Asia Payment's (APYME) 10-K provides clearer strategic picture

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Includes: AXP, FDC-OLD, MA, MZBYE
by: Ezra Marbach

Asia Payment Systems (ticker: APYME.ob), a China-based payment processing company, finally released its 10-K today. Here are some extracts and a comment:


Description

....We offer credit card transaction processing and merchant acquiring services.  We plan to offer credit card clearing services to merchants and financial institutions, primarily focusing on China and Japan.  Our Mission is to be a provider of third-party processing services in China to bankcard accepting merchants, issuers of bank credit cards, issuers of petroleum station retail cards, and to issuers of merchandise and grocery retail cards.

Current and Future Offerings

....Our business plan includes two primary services: (1) data processing services to merchants for credit and debit card transactions (referred to in this report as our "payment processing services"), and (2) credit card clearing services to card issuers (referred to in this report as "credit card clearing services"). We are currently offering the payment processing services.  We plan to offer credit card clearing services sometime after the beginning of 2006.

Payment Processing Services

....We started offering payment processing services to Japanese and U.S. merchants in 2004.  We plan to offer these services to Chinese merchants in the second quarter of 2005.

....We are currently providing our payment processing services to DFS Group, a retail merchant in Japan, pursuant to an agreement dated May 1, 2004.  We did not recognize revenue from this agreement until 2005.

Revenue from DFS Group

....We did not recognize any operating revenue from inception through December 31, 2004.  Our revenue for the current fiscal year is currently dependent almost entirely upon our agreement with DFS Group of Japan.  We plan to begin providing our payment processing services to merchants in China in the second quarter of 2005.  We expect that by the end of the year, such sales will exceed the sales expected from DFS Group.  However, we do not currently have sufficient liquidity and capital resources to implement this plan.

Focus on China

...The key to our business plan is our growth in China.  The key to our business plan in China is our access to telecommunication services in China that allow us to use the telephone lines and Internet to provide our payment processing services to Chinese merchants.  We recently secured this access through our contract with Shanghai CRC Telecom Co., Ltd. ("SCRC"), more fully described in Item 8B of this report.  We are starting a 9-month pilot project with SCRS, pursuant to which we are developing a partnership to provide two main services in China:

(a) an individual and business credit reference service platform that meets international standards, such as that used by Equifax, Experian and Trans Union, and

(b) a payment processing system for merchants in China.  We are installing our payment processing systems in SCRC facilities in China.

We will provide our payment processing services to merchants through relationships with SCRC.  We will use the services of the government-owned clearing house service called China UnionPay, until that monopoly is opened to competition by the Chinese government.  SCRC will negotiate rates for the clearing house services that will be passed on to our merchant customers.  We plan to charge a flat rate per transaction, similar to our rate plans operated in Japan.

Opportunity with Smaller Banks

....There are in excess of 100 banks in China with credit card issuing and merchant services programs.  Many of these are small regional operators that have no significant investment in card services and that primarily use China UnionPay "CUP" to process debit card transactions on their behalf.  Typically the smaller banks have no credit card program whatsoever.

Industry figures indicate a card base of 200,000+ is required to generate an acceptable return on investment.  This means many of the smaller "tier 2 & 3 banks" will not be able to participate in the credit card business and will lose existing customers to larger banks.  We believe these smaller banks make up approximately 20% of the credit card clearing service market in China.

We believe there is significant opportunity in this area for us to offer these smaller banks a partial or complete outsourcing service for their card clearing. We have had discussions with several of these banks, and they have indicated strong interest in our services.  We plan to have our sales force vigorously pursue this market in the latter half of 2005 after the banking industry in China opens to foreign service providers.

Market Overview

....The market for credit card clearing services in China, with a population of 1.4 billion, is expected to grow over the next six years at a compounded annual rate of growth in total credit card loans of 88%.  We expect growth from US$300 million in 2003 to US$13.2 billion in 2009. In addition, only 5% of the merchants in China are capable of accepting cards as compared with 81% of U.S. merchants and 79% of Japanese markets. The current transaction processing infrastructure is significantly immature and incapable of supporting the anticipated robust growth. We are aggressively pursuing this opportunity to provide this infrastructure to both merchants and banks as customers of our third-party processing systems.

Presently, Chinese merchants who wish to accept credit cards from customers must contact or be contacted by one of the 110+ China UnionPay accredited banks to begin the process of determining their qualification to accept domestic China cards. There are no independent third-party processing companies currently operating in China; however, First Data Corp. recently announced an agreement to provide merchant and card issuing services to China Everbright Bank in Shanghai.

No providers are currently dominant in our primary target area: the credit card processing market.  In debit card processing, China Union Pay has over 90% market share, but this is not seen as a large growth area for us because there is increasingly less revenue in the processing of debit cards than in credit cards. We do not believe there is a dominant player in the credit card market, but there are no statistics published regarding this.  Credit card services are provided by several banks, but the card population is extremely low because it is difficult to find merchants that accept this form of payment.  Many of these credit cards have been issued to high income Chinese and are used more overseas than in China.  Competitors are expected to include First Data, China UnionPay, HSBC/BOCOM [Bank of Communications], Citibank, EDS, and other Chinese banks.

Employees

....As of April 11, 2005, the company has twelve (12) employees.  It administers the business through consulting arrangements with the company's officers, directors and other individuals.

Risk Factors

WE HAVE NO HISTORY OF OPERATIONS, AND WE DO NOT HAVE ENOUGH LIQUIDITY AND CAPITAL RESOURCES TO IMPLEMENT OUR PLAN OF OPERATION.

The company has no history of operations. We currently do not have sufficient capital or customers to implement our plan of operation. If we are unable to raise capital through the sale of debt or equity, or a combination or both, within the next six to nine months, we will not be able to implement our current business plan and may not be able to become successful in this market.

WE REQUIRE ADDITIONAL FINANCING TO BE ABLE TO MEET OUR CURRENT LIABILITIES, AND WE HAVE DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

The Auditors' report on the company's consolidated financial statements for the year ended December 31, 2004, raises substantial doubt about the company's ability to continue as a going concern.  We need additional cash during the next twelve months to finance operations and to pay $74,411 of existing accounts payable and our additional commitment of approximately $145,000 per month. We had no operating revenue during 2004.  We started recognizing revenue during the first quarter of 2005. At December 31, 2004, we had cash of $18,780.  This has been reduced during 2005.  If we are unable to generate significant cash flow before the end of the third quarter of 2005, we will be required to curtail operations substantially, and seek additional capital. There is no assurance that we will be able to obtain additional capital on terms and conditions favorable to the company, if at all.

Strategic Planning, Public Relations and Marketing Services Agreements

  • In January 2005 the Company issued 375,000 shares of common stock for a contract with  an accredited investor to perform strategic planning, public relations and marketing  services  provided  over  the  following  four  months,  subject  to completion  of  the services.  The shares will be valued at $0.47 per share, the closing  market  price  of  the  Company's  common  stock  on  the  date  of the transaction  for  a  total  of  $176,250.
  • In January 2005 the Company issued 250,000 shares of common stock for a contract with  an accredited investor to perform strategic planning, public relations and marketing  services  provided  over  three  months, subject to completion of the services. The shares will be valued at $0.47 per share, the closing market price of  the  Company's  common  stock  on the date of the transaction for a total of $117,500.
  • In  February  2005  the  Company  issued  500,000  shares  of common stock for a contract  with  an  accredited  investor  to  perform strategic planning, public relations  and  marketing services over six months, subject to completion of the services. The shares will be valued at $1.07 per share, the closing market price of the  Company's  common  stock on the date of the transaction, for a total of $535,000.
  • On or about January 6, 2005, we entered into an agreement with Sussex Avenue Partners to perform strategic planning, public relations and marketing services. We paid to Sussex 375,000 shares of common stock, subject to completion of the services.  The shares were valued at $0.47 per share, the closing market price of our common stock on the date of the transaction for a total consideration of $176,250.  The term of the agreement is four months.
  • On or about January 6, 2005, we entered into an agreement with Ken Weiner to perform strategic planning, public relations and marketing services.  We paid to Weiner 250,000 shares of common stock, subject to completion of the services. The shares were valued at $0.47 per share, the closing market price of our common stock on the date of the transaction for a total consideration of $117,500.  The term of the agreement is three months.
  • On or about February 17, 2005, we entered into a second agreement with Sussex Avenue Partners to perform strategic planning, public relations and marketing services.  We will pay to Sussex 2,000,000 shares of our common, valued at $0.47 per share, the closing market price of our common stock on the date of the transaction for a total consideration of $940,000.  We will issue the stock over a seven-month period as follows:  500,000 shares on February 17, 2005, 1,000,000 shares on May 1, 2005, and 500,000 shares on September 17, 2005, all subject to completion of the services.  The term of the agreement is two years.

Comment: The company is starving for capital - yet management continues to pay for marketing services that provide little, if any, operational value. While the company is mostly using stock as currency, it is somewhat strange to be diluting shareholders for marketing purposes at such an early stage in the company's history.

And, just last week, management engaged Shazamstocks, a web site advertising small and micro-cap stocks, yet again. Though management failed to disclose this new long-term agreement with Shazam in today's 10-K, Shazam's web site claims the deal was struck almost a week ago. And it seems to be a cash deal with monies coming straight from Asia Pay:

According to Shazam:

....We have been compensated by a 3rd party 50,000 free trading shares and $15000. We have sold all shares. On 1/7/05 APYM extended our campaign for an additional 3 month for 250,000 Rule 144 shares with registration rights. On 5/3/05 we extended our contract for 1 year backdated to 4/6/05 at a rate of $10,000 a month.

$10,000 a month for a company that is in dire need of capital???

Not only is Shazam's profile lacking in substance, it doesn't even quote the correct ticker symbol (the stock has been trading as APYME.ob for almost a month). Asia Payment, however, found the profile worthy of posting on its web site.

For more on APYME from The China Stock Blog see here.

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Disclosure: I am LONG Asia Payment Systems.