10-Q 1 f10q0920_theolbgroup.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2020

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from _______ to _______

 

Commission File Number: 000-52994

 

 

THE OLB GROUP, INC.

(Exact name of small business issuer as specified in its charter)

 

DELAWARE   13-4188568
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

200 Park Avenue, Suite 1700, New York, NY   10166
(Address of principal executive offices)   (Zip Code)

 

(212) 278-0900
(Registrant’s telephone number, including area code)

 

 
(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on
which registered
Common Stock, $0.0001 par value   OLB   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has fled 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 whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ 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 ☒

 

As of November 11, 2020, there were 6,160,054 shares of the issuer’s common stock. 

 

 

 

 

 

 

THE OLB GROUP, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended September 30, 2020

 

INDEX

 

PART I Financial Information 1
Item 1. Financial Statements (unaudited) 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
     
PART II Other Information 25
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26

  

i

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INDEX TO FINANCIAL STATEMENTS

 

Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019   2
     
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)   3
     
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2020, and 2019 (unaudited)   4
     
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)   5
     
Notes to the Condensed Consolidated Financial Statements (unaudited)   6

  

1

 

 

The OLB Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

  

   September 30,
2020
   December 31,
2019
 
   (Unaudited)     
ASSETS        
Current Assets:        
Cash  $4,122,640   $507,616 
Accounts receivable, net   420,074    479,404 
Prepaid expenses   16,457    16,706 
Other current assets   17,046    108,278 
Total Current Assets   4,576,217    1,112,004 
           
Other Assets:          
Property and equipment, net   23,359    36,653 
Intangible assets, net   2,856,720    3,335,239 
Deferred offering costs   -    210,305 
Goodwill   6,858,216    6,858,216 
Operating lease right to use asset   290,863    - 
Other long-term assets   384,140    316,512 
TOTAL ASSETS  $14,989,515   $11,868,929 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current Liabilities:          
Accounts payable  $458,581   $592,853 
Accrued expenses – related party   -    1,012,023 
Accrued expenses   171,371    78,392 
Operating lease liability – current portion   83,816    - 
Deferred revenue   -    99,594 
Note payable – current portion   450,000    325,000 
Note payable – related parties – current portion   -    386,467 
Total Current Liabilities   1,163,768    2,494,329 
Long Term Liabilities:          
Note payable – related party   -    3,000,000 
Notes payable, net of current portion   7,916,076    9,175,000 
Operating lease liability – net of current portion   207,330    - 
Total Liabilities   9,287,174    14,669,329 
           
Commitments and contingencies (Note 9)          
           
Stockholders’ Equity (Deficit):          
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding   -    - 
Series A Preferred stock, $0.01 par value, 10,000 shares authorized, 4,633 and no shares issued and outstanding, respectively   46    - 
Common stock, $0.0001 par value; 200,000,000 shares authorized, 6,160,054 and 5,411,905 shares issued and outstanding, respectively   616    541 
Additional paid-in capital   26,263,532    16,050,938 
Accumulated deficit   (20,561,853)   (18,851,879)
Total Stockholders’ Equity (Deficit)   5,702,341    (2,800,400)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $14,989,515   $11,868,929 

 

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

 

2

 

 

The OLB Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

  

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Revenue:                
Transaction and processing fees  $2,128,771   $2,455,937   $6,297,146   $7,578,561 
Merchant equipment rental and sales   22,018    15,294    60,828    53,118 
Other revenue from monthly recurring subscriptions   157,248    6,201    564,091    18,587 
Total revenue   2,308,037    2,477,432    6,922,065    7,650,266 
                     
Operating expenses:                    
Processing and servicing costs, excluding merchant portfolio amortization   1,486,257    1,700,048    4,501,274    5,096,694 
Amortization expense   222,090    203,214    628,519    609,643 
Salaries and wages   318,682    342,338    1,036,068    1,143,733 
General and administrative expenses   706,430    316,962    1,602,685    1,153,504 
Total operating expenses   2,733,459    2,562,562    7,768,546    8,003,574 
                     
Loss from operations   (425,422)   (85,130)   (846,481)   (353,308)
                     
Other Income (Expense):                    
Interest expense   (199,891)   (218,500)   (629,446)   (648,015)
Interest expense, related party   (33,320)   (97,889)   (235,951)   (281,128)
Other income   1,275    (340    1,904    809 
Total other expense   (231,936)   (316,729)   (863,493)   (928,334)
                     
Net Loss  $(657,358)  $(401,859)  $(1,709,974)  $(1,281,642)
                     
Net loss per share, basic and diluted  $(0.11)  $(0.07)  $(0.31)  $(0.24)
                     
Weighted average shares outstanding, basic and diluted   5,849,806    5,466,501    5,558,938    5,447,501 

  

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

 

3

 

 

The OLB Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the Nine Months ended September 30, 2020 and 2019

(Unaudited)

 

   Preferred Stock   Common Stock   Additional
Paid
   Accumulated     
   Shares   Amount   Shares   Amount   In Capital   Deficit   Total 
Balance at January 1, 2020   -   $-    5,411,905   $541   $16,050,938   $(18,851,879)  $(2,800,400)
Stock based compensation   -    -    -    -    74,596    -    74,596 
Net loss   -    -    -    -    -    (542,207)   (542,207)
Balance at March 31, 2020   -    -    5,411,905    541    16,125,534    (19,394,086)   (3,268,011)
Stock based compensation   -    -    -    -    74,596    -    74,596 
Net loss   -    -    -    -    -    (510,409)   (510,409)
Balance at June 30, 2020   -    -    5,411,905    541    16,200,130    (19,904,495)   (3,703,824)
Stock based compensation   -    -    -    -    74,596    -    74,596 
Conversion of debt – related party   4,633    46    -    -    4,634,396    -    4,634,442 
Common stock units sold for cash   -    -    700,000    70    4,942,811    -    4,942,881 
Warrants sold for cash   -    -    -    -    155,380    -    155,380 
Warrants converted to common stock   -    -    21,150    2    94,498    -    94,500 
Common stock issued to directors   -    -    26,999    3    161,721    -    161,724 
Net loss   -    -    -    -    -    (657,358)   (657,358)
Balance at September 30, 2020   4,633   $46    6,160,054   $616   $26,263,532   $(20,561,853)  $5,702,341 

 

   Common Stock   Additional
Paid
   Accumulated     
   Shares   Amount   In Capital   Deficit   Total 
Balance at January 1, 2019   5,411,905   $541   $15,785,888   $(17,508,467)  $(1,722,038)
Stock based compensation   -    -    66,262    -    66,262 
Net loss   -    -    -    (406,945)   (406,945)
Balance at March 31, 2019   5,411,905    541    15,852,150    (17,915,412)   (2,062,721)
Stock based compensation   -    -    66,263    -    66,263 
Net loss   -    -    -    (472,838)   (472,838)
Balance at June 30, 2019   5,411,905    541    15,918,413    (18,388,250)   (2,469,296)
Stock based compensation   -    -    66,262    -    66,262 
Net loss   -    -    -    (401,859)   (401,859)
Balance at September 30, 2019   5,411,905   $541   $15,984,675   $(18,790,109)  $(2,804,893)

   

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

 

4

 

 

The OLB Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

  

   For the Nine Months Ended
September 30,
 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(1,709,974)  $(879,783)
Adjustments to Reconcile Net Loss to Net Cash Used in Operations:          
Depreciation and amortization   616,813    422,502 
Stock based compensation   223,788    132,525 
Common stock issued for services – related party   161,724    - 
Operating lease expense   283    - 
Changes in assets and liabilities:          
Accounts receivable   59,330    (103,282)
Prepaid expenses and other current assets   91,481    4,704 
Other long-term assets   (67,628)   (5,353)
Accounts payable   (134,272)   75,862 
Accrued expenses – related party   235,952    172,626 
Other accrued liabilities   92,979    (8,758)
Deferred revenue   (99,594)   - 
Net Cash used in Operating Activities   (529,118)   (188,957)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Acquisition of intangible assets   (125,000)   - 
Net Cash used in Investing Activities   (125,000)   - 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from notes payable – related party   -    132,789 
Proceeds from note payable   236,231    - 
Payments on note payable   (1,370,155)   - 
Warrants converted to common stock   94,500    - 
Proceeds from sale of common stock units   4,942,881    - 
Proceeds from sale of warrants   155,380    - 
Payment of offering costs   210,305    - 
Net Cash provided by Financing Activities   4,269,142    132,789 
           
Net Change in Cash   3,615,024    (56,168)
Cash – Beginning of Period   507,616    111,586 
Cash – End of Period  $4,122,640   $55,418 
           
Cash Paid For:          
Interest  $636,861   $442,250 
Income taxes  $-   $- 
Supplemental non-cash disclosure:          
    Establish operating lease asset and related liability  $323,812   $- 

  

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

 

5

 

 

The OLB Group, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

 

NOTE 1 – BACKGROUND

 

Background

 

The OLB Group, Inc. (“OLB” the “Company”) was incorporated in the State of Delaware on November 18, 2004 and provides services through its wholly-owned subsidiaries.

 

The Company provides integrated financial and transaction processing services to businesses throughout the United States. Through its eVance Capital, Inc. subsidiary (“eVance”), the Company provides an integrated suite of third-party merchant payment processing services and related proprietary software enabling products that deliver credit and debit card-based internet payment processing solutions primarily to small and mid-sized merchants operating in physical “brick and mortar” business environments, on the internet and in retail settings requiring both wired and wireless mobile payment solutions. eVance operates as an independent sales organization (“ISO”) generating individual merchant processing contracts in exchange for future residual payments. As a wholesale ISO, eVance has a direct contractual relationship with the merchants and takes greater responsibility in the approval and monitoring of merchants than do retail ISOs and as a result, receives additional consideration for this service and risk. The Company’s Securus365, Inc. subsidiary operates as a retail ISO and receives residual income as commission for merchants it places with third party processors.

 

CrowdPay.us, Inc. (“CrowdPay”) is a Crowdfunding platform used to facilitate a capital raise anywhere from $1,000,0000 -$50,000,000 of various types of securities under Regulation D, Regulation Crowdfunding, Regulation A and the Securities Act of 1933. To date, the activities of this subsidiary have been insignificant.

 

OmniSoft.io, Inc. (“OmniSoft”) operates a software platform for small merchants. The Omnicommerce applications work on an iPad, mobile device and the web and allows you to sell a store’s products in a physical, retail setting. To date, the activities of this subsidiary have been insignificant when compared to the overall business.

 

The Company also provides ecommerce development and consulting services on a project by project basis.

 

COVID-19 Impact

 

On January 30, 2020, the World Health Organization declared the COVID-19 (coronavirus) outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. The virus and actions taken to mitigate its spread have had and are expected to continue to have a broad adverse impact on the economies and financial markets of many countries, including the geographical areas in which the Company operates. In response to the pandemic, the Company is working with merchants to address potential changes to the purchase patterns of consumers. In addition, it is focusing on servicing merchants that sell products with an extended delivery time frame, that have products that are paid for in advance, and that work in the catering, ticketing, limo and travel related businesses which have been directly impacted by the social distancing requirement of the pandemic. Further, for those of the Company’s employees that are able to perform their job remotely, the Company has implemented a “remote work” policy and provided employees with the technology necessary to continue to do their jobs from home and for those employees that are unable to perform their job from a remote location, the Company has taken steps to ensure appropriate distancing and added sanitizing stations along with requiring frequent hand washing and work station cleaning. At September 30, 2020, most employees were no longer working remotely. However, the Company continues to monitor and follow the advice of federal and state authorities.

 

The Company has experienced disruptions to its business and has observed disruptions for the Company’s customers and merchants which has resulted in a decline in transaction volume during some months. While the volume of processing transactions by merchants in March was relatively in-line with the Company’s expectations that the number of transactions during March would be below the prior year because states in the United States began to implement stay-at-home orders, the number of transactions and resulting revenue was approximately 15% lower in March than in February and 30% lower in April than in March. In May, the number of transactions increased whereby they were 5% higher than in April, and in June, transactions were 7% higher than May and in June through September, the number and amount of transactions continued to steadily increase whereby they are meeting expectations. The Company’s revenue during the period of time decreased and then increased in the amount similar to the percentage of month-to-month transaction volume.

 

We do estimate that the number of transactions will continue to stay at a depressed level or further decline from the prior year, along with revenues, until the end of the COVID-19 pandemic or the response to the COVID-19 pandemic relaxes further stay-at-home restrictions and allows customers to make more point of purchase transactions for merchants and/or more merchants provide for additional contactless and online purchase options. The anticipated amount of decline from prior year is unknown, but it will be impacted until such time when consumers return to the level of purchasing that occurred in the prior year and before the pandemic. The Company does not anticipate that the pandemic will continue to have a material impact on the Company’s business or liquidity. However, additional closings and reopenings of businesses in the future will likely result in a month over month decline and then increase similar to what occurred in March through June 2020.

 

6

 

 

While it is unknown how long these conditions will last and what the complete financial impact will have on the Company, the financial services and payment technology industries in which we operate depend heavily upon the overall level of consumer, business and government spending. A sustained deterioration in general economic conditions resulting in less consumer, business and government spending may adversely affect our financial performance by reducing the number or average purchase amount of transactions we process. If our customers make fewer sales of products and services using electronic payments, or consumers spend less money through electronic payments, whether due to the outbreak of the COVID-19 virus, change of consumer behavior or otherwise, we will have fewer transactions to process at lower dollar amounts, resulting in lower revenue making it reasonably possible that we are financially vulnerable to the effects of the pandemic. If we experience lower revenue, the risk of not meeting financial covenants could exist.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2019 included in the Company’s Form 10-K. The results of the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.

 

In the opinion of management, all adjustments necessary to present fairly the financial position as of September 30, 2020 and the results of operations and cash flows presented herein have been included in the interim financial statements. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results of operations for the full year.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s accounting estimates include the collectability of receivables, useful lives of long lived assets and recoverability of those assets, impairment in fair value of goodwill, valuation allowances for income taxes, stock based compensation.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, eVance, Securus, CrowdPay, and OMNISOFT. All significant intercompany transactions and balances have been eliminated.

 

Reclassifications

 

Certain reclassifications have been made to the prior period financial information to conform to the presentation used in the financial statements for the three and nine months ended September 30, 2020.

 

Net Loss per Share

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period. The weighted average number of common shares for the three and nine months ended September 30, 2020 and 2019 does not include warrants to acquire 3,353,698 and 40,000 shares of common stock, respectively, because of their anti-dilutive effect. The weighted average number of common shares for the three and nine months ended September 30, 2020 and 2019 includes 112,735 and 55,257 vested options, respectively, due to the nominal exercise price of the options. The weighted average number of common shares for the three and nine months ended September 30, 2020 and 2019 does not include 172,437 and 223,250 unvested options, respectively, to purchase common stock because of their anti-dilutive effect.

 

Revenue Recognition and Cost of Revenues

 

The Company receives a percentage of recurring monthly transaction related fees comprised of credit and debit card fees charged to merchants, net of association fees, otherwise known as Interchange, as well as certain service charges and convenience fees, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. Fees are calculated on either a percentage of the dollar volume of the transaction or a fixed fee or a hybrid of the two and are recognized at the time of the transaction. In the case of “wholesale” residual revenue in which the Company has a direct contractual relationship with the merchant, bears risk of chargebacks and performs underwriting on the merchants, the Company records the full discount charged to the merchant as revenue and the related interchange and other processing fees as expenses. In cases of residual revenue where the Company is not responsible for merchant underwriting and has no chargeback liability and has no or limited contractual relationship with the merchant, the Company records the amount it receives from the processor net of interchange and other processing fees as revenue.

 

7

 

 

Disaggregation of Revenue

 

The following table presents the Company’s revenue disaggregated by revenue source:

  

   For the
Three Months Ended
September 30,
   For the
Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Revenue from contracts with customers:                
   Wholesale contracts  $1,293,217   $1,544,775   $3,759,822   $4,715,570 
   Retail contracts  $601,118   $682,598   $1,768,720   $1,910,494 
   Other transaction and processing fees  $413,702   $250,059   $1,393,523   $1,024,202 
   Total Revenue  $2,308,037   $2,477,432   $6,922,065   $7,650,266 

 

The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). The Company determines revenue recognition through the following steps:

 

  Identification of a contract with a customer;
     
  Identification of the performance obligations in the contract;
     
  Determination of the transaction price;
     
  Allocation of the transaction price to the performance obligations in the contract; and
     
  Recognition of revenue when or as the performance obligations are satisfied.

 

Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Shipping and handling activities associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment activity and recognized as revenue at the point in time at which control of the goods transfers to the customer. As a practical expedient, the Company does not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less.

 

Transaction and processing fees

 

Fees for the Company’s transaction and processing arrangements are typically billed and paid on a monthly basis. The Company receives a percentage of recurring monthly transaction related fees comprised of credit and debit card fees charged to merchants, net of association fees, otherwise known as Interchange, as well as certain service charges and convenience fees, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. Fees are calculated on either a percentage of the dollar, volume of the transaction or a fixed fee or a hybrid of the two and are recognized at the time of the transaction. These merchant services represent a single performance obligation satisfied over time and that the same measure of progress should be used to measure the Company’s progress toward complete satisfaction of the performance obligation. The Company will recognize revenue on a monthly basis as the services are transferred to the customer in short daily increments that qualify for series guidance as the best measure of the transfer of control.

 

In wholesale contracts, the Company recognizes transaction and processing fees on a gross basis as the Company is the principal in the merchant services. The Company has concluded it is the principal because it has a direct contractual relationship with the merchant, is primarily responsible for the delivery of services to the merchants, including performing underwriting, has discretion in setting prices, and bears risk of chargebacks and other merchant losses. The Company also has the unilateral ability to accept or reject a transaction based on criteria established by the Company. As the principal, the Company records the full discount charged to the merchant as revenue and the related interchange and other processing fees within cost of revenues.

 

In retail contracts, the Company is not responsible for merchant underwriting, has no chargeback liability and has no or limited contractual relationship with the merchant. As such, the Company records the net amount it receives from the processor, after interchange and other interchange and other processing fees, as revenue.

 

8

 

 

Merchant equipment sales and other

 

The Company generates revenue through the sale and rental of merchant equipment. The Company satisfies its performance obligation upon delivery of equipment to merchants and recognizes revenue at a point in time. The Company allows for customer returns which are accounted for as variable consideration. The Company estimates these amounts based on historical experience and reduces revenue recognized. The Company invoices customers upon delivery of the equipment to merchants, and payments from such customers are due upon invoicing. The Company offers hardware installment sales to customers with terms ranging from three to forty-eight months. The Company allocates a portion of the consideration received from these arrangements to a financing component when it determines that a significant financing component exists. The financing component is subsequently recognized as financing revenue separate from hardware revenue, within subscription and services-based revenue, over the terms of the arrangement with the customer. Pursuant to practical expedients afforded under ASC 606, the Company does not recognize a financing component for hardware installment sales that have a term of one year or less.

 

Deferred Revenue

 

From time to time the Company may launch new products or services to its merchants. In the event step 1 under ASC 606 is not met, the Company will record deferred revenue upon receipt of the payment by the customer. In November 2019, the Company began billing existing merchants for its cloud-based omni-channels software, ShopFast. Merchants are billed monthly with the ability to opt out and receive a refund for up to 30 days after they are billed. Due to the lack of historical data related to these services, customer activity and the associated billings and refunds, $99,594 was recorded as deferred revenue as of December 31, 2019. All of the deferred revenue, net of any refunds, was recognized in the nine months ended September 30, 2020. During the nine months ended September 30, 2020, the Company determined it had sufficient information to determine Step 1 was achieved, and therefore recognized all revenue that was previously deferred. As such, $99,594 of revenue recognized during the nine months ended September 30, 2020 pertained to services provided in the prior period.

 

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. We adopted the ASU effective January 1, 2020, using the modified retrospective transition method. Under this method, there was no cumulative impact adjustment necessary with the adoption to our accumulated deficit on January 1, 2020. Our condensed consolidated financial statements for periods ending after January 1, 2020 are presented in accordance with the requirements of Topic 842, while comparative prior period amounts have not been adjusted and continue to be reported in accordance with Topic 840. 

 

Recent Accounting Standards

 

In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivative and Hedging (Topic 815), and Leases (Topic 842).  This new guidance became effective for us on January 1, 2020. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

 

NOTE 3 – LIQUIDITY AND CAPITAL RESOURCES

 

In connection with the response to the COVID-19 pandemic in the United States, the Company has experienced disruptions to its business and has observed disruptions with its customers and merchants, which has resulted in a decline in transaction volume. While the volume of processing transactions by merchants in March was relatively in-line with the Company’s expectations that the number of transactions during March would be below the prior year because states in the United States began to implement stay-at-home orders, the number of transactions and resulting revenue was approximately 15% lower in March than in February and 30% lower in April than in March. In May, the number of transactions began to increase whereby they were 5% higher than in April, and in June, transactions were 7% higher than May and in June through September, the number and amount of transactions continued to steadily increase whereby they are meeting expectations. The Company’s revenue during the period of time decreased and then increased in the amount similar to the percentage of month-to-month transaction volume. The Company’s revenue during the period of time decreased and then increased in the amount similar to the percentage of month-to-month transaction volume. Despite recent increases in volume, the Company estimates that the number of transactions will continue to stay at a depressed level or further decline from the prior year, along with revenues, until the end of the COVID-19 pandemic or the response to the COVID-19 pandemic fully relaxes further stay-at-home restrictions and allows customers to make more point of purchase transactions for merchants, customers become more comfortable shopping in stores and/or more merchants provide for additional contactless and online purchase options. The anticipated amount of anticipated decline from prior year is unknown, but it will be impacted by when consumers return to the level of purchasing that occurred in the prior year and before the pandemic. The Company does not anticipate that the pandemic will continue to have a material impact on the Company’s business or liquidity. However, additional closings and reopenings of businesses or if additional businesses cease to operate in the future will likely result in a month over month decline and then increase similar to what occurred in March through September 2020.

 

At September 30, 2020, the Company had cash of $4,122,640 and working capital of $3,412,449. For the three and nine months ended September 30, 2020, the Company’s net loss was $657,358 and $1,709,974, respectively. In addition, as of September 30, 2020, the Company was not in compliance with certain financial covenants required by the Credit Agreement.

 

9

 

 

As a result of these factors, the Company determined it was necessary to review its cash flow for 2020 and an overall analysis of market trends to determine whether or not it has sufficient liquidity to continue as a going concern for a period of at least twelve months from the date of this Quarterly Report. The Company also determined it was necessary to take certain corporate actions, including reducing discretionary expenses and amending its existing senior indebtedness as discussed below, in order to ensure it has sufficient liquidity to continue as a going concern for a period of at least twelve months from the date of this Quarterly Report.

 

On August 11, 2020, the Company closed an offering of its securities (the “Offering”) for gross proceeds of $6.45 million. The Company sold 700,000 units consisting of (a) one share of our common stock; (b) two Series A Warrants, and (c) one-half of one Series B warrant. In addition, the underwriter fully exercised its option to purchase 210,000 Series A warrants and 52,500 Series B warrants. While 20% of the net proceeds of $5.5 million was used to repay a portion of our outstanding Term Loan, immediately following the Offering, the Company had cash of $5.6 million on hand. As such, the Company believes it will be able fund future liquidity and capital requirements through cash flows generated from its operating activities for a period of at least twelve months from the date its condensed consolidated financial statements are issued.

 

In addition, the Company has received a Paycheck Protection Program loan under the CARES Act for approximately $236,000 (the “PPP Loan”). The Paycheck Protection Program provides that the use of PPP Loan proceeds were limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. The Company currently intends to use the PPP Loan for permitted uses, although no assurance can be given that the Company will obtain forgiveness of all or any portion of amounts due under the PPP Loan.

 

As a result of the improved transaction volume trends the Company experienced in the three months ended September 30, 2020, as well as the above discussed capital raises, the Company believes it has sufficient liquidity in order to sustain operations for a period of at least twelve months from the date its condensed consolidated financial statements are available to be issued.

 

Additional Information Regarding Our Credit Agreement

 

On April 24, 2020, the Company entered into Amendment No. 4 to Loan and Security Agreement amending the Credit Agreement. The purpose of Amendment No. 4 was to extend the Maturity Date of the indebtedness to April 9, 2022 and to waive any outstanding events of default. In consideration for the foregoing, the Credit Agreement was amended to include a new principal repayment schedule under the note whereby the Company paid an amount equal to $125,000 upon execution of Amendment No. 4 and the Company agreed to make a monthly payment of $25,000 per month, commencing May 1, 2020, and on the first business day of each calendar month thereafter until the required balloon payment on April 9, 2022. In the event that the Company does not make a monthly payment, Messrs. Yakov and Herzog will have the ability to make an equity contribution to the Company for the sole purpose of paying the monthly payment obligation of the Company under the Credit Agreement.

 

Although, we believe we are currently in compliance, we have not complied with these obligations at certain times since the Credit Agreement was entered into and were obligated to obtain certain waivers and modifications of these provisions to avoid an acceleration event under the Credit Agreement. If we are not able to remain in compliance with these obligations, the creditor may accelerate the maturity of the loan or may require us to adhere to stricter financial covenants in exchange for a waiver. While we expect to comply with these financial covenants, we cannot guarantee our ability to do so. Although it has entered into Amendment No. 4 which extended the maturity date, the Company is exploring refinancing solutions for more advantageous terms for its long-term debt with new debtholders. If the Company is unable to refinance its debt or is unable to satisfy its obligations as they become due, the Company may be required to sell assets to repay all or part of the debt or replace the debt with less favorable terms.

 

Pursuant to the terms of the Credit Agreement, the Company is required to maintain the following financial covenants in order to avoid an event of default: (1) a Fixed Charge Coverage Ratio (“FCCR”) not less than 1.20:1.00, measured in each case on a trailing twelve month basis and (2) net revenue of the Company shall not be less than (x) until June 30, 2021 $9,000,000 and (y) from and after July 1, 2021, $10,000,000. on a trailing twelve-month basis. The Fixed Charge Coverage Ratio is defined as the ratio of (A) EBITDA for each fiscal month minus unfinanced capital expenditures (but not less than zero) for such fiscal month to (B) the sum of (i) all principal payments scheduled to be made during or with respect to such period, plus (ii) all interest expense for such period paid or required to be paid in cash during such period, plus (iii) all federal, state, and local income taxes paid or required to be paid for such period, plus (iv) all cash distributions, dividends, redemptions and other cash payments made or required to be made during such period with respect to equity issued by the Company. On August 10, 2020 GACP, as agent to the senior lenders, waived the Company’s default on June 30, 2020 of the financial covenant relating to the FCCR. GACP further acknowledged and agreed that the Company’s payment of 20% of the net proceeds of its public offering which closed on August 11, 2020 does not constitute a scheduled payment required to be included when calculating the Fixed Charge Coverage Ratio.

 

10

 

 

NOTE 4 – INTANGIBLE ASSETS

 

Intangible assets, net, consist of the following as of:

 

   September 30,
2020
   December 31,
2019
 
Merchant Portfolios  $2,340,000   $2,190,000 
Less Accumulated Amortization   (1,108,280)   (854,761)
Net residual portfolios  $1,231,720   $1,335,239 

 

   September 30,
2020
   December 31,
2019
 
Trade name  $2,500,000   $2,500,000 
Less Accumulated Amortization   (875,000)   (500,000)
Net trade name  $1,625,000   $2,000,000 

 

Amortization expense for the three months ended September 30, 2020 and 2019 was $222,090 and $203,214, respectively.

 

Amortization expense for the nine months ended September 30, 2020 and 2019 was $628,519 and $609,643, respectively.

 

The Company’s merchant portfolios and tradename are being amortized over respective useful lives of 7 and 5 years.

 

The following sets forth the estimated amortization expense related to amortizing intangible assets for the years ended December 31:

 

2020 (remainder of year)  $215,904 
2021   863,615 
2022   863,615 
2023   496,443 
2024   312,857 
Thereafter   104,286 
Total  $2,856,720 

 

The weighted average remaining useful life of amortizing intangible assets was 3.33 years at September 30, 2020.

  

NOTE 5 – NOTE PAYABLE

 

On April 8, 2018, eVance, Omnisoft, and CrowdPay, (collectively, the “Borrowers”), entered into a term loan of $12,500,000 with GACP (the “Term Loan”) to the which obligations are guaranteed by the Company (collectively with the Borrowers, the “Loan Parties”), under the Loan and Security Agreement (the “Credit Agreement”).

 

On April 24, 2020, the Company entered into Amendment No. 4 to Loan and Security Agreement amending the Credit Agreement. The purpose of Amendment No. 4 was to extend the Maturity Date of the indebtedness and to waive certain outstanding events of default. Specifically, the Maturity Date of the indebtedness was extended for one year to April 9, 2022. The lenders also waived the Company’s existing default under the Credit Agreement from the date the default occurred until the date of Amendment No. 4. These defaults were: (i) failure to notify the Agent that one or more of the Loan Parties received proceeds from litigation above $99,999.99 and use the proceeds to make a prepayment of the Loans, (ii) one or more of the Loan Parties incurred indebtedness in an aggregate amount of $386,467 during fiscal year 2019 as a result of not reimbursing business expenses paid by Mr. Yakov in the ordinary course, which indebtedness is not permitted under Section 5.23(f) of the Credit Agreement (“Debt Default”) and (iii) Lender had not received financial statements and covenant compliance certificate of the Company as parent guarantor and the Borrowers for the fiscal year ended December 31, 2019 within 90-days of such fiscal year end as required by Section 5.15(a) of the Credit Agreement. In addition, Amendment No. 4 provides the Company with a limited waiver permitting the Company to incur government funded indebtedness from the United States CARES Act loan programs. Further, the financial covenants were amended whereby Consolidated Net Revenue for any rolling 12-month period shall not be less than $9,000,000 until June 30, 2021 and $10,000,000 from and after July 1, 2021. Further, Amendment No. 4 requires that the Company pay 100% of the proceeds from any favorable judgments from ongoing litigation and 20% of the net proceeds from any future equity offering completed by the Company to reduce the principal of the Term Loan and such payment was made following the closing of the Offering.

 

The Term Loan matures in full on April 9, 2022, the third anniversary of the Closing. $1,000,000 of the principal amount under the Term Loan was repaid on to July 31, 2018, and an additional $2,000,000 in principal was paid on November 14, 2018. Additionally, the Company paid $125,000 of the Term Loan upon execution of Amendment No. 4 in April 2020 and the Company agreed to make a monthly payment of $25,000 per month, commencing May 1, 2020 and on the first business day of each calendar month thereafter, with the remaining principal due upon maturity. The Term Loan can be prepaid without penalty in part by the Loan Parties with ten days’ prior written notice to the Agent, and in full within thirty days’ prior written notice. The Term Loan is subject to an interest rate of 9.0% per annum, payable monthly in arrears.

 

11

 

 

The obligations of the Loan Parties under the Credit Agreement are secured by all of their respective assets and the Loan Parties pledged all of their assets as collateral for their obligations under the Credit Agreement. Additionally, the Company pledged its ownership interests in the Purchasers and any of its other subsidiaries that it may form or acquire from time to time.

 

The Credit Agreement includes customary representations, warranties and financial and other covenants of the Loan Parties for the benefit of the Lenders and the Agent. The obligations of the Loan Parties under the Credit Agreement are subject to customary events of default for a secured term loan. Each Loan Party is jointly and severally liable for the obligations under the Credit Agreement.

 

Although, following the execution of Amendment No. 4, we are in compliance, we have not complied with these obligations at certain times since the Credit Agreement was entered into, including at June 30, 2020, and were obligated to obtain certain waivers and modifications of these provisions to avoid an acceleration event under the Credit Agreement. If we are not able to remain in compliance with these obligations, the creditor may accelerate the maturity of the loan or may require us to adhere to stricter financial covenants in exchange for a waiver. While we expect to comply with these financial covenants, we cannot guarantee our ability to do so. Although it has entered into Amendment No. 4 which extended the maturity date, the Company is exploring refinancing solutions for more advantageous terms for its long-term debt either with new debtholders. If the Company is unable to refinance its debt or is unable to satisfy its obligations as they become due, the Company may be required to sell assets to repay all or part of the debt or replace the debt with less favorable terms Total interest expense for the three and nine months ended September 30, 2020 was $199,890 and $629,446, respectively, $60,974 of which is accrued as of September 30, 2020. Total interest expense for the GACP loan incurred during the three and nine months ended September 30, 2019 was $218,500 and $648,375, respectively. Accrued interest as of December 31, 2019 was $73,625.

 

See Note 12- Subsequent Events for additional information about the Credit Agreement.

 

On May 6, 2020, the Company received a Paycheck Protection Program loan under the CARES Act for $236,231 (the “PPP Loan”). The PPP Loan matures on May 7, 2022 and bears interest at 1% per annum. Monthly amortized principal and interest payments are deferred for 6 months after the date of the agreement. The Paycheck Protection Program provides that the use of PPP Loan proceeds were limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. The Company believes it has used the PPP Loan for permitted uses, although no assurance can be given that the Company will obtain forgiveness of all or any portion of amounts due under the PPP Loan. The loan has been accounted for as long-term debt, which, if forgiven will result in a gain on forgiveness of debt in the period forgiveness is obtained.

 

NOTE 6 – STOCK OPTIONS

 

On January 1, 2020, pursuant to the terms on the employment agreement with Mr. Yakov he was granted 6,667 common stock options. The grant shall vest at the rate of 1/3 beginning on each anniversary of the effective date of grant. The options have an exercise price of $0.001 and expire in three years after each vest date. The aggregate fair value of the options totaled $99,994 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $0.001, 1.63% risk free rate, 95.3% volatility and expected life of the options of 3 years. The fair value is being amortized over the applicable vesting period and credited to additional paid in capital.

 

A summary of the status of the Company’s outstanding stock options and changes during the nine months ended September 30, 2020 is presented below:

   

Stock Options  Shares   Weighted
Average
Exercise Price
   Aggregate Intrinsic
Value
 
Options outstanding at January 1, 2020   278,506   $0.0001    - 
Granted   6,667   $0.001    - 
Exercised   -   $-    - 
Forfeited   -   $-    - 
Options outstanding September 30, 2020   285,173   $0.0001   $1,069,399 
Shares exercisable at September 30, 2020   112,735   $0.0001   $422,755 

  

12

 

 

NOTE 7 – WARRANTS

 

On August 6, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., acting as representative of the underwriters (“Aegis”), pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 700,000 units (the “Units”), with each Unit consisting of: (a) one share of our common stock; (b) two Series A warrants (the “Series A Warrants”), with each Series A Warrant entitling the holder thereof to purchase one share of our common stock at an exercise price equal to $9.00 per share, exercisable until the fifth anniversary of the issuance date, subject to their earlier redemption as described therein; and (c) one-half of one Series B warrant (the “Series B Warrants,” and together with the Series A Warrants, the “Warrants”), with each whole Series B Warrant entitling the holder thereof to purchase one share of common stock at an exercise price equal to $4.50 per share, exercisable until the fifth anniversary of the issuance date and subject to their earlier redemption as described therein. The Company also granted the underwriters a 45-day option to purchase up to an additional 105,000 shares of common stock, and/or an additional 210,000 Class A Warrants to purchase shares of common stock and/or an additional 52,500 Class B Warrants to purchase shares of common stock as may be necessary to cover over-allotments in connection with the Offering. The Offering, including the exercise in full of the over-allotment option for the Warrants, closed on August 11, 2020.

 

 The Units and the securities underlying the Units were offered by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-232368), filed with the Securities and Exchange Commission (the “Commission”), which was declared effective by the Commission on August 6, 2020 (the “Registration Statement”).

 

The net proceeds to the Company from the Offering, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s Offering expenses, was approximately $5.6 million. The Company utilized $1,120,155 of the net proceeds to repay a portion of the Company’s long-term indebtedness (the “Term Loan”) and anticipates using the remainder of the net proceeds from the Offering to invest in or acquire companies or technologies that are synergistic with or complimentary to our business, expand and market our current products and for working capital and other general corporate purposes (including payment of outstanding accounts payable).

  

Warrants

 

The Warrants were issued in registered form under separate warrant agent agreements (each a “Warrant Agent Agreement”) between us and our warrant agent, Transfer Online, Inc. (the “Warrant Agent”).

 

Each Series A Warrant entitles the registered holder to purchase one share of our common stock at a price equal to $9.00 per share, subject to adjustment as discussed below, terminating at 5:00 p.m., New York City time, on the fifth (5th) anniversary of the date of issuance. No fractional warrants will be issued and only whole warrants are exercisable. The exercise price and number of shares of common stock issuable upon exercise of the Series A Warrants may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation. If we fail to maintain a current prospectus or prospectus relating to the common stock issuable upon the exercise of the Series A Warrants, such holders may exercise their Series A warrants on a “cashless” basis pursuant to a formula set forth in the terms of the Series A Warrants.

 

Each whole Series B Warrant entitles the holder thereof to purchase one share of our common stock at an exercise price of $4.50 per share, subject to adjustment as discussed below, terminating at 5:00 p.m., New York City time, on the fifth (5th) anniversary of the date of issuance. No fractional warrants will be issued and only whole warrants are exercisable. The exercise price and number of shares of common stock issuable upon exercise of a whole Series B Warrant may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation. If we fail to maintain a current prospectus or prospectus relating to the common stock issuable upon the exercise of the Series B Warrants, such holders may exercise their Series B warrants on a “cashless” basis pursuant to a formula set forth in the terms of the Series B Warrants.

 

Each holder of the Warrants will be subject to a requirement that they will not have the right to exercise the Warrants to the extent that, after giving effect to such exercise, such holder (together with its affiliates) would beneficially own in excess of 4.99% (subject to increase to 9.99%) of the shares of our common stock outstanding immediately after giving effect to such exercise.

 

The Warrants are callable in the event that the last sales price of our common stock for any twenty (20) consecutive trading day period on or after the date of issuance (the “Measurement Period”) exceeds $9.00. The Company may, within ten (10) trading days of the end of such Measurement Period, call for the redemption of all or any portion of the outstanding and unexercised Warrants for consideration equal to the Black Scholes Value (as defined therein) of the remaining unexercised portion of the Warrants called for redemption on such date.

 

13

 

 

Pursuant to the Underwriting Agreement, the Company issued to Aegis a warrant (the “Representative’s Warrants”) to purchase 35,000 shares of common stock. The Representative’s Warrants will be exercisable at a per share exercise price equal to $11.25 and is exercisable at any time and from time to time, in whole or in part, during the four-year period commencing twelve months from the effective date of the Registration Statement. The Representative’s Warrants also provide for one demand registration right of the shares underlying the Representative’s Warrants, and unlimited “piggyback” registration rights with respect to the registration of the shares of common stock underlying the Representative’s Warrants and customary anti-dilution provisions.

 

The aggregate fair value of the 35,000 warrants, totaled $363,958 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $11.25, 0.21% risk free rate, 315.6% volatility and expected life of the warrants of 6 years. The value of the warrants has been netted against the proceeds of the offering proceeds and accounted for in additional paid in capital.

 

   Number of Warrants   Weighted Average
Exercise Price
   Weighted Average Remaining Contract Term 
Outstanding, December 31, 2019   40,000   $7.50    0.52 
Warrant A Granted (1)   2,639,848   $9.00    9.00 
Expired   -   $-    - 
Warrant B Granted (2)   659,970   $4.50    4.50 
Warrant B Exercised   (21,150)  $4.50    - 
Underwriter Warrant   35,000   $11.25    11.25 
Underwriter Warrant Exercised   -    -    - 
    3,353,698    4.61    4.81 

 

(1)Includes 210,000 Warrant A granted to Underwriters upon exercise of overallotment in connection with the Offering
(2)Includes 52,5000 Warrant B granted to Underwriters upon exercise of overallotment in connection with the Offering

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

On July 30, 2018, pursuant to the terms of the Amendment, the Company issued to Mr. John Herzog, a significant stockholder of the Company a subordinated promissory note in the principal amount of $1,000,000 (the “Note”) for cash proceeds of $1,000,000. The Note initially matured on March 31, 2019 (though the Company had the right to prepay the Note, in whole or in part, at any time prior to maturity) and bears interest at a rate of 12% per annum, compounding annually. The Note is subordinated to the Credit Agreement. The Company used the proceeds received to make the initial payment under the Credit Agreement.

 

On November 14, 2018, the Company issued to John Herzog, a subordinated promissory note in the principal amount of $2,000,000 for cash proceeds of $2,000,000.

 

On March 1, 2019, the Company entered into Amendment No. 1 to Subordinated Promissory Note (the “Subordinated Note Amendment”) with Mr. Herzog. The purpose of the Subordinated Note Amendment was to amend that certain subordinated promissory note issued on July 26, 2018 in the principal amount of $1,000,000 to reflect an increase in the amount of principal due under the note from $1,000,000 to $3,000,000 reflecting a payment made by the payee to the Company of $2,000,000 on November 14, 2018 (the proceeds of which were used by the Company to make a second required payment under the Credit Agreement) and to extend the maturity date of the Note from March 31, 2019 to September 30, 2020. On June 25, 2019, the Company entered into Amendment No. 2 to the subordinated promissory note with Mr. Herzog. The purpose of the amendment was to amend the maturity date of such subordinated promissory note such that it will be extended until September 30, 2022.

 

Total interest expense on the two loans from Mr. Herzog for the three and nine months ended September 30, 2019 was $90,740 and $269,260, respectively.

 

Total interest expense on the loans from Mr. Herzog for the three and nine months ended September 30, 2020 was $33,321 and $212,827, respectively. Total accrued interest as of September 30, 2020 and December 31, 2019 was $0 and $402,849, respectively.

 

On May 13, 2020, Mr. Herzog agreed to convert, concurrently with the public offering of the Company’s securities, $3,522,191 in principal amount of indebtedness (plus any additional accrued interest and other fees thereon that accrues prior to the offering) into shares of convertible Series A Preferred Stock to be designated concurrently with the offering. On July 24, 2020, the terms of such conversion were amended such that Mr. Herzog agreed to convert such an aggregate of $3,582,355 of indebtedness and accrued interest into Series A Preferred Stock and warrants to purchase common stock at an exercise price determined by the public offering (“Conversion Warrants”), which Series A Preferred Stock and conversion warrants would be issued concurrently with the closing of the public offering. The Company has determined Mr. Herzog’s debt is being extinguished in order to protect his equity investment in the Company. Mr. Herzog is considered a principal owner with 10.3% of voting interests of the Company prior a conversion. The Company believes the equity investment in the Company is significant and indicates that Mr. Herzog entered into the exchange to protect his equity investment. In accordance with ASC 470-50-40-2, an extinguishment transaction between related entities may be capital transactions. If the extinguishment accounting is applied, any gain or loss that results should be reflected in equity. As a result, we believe the extinguishment did not and will not have any impact to the Company’s future financial statements.

 

14

 

 

As of September 30, 2020 and December 31, 2019, the Company has total accrued compensation due to Mr. Yakov of $0 and $568,027, respectively, and advances to be repaid to Mr. Yakov of $0 and $17,684, respectively.

 

Mr. Yakov, CEO has loaned funds to the Company for working capital purposes. As of September 30, 2020 and December 31, 2019 the balance on these loans is $0 and $386,467, respectively. The loans are unsecured, bear interest at 12% and are due on demand. As of September 30, 2020 and December 31, 2019 there is $0 and $22,279 of interest accrued, respectively, on these loans. Interest expense for the three months ended September 30, 2020 and 2019 was $0 and $4,375, respectively. Interest expense for the nine months ended September 30, 2020 and 2019 was $23,125 and $10,538, respectively.

 

On May 13, 2020, Mr. Yakov agreed to convert, concurrently with the public offering of the Company’s securities, $1,011,016 in principal amount of indebtedness and accrued interest, which includes deferred salary and unreimbursed expenses, most of which was outstanding for more than one year, (plus any additional accrued interest and other fees thereon that accrues prior to the offering), into shares of convertible Series A Preferred Stock to be designated concurrently with the offering. On July 24, 2020, the terms of such conversion were amended such that Mr. Yakov agreed to convert an aggregate of $1,017,573 of accrued salary, indebtedness and accrued interest into Series A Preferred Stock and Conversion Warrants, which Series A Preferred Stock and conversion warrants were issued concurrently with the closing of the offering.  In accordance with ASC 470-50-40-2, an extinguishment transaction between related entities may be a capital transaction. As the extinguishment accounting is applied, any gain or loss that results will be reflected in equity. As a result, the extinguishment did not have any impact to the Company’s future financial statements and further disclosures related to ASC 855-10-50-2 is not necessary.

 

On July 24, 2020, the terms of the agreement whereby Mr. Herzog agreed to convert, concurrently with the public offering of the Company’s securities, $3,522,191 in principal amount of indebtedness (plus any additional accrued interest and other fees thereon that accrues prior to the offering) into shares of convertible Series A Preferred were amended such that Mr. Herzog agreed to convert such an aggregate of $3,582,355 of indebtedness and accrued interest into Series A Preferred Stock and Conversion Warrants, which Series A Preferred Stock and Conversion Warrants would be issued concurrently with the closing of the public offering. On August 11, 2020, Mr. Herzog converted $3,612,940 of indebtedness into 3,612 shares of Series A Preferred Stock (the terms of which are described below) and 802,875 Series A Conversion Warrants with an exercise price of $9.00 and 200,719 Series B Conversion Warrants with an exercise price of $4.50.

 

On July 24, 2020, the terms of the agreement whereby Mr. Yakov agreed to convert, concurrently with the public offering of the Company’s securities, $1,017,753 in principal amount of indebtedness and accrued interest, which includes deferred salary and unreimbursed expenses (plus any additional accrued interest and other fees thereon that accrues prior to the offering), into shares of convertible Series A Preferred Stock to be designated concurrently with the offering such conversion were amended such that Mr. Yakov agreed to convert an aggregate of $1,017,573 of accrued salary, indebtedness and accrued interest into Series A Preferred Stock and conversion warrants, which Series A Preferred Stock and conversion warrants would be issued concurrently with the closing of the offering. On August 11, 2020, Mr. Yakov converted $1,021,512 of indebtedness into 1,021 shares of Series A Preferred Stock (the terms of which are described in Note 10 below) and 227,003 Series A Conversion Warrants with an exercise price of $9.00 and 56,751 Series B Conversion Warrants with an exercise price of $4.50.

 

NOTE 9 – OPERATING LEASE

 

On June 24, 2020, eVance, Inc. (“eVance”), a Delaware corporation and an indirect, wholly owned subsidiary of The OLB Group, Inc. (the “Company”), entered into a Lease Agreement dated June 24, 2020 (the “Lease”) with Pergament Lodi, LLC (the “Lessor”) relating to approximately 4,277 square feet of property located at 960 Northpoint Parkway, Alpharetta, Georgia, Suite 400. The term of the Lease is for thirty-nine (39) months commencing September 1, 2020. The monthly base rent is $8,019 for the first twelve (12) months increasing thereafter to $8,768. The total rent for the entire lease term is $315,044 and $8,768 is payable as a security deposit.  The first three months of rent will be abated so long as eVance is not in default of any portion of the Lease.

 

   Balance Sheet Classification  September 30,
2020
 
Asset       
Operating lease asset  Right of use asset  $290,863 
Total lease asset     $290,863 
         
Liability        
Operating lease liability – current portion  Current operating lease liability  $83,816 
Operating lease liability – noncurrent portion  Long-term operating lease liability   207,330 
Total lease liability     $291,146 

 

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Lease obligations at September 30, 2020 consisted of the following:

 

For the year ended December 31:    
2020  $24,058 
2021   97,202 
2022   100,139 
2023   94,393 
Total payments  $315,792 
Amount representing interest  $(24,646)
Lease obligation, net   291,146 
Less current portion   (83,816)
Lease obligation – long term  $207,330 

 

Rent expense for the three-and-nine months ended September 30, 2020 was $26,848 and $83,300, respectively. Rent expense for the three and nine months ended September 30, 2019 was $24,777 and $70,908, respectively.

 

At September 30, 2020, the weighted average remaining lease term is 3.17 years and the weighted average discount rate is 5%.

 

NOTE 10 – PREFERRED STOCK

 

Our certificate of incorporation authorizes the issuance of 50,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. No shares of preferred stock are currently issued or outstanding.

 

Series A Preferred Stock

 

On August 7, 2020, we filed a Certificate of Designations, Preferences and Rights of Series A Preferred Stock (the “Certificate of Designations”) with the Secretary of State of Delaware. The Certificate of Designations will provide that the Company may issue up to 10,000 shares of Series A Preferred Stock at a stated value (the “Stated Value”) of $1,000.00 per share. Holders of Series A Preferred Stock are entitled to the following rights and preferences:

 

Dividends

 

The Series A Preferred Stockholders are entitled to receive cash dividends at a rate per share (as a percentage of the Stated Value per share) of 12% per annum. Dividends accrue quarterly. Dividends are to be paid to the holders from funds legally available for payment and as approved for payment by the Board of Directors of the Company.

 

Conversion

 

The Series A Preferred Stock holders may convert, at their option, on or after the date on which the Term Loan is repaid in full, each share of Series A Preferred Stock (along with accrued but unpaid dividends thereon) into such number of shares of common stock as determined by dividing the Stated Value by the conversion price. The conversion price for the Series A Preferred Stock will be equal to the offering price per Unit in this offering and will be subject to adjustment for splits and the like. The holders of Series A Preferred Stock will only be permitted to convert their shares of Series A Preferred Stock into shares of common stock at such time as the Term Loan has been repaid in full and there is no further outstanding obligations regarding such indebtedness.

 

Voting

 

Each holder of a share of Series A Preferred Stock will have the right to vote its shares of Series A Preferred Stock with the common stock on an as-converted basis, and with respect to such votes, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of common stock, and shall be entitled, to notice of any stockholders’ meeting in accordance with the Company’s bylaws, and shall be entitled to vote, together with holders of common stock, with respect to any question upon which holders of common stock have the right to vote. Fractional votes shall not be permitted, and such shares shall be rounded up.

 

Liquidation Preference

 

Each share of Series A Preferred Stock will have a liquidation preference equal to the Stated Value plus any accrued but unpaid dividends thereon. In the event of a liquidation, dissolution or winding up of the Company (which includes any merger, reorganization, sale of assets in which control of the Company is transferred or event which results in all or substantially all of the Company’s assets being transferred), the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Company, before any payment is made to the holders of the Company’s common stock and either in preference to or pari pasu with the holders of any other series of preferred stock that may be issued in the future, a per share amount equal to the liquidation preference.

 

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NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.

 

On October 20, 2017, the Company entered into a new employment agreement with its founder and president for 7 years effective January 1, 2018 through December 31, 2024. The agreement provides for an annual salary of $375,000, fringe benefits ($2,500 monthly automobile allowance, any benefit plans of the Company and 4 weeks paid vacation), an incentive bonus of $200,000 based on the achievement of certain performance criteria and an acquisition bonus equal to two (2%) percent of the gross purchase price paid in connection therewith upon the closing of any acquisition directly or indirectly by the Company or its subsidiaries during the Employment Period of any company or business (including purchases of all or substantially all of the assets of any such entity) having then existing sales of not less than three million five hundred thousand dollars ($3,500,000). As of September 30, 2020, no bonuses have been earned or paid.

 

NOTE 12 – SUBSEQUENT EVENTS

 

Amendment No. 5 to Loan and Security Agreement

 

On October 23, 2020, the Company entered into Amendment No. 5 to Loan and Security Agreement (“Amendment No. 5”) amending the Loan and Security Agreement (as amended by Amendment No. 1 to Loan and Security Agreement dated July 30, 2018, Amendment No. 3 to Loan and Security Agreement dated February 5, 2019, Amendment No. 4 to Loan and Security Agreement dated April 24, 2020, the “Credit Agreement”), dated as of April 9, 2018, by and among the Company’s subsidiaries Securus365, Inc., eVance Capital, Inc., and eVance Inc., (the “Purchasers”) and GACP Finance Co., LLC, a Delaware limited liability company (“GACP”), as administrative agent and collateral agent (“Agent”), and as the initial sole lender thereunder. The purpose of Amendment No. 5 was to remove the financial covenant whereby the Company’s was required to have a Fixed Charge Coverage Ratio not be less than 1.20:1.00, measured in each case on a trailing twelve-month basis.

 

In consideration for the removal of the financial covenant requirement, the Credit Agreement was amended to include a requirement that the Company maintain a cash balance in its controlled operating bank account of not less than $1,000,000. Further, the repayment schedule under the note was amended whereby the Company paid an amount equal to $450,000 upon execution of Amendment No. 5.   

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, our actual results may differ significantly from management’s expectations. These risks and uncertainties include those factors described in greater detail in the risk factors disclosed in our Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those anticipated in these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or, in the case of documents referred to or incorporated by reference, the date of those documents.

 

The following discussion and analysis should be read in conjunction with our unaudited financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

Company Overview and Description of Business

 

We were incorporated in the State of Delaware on November 18, 2004 for the purpose of merging with OLB.com. The merger was done for the purpose of changing our state of incorporation from New York to Delaware. In April 2018, we completed an acquisition of substantially all of the net assets of Excel and its subsidiaries Payprotec Oregon, LLC, Excel Business Solutions, Inc. and eVance Processing, Inc. (such assets are the foundation of our eVance business). In May 2018, we entered into share exchange agreements with Crowdpay and Omnisoft, affiliate companies of our company’s majority stockholder, pursuant to which each of Crowdpay and Omnisoft became solely owned subsidiaries of our Company. Our Company’s headquarters is located at 200 Park Avenue, Suite 1700, New York, NY 10166. Our telephone number is (212) 278-0900.

 

We are a FinTech company and PayFac that focuses on a suite of products in the merchant services and payment facilitator verticals that seeks to provide integrated business solutions to merchants throughout the United States. We seek to accomplish this by providing merchants with a wide range of products and services through our various online platforms, including financial and transaction processing services. We also have products that provide support for crowdfunding and other capital raising initiatives. We supplement our online platforms with certain hardware solutions that are integrated with our online platforms. Our business functions primarily through three wholly-owned subsidiaries, eVance, OmniSoft, and CrowdPay, though substantially all of our revenue has been generated from our eVance business (we began generating revenue from our OmniSoft and CrowdPay businesses in the second half of 2019). We expect to build out our OmniSoft software business and to rely more on our PayFac model for revenue so that we are not dependent on our revenue from our eVance business but there is no guarantee that we will be able to do so.

 

With respect to our eVance business, our merchants are currently processing over $82,000,000 in gross transactions monthly and average approximately 1,400,000 transactions a month. These transactions come from a variety of sources including direct accounts and ISO channels. The accounts consist of businesses across the United States with no concentration of industries or merchants.

  

We have integrated all the applications for OmniSoft and the ShopFast Omnicommerce solution with the eVance mobile payment gateway, SecurePay.comTM. SecurePay.comTM, is currently used by approximately 3,000 merchants processing over 32,000 transactions and approximately $9,000,000 of monthly gross transactions (though our revenue from these transactions is limited). In July 2019, we launched a new merchant and ISO boarding system that will be able to onboard merchants instantly. This will provide the merchant with an automated approval and ISOs will have the ability to see all their merchants and their residuals as they load to the system.

 

On May 22, 2020, the Company purchased certain assets from POSaBIT Inc. (“POSaBIT”), including its contracts and arrangements with the Doublebeam merchant payment processing platform (the “POSaBIT Asset Acquisition”). The assets included, but were not limited to, software source codes, customer lists, customer contracts, hardware and website domains. The total purchase price was $270,000 (the “Purchase Price”) with $125,000 payable at closing; (b) $25,000 payable within 90 days of the closing and (c) $120,000 payable within 180 days of the closing. The Purchase Price may be reduced by an amount that is equal to the percentage of the decrease in average monthly revenue in the period from August 1, 2020 through October 31, 2020 compared with the period from March 1, 2020 through April 30, 2020. As of the date of this Report, the Company has not finalized the calculation to determine if a reduction of the Purchase Price will occur.

 

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Results of Operations

 

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) includes a discussion of the consolidated results from operations of The OLB Group, Inc. and its subsidiaries for the three and nine months ended September 30, 2020 and 2019.

   

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

 

For the three months ended September 30, 2020, we had total revenue of $2,308,037 compared to $2,477,432 of revenue for the three months ended September 30, 2019, a decrease of $327,166 or 13%. We earned $2,128,771 in transaction and processing fees, $22,018 in merchant equipment rental and sales and $157,248 in other revenue from monthly recurring subscriptions, during the three months ended September 30, 2020, compared to $2,455,937 in transaction and processing fees, $15,294 in merchant equipment rental and sales and $6,201 in other revenue from monthly recurring subscriptions, in the same period in the prior period.

 

Our transaction and processing fee revenue decreased $327,166 compared with the prior period, primarily due to initial impact of the COVID-19 pandemic and the reduction in transactions processed while businesses were closed and customers stayed home in 2020. While the volume of processing transactions by merchants in March was relatively in-line with the Company’s expectations that the number of transactions during March would be below the prior year because states in the United States began to implement stay-at-home orders, the number of transactions and resulting revenue was approximately 15% lower in March than in February and 30% lower in April than in March. In May, when some states began to reopen businesses and relax stay-at-home orders, the number of transactions increased whereby they were 5% higher than in April, and in June, transactions were 7% higher than May. July, August and September have shown month over month increases of 3%, 3% and 7% respectively.

  

For the three months ended September 30, 2020, we had processing and servicing costs of $1,486,257 compared to $1,700,048 of processing and servicing costs for the three months ended September 30, 2019. Processing and servicing costs decreased by $213,791 or 13% because of the decrease in the number of transactions processed during the period and the reasons discussed above relating to the COVID-19 pandemic.

 

Amortization expense for the three months ended September 30, 2020 was $222,090 compared to $203,214 for the three months ended September 30, 2019, an increase of $18,876 or 9%. We recorded amortization expense on our merchant portfolio and trademarks.

 

Salary and wage expense for the three months ended September 30, 2020 was $318,682 compared to $342,338 for the three months ended September 30, 2019, a decrease of $23,656 or 7%. Salary and wage expense decreased in the current period due to the reductions in our sales force, and other personnel made during 2019.

 

General and administrative expenses (“G&A”) for the three months ended September 30, 2020 was $706,430 compared to $316,962 for the three months ended September 30, 2019, an increase of $389,458 or 123%. In the current period we had increases of our legal expense of approximately $37,000 and our audit expense of approximately $69,000. We also recognized an additional $170,000 of stock-based compensation in the current period.

 

For the three months ended September 30, 2020, we incurred $233,211 of interest expense, compared to $316,389 for the three months ended September 30, 2019, a decrease of $83,178 or 74%. The decrease in interest expense is primarily due the conversion of all related party debt during the quarter.

 

Our net loss for the three months ended September 30, 2020 was $657,358 compared to $401,859 for the three months ended September 30, 2019. We had an increase in our net loss of $255,499 for the reasons discussed above.

 

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Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

 

For the nine months ended September 30, 2020, we had total revenue of $6,922,065 compared to $7,650,266 of revenue for the nine months ended September 30, 2019, a decrease of $1,281,415 or 17%. We earned $6,297,146 in transaction and processing fees, $60,828 in merchant equipment rental and sales and $564,091 in other revenue from monthly recurring subscriptions, during the nine months ended September 30, 2020, compared to $7,578,561 in transaction and processing fees, $53,118 in merchant equipment rental and sales and $18,587 in other revenue from monthly recurring subscriptions in the same period in the prior period.

 

Our transaction and processing fee revenue decreased $1,281,415 in the current period primarily due to merchant attrition and the initial impact of the COVID-19 pandemic and the reduction in transactions processed while businesses were closed and customers stayed home. While the volume of processing transactions by merchants in March was relatively in-line with the Company’s expectations that the number of transactions during March would be below the prior year because states in the United States began to implement stay-at-home orders, the number of transactions and resulting revenue was approximately 15% lower in March than in February and 30% lower in April than in March. In May, when some states began to reopen businesses and relax stay-at-home orders, the number of transactions increased whereby they were 5% higher than in April, and in June, transactions were 7% higher than May. July, August and September have shown month over month increases of 3%, 3% and 7% respectively.

 

For the nine months ended September 30, 2020, we had processing and servicing costs of $4,501,274 compared to $5,096,694 of processing and servicing costs for the nine months ended September 30, 2019. Processing and servicing costs decreased by $595,420 or 12% because of the decrease in the number of transactions processed during the period and the reasons discussed above relating to the COVID-19 pandemic.

 

Amortization expense for the nine months ended September 30, 2020 was $628,519 compared to $609,643 for the nine months ended September 30, 2019, an increase of $18,876 or 3%. We record amortization expense on our merchant portfolio and trademarks.

 

Salary and wage expense for the nine months ended September 30, 2020 was $1,036,068 compared to $1,143,733 for the nine months ended September 30, 2019, a decrease of $107,665 or 9%. Salary and wage expense decreased in the current period due to the reductions in our sales force, and other personnel made during 2019 and 2020 and not replaced in 2020.

 

G&A expense for the nine months ended September 30, 2020 was $1,602,685 compared to $1,153,504 for the nine months ended September 30, 2019, an increase of $449,181 or 39%. Some of our larger G&A expenses included rent, stock-based compensation, professional fees and computer and internet expense. In the current period we incurred additional professional fees related to the completions of our public offering and amendments to our senior and subordinated loans. Audit fees were increased by approximately $39,000 and legal and other professional fees increased by approximately $123,000. We also recognized an additional $187,000 of stock-based compensation in the current period.

 

For the nine months ended September 30, 2020, we incurred $865,397 of interest expense, compared to $929,143 for the nine months ended September 30, 2019, a decrease of $63,746 or 19%. The decrease in interest expense is primarily due the conversion of all related party debt during the quarter.

 

 Our net loss for the nine months ended September 30, 2020 was $1,709,974 compared to $1,281,642 for the nine months ended September 30, 2019. We had an increase in our net loss of $428,332 for the reasons discussed above.

 

Liquidity and Capital Resources

 

Trends and Uncertainties

 

The Company’s future  financial condition and results of operations may be adversely affected by the recent COVID-19 pandemic.

 

The New York and Atlanta areas, which include the location of the Company’s corporate headquarters and its operations business, have experienced and continue to experience a significant impact of the COVID-19 pandemic in the U.S. The Company is currently following the recommendations of local health authorities to minimize exposure risk for its employees and visitors. However, the scale and scope of the ongoing pandemic is unknown, and the duration of the business disruption and related financial impact cannot be reasonably estimated at this time. While the Company is currently implementing specific business continuity plans to reduce the potential impact of the ongoing COVID-19 pandemic during 2020 and believe that its business being principally operated using digital platforms, in the long-term, will suffer minimal negative impact, there is no guarantee that the Company’s continuity plan will be successful, that the Company’s merchants will meet the number of forecasted transactions due to a change in consumer activity around point of sale purchasing resulting from the temporary closure of businesses.

 

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The Company has already experienced certain disruptions to its business and disruptions for the Company’s customers and merchants that may materially affect the number of transactions processed by the Company. Similarly, the response to and duration of the COVID-19 pandemic could have a long-term impact on the Company’s customers and/or merchants during and after 2020 which could reduce their demand for Company products. The extent to which the COVID-19 pandemic or any other health epidemic may impact the Company’s results for 2020 and beyond will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the economic impact of the response to the COVID-19 pandemic. Accordingly, the COVID-19 pandemic could have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2020 and beyond.

 

Changes in Cash Flows

 

For the nine months ended September 30, 2020, $529,118 of cash was used by operating activities, which included our net loss, offset by $616,813 for amortization and depreciation expense, $223,788 for stock-based compensation and net changes in operating assets and liabilities of $340,255. For the nine months ended September 30, 2019, $188,957 in cash was used by operating activities, offset by $422,502 for amortization and depreciation expense, $132,525 for stock-based compensation, and net changes in operating assets and liabilities of $135,799.

 

For the nine months ended September 30, 2020 and 2019, we used $125,000 and $0, respectively, of cash used for investing activities. The $125,000 represents the purchase price in connection with the POSaBIT Asset Acquisition.

 

For the nine months ended September 30, 2020, we received net cash of $4,269,142 from financing activities. $1,370,155 was repaid on our loan to GACP. We received $236,231 from the Paycheck Protection Program loan under the CARES Act and a total of $4,942,881 from the sale of stock and warrants. During the nine months ended September 30, 2019, $132,789 in cash was provided by financing activities from related party loans.

 

Liquidity and Capital Resources

 

At September 30, 2020, the Company had cash of $4,122,640 and working capital of $3,412,449. For the three and nine months ended September 30, 2020, the Company’s net loss was $657,358 and $1,709,974, respectively.

 

In connection with the response to the COVID-19 pandemic in the United States, the Company has experienced disruptions to its business and has observed disruptions with its customers and merchants, which has resulted in a decline in transaction volume. While the volume of processing transactions by merchants in March was relatively in-line with the Company’s expectations that the number of transactions during March would be below the prior year because states in the United States began to implement stay-at-home orders, the number of transactions and resulting revenue was approximately 15% lower in March than in February and 30% lower in April than in March. In May, when some states began to reopen businesses and relax stay-at-home orders, the number of transactions increased whereby they were 5% higher than in April, and in June, transactions were 7% higher than May. July, August and September have shown month over month increases of 3%, 3% and 7%, respectively.

 

The Company’s revenue during the period of time decreased and then increased in the amount similar to the percentage of month-to-month transaction volume. Despite recent increases in volume, the Company estimates that the number of transactions will continue to stay at a depressed level or further decline from the prior year, along with revenues, until the response to the COVID-19 pandemic relaxes further stay-at-home restrictions and allows customers to make more point of purchase transactions for merchants, customers become more comfortable shopping in stores and/or more merchants provide for additional contactless and online purchase options. The anticipated amount of decline from prior year is unknown, but it will be impacted by when consumers return to the level of purchasing that occurred in the prior year and before the pandemic. However, additional closings and reopenings of businesses or if additional businesses cease to operate in the future will likely result in a month over month decline and then increase similar to what occurred in March through June 2020.

 

On August 11, 2020, the Company closed an offering of its securities (the “Offering”) for gross proceeds of $6.45 million. The Company sold 700,000 units consisting of (a) one share of our common stock; (b) two Series A Warrants, and (c) one-half of one Series B warrant. In addition, the underwriter fully exercised its option to purchase 210,000 Series A warrants and 52,500 Series B warrants. While 20% of the net proceeds of $5.5 million was used to repay a portion of our outstanding Term Loan, immediately following the Offering, the Company had cash of $5.6 million on hand. As such, the Company believes it will be able fund future liquidity and capital requirements through cash flows generated from its operating activities for a period of at least twelve months from the date its condensed consolidated financial statements are issued.

 

On August 11, 2020, Mr. Herzog converted $3,612,940 of indebtedness into 3,612 shares of Series A Preferred Stock (the terms of which are described below) and 802,875 Series A Conversion Warrants with an exercise price of $9.00 and 200,719 Series B Conversion Warrants with an exercise price of $4.50.

 

Also, on August 11, 2020, Mr. Yakov converted $1,021,512 of indebtedness into 1,021 shares of Series A Preferred Stock (the terms of which are described below) and 227,003 Series A Conversion Warrants with an exercise price of $9.00 and 56,751 Series B Conversion Warrants with an exercise price of $4.50.

 

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Following the reduction in the Term Loan and conversion of debt held by Messrs. Herzog and Yakov, the Company has $8.4 million of outstanding debt. 

 

In addition, the Company has received a Paycheck Protection Program loan under the CARES Act for approximately $236,000 (the “PPP Loan”). The Paycheck Protection Program provides that the use of PPP Loan proceeds were limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. The Company believes it has used the PPP Loan for permitted uses whereby it will be forgiven in full, although no assurance can be given that the Company will obtain forgiveness of all or any portion of amounts due under the PPP Loan.

 

The Company reviewed its cash flow for 2020, projected cash flow from operations for 2021 and an overall analysis of market trends to determine whether or not it has sufficient liquidity to continue as a going concern for a period of at least twelve months from the date of this Quarterly Report. As a result of the improved transaction volume trends the Company experienced in the three months ended September 30, 2020, as well as the above discussed capital raises, the Company believes it has sufficient liquidity in order to sustain operations for a period of at least twelve months.

 

Additional Information Regarding Our Credit Agreement

 

On August 10, 2020 GACP, as agent to the senior lenders, waived the Company’s default on June 30, 2020 of the financial covenant relating to the FCCR. GACP further acknowledged and agreed that the Company’s payment of 20% of the net proceeds of its public offering which closed on August 11, 2020 does not constitute a scheduled payment required to be included when calculating the Fixed Charge Coverage Ratio.

 

On October 23, 2020, the Company entered into Amendment No. 5 to Loan and Security Agreement (“Amendment No. 5”) amending the Loan and Security Agreement (as amended by Amendment No. 1 to Loan and Security Agreement dated July 30, 2018, Amendment No. 3 to Loan and Security Agreement dated February 5, 2019, Amendment No. 4 to Loan and Security Agreement dated April 24, 2020, the “Credit Agreement”), dated as of April 9, 2018, by and among the Company’s subsidiaries Securus365, Inc., eVance Capital, Inc., and eVance Inc., (the “Purchasers”) and GACP Finance Co., LLC, a Delaware limited liability company (“GACP”), as administrative agent and collateral agent (“Agent”), and as the initial sole lender thereunder. The purpose of Amendment No. 5 was to remove the financial covenant whereby the Company’s was required to have a Fixed Charge Coverage Ratio not be less than 1.20:1.00, measured in each case on a trailing twelve-month basis.

 

In consideration for the removal of the financial covenant requirement, the Credit Agreement was amended to include a requirement that the Company maintain a cash balance in its controlled operating bank account of not less than $1,000,000. Further, the repayment schedule under the note was amended whereby the Company paid an amount equal to $450,000 upon execution of Amendment No. 5.

 

Although, we believe we are currently in compliance, we have not complied with these obligations at certain times since the Credit Agreement was entered into and were obligated to obtain certain waivers and modifications of these provisions to avoid an acceleration event under the Credit Agreement. If we are not able to remain in compliance with these obligations, the creditor may accelerate the maturity of the loan or may require us to adhere to stricter financial covenants in exchange for a waiver. While we expect to comply with these financial covenants, we cannot guarantee our ability to do so. the Because the maturity date is April 9, 2022, the Company is exploring refinancing solutions for more advantageous terms for its long-term debt. If the Company is unable to refinance its debt or is unable to satisfy its obligations as they become due, the Company may be required to sell assets to repay all or part of the debt or replace the debt with less favorable terms.

 

Pursuant to the terms of the Credit Agreement and following Amendment No. 5, the Company is required to maintain the following financial covenants in order to avoid an event of default, ) net revenue of the Company shall not be less than (x) until June 30, 2021 $9,000,000 and (y) from and after July 1, 2021, $10,000,000. on a trailing twelve-month basis. The Fixed Charge Coverage Ratio is defined as the ratio of (A) EBITDA for each fiscal month minus unfinanced capital expenditures (but not less than zero) for such fiscal month to (B) the sum of (i) all principal payments scheduled to be made during or with respect to such period, plus (ii) all interest expense for such period paid or required to be paid in cash during such period, plus (iii) all federal, state, and local income taxes paid or required to be paid for such period, plus (iv) all cash distributions, dividends, redemptions and other cash payments made or required to be made during such period with respect to equity issued by the Company.

 

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Other Indebtedness

 

On July 24, 2020, the terms of the agreement whereby Mr. Herzog agreed to convert, concurrently with the public offering of the Company’s securities, $3,522,191 in principal amount of indebtedness (plus any additional accrued interest and other fees thereon that accrues prior to the offering) into shares of convertible Series A Preferred were amended such that Mr. Herzog agreed to convert such an aggregate of $3,582,355 of indebtedness and accrued interest into Series A Preferred Stock and Conversion Warrants, which Series A Preferred Stock and Conversion Warrants would be issued concurrently with the closing of the public offering. On August 11, 2020, Mr. Herzog converted $3,612,940 of indebtedness into 3,612 shares of Series A Preferred Stock (the terms of which are described below) and 802,875 Series A Conversion Warrants with an exercise price of $9.00 and 200,719 Series B Conversion Warrants with an exercise price of $4.50.

 

On July 24, 2020, the terms of the agreement whereby Mr. Yakov agreed to convert, concurrently with the public offering of the Company’s securities, $1,011,016 in principal amount of indebtedness and accrued interest, which includes deferred salary and unreimbursed expenses (plus any additional accrued interest and other fees thereon that accrues prior to the offering), into shares of convertible Series A Preferred Stock to be designated concurrently with the offering such conversion were amended such that Mr. Yakov agreed to convert an aggregate of $1,017,573 of accrued salary, indebtedness and accrued interest into Series A Preferred Stock and conversion warrants, which Series A Preferred Stock and conversion warrants would be issued concurrently with the closing of the offering. On August 11, 2020, Mr. Yakov converted $1,021,512 of indebtedness into 1,021 shares of Series A Preferred Stock (the terms of which are described below) and 227,003 Series A Conversion Warrants with an exercise price of $9.00 and 56,751 Series B Conversion Warrants with an exercise price of $4.50.

 

Critical Accounting Policies

 

Refer to our Form 10-K for the year ended December 31, 2019, for a full discussion of our critical accounting policies.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Report Disclosure Controls and Procedures

  

During the quarter ended September 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were ineffective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. 

 

To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. In addition, we engaged accounting consultants to assist in the preparation of our financial statements. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. 

 

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Management’s Report on Internal Control over Financial Reporting

 

Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The management is responsible for establishing and maintaining adequate internal control over our financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the Internal Control – Integrated Framework (2013) developed by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our Chief Executive Officer and Interim Financial Officer have concluded that our internal control over financial reporting was not effective as of September 30, 2020.

 

  

We are aware of the following material weaknesses in internal control that could adversely affect the Company’s ability to record, process, summarize and report financial data:

 

  Due to our size and limited resources, we currently do not employ the appropriate accounting personnel to ensure (a) we maintain proper segregation of duties, (b) that all transactions are entered timely and accurately, and (c) we properly account for complex or unusual transactions

 

  Due to our size and scope of operations, we currently do not have an independent audit committee in place

 

  Due to our size and limited resources, we have not properly documented a complete assessment of the effectiveness of the design and operation of our internal control over financial reporting.

 

Inherent limitations on effectiveness of controls

 

Internal control over financial reporting has inherent limitations, which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors. Internal control over financial reporting is a process, which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2020, that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

  

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no claims, actions, suits, proceedings, or investigations that are currently pending or, to the Company’s knowledge, threatened by or against the Company or respecting its operations or assets, or by or against any of the Company’s officers, directors, or affiliates.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit
Number
  Exhibit Description
     
31.1   Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
     
31.2   Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
     
32   Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
     
101   Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in Extensible Business Reporting Language (XBRL).

 

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SIGNATURES

 

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

 

Date: November 12, 2020  By: /s/ Ronny Yakov
  Name:  Ronny Yakov
  Title: Chief Executive Officer
(Principal Executive Officer)
     
Date: November 12, 2020 By: /s/ Rachel Boulds
  Name: Rachel Boulds
  Title: Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

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