reduction in payroll expenses of MXN1,261,731, lower marketing related expenses of MXN 483,422, a decrease in consulting expenses of MXN4,099,137 and various other cost saving initiatives.

 

  ii. The general administrative expenses incurred by Qpagos Corporation in the US, amounted to $1,411,392 and $3,084,747 for the years ended December 31, 2017 and 2016, respectively, a decrease of $1,673,355 or 54.2%. The decrease is primarily due to:

 

  non-cash compensation of $2,032,275 related to share based consulting agreements in the prior year, offset by;

  an increase in management fees of $783,321 and $557,358 for the years ended December 31, 2017 and 2016, respectively, an increase of $225,963 or 40.5%, primarily due to compensation paid to our CEO which was absorbed by the Mexican operations in the prior year;

  a capital raising fee of $303,407 incurred on the issue of convertible notes, the repurchase of some of these notes and various professional fees associated with these notes.

  Various other cost saving initiatives introduced to reduce the overall overhead burden on the Company.

Other income

Other (expense) income of the Company was $(166,432) and $788 for the years ended December 31, 2017 and 2016, respectively. Other expense consisted of losses made on the conversion of debt to equity during the year at discounts to market prices, in terms of the various convertible note agreements entered into during the current year.

Interest expense, net

Interest expense, net was $2,071,781 and $54,610 for the years ended December 31, 2017 and 2016, respectively, an increase of $2,017,171. The interest expense in the current year includes the amortization of non-cash debt discount of $1,919,030 and interest expense of $152,751, consisting of interest on the convertible notes, including penalty interest of $45,500 on early note settlements. The debt discount is calculated at note inception based on the fair market value of the underlying equity of variably priced convertible notes and certain warrants. The interest expense in the prior year of $54,610 was incurred on a note payable to an investor.

Change in fair value of derivative liability

The change in fair value of derivative liabilities was $(330,134) and $(36,074) for the years ended December 31, 2017 and 2016, respectively. The movements in derivative liabilities represents the mark-to-market of underlying conversion features of debt and warrant securities and is dependent on the market price of the Company’s stock and the volatility underpinning our stock.

Foreign currency gain (loss)

The foreign currency gain (loss) in Qpagos Corporation was $178,555 and ($357,855) for the years ended December 31, 2017 and 2016, respectively, an increase of $536,410 or 149.9%. The increase is primarily due to a reduction of liabilities denominated in US$’s in our Mexican operations. There were significant intercompany balances between the US holding company and the Mexican subsidiaries which arose during the 2017 year, which were subsequently capitalized.

11

 

Net loss

We incurred a net loss of $4,630,994 and $4,731,049, for the years ended December 31, 2017 and 2016, respectively, a decrease of $100,055 or approximately 2.1%, primarily due to the lower expenses, discussed above, offset by the non-cash amortization of debt discount during the current year.

Liquidity and Capital Resources

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

We incurred an accumulated deficit of $13,388,991 through December 31, 2017 and incurred negative cash flow from operations of $1,907,581 and $1,929,453 for the years ended December 31, 2017 and 2016, respectively. We have spent, and need to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development effort and will be required to raise additional funding.

At December 31, 2017, we had cash of $19,028 and a working capital deficit of $4,696,182. We believe that the current cash balances together with revenue anticipated to be generated from operations will not be sufficient to meet our current working capital needs and as mentioned above, we will seek further funding from either equity issues or further debt funding, should we not be successful, we may have to curtail our operations significantly.

During the year ended December 31, 2017, the Company raised $404,916 in notes payable and a further $1,832,253 of short-term convertible debt from the issuance of debt securities, to fund the operations of the business. During 2017, $94,267 in convertible loans were exchanged for 753,424 shares of common stock.

Subsequent to December 31, 2017 we raised the following additional funds:

  An additional $327,500 in variably priced convertible securities with short term maturities of one year or less.

 

  An additional $155,500 from an investor in funds that have not been designated as yet.

During the year ended December 31, 2017, we purchased and capitalized $17,538 in kiosks.

We have notes payable from related parties and convertible notes payable, all with maturities of less than one year. The notes payable from related parties amounts to $349,916 and our convertible notes payable from related parties has an aggregate principal outstanding of $1,152,070 and accrued interest thereon as of December 31, 2017 of $31,231, The convertible notes payable to non-related parties amounted to an aggregate principal of $1,341,964 , and accrued interest thereon of $49,971. Other than the above we have minimal commitments which include a lease of an office facility with a future commitment of $40,500 in each of the years 2018 and 2019.

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

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

   

Amount

 
         

2018

 

$

20,100

 

2019

   

20,100

 

2020

   

20,100

 

2021

   

 20,100

 

2022 and thereafter

   

67,167

 
   

$

147,567

 

Capital Expenditures

None.

12

 

Critical Accounting Policies

a)Use of Estimates

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

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

b)Contingencies

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

c)Fair Value of Financial Instruments

We 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 has identified the short term convertible notes and certain warrants attached to certain of the notes 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. We evaluate the fair value of variably priced derivative liabilities on a quarterly basis and report any movements thereon in earnings.

 

d)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. We have 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, we regularly assess the state of our 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 years ended December 31, 2017 and 2016.

13

 

 

e)Inventory

We primarily value inventories at the lower of cost or net realizable value on a first-in, first-out basis. We identify and write down our excess and obsolete inventories to net realizable value based on usage forecasts, order volume and inventory aging. With the development of new products, we also rationalize our product offerings and will write-down discontinued product to the lower of cost or net realizable value.

f)Intangibles

All of our intangible assets are subject to amortization. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. Where intangibles are deemed to be impaired we recognize an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.

g)License Agreements

License agreements acquired by us are reported at acquisition value less accumulated amortization and impairments.

Amortization

Amortization is reported in the statement of operations and comprehensive loss on a straight-line basis over the estimated useful life of the intangible assets unless the useful life is indefinite. Amortizable intangible assets are amortized from the date that they are available for use. The estimated useful life of the license agreement is five years which is the expected period for which we expect to derive a benefit from the underlying license agreements.

 

h)Long-Term Assets

Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

i)Revenue Recognition

Our 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, we record revenue when it is realized, or realizable and earned. We consider 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.

We have 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 we own or kiosks that are owned by third parties. We recognize 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 us, net of any value-added tax which is collected on behalf of the Mexican Revenue Authorities.

  Payment processing provided to end-users

We provide a secure means for end-users to pay for certain services, such as utilities through our kiosks. We earn either a fixed per-transaction fee or a fixed percentage of the service sold. We act as a collection agent and recognize 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.

We import, assemble 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.

14

 

We do not enter into any leasing of kiosks arrangements with customers and we do not generate any revenues from merchants who access our terminals as yet.

j)Share-Based Payment Arrangements

Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments is recorded in operating expenses in the consolidated statement of operations.

Prior to our reverse merger which took place on May 12, 2016, all share-based payments were based on management’s estimate of market value of our equity. The factors considered in determining managements estimate of market value includes, assumptions of future revenues, expected cash flows, market acceptability of our technology and the current market conditions. These assumptions are complex and highly subjective, compounded by the business being in its early stage of development in a new market with limited data available.

Where equity transactions with arms-length third parties, who had applied their own assumptions and estimates in determining the market value of our equity, had taken place prior to and within a reasonable time frame of any share-based payments, the value of those share transactions have been used as the fair value for any share-based equity payments.

Where equity transactions with arms-length third parties, included both shares and warrants, the value of the warrants have been eliminated from the unit price of the securities using a Black-Scholes valuation model to determine the value of the warrants. The assumptions used in the Black Scholes valuation model includes market related interest rates for risk-free government issued treasury securities with similar maturities; the expected volatility of our common stock based on companies operating in similar industries and markets; our estimated stock price; the expected dividend yield of the Company and; the expected life of the warrants being valued.

Subsequent to our reverse merger which took place on May 12, 2016, we had utilized the market value of our common stock as quoted on the NASDAQ OTCQB, as an indicator of the fair value of our common stock in determining share- based payment arrangements.

Off Balance Sheet Arrangements

None.

Contractual Obligations

   

Payments due by period

 
   

Total

   

Less than 1
year

   

1 -3 years

   

3 - 5 years

   

More than 5
years

 
                                         

Operating lease obligations

 

$

71,782

   

$

35,891

   

$

35,891

   

$

   

$

 

Licenses

 

$

147,567

   

$

20,100

   

$

60,300

   

$

60,300

   

$

6,867

 
                                         
   

$

219,349

   

$

55,991

   

$

96,191

   

$

60,300

   

$

6,867

 

Inflation

The effect of inflation on the Company’s operating results was not significant.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable because we are a smaller reporting company.

15

 

 

Item 8. Financial Statements and Supplemental Data

   

Page

Report of Independent, Registered Public Accounting Firm

 

F-1

Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016

 

F-2

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017 and December 31, 2016

 

F-3

Consolidated Statements of (Deficit) Equity for the years ended December 31, 2017 and December 31, 2016

 

F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2017 and December 31, 2016

 

F-5

Notes to the Consolidated Financial Statements

 

F-6 to F-43

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
QPAGOS

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of QPAGOS and subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, statement of changes in stockholders’ (deficit) equity, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the notes to consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

The Company’s Ability to Continue as a Going Concern 

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has incurred a loss since inception and has not generated sufficient revenue to cover its operating expenditures, raising substantial doubt about the Company’s ability to continue as going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RBSM LLP
 
We have served as the Company’s auditor since 2014.
 
Henderson, NV
 
April 17, 2018

F-1 

 

QPAGOS


CONSOLIDATED BALANCE SHEETS

   

December 31,
2017

   

December 31,
2016

 
                 

Assets

               
                 

Current Assets

               

Cash

 

$

19,028

   

$

46,286

 

Accounts receivable

   

59,628

     

79,943

 

Inventory

   

504,794

     

350,273

 

Recoverable IVA taxes and credits

   

215,990

     

353,780

 

Other current assets

   

288,687

     

279,878

 

Total Current Assets

   

1,088,127

     

1,110,160

 
                 

Non-Current Assets

               

Plant and equipment, net

   

160,301

     

231,328

 

Intangibles, net

   

125,417

     

168,417

 

Investment – related party

   

3,000

     

3,000

 

Other assets

   

6,950

     

9,847

 

Total Non-Current Assets

   

295,668

     

412,592

 

Total Assets

 

$

1,383,795

   

$

1,522,752

 
                 

Liabilities and Stockholders’ (Deficit) Equity

               
                 

Current Liabilities

               

Accounts payable

 

$

446,032

   

$

320,487

 

Loans payable – Related parties

    349,916        

Notes payable

   

     

323,462

 

Notes payable – related parties

   

     

203,288

 

Convertible debt, net of unamortized discount of $652,563 and $75,888, respectively

   

724,776

     

1,180

 

Convertible debt – related parties, net of unamortized discount of $338,709

   

859,190

     

 

Derivative liability

   

3,277,621

     

113,074

 

IVA and other taxes payable

   

7,178

     

166,108

 

Advances from customers

   

119,597

     

132,133

 

Total Current Liabilities

   

5,784,310

     

1,259,732

 
                 

Total Liabilities

   

5,784,310

     

1,259,732

 
                 

Stockholders’ (Deficit) Equity

               

Preferred stock, $0.0001 par value; 25,000,000 shares authorized, no preferred shares issued and outstanding at December 31, 2017 and 2016, respectively

   

     

 

Common stock, $0.0001 par value; 100,000,000 shares authorized, 56,207,424 and 55,454,000 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively.

   

5,620

     

5,545

 

Additional paid-in-capital

   

8,494,502

     

8,284,522

 

Accumulated deficit

   

(13,388,191

)

   

(8,757,197

)

Accumulated other comprehensive income

   

487,554

     

730,150

 

Total Stockholders’ (Deficit) Equity

   

(4,400,515

)

   

263,020

 

Total Liabilities and Stockholders’ (Deficit) Equity

 

$

1,383,795

   

$

1,522,752

 

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

F-2 

 

QPAGOS


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

   

Year Ended
December 31,
2017

   

Year Ended
December 31,
2016

 
                 

Net Revenue

 

$

3,941,273

   

$

2,691,896

 
                 

Cost of Goods Sold

   

3,913,953

     

2,595,012

 
                 

Gross Profit

   

27,320

     

96,884

 
                 

General and administrative

   

2,196,213

     

4,312,107

 

Depreciation and amortization

   

72,309

     

68,075

 

Total Expense

   

2,268,522

     

4,380,182

 

Loss from Operations

   

(2,241,202

)

   

(4,283,298

)

                 

Other (expense) income

   

(166,432

)

   

788

 

Interest expense, net

   

(2,071,781

)

   

(54,610

)

Change in fair value of derivative liabilities

   

(330,134

)

   

(36,074

)

Foreign currency loss

   

178,555

     

(357,855

)

Loss before Provision for Income Taxes

   

(4,630,994

)

   

(4,731,049

)

                 

Provision for Income Taxes

   

     

 
                 

Net Loss

 

$

(4,630,994

)

 

$

(4,731,049

)

                 

Net Loss Per Share - Basic and Diluted

 

$

(0.08

)

 

$

(0.09

)

                 

Weighted Average Number of Shares Outstanding - Basic and Diluted

   

55,653,369

     

52,728,587

 
                 

Other Comprehensive Income

               

Foreign currency translation adjustment

   

(242,596

)

   

323,580

 
                 

Total Comprehensive loss

 

$

(4,873,590

)

 

$

(4,407,469

)

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

F-3 

 

 QPAGOS


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE PERIOD JANUARY 1, 2016 TO DECEMBER 31, 2017

                                   
   


Preferred Stock
    Common Stock     Additional Paid-in Capital     Accumulated Deficit     Accumulated Other Comprehensive Income     Total
Stockholders’
(Deficit)
Equity
 
    Shares     Amount     Shares     Amount                  
Balance as of December 31, 2015         $       44,784,000     $ 4,478     $ 5,735,861     $ (4,026,148 )   $ 406,570     $ 2,120,761  
                                                                 
Equity based compensation                             144,000                   144,000  
                                                                 
Shares issued for services                 5,145,000       515       2,031,760                   2,032,275  
                                                                 
Shares retained by accounting acquirer in reverse merger transaction                     5,025,000       503       (2,050 )                 1,547  
                                                                 
Shares issued for cash                 500,000       49       374,951                   375,000  
                                                                 
Translation adjustment                                         323,580       323,580  
                                                                 
net loss for the year ended December 31, 2016                                   (4,731,049 )           (4,731,049 )
                                                                 
Balance as of December 31, 2016         $       55,454,000     $ 5,545     $ 8,284,522     $ (8,757,197 )   $ 730,150     $ 263,020  
                                                                 
Conversion of debt to equity                 753,424       75       209,980                   210,055  
                                                                 
Translation adjustment                                         (242,596 )     (242,596 )
                                                                 
net loss for the year ended December 31, 2017                                   (4,630,994 )           (4,630,994 )
                                                                 
Balance as of December 31, 2017         $       56,207,424     $ 5,620     $ 8,494,502     $ (13,388,191 )   $ 487,554     $ (4,400,515 )

 

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

F-4 

 

 

QPAGOS


CONSOLIDATED STATEMENTS OF CASH FLOWS

   

Year Ended
December 31,
2017

   

Year Ended
December 31,
2016

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

   

(4,630,994

)

   

(4,731,049

)

Adjustment to reconcile net loss to net cash used in operating activities:

               

Depreciation expense

   

65,827

     

61,412

 

Amortization expense

   

43,000

     

43,907

 
Inventory provision     26,028        

Equity based compensation charge

   

     

144,000

 

Shares issued for services

   

     

2,032,275

 

Convertible notes issued for services

    221,072        

Derivative liability movements

   

330,134

     

36,074

 

Amortization of debt discount

   

1,919,030

     

1,112

 

Loss on conversion of debt to equity

   

112,665

     

 

Non-cash investment in affiliates

   

     

(3,000

)

Changes in Assets and Liabilities

               

Accounts receivable

   

25,361

   

162,132

 

Inventory

   

(228,939

)

   

45,742

 

Recoverable IVA taxes and credits

   

162,035

     

64,117

 

Other current assets

   

5,832

     

(227,864

)

Other assets

   

3,534

     

1,865

 

Accounts payable and accrued expenses

   

124,052

     

282,115

 

IVA and other taxes payable

   

(174,083

)

   

(25,936

)

Advances from customers

   

(20,034

)

   

130,147

 

Interest accruals

   

107,899

     

53,498

 

CASH USED IN OPERATING ACTIVITIES

   

(1,907,581

)

   

(1,929,453

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Reverse merger net liabilities

   

     

(1,547

)

Purchase of property and equipment

   

(17,538

)

   

(453

)

NET CASH USED IN INVESTING ACTIVITIES

   

(17,538

)

   

(2,000

)

                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds on common stock issued

   

     

375,000

 

Proceeds from loans payable

   

404,916

     

370,000

 

Proceeds from short term notes and convertible notes

   

1,832,253

     

77,000

 

Repayment of convertible notes

   

(235,000

)

   

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

   

2,002,169

     

822,000

 
                 

Effect of exchange rate changes on cash and cash equivalents

   

(104,308

)

   

323,580

 
                 

NET (DECREASE) INCREASE IN CASH

   

(27,258

)

   

(785,873

)

CASH AT BEGINNING OF PERIOD

   

46,286

     

832,159

 

CASH AT END OF PERIOD

 

$

19,028

   

$

46,286

 
                 

CASH PAID FOR INTEREST AND TAXES:

               

Cash paid for income taxes

 

$

   

$

 

Cash paid for interest

 

$

54,707

   

$

 
                 

NON-CASH INVESTING AND FINANCING AVTIVITIES

               

Note payable, including interest thereon, converted to convertible notes payable

 

$

692,623

   

$

 

Conversion of notes payable into equity

 

$

97,391

   

$

 

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

F-5 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1ORGANIZATION AND DESCRIPTION OF BUSINESS

 

a)Organization

 

On May 12, 2016, QPAGOS (formerly known as Asiya Pearls, Inc.), 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, as of the date of the Merger. Prior to and as a condition to the closing of the Merger, the then-current QPAGOS stockholder of 5,000,000 shares of Common Stock agreed to return to QPAGOS 4,975,000 shares of Common Stock held by such holder to QPAGOS and the then-current QPAGOS stockholder retained an aggregate of 25,000 shares of Common Stock and the other stockholders of QPAGOS retained 5,000,000 shares of Common Stock. Therefore, immediately following the Merger, Qpagos Corporation’s former stockholders held 49,929,000 shares of QPAGOS common stock which represented approximately 91% of the outstanding Common Stock.

 

The Merger was treated as a reverse acquisition of QPAGOS, a public shell company, for financial accounting and reporting purposes. As such, Qpagos Corporation was treated as the acquirer for accounting and financial reporting purposes while QPAGOS was treated as the acquired entity for accounting and financial reporting purposes. Further, as a result, the historical financial statements that are reflected in this Annual Report on Form 10-K 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 (“the Company”) was incorporated on May 1, 2015 under the laws of the state of Delaware to effectuate a reverse merger transaction with Qpagos, S.A.P.I. de C.V. (Qpagos) and Redpag Electrónicos S.A.P.I. de C.V. (Redpag). Each of the 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.

 

b)Description of the business

 

QPAGOS Corporation, through its subsidiaries Qpagos and Redpag, 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, our licensed technology can be used to pay bills, add minutes to mobile phones, purchase transportation and tickets, shop online or at a retail store, buy digital services or send money to a friend or relative.

 

2ACCOUNTING POLICIES AND ESTIMATES

 

a)Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

 

F-6 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

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

 

b)Principles of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its subsidiary in which it has a majority voting interest. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. The entities included in these consolidated financial statements are as follows:

 

QPAGOS – Parent Company

Qpagos Corporation – 100% owned

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

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

 

c)Mexican Operations

 

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

 

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

 

d)Use of Estimates

 

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

 

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

 

F-7 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

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)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 has identified the short term convertible notes and certain warrants attached to certain of the notes 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. We evaluate the fair value of variably priced derivative liabilities on a quarterly basis and report any movements thereon ibn earnings.

 

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-8 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

h)Recent Accounting Pronouncements

 

In January 2017, the FASB issued Accounting Standards Update No. (“ASU”) 2017-02, an amendment to Topic 805, Business Combinations. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this Update affect all reporting entities that must determine whether they have acquired or sold a business. The amendments in this Update provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this Update apply to annual periods beginning after December 15, 2017. The amendments in this Update should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect this guidance to have a material impact on its financial statements.

 

In January 2017, the FASB issued Accounting Standards Update No. (“ASU”) 2017-04, an amendment to Topic 350, Intangibles – Goodwill and Other, an entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 3 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. An entity should apply the amendments in this Update on a prospective basis. The amendments in this Update are effective for Goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the effect ASU 2017-04 will have on our consolidated financial statements.

 

In February 2017, the FASB issued Accounting Standards Update No. (“ASU”) 2017-05, an amendment to Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets. The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. An entity should apply the amendments in this Update on a prospective basis. The amendments in this Update are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the effect ASU 2017-05 will have on our consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715). This Update is being issued primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This Update also includes amendments to the Overview and Background Sections of the FASB Accounting Standards Codification. Under generally accepted accounting principles (GAAP), defined benefit pension cost and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements. The amendments in this Update apply to all employers, including not-for-profit entities that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments in this Update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those 3 annual periods. For other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We are currently evaluating the effect ASU 2017-07 will have on our consolidated financial statements.

 

F-9 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

h)Recent Accounting Pronouncements

 

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization of Purchased Callable Debt Securities. The amendments in this Update affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Under current GAAP, premiums and discounts on callable debt securities generally are amortized to the maturity date. The amendments in this Update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, 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. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. We are currently evaluating the effect ASU 2017-08 will have on our consolidated financial statements.

 

In May 2017, the FASB issued Accounting Standards Update No. (“ASU’’) 2017-09, Compensation – Stock Compensation, an amendment to Topic 718. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. 2. An entity should account for the effects of a modification unless all the following are met:

 

  1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.

 

  2. The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.

 

  3.

The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

 

The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. The amendments in this Update are effective for all entities for annual periods beginning after December 15, 2017. Early adoption is permitted and should be applied prospectively to an award modified on or after the adoption date. The amendments proposed in this ASU are not expected to have a material impact on the Company’s consolidated financial statements.

 

F-10 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

h)Recent Accounting Pronouncements

 

In May 2017, the FASB issued ASU 2017-10, service concession Arrangements, an amendment to Topic 853. Topic 853 provides guidance for operating entities when they enter into a service concession arrangement with a public-sector grantor who both:

 

  1. Controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price

 

  2. Controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.

 

In a service concession arrangement within the scope of Topic 853, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment. An operating entity should refer to other Topics to account for various aspects of a service concession arrangement. For example, an operating entity should account for revenue relating to construction, upgrade, or operation services in accordance with Topic 605, Revenue Recognition, or Topic 606, Revenue from Contracts with Customers.

 

The amendments in this Update apply to the accounting by operating entities for service concession arrangements within the scope of Topic 853. These updates are effective when the Company adopts the updates to Topic 606. The amendments proposed in this ASU are not expected to have an impact on the Company’s consolidated financial statements.

 

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.

 

In November 2017, the FASB issued ASU 2017-14, Income Statement – Reporting Comprehensive Income (Topic220), Revenue Recognition (Topic 605) and Revenue from Contracts with Customers (Topic 606). The amendments in this update provide guidance about:

 

Certain amendments made to SEC materials and staff guidance relating to Operating-Differential subsidiaries, and amendments to the wording and disclosure requirements of Topic 605, Revenue Recognition. 

 

F-11 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

h)Recent Accounting Pronouncements

 

In January 2018, the FASB issued ASU 2018-1, Leases (Topic 842), Land Easement practical expedient for Top 842. The amendments in this update provide guidance about:

 

The amendments in this Update permit an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. An entity that elects this practical expedient should apply the practical expedient consistently to all of its existing or expired land easements that were not previously accounted for as leases under Topic 840. Once an entity adopts Topic 842, it should apply that Topic prospectively to all new (or modified) land easements to determine whether the arrangement should be accounted for as a lease. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The amendment in this Update clarifies that an entity should determine whether land easements are leases in accordance with Topic 842 before applying the guidance.

 

The impact this ASU will have on the Company’s consolidated financial statements is expected to be immaterial.

 

In February 2018, the FASB issued ASU 2018-2, Income Statement- Reporting Comprehensive Income (Topic 220), Reclassification of certain tax effects from accumulated other comprehensive income.

 

The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects.

 

The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

 

The impact this ASU will have on the Company’s consolidated financial statements will be a reduction in the tax effect of net operating losses carried forward.

 

In February 2018, the FASB issued ASU 2018-3 Technical Corrections and Improvements to Financial Instruments – Overall (Sub topic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update provide guidance about:

 

The amendment clarifies that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.

 

The amendment clarifies that the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.

 

F-12 

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

h)Recent Accounting Pronouncements

 

The amendment clarifies that remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities.

 

The amendment clarifies that when the fair value option is elected for a financial liability, the guidance in paragraph 825-10-45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging— Embedded Derivatives, or 825-10, Financial Instruments— Overall.

 

The amendments clarify that for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.

 

The amendment clarifies that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services—Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected.

 

The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01.

 

The amendments in this update are not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-4 Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980), Amendments to SEC Paragraphs pursuant to SEC Staff Accounting Bulletin no. 117 and SEC Release No. 33-9273. The amendments in this update provide guidance about:

 

Certain amendments made to SEC materials and staff guidance relating to Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980).

 

The amendments in this update are not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-5, Income Taxes (Topic 740) Amendments to SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 118

 

These amendments affect the wording of SEC paragraphs in the accounting standard codification dealing with Income Taxes (Topic 740).

 

The amendments in this update are not expected to have a material impact on the Company’s consolidated financial statements.

 

F-13 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

h)Recent Accounting Pronouncements

 

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 2017-12 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 has evaluated the impact of this ASU and has initially concluded that the impact will be immaterial.

 

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 consolidated financial statements upon adoption.

 

i)Reporting by Segment

 

No segmental information is required as the Company currently only has one segment of business, providing physical and virtual payment services in the Mexican Market.

 

j)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 December 31, 2017 and December 31, 2016, respectively, the Company had no cash equivalents.

 

The Company minimizes credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution in the United States. The balance at times may exceed federally insured limits. At December 31, 2017 and 2016, the balance did not exceed the federally insured limit.

 

k)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 period ended December 31, 2017 and 2016.

 

l)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 consolidated balance sheet or statement of operations and comprehensive loss. However, impairment charges are recognized in the 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 December 31, 2017.

 

m)Inventory

 

The Company primarily values inventories at the lower of cost or 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.

 

n)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-14 

 

   

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

o)Plant and Equipment

 

Plant and equipment is stated at cost, less accumulated depreciation. Plant and equipment with costs greater than $1,000 are capitalized and depreciated. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

 

Description   Estimated Useful Life
Kiosks   7 years
Computer equipment   3 years
Leasehold improvements   Lesser of estimated useful life or life of lease
Office equipment   10 years

 

The cost of repairs and maintenance is expensed as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

 

p)Intangibles

 

All of our intangible assets are subject to amortization. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. Where intangibles are deemed to be impaired we recognize an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.

 

i)License Agreements

 

License agreements acquired by the Company are reported at acquisition value less accumulated amortization and impairments.

 

ii)Amortization

 

Amortization is reported in the income statement on a straight-line basis over the estimated useful life of the intangible assets, unless the useful life is indefinite. Amortizable intangible assets are amortized from the date that they are available for use. The estimated useful life of the license agreement is five years which is the expected period for which we expect to derive a benefit from the underlying license agreements.

 

q)Long-Term Assets

 

Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

r)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.

 

F-15 

 

   

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

r)Revenue Recognition (continued)

 

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. We recognize 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 sells 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 we do not generate any revenues from merchants who access our terminals as yet.

 

s)Share-Based Payment Arrangements

 

Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments is recorded in operating expenses in the consolidated statement of operations.

 

Prior to the Company’s reverse merger which took place on May 12, 2016, all share-based payments were based on management’s estimate of market value of the Company’s equity. The factors considered in determining managements estimate of market value includes, assumptions of future revenues, expected cash flows, market acceptability of our technology and the current market conditions. These assumptions are complex and highly subjective, compounded by the business being in its early stage of development in a new market with limited data available.

 

Where equity transactions with arms-length third parties, who had applied their own assumptions and estimates in determining the market value of our equity, had taken place prior to and within a reasonable time frame of any share-based payments, the value of those share transactions have been used as the fair value for any share-based equity payments.

 

Where equity transactions with arms-length third parties, included both shares and warrants, the value of the warrants have been eliminated from the unit price of the securities using a Black-Scholes valuation model to determine the value of the warrants. The assumptions used in the Black Scholes valuation model includes market related interest rates for risk-free government issued treasury securities with similar maturities; the expected volatility of the Company’s common stock based on companies operating in similar industries and markets; the estimated stock price of the Company; the expected dividend yield of the Company and; the expected life of the warrants being valued.

 

Subsequent to the Company’s reverse merger which took place on May 12, 2016, the Company has utilized the market value of its common stock as quoted on the OTCQB, as an indicator of the fair value of its common stock in determining share- based payment arrangements.

 

F-16 

 

   

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2ACCOUNTING POLICIES AND ESTIMATES (continued)

 

t)Derivative Liabilities

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re- measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.

 

u)Income Taxes

 

The Company’s primary operations are based in Mexico and currently enacted tax laws in Mexico are used in the calculation of income taxes, the holding company is based in the US and currently enacted US tax laws are used in the calculation of income taxes.

 

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A full valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. It is the Company’s policy to classify interest and penalties on income taxes as interest expense or penalties expense. As of December 31, 2017 and 2016, there have been no interest or penalties incurred on income taxes.

 

v)Comprehensive income

 

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes translation adjustment and net loss.

 

3GOING 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 $13,388,191 as of December 31, 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. 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 for at least the next twelve months from the date the financial statements were issued.

 

F-17 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

4ACQUISITION

 

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

 

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

 

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

 

5INVENTORY

 

Inventory consisted of the following as of December 31, 2017 and December 31, 2016:  

 

    December 31, 2017     December 31, 2016  
Kiosks   $ 504,794     $ 350,273  
    $ 504,794     $ 350,273  

 

6PLANT AND EQUIPMENT

 

Plant and Equipment consisted of the following as of December 31, 2017 and December 31, 2016:

 

    December 31, 2017     December 31, 2016  
             
Kiosks   $ 263,709     $ 269,810  
Computer equipment     73,448       69,577  
Office equipment     9,911       9,430  
Leasehold improvement     8,608       8,192  
Total cost     355,676       357,009  
Less: accumulated depreciation and amortization     (195,375 )     (125,681 )
Plant and equipment, net   $ 160,301     $ 231,328  

 

Depreciation and amortization expense totaled $65,827 and $62,319 for the years ended December 31, 2017 and 2016, respectively.

 

F-18 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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, the Company entered into a 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 the Company fails to comply with its terms and conditions.

Intangibles consisted of the following:

   

December 31,
2017

   

December 31,
2016

 
                 

Software Localization Agreement

 

$

215,000

   

$

215,000

 

Total cost

   

215,000

     

215,000

 

Less: accumulated amortization

   

(89,583

)

   

(46,583

)

Intangibles, net

 

$

125,417

   

$

168,417

 

Amortization expense was $43,000 and $43,000 for the year ended December 31, 2017 and 2016, respectively.

8 NOTES PAYABLE

Notes payable consisted of the following:

Description

 

Interest
Rate

   

Maturity

   

December 31,
2017

   

December 31,
2016

 

YP Holdings LLC

   

12

%

   

December 31, 2015

   

$

   

$

151,353

 

Strategic IR

   

10

%

   

January 1, 2017

     

     

146,575

 

Joseph W and Patricia G Abrams

   

10

%

   

June 13, 2017

     

     

25,534

 

Total notes payable

                 

$

   

$

323,462

 

Interest expense totaled $0 and $3,025 for the year ended December 31, 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.

F-19 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

8 NOTES PAYABLE (continued)

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.

Viktoria Akhmetova

 

Ms. Akhmetova is considered to be a related party as her shareholding exceeds 5%.

 

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 Convertible Notes Payable below.

F-20 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE NOTES PAYABLE

Convertible notes payable consists of the following:

Description   Interest
rate
  Maturity Date   Principal     Accrued
interest
    Unamortized
debt discount
    December 31,
2017
Balance,
net
    December 31,
2016
Balance,
net
 
                                         
Power Up Lending Group     8 %   September 30, 2017   $     $     $     $     $ 1,180  
      8 %   November 30, 2017                              
      8 %   April 20, 2018     83,000       3,165       (32,148 )     54,017        
      8 %   June 30, 2018     63,000       1,491       (39,457 )     25,034        
      8 %   August 30, 2018     53,000       546       (44,381 )     9,165        
                                                     
Labrys Fund, LP     8 %   June 14, 2018     78,000       291       (70,714 )     7,577        
                                                     
JSJ Investments, Inc.     8 %   November 29, 2018     75,000       526       (68,425 )     7,101        
                                                     
GS Capital Partners, LLC     8 %   May 22, 2018     35,000       1,728       (13,616 )     23,112        
      8 %   June 16, 2018     112,500       4,882       (51,473 )     65,909        
                                                     
Strategic IR     15 %   December 8, 2018     10,000       693             10,693        
      15 %   December 8, 2018     20,164       1,384             21,548        
      15 %   December 26, 2018     53,740       3,291             57,031        
      15 %   December 26, 2018     115,535       7,075             122,610        
      8 %   October 3, 2018     14,298       6       (11,595 )     2,709        
                                                     
Viktoria Akhmetova     15 %   December 8, 2018     20,164       1,384             21,548        
      8 %   October 20, 2018     50,000       811       (39,918 )     10,893          
      8 %   August 24,2018     113,845       1,547       (73,610 )     41,782        
      8 %   September 18, 2018     69,047       560       (49,373 )     20,234        
      8 %   September 26, 2018     20,000       127       (14,740 )     5,387        
Joseph W and Patricia G Abrams     15 %   December 10, 2018     26,247       1,780             28,027        
      15 %   January 27, 2019     3,753       189       (563 )     3,379        
                                                     
Roman Shefer     15 %   December 24, 2018     10,000       621             10,621        
                                                     
Crown Bridge Partners, LLC     8 %   August 14, 2018     75,000       2,285       (46,439 )     30,846        
                                                     
BOBA Management     8 %   August 31, 2018     88,847       1,071       (59,150 )     30,768        
      8 %   October 3, 2018     48,880       236       (36,961 )     12,155        
      8 %   December 24, 2017     100,000       2,360           102,630        
                                                     
Total convertible notes payable               $ 1,339,020     $ 38,319     $ (652,563 )   $ 724,776     $ 1,180  

Interest expense amounted to $96,434 and $68 for the years ended December 31, 2017 and 2016, respectively. Debt discount amortized amounted to $1,171,281 and $1,112 for the years ended December 31, 2017 and 2016, respectively.

The convertible notes disclosed above with a coupon of 15%, 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. The beneficial conversion feature was 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 and the conversion price. The difference between the fair market value and the conversion price was recorded as a debt discount with a corresponding credit to derivative financial liability.

The remaining convertible notes have variable conversion prices based on a discount to market price of trading activity over a specified period of time. The variable conversion features were valued using a Black Scholes valuation model. The difference between the fair market value of the common stock and the calculated conversion price on the issuance date was recorded as a debt discount with a corresponding credit to derivative financial liability.

The total value of the beneficial conversion feature recorded as a debt discount during the year ended December 31, 2017 and 2016 was $2,383,113 and $77,000, respectively.

F-21 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE 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.

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 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 December 31, 2017 was $54,017, net of unamortized discount of $32,148.

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 December 31, 2017 was $25,034, net of unamortized discount of $39,457.

On November 14, 2017, 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 August 30, 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 December 31, 2017 was $9,165, net of unamortized discount of $44,381.

F-22 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE NOTES PAYABLE (continued)

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

On December 14, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $78,000 to Labrys Fund, LP. The note has a maturity date of June 14, 2018 and a coupon of eight percent (8%) per annum. In connection with the issuance of the note, the Company was required to issue 231,931 shares of common stock as a commitment fee valued at $76,537. The shares are 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 231,931 shares was not recorded.

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 December 31, 2017 was $7,577, net of unamortized discount of $70,714.

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 had 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.

On November 29, 2017, the Company issued a Convertible Promissory Note in the aggregate principal amount of $75,000 to JSJ Investments, Inc. The note has a maturity date of November 29, 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 December 31, 2017 was $7,101, net of unamortized discount of $68,425.

F-23 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE NOTES PAYABLE (continued)

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.

On October 3, 2017, Strategic IR entered into an agreement whereby the 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 25, 2017, in terms of an agreement entered into between Strategic and Vladimir Skigin, this note was assigned to Vladimir Skigin, refer note 16 below.

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., (“GS Capital”). 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.

On November 11, 2017, GS Capital converted $20,000 of the principal amount of the convertible note into equity at a conversion price of $0.1023 per share for an aggregate 203,516 shares of common stock.

On December 13, 2017, GS Capital converted a further $20,000 of the principal amount of the convertible note into equity at a conversion price of $0.1240 per share for an aggregate 168,466 shares of common stock.

The balance of the note plus accrued interest at December 31, 2017 was $23,112, net of unamortized discount of $13,616.

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 December 31, 2017 was $65,909, net of unamortized discount of $51,473.

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-24 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE 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 matured on December 16, 2017. In terms of an agreement entered into with the note holder , the maturity date of the note was extended to December 8, 2018 and the interest rate was increased to 15% per annum.

The note is convertible into common shares at a conversion price of $.20 per share.

The balance of the note plus accrued interest at December 31, 2017 was $10,693.

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 matured on December 8, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 8, 2018 and the interest rate was increased to 15% per annum.

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 December 31, 2017 was $21,548.

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 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.

On October 25, 2017, the Company received a notice that the note had been assigned to BOBA Management and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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 which matured on December 26, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 26, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $57,031.

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 matured on December 26, 2017. In terms of an agreement entered into with the note holder the maturity date was extended to December 26, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $122,610.

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.

On October 25, 2017, the Company received a notice that the note had been assigned to Vladimir Skigin and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

F-25 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE NOTES PAYABLE (continued)

Strategic IR (continued)

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.

On October 25, 2017, the Company received a notice that the note had been assigned to Beverly Pacific Holdings and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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.

On October 25, 2017, the Company received a notice that the note had been assigned to Victoria Akhmetova and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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.

On October 25, 2017, the Company received a notice that the note had been assigned to BOBA Management and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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.

On October 25, 2017, the Company received a notice that the note had been assigned to Beverly Pacific Holdings and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

F-26 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE NOTES PAYABLE (continued)

Strategic IR (continued)

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.

On October 25, 2017, the Company received a notice that the note had been assigned to Victoria Akhmetova and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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.

On October 25, 2017, the Company received a notice that the note had been assigned to Victoria Akhmetova and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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.

On October 25, 2017, the Company received a notice that the note had been assigned to Vladimir Skigin and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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 25, 2017, the Company received a notice that the note had been assigned to Vladimir Skigin and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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 25, 2017, the Company received a notice that the note had been assigned to BOBA Management and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

F-27 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE NOTES PAYABLE (continued)

Strategic IR (continued)

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 25, 2017, the Company received a notice that the note had been assigned to Vladimir Skigin and simultaneously therewith, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

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.

The balance of the note plus accrued interest at December 31, 2017 was $2,709, net of unamortized discount of $11,595.

In connection with the convertible notes with a 15% coupon, 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.

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 matured on December 8, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 8, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $21,548.

 

F-28 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

9 CONVERTIBLE NOTES PAYABLE (continued)

 

Viktoria Akhmetova (continued)  

 

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.

 

The balance of the note plus accrued interest at December 31, 2017 was $10,893, net of unamortized discount of $39,918.

 

On October 25, 2017, in terms of an agreement entered into, Strategic IR assigned a note entered into on August 24, 2017 with the Company to Viktoria Akhmetova. The note had an aggregate principal amount of $113,845 and accrued interest thereon of $1,547. The note has a maturity date of August 24, 2018 and a coupon of 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.

 

On October 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

 

The balance of the note plus accrued interest at December 31, 2017 was $41,782, net of unamortized discount of $73,610.

 

On October 25, 2017, in terms of an agreement entered into, Strategic IR assigned a note entered into on September 18, 2017 with the Company to Viktoria Akhmetova. The note had an aggregate principal amount of $69,047 and accrued interest thereon of $560. The note has a maturity date of September 18, 2018 and a coupon of 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 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

 

The balance of the note plus accrued interest at December 31, 2017 was $20,234, net of unamortized discount of $49,373.

 

On October 25, 2017, in terms of an agreement entered into, Strategic IR assigned a note entered into on September 26, 2017 with the Company to Viktoria Akhmetova. The note had an aggregate principal amount of $20,000 and accrued interest thereon of $127. The note has a maturity date of September 26, 2018 and a coupon of 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 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

 

The balance of the note plus accrued interest at December 31, 2017 was $5,387, net of unamortized discount of $14,740.

 

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 matured on December 10, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 10, 2018 and the interest rate was increased to 15% per annum.

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 December 31, 2017 was $28,027.

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 12% per annum. In terms of an agreement entered into with the note holder, the maturity date was extended to January 27, 2019 and the interest rate was increased to 15% 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 December 31, 2017 was $3,379, net of unamortized discount of $563.

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 bore interest at 12% per annum and matured on December 16, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 24, 2018 and the interest rate was increased to 15% per annum.

The note is convertible into common shares at a conversion price of $.20 per share.

The balance of the note plus accrued interest at December 31, 2017 was $10,621.

F-29 

 

 

QPAGOS

NOTES TO THE 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 December 31, 2017 was $30,846, net of unamortized discount of $46,439.

BOBA Management

On October 25, 2017, in terms of an agreement entered into, Strategic IR assigned a note entered into on August 31, 2017 with the Company to BOBA Management. The note had an aggregate principal amount of $88,847 and accrued interest thereon of $1,071. 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.

On October 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

The balance of the note plus accrued interest at December 31, 2017 was $30,768, net of unamortized discount of $59,150.

On October 25, 2017, in terms of an agreement entered into, Strategic IR assigned a note entered into on October 3, 2017 with the Company to BOBA Management. The note had an aggregate principal amount of $48,880 and accrued interest thereon of $236. 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 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

 

The balance of the note plus accrued interest at December 31, 2017 was $12,155, net of unamortized discount of $36,961.

 

On October 25, 2017, in terms of an agreement entered into, Strategic IR assigned a previously unclassified amount due to Strategic, subsequently classified as a Convertible Promissory Note on June 27, 2017 with an aggregate principal amount of $100,000 and accrued interest thereon of $2,630, to BOBA Management. The note has a maturity date of December 24, 2017 and a coupon of 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.

 

On October 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

 

The balance of the note plus accrued interest at December 31, 2017 was $102,630.

F-30 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

10 DERIVATIVE LIABILITY

Certain of the short-term convertible notes disclosed in note 9 above and note 16 below, 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 December 31, 2017 and 2016, and $330,134 and $36,074 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:

   

Year ended
December 31,
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 1.98

%    

0.85

%

Expected life of derivative liability

   

9 to 36 months

     

9 months

 

expected volatility of underlying stock

   

134.1 to 202.3

%    

133.0

%

Expected dividend rate

   

0

%

   

0

%

The movement in derivative liability is as follows:

   

December 31, 2017

   

December 31, 2016

 
                 

Opening balance

 

$

113,074

   

$

 

Derivative financial liability arising from convertible note

   

2,834,413

     

77,000

 

Fair value adjustment to derivative liability

   

330,134

     

36,074

 
   

$

3,277,621

   

$

113,074

 

 

F-31 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11 STOCKHOLDERS’ EQUITY

  a. Common Stock

After giving effect to the reverse merger consummated on May 12, 2016 and the issuances set forth below, the Company has authorized 100,000,000 common shares with a par value of $0.0001 each. The Company has authorized, issued and outstanding 56,207,424 shares of common stock as of December 31, 2017 and 55,454,000 as of December 31, 2016.

On March 5, 2018, in terms of an amendment to the Company’s Articles of Association, the authorized share capital was increased to 500,000,000 common shares with a par value of $0.001 each.

The following common shares were issued by the Company during the years ended December 31, 2016 and 2017:

On February 16, 2016, the Company entered into consulting agreements with Gibbs Investment Holdings, Gibbs International, Eurosa, Inc. and Robert Skaff, in terms of which the parties have provided consulting services to the Company and continue to provide such services and were issued a total of 2,572,500 common shares of Qpagos Corporation, which were subsequently converted to 5,145,000 shares of the Company at a value of $2,032,275.

During the period, May 16, 2016 to October 17, 2016, in terms of subscription agreements entered into, the Company issued 500,000 shares to a shareholder for gross proceeds of $375,000.

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.

On November 27, 2017 and December 13, 2017, a note holder converted $20,820 and $20,890 of convertible debt, including accrued interest thereon into 203,516 and 168,466 shares of common stock at conversion prices of $0.1023 and $0.1240, resulting in a loss on conversion of $40,235 and $27,965 respectively.

The Company has recorded an expense of $0 and $144,000 for the nine months ended December 31, 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 December 31, 2017 and 2016.

  (c) Warrants

During the period June 8, 2017 to July 31, 2017, the Company issued warrants to the 15% (previously 12% coupon note holders before amendment) convertible note holders, disclosed in note 9 above, to acquire an aggregate of 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 $267,910.

F-32 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11 STOCKHOLDERS’ EQUITY (continued)

 

(c) Warrants (continued)

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

   

Year ended
December 31,
2017

 
         

Calculated stock price

 

$

0.32 to 0.40

 

Risk-free interest rate

   

1.50 to 1.53

%

Expected life of warrants (in years)

   

5

 

Expected volatility of the underlying stock

   

159.7 to 168.7

%

Expected dividend rate

   

0

%

The volatility of the common stock is estimated using historical data of the Company. The risk-free interest rate used in the Black-Scholes pricing model is determined by reference to historical U.S. Treasury constant maturity rates with maturities approximate to the life of the warrants granted. An expected dividend yield of zero is used in the valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future. As of December 31, 2017, the Company does not anticipate any of the warrants will be forfeited in performing the valuation of the warrants.

A summary of warrant activity during the period January 1, 2016 to December 31, 2017 is as follows:

   

Shares
Underlying
Warrants

   

Exercise
price per
share

   

Weighted
average
exercise
price

 

Outstanding January 1, 2016

   

   

$

   

$

 

Granted

   

6,219,200

     

0.625

     

0.625

 

Forfeited/Cancelled

   

     

     

 

Exercised

   

     

     

 

Outstanding December 31, 2016

   

6,219,200

   

$

0.625

   

$

0.625

 

Granted

   

2,308,513

     

0.20

     

0.20

 

Forfeited/Cancelled

   

     

     

 

Exercised

   

     

     

 

Outstanding December 31, 2017

   

8,527,713

   

$

0.20 to 0.625

   

$

0.51

 

The warrants outstanding and exercisable at December 31, 2017 are as follows:

     

Warrants Outstanding

   

Warrants Exercisable

 

Exercise
Price

   

Number
Outstanding

   

Weighted
Average
Remaining
Contractual
life in years

   

Weighted
Average
Exercise
Price

   

Number
Exercisable

   

Weighted
Average
Exercise
Price

   

Weighted
Average
Remaining
Contractual
life in years

 

$

   

0.625

     

6,219,200

     

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

     

 2.94

 

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

F-33 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 NET REVENUE

Revenue is derived from the following sources:

   

Year ended
December 31, 2017

   

Year ended
December 31, 2016

 
                 

Sales of services

 

$

3,744,051

   

$

2,610,820

 

Payment processing fees

   

29,712

     

34,916

 

Kiosk sales

   

131,621

     

44,606

 

Other

   

35,889

     

1,554

 
   

$

3,941,273

   

$

2,691,896

 

13 INCOME TAXES

 

The Company’s primary operations are based in Mexico and currently enacted tax laws in Mexico are used in the calculation of income taxes, the holding company is based in the US and currently enacted US tax laws are used in the calculation of income taxes.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the TCJA), which significantly modified U.S. corporate income tax law, was signed into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but not limited to the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and generally eliminating net operating loss carrybacks, allowing net operating losses to carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including changes to the orphan drug tax credit and changes to the deductibility of research and experimental expenditures that will be effective in the future). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.

 

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A full valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. It is the Company’s policy to classify interest and penalties on income taxes as interest expense or penalties expense. As of December 31, 2017 and 2016, there have been no interest or penalties incurred on income taxes.

 

The Company has not recorded the necessary provisional adjustments in the financial statements in accordance with its current understanding of the TCJA and guidance currently available as of this filing. But is reviewing the TCJA’s potential ramifications. Noting, The Company determined that it had no liability as of December 31, 2018 for the one-time transition tax on deemed repatriated earnings of foreign subsidiaries imposed by the Act.

The provision for income taxes consists of the following:

   

Year ended
December 31, 2017

   

Year ended
December 31, 2016

 
                 

Current

               

Federal

 

$

   

$

 

State

   

     

 

Foreign

   

     

 
   

$

   

$

 
                 

Deferred

               

Federal

 

$

   

$

 

State

   

     

 

Foreign

   

     

 
   

$

   

$

 

A reconciliation of the U.S. Federal statutory income tax to the effective income tax is as follows:

   

Year ended
December 31, 2017

   

Year ended
December 31, 2016

 
                 

Tax expense at the federal statutory rate

 

$

(1,611,075

)

 

$

(1,656,872

)

State tax expense, net of federal tax effect

           

 

Effect of foreign operations

   

20,860

     

65,642

 

Effect of income tax rate change

    547,371          

Permanent timing differences

   

98,885

     

72,738

 

Deferred income tax asset valuation allowance

   

943,959

     

1,518,492

 
   

$

   

$

 

Significant components of the Company’s deferred income tax assets are as follows:

   

December 31, 2017

   

December 31, 2016

 

Depreciation and amortization

 

$

(46,332

)

 

$

(74,655

)

Other

   

53,105

     

88,935

 

Net operating losses

   

172,940

     

1,504,212

 

Valuation allowance

   

(179,713

)

   

(1,518,492

)

Net deferred income tax assets

 

$

   

$

 

F-34 

 

 

QPAGOS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13 INCOME TAXES (continued)

The valuation allowance for deferred income tax assets as of December 31, 2017 and December 31, 2016 was $179,713 and $1,518,492, respectively. The net change in the deferred income tax assets valuation allowance was a decrease of $1,338,779 for 2017, after taking into account the income tax rate change from 35% to 21%, effective January 1, 2018, and a true up from the prior year net operating loss carry forward, and an increase of 589,277 for 2016, respectively.

As of December 31, 2017, the prior three years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.

The Company’s net operating loss carry-forwards of its foreign subsidiaries of $7,773,375 begin to expire in 2023 through 2027. Net operating loss carry-forwards of the US companies of $346,106 begin to expire in 2033 through 2037. In assessing the realizability of deferred income tax assets, management considers whether or not it is more likely than not that some portion or all deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment.

 

The Company’s ability to utilize the operating loss carry-forwards may be subject to an annual limitation in future periods pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, if future changes in ownership occur. Management has not determined if an ownership change has occurred under Section 382, but is evaluating, if such change has occurred.

 

14 EQUITY BASED COMPENSATION

Equity based compensation is made up of the following:

   

Year ended
December 31, 2017

   

Year ended
December 31, 2016

 
                 

Stock based compensation

   

     

144,000

 

Stock issued for services rendered

   

     

2,032,275

 
   

$

   

$

2,176,275

 

15 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 year ended December 31, 2017 and 2016, all unvested restricted stock awards and warrants, were excluded from the computation of diluted net loss per share. Dilutive shares which could exist pursuant to the exercise of outstanding stock instruments and which were not included in the calculation because their affect would have been anti-dilutive are as follows:

   

Year ended
December 31, 2017
(Shares)

   

Year ended
December 31, 2016
(Shares)

 
                 

Convertible debt

   

18,884,635

     

 

Warrants to purchase shares of common stock

   

8,527,713

     

6,219,200

 
     

27,412,348

     

6,219,200

 
                 

F-35 

 

 

 QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

16 RELATED PARTY TRANSACTIONS

 

The following transactions were entered into with related parties:

 

LOANS PAYABLE

 

  Description   Interest Rate   Maturity Date     December 31,
2017
    December 31,
2016
 
                         
  Gibbs International Holdings – Equipment funding     N/A     November 1, 2017     $ 294,620        
  Vladimir Skigin – Equipment funding     N/A     November 1, 2017       55,295        
                                 
  Notes payable – Related parties                 $ 349,915     $  

 

Jimmy Gibbs

 

Jimmy Gibbs is the principal and has control over Gibbs Investment Holdings and Gibbs International Holdings. Mr Gibbs is considered to be a related party due to his shareholding and the shareholding under his control in the company exceeds 5%.

 

  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.

 

Vladimir Skigin

 

Vladimir Skigin is the principal and has control over Cobbolo Limited and has personally advanced the Company inventory funding. Mr. Skigin is considered to be a related party as his shareholding and that of the Company’s under his control exceeds 5%.

 

  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.

 

F-36 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

16 RELATED PARTY TRANSACTIONS

 

NOTES PAYABLE

 

  Description  Interest Rate  Maturity Date   December 31,
2017
   December 31,
2016
 
                  
  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           $   $203,288 

 

Interest expense totaled $0 and $3,288 for the year ended December 31, 2017 and 2016, respectively.

 

Jimmy 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 Convertible Notes Payable below.

 

Vladimir Skigin

 

Vladimir Skigin is the principal and has control over Cobbolo Limited and has personally advanced the Company inventory funding. Mr. Skigin is considered to be a related party as his shareholding and that of the Company’s under his control exceeds 5%.

  

  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 Convertible Notes Payable below. 

 

F-37 

 

 

QPAGOS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

16 RELATED PARTY TRANSACTIONS (continued)

 

NOTES PAYABLE (continued)

 

Alex Motorin

 

Alex Motorin is the principal of Delinvest Commercial LTD. Mr. Motorin is considered to be a related party as his shareholding and that of the Company’s under his control exceeds 5%.

 

  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 Convertible Notes Payable below.

 

CONVERTIBLE NOTES PAYABLE

 

  Description   Interest
rate
  Maturity Date   Principal     Accrued
interest
    Unamortized
debt discount
    December 31,
2017
Balance,
net
    December 31,
2016
Balance,
net
 
                                           
  Delinvest Commercial, LTD     15 %   December 16, 2018     20,000       1,307             21,307        
        15 %   December 26, 2018     54,123       3,314             57,437        
                                                       
  Gibbs International Holdings     15 %   December 16, 2018     52,494       3,430             55,924        
                                                       
  Cobbolo Limited     15 %   December 26, 2018     53,438       3,272             56,710        
        15 %   December 26, 2018     52,959       3,243             56,202        
                                                       
  Vladimir Skigin     8 %   January 22, 2018     117,000       2,334       (14,300 )     105,034        
        8 %   October 10, 2018     150,000       2,696       (116,301 )     36,395          
        8 %   September 28, 2018     246,000       1,456       (182,647 )     64,809        
        8 %   January 6, 2018     100,000       4,427       (2,182 )     102,245        
        8 %   February 10, 2018     33,000       1,324       (4,649 )     29,675        
                                                       
  Beverly Pacific Holdings     8 %   March 9, 2018     100,000       5,041       (18,630 )     86,411        
        8 %   November 6, 2017     176,000       11,041             187,041        
                                                       
  Total convertible notes payable               $ 1,155,014     $ 42,885     $ (338,709 )   $ 859,190     $  

 

Interest expense amounted to $42,885 and $0 for the years ended December 31, 2017 and 2016, respectively. The amortization of debt discount amounted to $747,749 and $0 for the years ended December 31, 2017 and 2016, respectively.

 

F-38 

 

 

 

QPAGOS

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16 RELATED PARTY TRANSACTIONS (continued)

 

CONVERTIBLE NOTES PAYABLE (continued)

 

The 15% 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 were valued using a Black-Scholes valuation model, 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 remaining convertible notes have variable conversion prices based on a discount to market price of trading activity over a specified period of time. The variable conversion features were valued using a Black Scholes valuation model. The difference between the fair market value of the common stock and the calculated conversion price on the issuance date was recorded as a debt discount with a corresponding credit to derivative financial liability.

 

The total value of the beneficial conversion feature recorded as a debt discount during the year ended December 31, 2017 and 2016 was $1,245,469 and $0, respectively.  

 

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 bore interest at 12% per annum and matured on December 16, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 16, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $21,307.

 

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 matured on December 26, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 26, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $57,437.

 

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-39 

 

QPAGOS

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16 RELATED PARTY TRANSACTIONS (continued)

 

CONVERTIBLE NOTES PAYABLE (continued)

 

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 matured on December 16, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 16, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $55,924.

 

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 Cobbolo Limited and has also personally advanced the Company funds.

 

  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 matured on December 26, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 26, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $56,710.

 

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 matured on December 26, 2017. In terms of an agreement entered into with the note holder, the maturity date was extended to December 26, 2018 and the interest rate was increased to 15% per annum. 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 December 31, 2017 was $56,202.

 

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-40 

 

 

QPAGOS

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16 RELATED PARTY TRANSACTIONS (continued)

 

CONVERTIBLE NOTES PAYABLE (continued)

 

  Vladimir Skigin

 

On October 25, 2017, in terms of an agreement entered into, Strategic IR assigned a note entered into on July 26, 2017 with the Company to Vladimir Skigin. The Note had an aggregate principal amount of $117,000 and accrued interest thereon of $2,334. The note has a maturity date of January 22, 2018 and a coupon of 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.

 

On October 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

 

The balance of the note plus accrued interest at December 31, 2017 was $105,034, net of unamortized debt discount of $14,300.

 

On October 11, October 12 and October 26, 2017, the Company received three instalments of $50,000 each 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 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.

 

The balance of the note plus accrued interest at December 31, 2017 was $36,395, net of unamortized discount of $116,301.

 

On October 25, 2017 in terms of an agreement entered into, Strategic IR assigned a note entered into on September 28, 2017 with the Company to Vladimir Skigin. The note had an aggregate principal amount of $246,000 and accrued interest thereon of $1,456. The note has a maturity date of September 28, 2018 and a coupon of 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 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effective October 25, 2017. The Company had to increase its number of authorized shares in order to give effect to this conversion. The Company received a default waiver from the note holder to allow it to increase its authorized shares. The note and outstanding interest thereon was converted into equity on March 7, 2018.

 

The balance of the note plus accrued interest at December 31, 2017 was $64,809, net of unamortized discount of $182,647.

 

On October 25, 2017 in terms of an agreement entered into, Strategic IR assigned a note entered into on October 3, 2017, with the Company to Vladimir Skigin. The note had an aggregate principal balance of $100,000 and accrued interest thereon of $4,427. The note has a maturity date of January 6, 2018 and a coupon of 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 25, 2017, the Company received a notice of conversion of the outstanding principal and interest into common shares effecti