UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(MARK ONE)

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

 

For the quarterly period ended June 30, 2022

 

OR

 

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

 

For the transition period from                               to                            

 

Commission file number: 001-34294

 

GREENBOX POS

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

 

Nevada

22-3962936

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

 

3131 Camino Del Rio North, Suite 1400

San Diego, CA 

92108

(Address of principal executive offices)

(Zip Code)

 

(619) 631-8261

(Registrant’s telephone number, including area code)

 

                                                                                            

(Former name or former address, 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, $0.001 par value

GBOX

The Nasdaq Stock Market LLC (Nasdaq Capital Market)

 

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

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

Number of shares outstanding of the issuer’s classes of common equity, as of August 11, 2022 was 44,842,023 Shares of Common Stock (One Class)

 

 

 

 

TABLE OF CONTENTS

 

   

Page

PART I   Consolidated Financial Information

 
     

Item 1.

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021

7

 

Notes to Condensed Consolidated Financial Statements

8

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 4.

Controls and Procedures

31

     

PART II  Other Information

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

Signatures

34

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

GREENBOX POS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

June 30,

   

December 31,

 
   

2022

   

2021

 

ASSETS

               
                 

Current Assets:

               

Cash and cash equivalents

  $ 29,098,753     $ 89,559,695  

Restricted cash

    26,526,234       -  

Accounts receivable, net of allowance for bad debt of $54,795 and $54,795, respectively

    619,920       481,668  

Inventory, net of inventory reserve of $3,127 and $3,127, respectively

    259,924       286,360  

Cash due from gateways, net of allowance of $3,904,952 and $3,904,952, respectively

    14,270,698       18,941,761  

Prepaid and other current assets

    14,104,587       6,420,696  

Total current assets

    84,880,116       115,690,180  
                 

Non-current Assets:

               

Property and equipment, net

    1,714,914       1,674,884  

Other assets

    186,038       190,636  

Goodwill

    26,625,946       6,048,034  

Intangible Assets, net

    24,505,648       7,578,935  

Operating lease right-of-use assets, net

    1,868,633       1,490,159  

Total non-current assets

    54,901,179       16,982,648  
                 

Total assets

  $ 139,781,295     $ 132,672,828  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current Liabilities:

               

Accounts payable

  $ 1,347,629     $ 871,037  

Other current liabilities

    1,869,049       501,167  

Accrued interest

    1,717,398       1,226,287  

Payment processing liabilities, net

    33,467,867       4,997,807  

Derivative liability

    61,006       18,735,000  

Current portion of operating lease liabilities

    728,076       495,134  
                 

Total current liabilities

    39,191,025       26,826,432  

Long-term debt

    649,900       649,900  

Convertible debt, net of debt discount of $30,241,836 and $41,344,822, respectively

    58,758,165       58,655,178  

Operating lease liabilities, less current portion

    1,232,868       1,035,895  
                 

Total liabilities

    99,831,958       87,167,405  
                 

Commitments and contingencies

   
 
     
 
 
                 

Stockholders' Equity:

               

Common stock, par value $0.001, 82,500,000 shares authorized, shares issued and
      outstanding of 44,600,527 and 43,546,647, respectively

    43,884       42,831  

Common stock issuable, par value $0.001, 754,423 and 0 shares issuable, respectively

    754       -  

Additional paid-in capital

    89,386,501       88,574,469  

Accumulated other comprehensive income (loss)

    (397,839 )     -  

Accumulated deficit

    (49,083,963 )     (38,178,061 )

Less: Treasury stock, at cost; 0 and 714,831, respectively

    -       (4,933,816 )

Total stockholders' equity

    39,949,337       45,505,423  
                 

Total liabilities and stockholder's equity

  $ 139,781,295     $ 132,672,828  

 

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

 

3

 

GREENBOX POS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED) 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net revenue

  $ 6,965,578     $ 6,379,179     $ 11,861,104     $ 11,128,620  

Cost of revenue

    4,142,878       1,323,480       6,706,708       2,917,251  
                                 

Gross profit

    2,822,700       5,055,699       5,154,396       8,211,369  
                                 

Operating expenses:

                               

Advertising and marketing

    526,852       22,605       667,818       47,330  

Research and development

    1,919,944       808,210       3,858,077       1,461,591  

General and administrative

    1,353,604       298,030       3,145,788       864,225  

Payroll and payroll taxes

    2,712,424       1,061,929       5,095,821       1,621,130  

Professional fees

    1,167,798       867,472       2,672,359       1,325,224  

Stock compensation for employees

    -       1,291,887       166,800       2,089,500  

Stock grant expense

    1,715,298       -       1,715,298       -  

Stock compensation for services

    79,238       726,933       205,652       10,180,758  

Depreciation and amortization

    2,126,607       14,244       2,580,948       20,253  

Total operating expenses

    11,601,765       5,091,310       20,108,561       17,610,011  
                                 

Income (Loss) from operations

    (8,779,065 )     (35,611 )     (14,954,165 )     (9,398,642 )
                                 

Other income (expense):

                               

Interest expense

    (1,866,016 )     -       (3,755,501 )     (594,258 )

Interest expense - debt discount

    (5,582,164 )     -       (11,102,986 )     (2,993,408 )

Changes in fair value of derivative liability

    26,373,994       -       18,673,994       -  

Merchant liability settlement

    -       -       -       (364,124 )

Other income or expense

    185,893       (3,949 )     235,209       (18,560 )

Total other income (expense), net

    19,111,707       (3,949 )     4,050,716       (3,970,350 )
                                 

Income (loss) before provision for income taxes

    10,332,642       (39,560 )     (10,903,449 )     (13,368,992 )
                                 

Income tax provision

    (77,443 )     -       2,453       -  
                                 

Net income (loss)

  $ 10,410,085     $ (39,560 )   $ (10,905,902 )   $ (13,368,992 )
                                 

Comprehensive income statement:

                               

Net income (loss)

  $ 10,410,085     $ (39,560 )   $ (10,905,902 )   $ (13,368,992 )

Foreign currency translation loss

    (397,839 )     -       (397,839 )     -  

Total comprehensive income (loss)

  $ 10,012,246     $ (39,560 )   $ (11,303,741 )   $ (13,368,992 )
                                 

Net loss per share:

                               

Basic and diluted

  $ 0.24     $ (0.00 )   $ (0.26 )   $ (0.43 )
                                 

Weighted average number of common shares outstanding:

                               

Basic and diluted

    42,977,461       31,078,605       42,541,262       31,208,102  

 

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

 

4

 

GREENBOX POS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

   

Common Stock

   

Treasury Stock

   

 Additional Paid-In

   

Other Accumulated

Comprehensive

   

Accumulated

   

Total Stockholders' Equity

 
   

 Shares

   

Amount

   

Issuable

   

Amount

   

 Shares

   

At Cost

   

 Capital

   

Loss

   

Deficit

   

(Deficit)

 
                                                                                 

Balance at March 31, 2022

    43,289,572     $ 42,574       542,238     $ 541       (1,398,586 )   $ (8,170,539 )   $ 90,982,614     $ -     $ (59,494,048 )   $ 23,361,142  
                                                                                 

Common stock issued for services

    24,184       24       (8,905 )     (8 )     -       -       79,222       -       -       79,238  
                                                                                 

Common stock issued to employees as stock compensation

    272,257       272       221,090       221       -       -       1,496,218       -       -       1,496,711  
                                                                                 

Common stock issued from issuable - Acquisition of Sky assets

    500,000       500       (500,000 )     (500 )     -       -       -       -       -       -  
                                                                                 

Common stock shares contributed by shareholder

    (500,000 )     (500 )     500,000       500       -       -       -       -       -       -  
                                                                                 

Common stock issued for conversion of convertible debt

    2,413,100       2,413       -       -       -       -       4,997,587       -       -       5,000,000  
                                                                                 

Treasury shared cancelled

    (1,398,586 )     (1,399 )     -       -       1,398,586       8,170,539       (8,169,140 )     -       -       -  
                                                                                 

Other comprehensive loss

    -       -       -       -       -       -       -       (397,839 )     -       (397,839 )
                                                                                 

Net loss

    -       -       -       -       -       -       -       -       10,410,085       10,410,085  
                                                                                 

Balance at June 30, 2022

    44,600,527     $ 43,884       754,423     $ 754       -     $ -     $ 89,386,501     $ (397,839 )   $ (49,083,963 )   $ 39,949,337  

 

   

Common Stock

   

Treasury Stock

   

 Additional Paid-In

   

Other Accumulated

Comprehensive

   

Accumulated

   

Total Stockholders' Equity

 
   

 Shares

   

Amount

   

Issuable

   

Amount

   

 Shares

   

At Cost

   

 Capital

   

Loss

   

Deficit

   

(Deficit)

 
                                                                                 

Balance at December 31, 2021

    43,546,647     $ 42,831       -     $ -       (714,831 )   $ (4,933,816 )     88,574,469     $ -     $ (38,178,061 )   $ 45,505,423  
                                                                                 

Common stock issued for services

    54,692       55       -       -       -       -       205,597       -       -       205,652  
                                                                                 

Common stock issued to shareholder

    33,333       33       -       -       -       -       (33 )     -       -       -  
                                                                                 

Common stock issued to employees as stock compensation

    272,257       272       221,090       221       -       -       1,496,218       -       -       1,496,711  
                                                                                 

Common stock issued for stock options exercised

    12,417       12       -       -       -       -       5,203       -       -       5,215  
                                                                                 

Common stock contributed and cancelled from shareholder

    (333,333 )     (333 )     -       -       -       -       333       -       -       -  
                                                                                 

Common stock issuable - Acquisition of Sky assets

    500,000       500       -       -       -       -       2,109,500       -       -       2,110,000  
                                                                                 

Common stock shares contributed by shareholder

    (500,000 )     (500 )     -       -       -       -       500       -       -       -  
                                                                                 

Common stock shares issuable to shareholder

    -       -       533,333       533       -       -       (533 )     -       -       -  
                                                                                 

Common stock issued for conversion of convertible debt

    2,413,100       2,413       -       -       -       -       4,997,587       -       -       5,000,000  
                                                                                 

Treasury Stock

    (1,398,586 )     (1,399 )     -       -       714,831       4,933,816       (8,169,140 )     -       -       (3,236,723 )
                                                                                 

Stock compensation expense

    -       -       -       -       -       -       166,800       -       -       166,800  
                                                                                 

Other comprehensive loss

    -       -       -       -       -       -       -       (397,839 )     -       (397,839 )
                                                                                 

Net loss

    -       -       -       -       -       -       -       -       (10,905,902 )     (10,905,902 )
                                                                                 

Balance at June 30, 2022

    44,600,527     $ 43,884       754,423     $ 754       -     $ -       89,386,501     $ (397,839 )   $ (49,083,963 )   $ 39,949,337  

 

5

 

GREENBOX POS

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

   

Common Stock

   

Treasury Stock

   

Additional Paid-In

   

Accumulated

   

Total Stockholders' Equity

 
   

 Shares

   

Amount

   

To be Issued

   

Amount

   

 Shares

   

At Cost

   

Capital

   

Deficit

   

(Deficit)

 
                                                                         

Balance at March 31, 2021

    40,917,331     $ 40,918       -     $ -       -     $ -     $ 71,898,401     $ (25,053,981 )   $ 46,885,338  
                                                                         

Issuance of stock

    1,171,849       1,172       -       -       -       -       (1,172 )     -       -  
                                                                         

Common stock issued for services

    206,259       206       -       -       -       -       726,933       -       727,139  
                                                                         

Common stock issued for non-cash stock option

    30,780       31       -       -       -       -       (31 )     -       -  
                                                                         

Treasury stock

    (90,000 )     -       -       -       -       (933,343 )     -       -       (933,343 )
                                                                         

Stock compensation

    -       -       -       -       -       -       1,291,887       -       1,291,887  
                                                                         

Net loss

    -       -       -       -       -       -       -       (39,560 )     (39,560 )
                                                                         

Balance at June 30, 2021

    42,236,219     $ 42,327       -     $ -       -     $ (933,343 )   $ 73,916,018     $ (25,093,541 )   $ 47,931,461  

 

   

Common Stock

   

Treasury Stock

   

Additional Paid-In

   

Accumulated

   

Total Stockholders' Equity

 
   

 Shares

   

Amount

   

To be Issued

   

Amount

   

 Shares

   

At Cost

   

Capital

   

Deficit

   

(Deficit)

 
                                                                         

Balance at December 31, 2020

    30,710,645     $ 30,711       -     $ -       -     $ -     $ 12,079,074     $ (11,724,549 )   $ 385,236  
                                                                         

Common stock issued for exercise of warrant

    1,777,778       1,778       -       -       -       -       3,518,222       -       3,520,000  
                                                                         

Common stock issued for conversion of convertible debt

    1,944,444       1,944       -       -       -       -       3,848,056       -       3,850,000  
                                                                         

Common shares issued for restricted shares to executive

    83,333       83       -       -       -       -       (83 )     -       -  
                                                                         

Common stock issued for services

    990,118       990       -       -       -       -       10,179,974       -       10,180,964  
                                                                         

Common stock issued for interest for convertible debt

    96,664       97       -       -       -       -       594,258       -       594,355  
                                                                         

Common stock issued for non-cash stock option exercise

    70,112       70       -       -       -       -       (70 )     -       -  
                                                                         

Common stock issued for stock options exercised

    5,500       6       -       -       -       -       2,244       -       2,250  
                                                                         

Issuances of common stock, net of issuance costs of $4,305,758

    4,772,500       4,773       -       -       -       -       45,800,718       -       45,805,491  
                                                                         

Issuance of common stock

    1,171,849       1,172       -       -       -       -       (1,172 )     -       -  
                                                                         

Payment for previous common stock repurchased under treasury method

    -       -       -       -       -       -       (4,194,000 )     -       (4,194,000 )
                                                                         

Issuances of common stock from previous unregistered shares

    703,276       703       -       -       -       -       (703 )     -       -  
                                                                         

Stock compensation expense

    -       -       -       -       -       -       2,089,500       -       2,089,500  
                                                                         

Purchases of treasury stock

    (90,000 )     -       -       -       -       (933,343 )     -       -       (933,343 )
                                                                         

Net loss

    -       -       -       -       -       -       -       (13,368,992 )     (13,368,992 )
                                                                         

Balance at June 30, 2021

    42,236,219     $ 42,327       -     $ -       -     $ (933,343 )   $ 73,916,018     $ (25,093,541 )   $ 47,931,461  

 

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

 

6

GREENBOX POS

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

   

Six Months Ended June 30,

 
   

2022

   

2021

 
                 

Cash flows from operating activities:

               

Net loss

  $ (10,905,902 )   $ (13,368,992 )
                 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    2,580,948       20,253  

Noncash lease expense

    79,034       (1,720 )

Stock compensation expense

    166,800       2,089,500  

Common stocks issued for professional fees

    205,652       10,180,758  

Stock compensation issued for interest

    -       594,258  

Common stock issued to employees as stock compensation

    1,715,298       -  

Interest expense - debt discount

    11,102,986       2,993,408  

Changes in fair value of derivative liability

    (18,673,994 )     -  

Changes in assets and liabilities:

               

Guarantee deposits

    48,077       -  

Other receivable, net

    (138,252 )     (65,444 )

Inventory

    26,436       -  

Prepaid and other current assets

    (1,011,321 )     (1,958,422 )

Cash due from gateways, net

    4,671,063       (8,455,120 )

Other assets

    35,348       (99,000 )

Deferred tax asset

    -       239,131  

Accounts payable

    (2,186,733 )     67,853  

Other current liabilities

    732,221       -  

Accrued interest

    491,111       -  

Payment processing liabilities, net

    14,156,166       (5,904,437 )

Net cash provided by (used in) operating activities

    3,094,938       (13,667,974 )
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (86,952 )     (68,411 )

Purchase of intangibles

    (661,536 )     (2,500,000 )

Cash provided for Transact Europe Acquisition

    (28,810,600 )     -  

Cash provided for Sky asset acquisition

    (16,000,000 )     -  

Net cash used in investing activities

    (45,559,088 )     (2,568,411 )
                 

Cash flows from financing activities:

               

Treasury stock repurchase

    (3,236,723 )     (933,343 )

Proceeds from stock option exercises

    5,215       2,250  

Repayments on convertible debt

    (6,000,000 )     -  

Proceeds from exercise of warrant

    -       3,520,000  

Repurchase of common stock from stockholder

    -       (4,194,000 )

Proceeds from issuance of common stock

    -       45,805,491  

Net cash provided by (used in) financing activities

    (9,231,508 )     44,200,398  
                 

Restricted cash acquired from Transact Europe

    18,676,860       -  
                 

Net increase (decrease) in cash, cash equivalents, and restricted cash

    (33,018,798 )     27,964,013  
                 

Foreign currency translation adjustment

    (915,910 )     -  
                 

Cash, cash equivalents, and restricted cash – beginning of period

    89,559,695       1,832,735  
                 

Cash, cash equivalents, and restricted cash  end of period

  $ 55,624,987     $ 29,796,748  
                 

Supplemental disclosures of cash flow information

               

Cash paid during the period for:

               

Interest

  $ 3,127,111     $ -  

Income taxes

  $ -     $ 800  
                 
                 

Non-cash financing and investing activities:

               

Convertible debt conversion to common stock

  $ 5,000,000     $ 3,850,000  

Interest accrual from convertible debt converted to common stock

  $ -     $ 58,050  

 

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

 

7

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Organization

 

GreenBox POS is a financial technology company that develops, markets, and sells innovative blockchain-based payment solutions, which we believe offer significant improvements for the payment solutions marketplace. The Company’s core focus is to develop and monetize disruptive blockchain-based applications, integrated within an end-to-end suite of financial products, capable of supporting a multitude of industries. The Company’s proprietary, blockchain-based systems are designed to facilitate, record and store a virtually limitless volume of tokenized assets, representing cash or data, on a secured, immutable blockchain-based ledger.

 

The Company was formerly known as ASAP Expo, Inc ("ASAP”), and was incorporated in the state of Nevada on April 10, 2007. On January 4, 2020, PubCo and GreenBox POS LLC, a Washington limited liability company ("PrivCo”), entered into an Asset Purchase Agreement (the "Agreement”), to memorialize a verbal agreement (the "Verbal Agreement”) entered into on April 12, 2018, by and among PubCo (the Buyer) and PrivCo (the Seller). On April 12, 2018, pursuant to the Verbal Agreement, PubCo acquired PrivCo’s blockchain gateway and payment system business, point of sale system business, delivery business and kiosk business, bank and merchant accounts, as well as all intellectual property related thereto (the "GreenBox Business”). As consideration for the GreenBox Business, on April 12, 2018, PubCo assumed PrivCo’s liabilities that had been incurred in the normal course of the GreenBox Business.

 

On May 3, 2018, PubCo formally changed its name to GreenBox POS LLC, then subsequently changed its name to GreenBox POS on December 13, 2018.

 

On May 21, 2021, the Company acquired all of the outstanding stock of Northeast Merchant Systems, Inc. ("Northeast”) in a transaction treated as a business combination. Northeast is a merchant services company providing merchant credit card processing through their own Bank Identification Number (BIN) with the acquiring bank Merrick. This involves inside operations for new merchants that include sales assistance and applications processing, underwriting, and onboarding; inside operations for existing merchants include risk monitoring and customer service. Outside operations include: equipment service or replacement; sales calls and applications, site inspections and identity verification; security verification; and on-site customer service and technical support.

 

On July 13, 2021 (the "Closing Date”), GreenBox POS entered into and closed on a Membership Interest Purchase Agreement (the "Purchase Agreement”) with Charge Savvy LLC, an Illinois limited liability company ("Charge Savvy”), and Charge Savvy’s three members (collectively, the "Sellers”). One of the Sellers, Ken Haller, was an employee of the Company on the Closing Date. As a result of the Purchase Agreement, the Company purchased all of Charge Savvy’s issued and outstanding membership interests from the Sellers and Charge Savvy became a wholly owned subsidiary of the Company. Although the Purchase Agreement is dated July 9th, it was entered into and closed on July 13th.The purchase price under the Purchase Agreement for the all- stock transaction consisted of 1,000,000 shares of the Company’s common stock, par value $0.001 per share (the "Common Stock”) being issued and delivered to Sellers in proportion to the Sellers’ share of their membership interests in Charge Savvy. The share price at issuance was $12.14. Charge Savvy is a global Fintech company that specializes on developing software and providing payment processing and point of sale services to the merchant services industry. Charge Savvy also owns an approximately 64,000 square foot office building located in Chicago, Illinois where it is headquartered.

 

On March 31, 2022, the Company completed the acquisition of Transact Europe Holdings OOD. Transact Europe EAD (TEU) is an EU regulated electronic money institution headquartered in Sofia Bulgaria. TEU is a Principal Level Member of Visa, a Worldwide Member of MasterCard, and a Principal Member of China UnionPay. In addition, TEU is part of the direct SEPA program. With a global footprint, proprietary payment gateway and technology platforms, TEU offers a comprehensive portfolio of services, and decades of industry experience. TEU provides complete payment solutions by offering acquiring, issuing of prepaid cards and agent banking, serving hundreds of clients. The Company paid approximately $28.8 million (€26.0 million) in total consideration for the purchase.

 

Basis of Presentation and Consolidation

 

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. The consolidated financial statements include the accounts of Greenbox POS, Northeast Merchant Systems, Inc., Charge Savvy LLC, and Transact Europe Holdings. All intercompany accounts, transactions, and profits have been eliminated upon consolidation. 

 

8

 

Unaudited Interim Financial Information

 

Certain information and footnote disclosures normally included in the Company’s annual audited financial statements and accompanying notes have been condensed or omitted in these accompanying interim consolidated financial statements and footnotes. Accordingly, the accompanying interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2021.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments and accruals, consisting only of normal, recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein.

 

Segment Reporting

 

Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” requires public companies to report financial and descriptive information about their reportable operating segments. We identify our operating segments based on how our chief operating decision maker internally evaluates separate financial information, business activities and management responsibility. We have one reportable segment, consisting of the sale of wireless access products.

 

We generate revenues from three geographic areas, consisting of North America and Europe. The following enterprise-wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements. The following table contains certain financial information by geographic area:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 

Net revenue:

 

2022

   

2021

   

2022

   

2021

 

North America

  $ 5,934,187     $ 6,379,179     $ 10,829,713     $ 11,128,620  

Europe

    1,031,391       -       1,031,391       -  

Totals

  $ 6,965,578     $ 6,379,179     $ 11,861,104     $ 11,128,620  

 

   

June 30,

   

December 31,

 

Long-lived assets, net (property and equipment and intangible assets):

 

2022

   

2021

 

North America

  $ 25,031,359     $ 9,253,819  

Europe

    1,189,203       -  

Totals

  $ 26,220,562     $ 9,253,819  

 

Use of Estimates

 

The preparation of financial statements in conformity with the 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 materially differ from those estimates.

 

9

 

Foreign Currency Translation

 

The financial position and results of operations of the Company are determined using the local currency, US Dollar (“$”), as the functional currency.  The financial position and results of operations of Transact Europe Holdings, the Bulgaria subsidiary of the Company, are initially recorded using its local currency, Bulgarian Lev (“BGN”). Assets and liabilities denominated in foreign currency are translated to the functional currency at the functional currency rate of exchange at the balance sheet date. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution.  All translation adjustments resulting from the translation of the financial statements into the reporting currency, US Dollar, are recorded as a comprehensive income or loss as a component of accumulated other comprehensive income.  As of June 30, 2022, the exchange rate was BGN 1.8663 to one US Dollar.  The average exchange rate for the three months ended June 30, 2022 was BGN 1.7903 per US Dollar.  The Company acquired Transact Europe Holdings on April 1, 2022 and Transact Europe Holdings was consolidated from the date of acquisition which is April 1, 2022. 

 

Cash, Cash Equivalents and Restricted Cash

 

The Company’s Cash and cash equivalent and Restricted cash represents the following:

 

 

Cash and cash equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.

 

Restricted Cash – The Company’s technology enables transactional blockchain ledger to instantly reflect all transactions details. The final cash settlement of each transaction is subject to the gateway policies. This final disposition takes days to weeks to complete in accordance with these policies. Each policy is an integral part of the transactional contracts between the Company, its Independent Sales Organizations (ISOs), its agents, and the merchant clients. While the ledger reflects a held balance for the merchant, in reserve or payment in arears, the Company holds funds in a trust account as cash deemed restricted. The Company’s books reflect such restricted cash as a restricted cash and trust accounts, and the sum balance due to merchants and ISOs as settlement liabilities.

 

The following table provides a reconciliation of Cash and cash equivalents, and Restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.

 

   

June 30, 2022

   

December 31, 2021

 
                 

Cash and cash equivalents

  $ 29,098,753     $ 89,559,695  

Restricted cash

    26,526,234       -  
                 

Total cash, cash equivalents and restricted cash

  $ 55,624,987     $ 89,559,695  

 

Cash Due from Gateways and Payment Processing Liabilities

 

The Company’s primary source of revenues is payment processing services for its merchant clients. When such merchant makes a sale, the process of receiving the payment card information, engaging the banks for transferring the proceeds to the merchant’s account via digital gateways, and recording the transaction on a blockchain ledger are the activities for which the Company gets to collect fees.

 

In 2022 and 2021 the Company utilized several gateways. The gateways have strict guidelines pertaining to scheduling of the release of funds to merchants based on several criteria, such as return and chargeback history, associated risk for the specific business vertical, average transaction amount and so on. In order to mitigate processing risks, these policies determine reserve requirements and payment in arrears strategy. While reserve and payment in arrears restrictions are in effect for a merchant payout, the Company records gateway debt against these amounts until released.

 

Therefore, the total Cash due from gateways on the unaudited consolidated balance sheets represents the amount owed to the Company for processing.

 

Research and Development Costs

 

Research and development costs, which are expensed as incurred, are primarily comprised of costs and expenses for salaries and benefits for research and development personnel, outsourced contract services, and supplies and materials costs.

 

10

 

Revenue Recognition

 

Revenue is recognized upon transfer of control of promised goods or services to the Company’s customers or when the Company satisfies any performance obligations under contract. The amount of revenue reflects the consideration the Company expects to be entitled to in exchange for the respective goods or services provided. Further, under Accounting Standards Codification 606, “Revenue from Contracts with Customers, (“ASC 606”), contract assets or contract liabilities that arise from past performance but require a further performance before the obligation can be fully satisfied must be identified and recorded on the balance sheet until respective settlements have been met.

 

The Company’s primary revenue source is generated from payment processing services. Payment processing services revenue is based on a percentage of each transaction’s value and/or upon fixed amounts specified per each transaction or service and is recognized as such transactions or services are performed, at a point in time.

 

Fair Value of Financial Instruments

 

The Company assesses the fair value of financial instruments based on the provisions of ASC 820, Fair Value Measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability between market participants on the measurement date. ASC 820 also establishes a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1- Quoted prices in active markets for identical assets or liabilities.

Level 2- Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company did not have any Level 1 and Level 2 fair value measurement. The Company had the following Level 3 fair value measurement:

 

   

Fair Value at

June 30, 2022

 
         

Customer Relationship

  $ 25,196,976  

Business intellectual properties

  $ 2,674,851  

Derivative Liability

  $ 61,006  

 

   

Fair Value at

December 31, 2021

 
         

Customer Relationship

  $ 5,820,195  

Business Technology/IP

  $ 2,611,088  

Derivative liability

  $ 18,735,000  

 

Prepaid and other current assets

 

Prepaid expenses include the prepayment of various operating expenses such as insurance and income and property taxes which are expensed when the operating cost is realized.

 

Other current assets include the income receivable, loan receivable, security deposit and other assets.

 

11

 

Goodwill and Other Intangible Assets

 

The Company accounts for acquisitions of businesses in accordance with the acquisition method. Goodwill represents the excess of the purchase price of acquired businesses over the fair value of the identifiable assets acquired and liabilities assumed. Acquisition costs are expensed as incurred.

 

Goodwill and other intangible assets acquired in a business combination determined to have an indefinite useful life are generally not amortized, but instead are tested for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

 

Other intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values.

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever management believes that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent that the carrying value is determined to be unrecoverable, an impairment loss is recognized through a charge to expense. As of June 30, 2022, the Company does not believe that impairment indicators are present, and accordingly, based on this assessment, no further impairment analysis was performed.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net of operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. As of June 30, 2022, we have no material unrecognized tax benefits, and we expect no material unrecognized tax benefits for the next 12 months.

 

Earnings Per Share

 

A basic earnings per share is computed by dividing net income to common stockholders by the weighted average number of shares outstanding for the year. Dilutive earnings per share include the effect of any potentially dilutive debt or equity under the treasury stock method, if including such instruments is dilutive. The Company’s diluted earnings/loss per share is the same as the basic earnings/loss per share for the three and six months ended June 30, 2022 and 2021, as there are no potential shares outstanding other than options that would have a dilutive effect.

 

Recently Adopted Accounting Updates

 

In November 2021, the FASB issued ASU 2021-10 “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance,” which created FASB ASC Topic 832, Government Assistance (ASC 832). ASC 832 requires business entities to disclose information about certain government assistance they receive. The Company adopted this standard on January 1, 2022 and determined there was no material impact on the Company's condensed consolidated financial statements.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers," as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022. The Company is currently evaluating the effect, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows and disclosures.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses”. The standard, including subsequently issued amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11), requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In November 2019, the FASB issued ASU No. 2019-10 to postpone the effective date of ASU No. 2016-13 for public business entities eligible to be smaller reporting companies defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its consolidated financial statements.

 

12

 

3.

COVID-19 UPDATE

 

In December 2019, a novel strain of coronavirus (“COVID-19”) was identified and the disease has since spread across the world. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in the financial and capital markets. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning COVID-19 and the actions to contain or treat its impact and the economic impact and the economic impact on local, regional, national and international markets. As the COVID-19 pandemic continues, the Company’s results of operations, financial condition and cash flows may be materially adversely affected, particularly if the pandemic persists for a significant period of time.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. These provisions are not expected to have a material effect on the Company’s unaudited consolidated financial statements.

 

On April 29, 2020, the Company entered into a loan agreement with Preferred Bank under Paycheck Protection Program administered by SBA in the amount of $272,713. Under this loan program, the loan may be forgiven if utilized for specific purpose specified under the CARES Act and PPP guideline. The loan bears interest of 1.00% per annum and matures on April 29, 2022. The loan was forgiven on November 8, 2021.

 

4.

ACQUISITIONS

 

On April 1, 2022, the Company acquired Transact Europe Holdings for approximately $28.8 million (€26.0 million) in cash. Transact Europe EAD (TEU), an EU regulated electronic money institution headquartered in Sofia, Bulgaria, boasts an array of licenses such as principal level membership of Visa, worldwide membership of MasterCard, and principal membership of China UnionPay. TEU is also part of the direct SEPA (Single Euro Payments Area), a payment system enabling cashless payments across continental Europe.  The Company paid approximately $28.8 million as on April 1, 2022.  The $28.8 million paid as of June 30, 2022 is included as prepaid and other current assets in the balance sheets.

 

The following summarizes the estimated fair values of the net assets acquired which is recorded as of April 1, 2022:

 

Tangible assets (liabilities):

       

Net assets and liabilities

  $ 7,465,907  
         
         

Intangible assets:

       

Customer relationships

    1,266,781  

Goodwill

    20,077,912  
      21,344,693  
         

Total net assets acquired

  $ 28,810,600  

 

On March 31, 2022, the Company acquired a portfolio of merchant accounts from Sky Financial & Intelligence for $18,110,000. The Company paid $16,000,000 of cash in March 2022 and issued 500,000 shares of restricted common stock for the transaction in May 2022.

 

The following summarizes the estimated fair values of the net assets acquired:

 

Intangible assets:

       

Customer relationships

  $ 18,110,000  

 

13

 

5.

SETTLEMENT PROCESSING

 

The Company’s proprietary blockchain-based technology serves as the settlement engine for all transactions within the Company’s ecosystem. The blockchain ledger provides a robust and secure platform to log immense volumes of immutable transactional records in real time. Generally speaking, blockchain is a distributed ledger that uses digitally encrypted keys to verify, secure and record details of each transaction conducted within an ecosystem. Unlike general blockchain-based systems, GreenBox uses proprietary, private ledger technology to verify every transaction conducted within the GreenBox ecosystem. The verification of transaction data comes from trusted partners, all of whom have been extensively vetted by us. GreenBox facilitates all financial elements of our closed-loop ecosystem and we act as the administrator for all related accounts. Using our TrustGateway technology, we seek authorization and settlement for each transaction from Gateways to the issuing bank responsible for the credit/debit card used in the transaction. When the Gateway settles the transaction, our TrustGateway technology composes a chain of blockchain instructions to our ledger manager system.

 

When consumers use credit/debit cards to pay for transactions with merchants who use our ecosystem, the transaction starts with the consumer purchasing tokens from us. The issuance of tokens is accomplished when we load a virtual wallet with a token, which then transfers credits to the merchant’s wallet on a dollar-for-dollar basis, after which the merchant releases its goods or services to the consumer. These transfers take place instantaneously and seamlessly, allowing the transaction experience to seem like any other ordinary credit/debit card transaction to the consumer and merchant. While our blockchain ledger records transaction details instantaneously, the final cash settlement of each transaction can take days to weeks, depending upon contract terms between us and the gateways we use, between us and our ISOs, and between us and/or our ISOs and merchants who use our services. In the case where we have received transaction funds, but not yet paid a merchant or an ISO, we hold funds in either a trust account or as cash deemed restricted within our operating accounts. We record the total of such funds as Cash due from gateways, net – a Current Asset. Of these funds, we record the sum balance due to Merchants and ISOs as Payment processing liabilities, net – a Current Liability.

 

6.

PREPAIDS AND OTHER CURRENT ASSETS

 

As of June 30, 2022, prepaids and other current assets consists of the following:

 

   

June 30, 2022

   

December 31, 2021

 
                 

Prepaid expenses

  $ 407,090     $ 76,127  

Income receivable

    685,332       -  

Loan receivable

    5,590,000       5,590,000  

Security deposit

    18,316       18,316  

Security deposit - gateways

    6,259,434       -  

Other current assets

    1,144,415       736,253  
                 

Total prepaids and other current assets

  $ 14,104,587     $ 6,420,696  

 

7.

PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   

June 30, 2022

   

December 31, 2021

 

Land and building

  $ 1,360,000     $ 1,360,000  

Computers

    208,140       134,982  

Furniture and fixtures

    140,907       108,715  

Vehicles, machinery and equipment

    15,316       13,519  

Improvements

    140,300       140,300  

Total property and equipment

    1,864,663       1,757,516  

Less: accumulated depreciation

    (149,749

)

    (82,632

)

Net property and equipment

  $ 1,714,914     $ 1,674,884  

 

Depreciation expense was $34,340 and $7,329 for the three months ended June 30, 2022 and 2021, respectively. Depreciation expense was $67,117 and $13,338 for the six months ended June 30, 2021, respectively.

 

14

 

8.

GOODWILL

 

The Company tests goodwill during the fourth quarter of each year or more often if events or circumstances indicate there may be impairment. The Company only has one reporting unit. The Company performs its analysis in accordance with the provisions of FASB ASC Topic 350, Intangibles—Goodwill and Other (ASC 350). This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a goodwill impairment test by comparing the carrying value of its reporting unit to its fair value. The Company determines the estimated fair value of the reporting unit using a discounted cash flow analysis. The fair value of the reporting unit is the implied fair value of goodwill. In the event the reporting unit's carrying value exceeds its fair value, an impairment loss will be recognized. An impairment loss is measured by the difference between the carrying value of the reporting unit and its fair value.

 

As of June 30, 2022, goodwill assets consisted of the following:

 

   

June 30, 2022

   

December 31, 2021

 

Acquisition of Northeast

  $ 2,793,474     $ 2,293,474  

Acquisition of ChargeSavvy

    3,754,560       3,754,560  

Acquisition of Transact Europe

    20,077,912       -  
                 

Total goodwill

  $ 26,625,946     $ 6,048,034  

 

The Company recorded $500,000 as a good-will adjustment related to the earn-out provided during the three months ended June 30, 2022 related to the acquisition of Northeast.

 

9.

INTANGIBLE ASSETS

 

As of June 30, 2022 intangible assets consists of the following:

 

       

As of June 30, 2022

   

As of December 31, 2021

 

Intangible Assets

 

Amortization Period

 

Cost

   

Accumulated Amortization

   

Net

   

Cost

   

Accumulated Amortization

   

Net

 
                                                     

Customer relationships

 

3 to 5 years

  $ 25,196,976     $ (2,840,775

)

  $ 22,356,201     $ 5,820,195     $ (591,239

)

  $ 5,228,956  

Business technology/IP

 

5 years

    2,674,851       (525,404

)

    2,149,447       2,611,088       (261,109

)

    2,349,979  
                                                     

Total intangible assets

  $ 27,871,827     $ (3,366,179

)

  $ 24,505,648     $ 8,431,283     $ (852,348

)

  $ 7,578,935  

 

Amortization expense was $2,092,267 and $6,915 for the three months ended June 30, 2022 and 2021, respectively. Amortization expense was $2,513,831 and $6,915 for the six months ended June 30, 2022 and 2021, respectively.

 

Estimated amortization expense for each of the years ending December 31 is as follows:

 

Year

 

Amount

 

2022 (remainder)

 

$

4,184,532

 

2023

   

8,369,068

 

2024

   

7,894,024

 

2025

   

3,208,176

 

2026

   

846,661

 

Thereafter

   

3,187

 

Total

 

$

24,505,648

 

 

15

 

10.

LONG-TERM DEBTS

 

Long-term debt consisted of the following:

 

   

As of June 30, 2022

   

As of December 31, 2021

 
                 

$149,900 Economic Injury Disaster Loan (EIDL), interest rate of 3.75%, due June 1, 2050

  $ 149,900     $ 149,900  

$500,000 EIDL, interest rate of 3.75%, due May 8, 2050

    500,000       500,000  
                 

Total long-term debts

    649,900       649,900  

Less: current portion

    -       -  
                 

Net long-term debts

  $ 649,900     $ 649,900  

 

SBA CARES Act Loans - $649,900

 

On June 9, 2020, the Company entered into a 30 year loan agreement with the SBA under the CARES Act in the amount of $149,900. The loan bears interest at 3.75% per annum and requires monthly principal and interest payments of $731 beginning June 9, 2021. Both the Chief Executive Officer and Chairman of the Company signed personal guarantees under this loan.

 

On May 8, 2020, Charge Savvy executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the TNB’s business. As of December 31, 2020, the loan payable, Emergency Injury Disaster Loan noted above is not in default.

 

Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), Charge Savvy borrowed an aggregate principal amount of the EIDL Loan of $150,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue only on funds actually advanced from the date of each advance. Installment payments, including principal and interest, are due monthly beginning May 8, 2021 (twelve months from the date of the SBA Loan) in the amount of $731. The balance of principal and interest is payable thirty years from the date of the SBA Loan. In connection therewith, the Company also received a $10,000 grant, which does not have to be repaid. During the year ended December 31, 2020, $10,000 was recorded in Economy injury disaster loan (EIDL) grant income in the Statements of Operations. On Aug 24, 2021, Charge Savvy was granted an increase in loan principal in the amount of $350,000 on identical terms.

 

In connection therewith, Charge Savvy executed (i) loans for the benefit of the SBA (the “SBA Loan”), which contains customary events of default and (ii) Security Agreements, granting the SBA a security interest in all tangible and intangible personal property of Charge Savvy, which also contains customary events of default (the “SBA Security Agreement”).

 

11.

CONVERTIBLE DEBT

 

On November 3, 2021, the Company entered into convertible debt with the following terms:

 

 

Face value of the convertible debt of $100,000,000

 

 

Original issuance cost of 16% of the face value of the debt which amounted to $16,000,000

 

 

Interest at the rate of 8% per annum payable in cash quarterly in arrears on the first trading day of each calendar quarter on the outstanding balance.  The interest rate of the Notes will automatically increase to 15% per annum upon the occurrence and continuance of an event of default.

 

 

Maturity date of November 2023.

 

 

Certain conversion features.

 

16

 

Convertible debt consisted of the following:

 

   

As of June 30, 2022

   

As of December 31, 2021

 
                 

Convertible debt balance

  $ 89,000,000     $ 100,000,000  
                 

Debt discount:

               

Derivative liability

    (21,580,000

)

    (21,580,000

)

Original issue discount of 16%

    (16,000,000

)

    (16,000,000

)

Placement fees and issuance costs

    (7,200,000

)

    (7,200,000

)

Total debt discount

    (44,780,000

)

    (44,780,000

)

Accumulated accretion

    14,538,164       3,435,178  

Net debt discount after accretion

    (30,241,836

)

    (41,344,822

)

                 

Convertible debt balance, net of debt discount

  $ 58,758,165     $ 58,655,178  

 

The Company recorded accretion expense as interest expense in the amount of $5,582,164 and $0 for the three months ended June 30, 2022 and 2021, respectively. The Company recorded accretion expense as interest expense in the amount of $11,102,986 and $0 for the six months ended June 30, 2022 and 2021, respectively.  The Company incurred interest expense of $1,780,000 and $0 for the three months ended June 30, 2022 and 2021, respectively. The Company incurred interest expense of $3,618,222 and $0 for the six months ended June 30, 2022 and 2021, respectively.

 

Derivative liability

 

The Notes contain embedded derivatives representing the conversion features, redemption rights, and certain events of default. The Company determined that these embedded derivative required bifurcation and separate valuation.

 

The Company utilizes a binomial lattice model to value its bifurcated derivatives included in the Notes. ASC 815 does not permit an issuer to account separately for individual derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be combined together and fair valued as a single, compound embedded derivative. The Company selected a binomial lattice model to value the compound embedded derivative because it believes this technique is reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of the Notes. Such assumptions include, among other inputs, stock price volatility, risk-free rates, credit risk assumptions, early redemption and conversion assumptions, and the potential for future adjustment of the conversion price due to triggering events. Additionally, there are other embedded features of the Notes requiring bifurcation, other than the conversion features, which had no value at December 31, 2021 due to management’s estimates of the likelihood of certain events, but that may have value in the future should those estimates change.

 

A continuity of derivative liability for the six months ended June 30, 2022 is summarized as follows:

 

   

Total

 

Balance, December 31, 2021

  $ 18,735,000  

Change in fair value

    (18,673,994 )

Balance, June 30, 2022

  $ 61,006  

 

The Company sold and issued, in a registered direct offering, an 8% senior convertible note due November 3, 2023 in the aggregate original principal amount of $100 million (the “Note”). The Note had an original issue discount of sixteen percent (16%) resulting in gross proceeds of $84 million. The Note was sold pursuant to the terms of a Securities Purchase Agreement, dated November 2, 2021 (the “SPA”), between The Company and the investor in the Note (the “Investor”).

 

The Note was issued on November 8, 2021, pursuant to an indenture dated November 2, 2021 between the Company and Wilmington Savings Fund Society, FSB, as trustee (the “Base Indenture”), as supplemented by a first supplemental indenture thereto, dated November 2, 2021, relating to the Notes (the “First Supplemental Indenture” and, the Base Indenture as supplemented by the First Supplemental Indenture, the “First Indenture”). The terms of the Note include those provided in the First Indenture and those made part of the First Indenture by reference to the Trust Indenture Act.

 

17

 

Ranking

 

The Note is the senior unsecured obligations of the Company and not the financial obligations of our subsidiaries. Until such date as the principal amount of the Note is $5 million or less, all payments due under the Note will be senior to all other indebtedness of the Company and/or any of our subsidiaries.

 

Maturity Date

 

Unless earlier converted, or redeemed, the Note will mature on November 3, 2023, the second anniversary of their issuance date, which we refer to herein as the “Maturity Date”, subject to the right of the investors to extend the date:

 

(i) if an event of default under the Note has occurred and is continuing (or any event shall have occurred and be continuing that with the passage of time and the failure to cure would result in an event of default under the Note) and

 

(ii) for a period of 20 business days after the consummation of a fundamental transaction if certain events occur.

 

We are required to pay, on the Maturity Date, all outstanding principal, accrued and unpaid interest and accrued and unpaid late charges on such principal and interest, if any.

 

Interest

 

The Note bears interest at the rate of 8% per annum (a) shall commence accruing on the date of issuance, (b) shall be computed on the basis of a 360-day year and twelve 30-day months and (c) shall be payable in cash quarterly in arrears on the first trading day of each calendar quarter or otherwise in accordance with the terms of the Note. If a holder elects to convert or redeem all or any portion of a Note prior to the Maturity Date, all accrued and unpaid interest on the amount being converted or redeemed will also be payable. If we elect to redeem all or any portion of a Note prior to the Maturity Date, all accrued and unpaid interest on the amount being redeemed will also be payable. The interest rate of the Note will automatically increase to 15% per annum upon the occurrence and continuance of an event of default (See “-- Events of Default” below).

 

Late Charges

 

We are required to pay a late charge of 15% on any amount of principal or other amounts that are not paid when due.

 

Conversion

 

Fixed Conversions at Option of Holder

 

The holder of the Note may convert all, or any part, of the outstanding principal and interest of the Note, at any time at such holder’s option, into shares of our common stock at an initial fixed conversion price, which is subject to:

 

 

proportional adjustment upon the occurrence of any stock split, stock dividend, stock combination and/or similar transactions; and

 

 

full-ratchet adjustment in connection a subsequent offering at a per share price less than the fixed conversion price then in effect.

 

On January 28, 2022, we and the Investor, entered into an Agreement and Waiver (the “Waiver”) with regard to the Note that has the following major provisions:

 

 

a)

the Investor agreed to extend the “90 Day Eligibility Date” from February 3, 2022 to May 2, 2022 such that the Investor can no longer, if the closing price of the stock is less than $5.50, convert up to $30 million of the Note into shares of the Company’s common stock (with the conversion price being the lower of (i) the then in effect conversion price and (ii) the greater of (x) the Note’s $1.67 floor price or (y) 98% of the market price on the conversion date) (the “Alternate Optional Conversion Price”) prior to May 2, 2022;

 

 

b)

allows us to acquire, for cancellation, $6 million in in aggregate principal amount of the Note for a purchase price of $6.9 million such that the new principal amount of the Note is $94 million;

 

 

c)

lowers the initial fixed conversion price of the Note from $15 to $12; and

 

18

 

 

d)

if the trading volume of our common stock on any individual trading day is over $5 million (the “Alternate Conversion Company Waiver Measuring Date”), allows the Investor an opportunity to convert up to $5 million of the Note into shares of our common stock from the Alternate Conversion Company Waiver Measuring Date through and including 7:00 PM ET on the immediately following trading day. The conversion price would be the lower of (i) the then in effect conversion price and (ii) the greater of (x) the Note’s $1.67 floor price or (y) 98% of the market price on the conversion date.

 

The Company paid the investor $6.0 million on January 31, 2022. During the three months ended June 30, 2022, the lender converted $5,000,000 of the outstanding balance for 2,413,100 shares of common stock for an average conversion price of $2.07. If the Company’s common stock closing price remains under $5.50, the investor can convert up to another $25 million of the note at a conversion price that is the lower of (i) the then in effect conversion price and (ii) the greater of (x) the Note’s $1.67 floor price or (y) 98% of the market price on the conversion date.

 

The foregoing description of the Waiver does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Waiver, a copy of which was attached as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the period ended March 31, 2022 filed on May 16, 2022.

 

1-Year Alternate Optional Conversion

 

At any time following the first anniversary of the issuance date of the Note, but only if the closing bid price of our common stock on the immediately prior trading day is less than $6.50, each holder of the Note shall have the option to convert, at such holder’s option, pro rata, up to $30 million of the principal amount of the Note (in $250,000 increments) at the Alternate Optional Conversion Price.

 

Alternate Event of Default Optional Conversion

 

If an event of default has occurred under the Note, each holder may alternatively elect to convert the Note (subject to an additional 15% redemption premium) at the “Alternate Event of Default Conversion Price” equal to the lesser of:

 

 

the fixed conversion price then in effect; and

 

the greater of:

 

 

the floor price; and

 

 

80% of the lowest volume weighted average price of our common stock during the five trading days immediately prior to such conversion.

 

Beneficial Ownership Limitation

 

The Note may not be converted and shares of common stock may not be issued under the Note if, after giving effect to the conversion or issuance, the applicable holder of the Note (together with its affiliates, if any) would beneficially own in excess of 4.99% of the Company’s outstanding shares of common stock, which is referred to herein as the “Note Blocker”. The Note Blocker may be raised or lowered to any other percentage not in excess of 9.99% at the option of the applicable holder of Notes, except that any raise will only be effective upon 61-days’ prior notice to us.

 

Clarification to First Quarter Adjustment to Fixed Conversion Price

 

The Company wishes to clarify the possible first quarter adjustment to the Note’s initial fixed conversion price (which was originally $15 and is now, pursuant to the Waiver, $12).

 

If, during the fiscal quarter ending March 31, 2022, the Company (i) fails to process at least $750 million in transaction volume or (ii) has revenue that is less than $12 million, and, if the Note’s fixed conversion price then in effect is greater than the greater of (x) the Note’s $1.67 floor price floor and (y) 140% of the market price as of April 1, 2022 (the "Adjustment Measuring Price”) then, on April 1, 2022, the fixed conversion price will automatically adjust to the Adjustment Measuring Price.

 

Change of Control Redemption Right

 

In connection with a change of control of the Company, each holder may require us to redeem in cash all, or any portion, of the Notes at a 15% redemption premium to the greater of the face value, the equity value of our common stock underlying the Notes and the equity value of the change of control consideration payable to the holder of our common stock underlying the Notes.

 

19

 

The equity value of our common stock underlying the Notes is calculated using the greatest closing sale price of our common stock during the period immediately preceding the consummation or the public announcement of the change of control and ending the date the holder gives notice of such redemption.

 

The equity value of the change of control consideration payable to the holder of our common stock underlying the Notes is calculated using the aggregate cash consideration per share of our common stock to be paid to the holders of our common stock upon the change of control.

 

Events of Default

 

Under the terms of the first supplemental indenture, the events of default contained in the base indenture shall not apply to the Notes. Rather, the Notes contain standard and customary events of default including but not limited: (i) the suspension from trading or the failure to list our common stock within certain time periods; (ii) failure to make payments when due under the Notes; and (iii) bankruptcy or insolvency of the Company.

 

If an event of default occurs, each holder may require us to redeem all or any portion of the Notes (including all accrued and unpaid interest and late charges thereon), in cash, at a 15% redemption premium to the greater of the face value and the equity value of our common stock underlying the Notes

 

The equity value of our common stock underlying the Notes is calculated using the greatest closing sale price of our common stock on any trading day immediately preceding such event of default and the date we make the entire payment required.

 

Company Optional Redemption Rights

 

At any time no event of default exits, we may redeem all, but not less than all, the Notes outstanding in cash all, or any portion, of the Notes at a 5% redemption premium to the greater of the face value and the equity value of our common stock underlying the Notes.

 

The equity value of the Company’s common stock underlying the Notes is calculated using the greatest closing sale price of our common stock on any trading day during the period commencing on the date immediately preceding such date we notify the applicable holder of such redemption election and the date we make the entire payment required.

 

The foregoing description of the Note does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Note, a copy of which is attached hereto as Exhibit 4.1, and incorporated herein by reference.

 

12.

STOCK OPTION AWARDS

 

The following table represents the employee stock option activity during the six months ended June 30, 2022 and 2021.

 

   

Shares

   

Weighted Average

Exercise Price

   

Aggregate

Intrinsic Value

 
                         

Outstanding at December 31, 2020

    477,430     $ 3.53          

Granted

    230,122       10.59          

Exercised

    (100,802

)

    0.46          

Forfeited or Expired

    (31,251

)

    2.50          

Outstanding at June 30, 2021

    575,499     $ 7.06     $ 6,865,703  

Exercisable at June 30, 2021

    446,295     $ 5.37     $ 5,324,299  

Vested and Expected to Vest at June 30, 2021

    547,834     $ 6.80     $ 6,535,660  
                         

Outstanding at December 31, 2021

    391,562     $ 5.07          

Granted

    -       -          

Exercised

    (12,417

)

    0.07          

Forfeited or Expired

    (9,702

)

    9.24          

Outstanding at June 30, 2022

    369,443     $ 1.47     $ 387,916  

Exercisable at June 30, 2022

    369,443     $ 1.47     $ 387,916  

Vested and Expected to Vest at June 30, 2022

    369,443     $ 1.47     $ 387,916  

 

20

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $1.05 and $11.93 as of June 30, 2022 and 2021, respectively, which would have been received by the option holders had all option holders exercised their options as of that date. As of June 30, 2022, there was no unrecognized compensation cost related to non-vested stock options.

 

The Company adopted the 2021 Restricted Stock Plan (“2021 Plan”) in November 2021, which provides for the grant of restricted stock awards and performance stock awards to executive officers, non-employee directors and other key employees of the Company. The 2021 Plan provides for up to 5.0 million shares of common stock. the 2020 Plan generally have a term of five years and generally vest and become exercisable at various times from the option grant dates. These award will have such vesting or other provisions as may be established by the Board of Directors at the time of each award.

 

The following table represents the restricted stock award activity during the three months ended June 30, 2022 and 2021.

 

   

Non-vested Restricted

Stock Awards

   

Weighted Average Grant

Date Fair Value

 
                 

Non-vested at January 1, 2021

    -     $ -  

Granted

    -       -  

Vested

    -       -  

Forfeited

    -       -  

Non-vested at June 30, 2021

    -     $ -  
                 

Non-vested at January 1, 2022

    -     $ -  

Granted

    39,413       3.24  

Vested

    (39,413

)

    (3.24

)

Forfeited

    -       -  

Non-vested at June 30, 2022

    -     $ -  

 

Total stock-based compensation expense recognized for the Company’s 2021 Plan was $0 and $1,291,887 for the three months ended June 30, 2022 and 2021, respectively, and $166,800 and $2,089,500 for the six months ended June 30, 2022 and 2021, respectively.

 

13.

STOCK GRANT EXPENSE

 

The Company issues stock with no exercise price to its employees, outside service providers, and board members.  These stock grants typically do not have a vesting period and vest immediately upon issuances. 

 

The Company issued the following stock during the three and six months ended June 30, 2022:

 

   

Number of shares

 
   

Six months ended

   

Three months ended

 
   

June 30, 2022

   

June 30, 2022

 

Employees and board members

    493,347       493,347  

Services

    54,692       15,279  
                 

Total stock grants

    548,039       508,626  

 

The Company recorded stock grant compensation expense for employees and board members in the amount of $1,496,711 and $1,496,711 for the six and three months ended June 30, 2022, respectively, and stock grant compensation expense for services in the amount of $205,652 and $79,238 for the six and three months ended June 30, 2022, respectively. As of June 30, 2022, common stock issuable is 221,090.

 

21

 

14.

COMMON STOCK

 

GreenBox POS LLC (“PrivCo”), a privately held company owned by Ben Errez, Chairman and Executive Vice President of the Company, and Fredi Nisan, Chief Executive of the Company and a member of its Board of Directors, owns approximately 20,455,875 shares of the Company’s common stock. In November 2021, pursuant to a verbal agreement, PrivCo pledged to the Company 1,000,000 shares of common stock in exchange of $5.59 million (based on the $5.59 closing price of the common stock on November 24, 2021) held in a trust account, classified as current assets. The purpose of the 1,000,000 common share pledge is to allow the Company, if necessary, to cancel up to 1 million of PrivCo’s shares and issue them to new shareholders without increasing the Company’s shares outstanding. As shares get cancelled and issued to new shareholders, the Company would release the $5.59 per share value from the trust account to PrivCo. As part of the verbal agreement, the parties agreed that any shares cancelled and issued out of these 1 million shares will need to be later re-issued to PrivCo. PrivCo will need to return the $5.59 per share amount paid to it. In February 2022, the Company cancelled 33,333 of PrivCo’s shares and issued them to a shareholder and the Company is expected to cancel 500,000 of PrivCo’s shares and issue them to Sky Financial & Intelligence in May 2022. As a result, the Company recorded 533,333 shares to be issued to PrivCo as of March 31, 2022. PrivCo received $186,331 as of March 31, 2022 (for the cancellation of 33,333 shares) and will receive a further $2.795 million when the 500,000 shares are cancelled. The Company cancelled 500,000 of PrivCo’s shares on April 29, 2022. The Company issued 500,000 shares to Sky Financial & Intelligence LLC on May 12, 2022. 

 

15.

LEASES

 

For operating leases, we calculated right of use assets and lease liabilities based on the present value of the remaining lease payments as of the date of adoption using the incremental borrowing rate, in accordance with ASC 842, Leases.

 

The Company leases office space at three locations in California, Florida and Massachusetts. The Company had operating lease expense of $198,409 and $67,685 for the three months ended June 30, 2022 and 2021, respectively. The Company had operating lease expense of $357,831 and $100,789 for the six months ended June 30, 2022 and 2021, respectively.

 

Future minimum lease payments for all leases as of June 30, 2022 are as follows:

       

Year

 

Amount

 

2022 (Remainder)

  $ 464,384  

2023

    671,630  

2024

    462,452  

2025

    350,422  

2026

    248,605  

Thereafter

    42,463  

Total lease payments

    2,239,956  

Less: present value adjustment

    (279,012

)

Present value of total lease liabilities

    1,960,944  

Less: current lease liabilities

    (728,076

)

Long-term lease liabilities

  $ 1,232,868  

 

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date. As of June 30, 2022, the weighted average remaining lease term is 2.5 years and the weighted average discount rate used to determine the operating lease liabilities is 10.0%.

 

16.

RELATED PARTY TRANSACTIONS

 

Kenneth Haller and the Haller Companies

 

Kenneth Haller (“Haller”) became the Company’s Senior Vice President of Payment Systems in November 2018. The Company began working indirectly with Haller earlier in 2018, both individually and through our relationship with MTrac Tech Corporation (“MTrac”), which in turn has business relationships with Haller. Haller brings considerable advantages to the Company’s platform development and business development efforts and capabilities, including transactional business relations and a large network of agents (the “Haller Network”). The Haller Network is an amalgamation of the collective networks of Haller and two companies owned or majority-owned by Haller, which are Sky Financial & Intelligence, LLC (“Sky”), and Charge Savvy, LLC (collectively, the “Haller Companies”), each of which has formalized business relationships with the Company, as well as with some of the Company’s partners, which the Company believes allows the Company to maximize and diversity the Company’s market penetration capabilities. Haller, through Sky, owns controlling interests in Charge Savvy, LLC with whom the Company does business through their respective business relationship with MTrac.

 

22

 

Mr. Haller, as of March 31, 2022, is an independent contractor to the Company (and no longer an employee).

 

The following are certain transactions between the Company and the Haller Companies:

 

Sky Financial & Intelligence, LLC – Haller owns 100% of Sky Financial & Intelligence LLC (“Sky”), a Wyoming limited liability company, and serves as its sole Managing Member. Sky is a strategic merchant services company that focuses on high-risk merchants and international credit card processing solutions. In 2018, Sky was using GreenBox’s QuickCard payment system as its main payment processing infrastructure, through Sky’s relationship with MTrac. It was through this successful relationship, that we came to know Haller and the Haller Network. Realizing that the Haller Network and Haller’s unique skill set was highly complementary to our business objectives, we commenced discussions to retain Haller through his consulting firm, Sky, for a senior role, directly responsible for growing GreenBox’s operations. Subsequently, in November 2018, Haller was appointed as our Senior Vice President of Payment Systems, for a monthly consulting fee of $10,000, paid to Sky (“Haller Consulting Fee”).

 

On March 31, 2022, the Company acquired a portfolio of merchant accounts from Sky Financial & Intelligence for $18,110,000. The Company paid $16,000,000 of cash in March 2022 and issued 500,000 shares of restricted common stock for the transaction in May 2022.

 

Charge Savvy, LLC – Sky owns 68.4% of Charge Savvy, LLC (“Charge Savvy”), an Illinois limited liability company. Haller serves as one of three Managing Members of Charge Savvy, along with Higher Ground Capital, LLC (owns 14%), and Jeff Nickel (owns 17.4%). As a result of the Purchase Agreement, the Company purchased all of Charge Savvy’s issued and outstanding membership interests and Charge Savvy became a wholly owned subsidiary of the Company. The purchase price under the Purchase Agreement for the all-stock transaction consisted of 1,000,000 shares of Common Stock being issued and delivered to the Sellers in proportion to the Sellers’ share of their membership interests in Charge Savvy. The share price at issuance was $12.14.

 

The Company did not pay any commissions to the related parties mentioned above for the six months ended June 30, 2022 and 2021.

 

17.

COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

 

Corporate Performance Consulting, LLC (CPC) v. GreenBox POS – On April 7, 2021, CPC filed a complaint against GreenBox in San Diego Superior Court. Plaintiff CPC alleges breach of contract, breach of implied covenant of good faith and fair dealing, goods and services rendered, negligent misrepresentation, violation of CA Business and Professions Code Section 17200, and unjust enrichment. The crux of CPC’s claim is that GreenBox failed to compensate for certain consulting and corporate advisory services. GreenBox believes the claims are without merit and intends to defend itself vigorously. On June 17, 2021, GreenBox filed a Cross-Complaint for breach of contract, breach of implied covenant of good faith and fair dealing, negligent misrepresentation, unjust enrichment, and rescission. The parties are now in the discovery phase.

 

 

The Good People Farms, LLC (TGPF) - TGPF initiated an arbitration in AAA on or about April 20, 2020 against GreenBox POS, Fredi Nisan, Ben Errez, MTrac Tech., Vanessa Luna, and Jason LeBlanc. The matter was placed in abeyance for some time. On January 15, 2021, GreenBox filed a counterclaim for fraud - intentional misrepresentation, breach of contract, breach of covenant of good faith and fair dealing, violation of California Business and Professions Code Section 17200, and accounting. The arbitration was stayed pending further proceedings in the separate but related action filed by MTrac and Ms. Luna in San Diego Superior Court. The arbitration has now commenced again upon the state court's January 14, 2022 order denying MTrac's and Ms. Luna's motion for summary judgment and granting of TGPF 's motion to compel arbitration as to MTrac only. TGPF submitted a new complaint on June 21, 2022. There was a preliminary arbitration hearing held the first week of July 2022 and final hearings have been provisionally set for April 18-21, 2023. 

 

 

Pure Health, et al. v. Worldpay LLC et al - On February 18, 2022, forty-three online marketer Plaintiffs filed suit in the Court of Common Pleas, Hamilton County, Ohio against Worldpay LLC (formerly Vantiv LLC), Fifth Third Bank, ChargeSavvy LLC, a wholly owned subsidiary of GreenBox POS, GreenBox POS, and John Does 1 (Defendants) through 10, alleging breach of contract, breach of implied covenant of good faith and fair dealing, conversion, and money had and received (constructive trust). Defendant GreenBox POS believes that Plaintiffs’ claims against it are without merit and plans to pursue all judicial remedies necessary to resolve this matter. On April 22, 2022 Worldpay and Fifth Third filed a motion to stay proceedings and compel arbitration. The parties thereafter stipulated to arbitration, and the Court granted the parties’ stipulation to submit the dispute to binding arbitration on June 1, 2022. On June 9, 2022, the same forty-three online marketers (“Claimants”) filed their demand in AAA Arbitration. GreenBox submitted an answering to the Claimants’ demand on June 24, 2022. The parties are in the process of selecting an arbitrator.

 

23

 

 

Paul Levine – On April 27, 2022, Paul Levine (“Levine”), former Chief Executive Officer of Coyni, Inc., wholly-owned subsidiary of GreenBox POS, filed a charge with The Occupational Safety and Health Administration (“OSHA”) against respondents Coyni and GreenBox. Levine alleges retaliation in violation of the Sarbanes-Oxley Act of 2002, as amended, 18 U.S.C. §1514A (“SOX”). GreenBox believes the claims are without merit and intends to defend itself vigorously. This matter is currently pending in the investigation phase with OSHA.

 

18.

SUBSEQUENT EVENTS

 

The Company follows the guidance in FASB ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluates events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Accordingly, the Company did not have any subsequent events that require disclosure other than the following:

 

 

On June 30, 2022, Transact Europe EAD, a subsidiary of the Company entered into a stock purchase agreement to acquire 100% of the outstanding shares of Roark Holdings Ltd., dba Paysos, a UK Limited company.  The Company expects to finalize the transaction during Q3 2022.

 

 

 

 

24

 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

 

Disclaimer Regarding Forward Looking Statements

 

Our Management’s Discussion and Analysis or Plan of Operations contains not only statements that are historical facts, but also statements that are forward-looking. Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

Overview Organization and Name Changes

 

Organization

 

GreenBox POS is a financial technology company that develops, markets, and sells innovative blockchain-based payment solutions, which we believe offer significant improvements for the payment solutions marketplace. The Company’s core focus is to develop and monetize disruptive blockchain-based applications, integrated within an end-to-end suite of financial products, capable of supporting a multitude of industries. The Company’s proprietary, blockchain-based systems are designed to facilitate, record and store a virtually limitless volume of tokenized assets, representing cash or data, on a secured, immutable blockchain-based ledger.

 

The Company was formerly known as ASAP Expo, Inc (“ASAP”), and was incorporated in the state of Nevada on April 10, 2007. On January 4, 2020, PubCo and GreenBox POS LLC, a Washington limited liability company ("PrivCo”), entered into an Asset Purchase Agreement (the "Agreement”), to memorialize a verbal agreement (the “Verbal Agreement”) entered into on April 12, 2018, by and among PubCo (the Buyer) and PrivCo (the Seller). On April 12, 2018, pursuant to the Verbal Agreement, PubCo acquired PrivCo’s blockchain gateway and payment system business, point of sale system business, delivery business and kiosk business, bank and merchant accounts, as well as all intellectual property related thereto (the "GreenBox Business”). As consideration for the GreenBox Business, on April 12, 2018, PubCo assumed PrivCo’s liabilities that had been incurred in the normal course of the GreenBox Business.

 

On May 3, 2018, PubCo formally changed its name to GreenBox POS LLC, then subsequently changed its name to GreenBox POS on December 13, 2018.

 

25

 

Management Discussion and Analysis

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2022 (Unaudited) Compared to Three Months June 30, 2021 (Unaudited):

 

   

Three Months Ended June 30,

                 
   

2022

   

2021

   

Change

 
           

% of

           

% of

                 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 
                                                 

Net revenue

  $ 6,965,578       100.0 %   $ 6,379,179       100.0 %   $ 586,399       9.2 %

Cost of revenue

    4,142,878       59.5 %     1,323,480       20.7 %     2,819,398       213.0 %

Gross profit

    2,822,700       40.5 %     5,055,699       79.3 %     (2,232,999 )     -44.2 %
                                                 

Operating expenses:

                                               

Advertising and marketing

    526,852       7.6 %     22,605       0.4 %     504,247       2230.7 %

Research and development

    1,919,944       27.6 %     808,210       12.7 %     1,111,734       137.6 %

General and administrative

    1,353,604       19.4 %     298,030       4.7 %     1,055,574       354.2 %

Payroll and payroll taxes

    2,712,424       38.9 %     1,061,929       16.6 %     1,650,495       155.4 %

Professional fees

    1,167,798       16.8 %     867,472       13.6 %     300,326       34.6 %

Stock compensation for employees

    -       0.0 %     1,291,887       20.3 %     (1,291,887 )     -100.0 %

Stock grant expense

    1,715,298       24.6 %     -       0.0 %     1,715,298       n/a  

Stock compensation for services

    79,238       1.1 %     726,933       11.4 %     (647,695 )     -89.1 %

Depreciation and amortization

    2,126,607       30.5 %     14,244       0.2 %     2,112,363       14829.8 %

Total operating expenses

    11,601,765       166.6 %     5,091,310       79.8 %     6,510,455       127.9 %
                                                 

Loss from operations

    (8,779,065 )     -126.0 %     (35,611 )     -0.6 %     (8,743,454 )     24552.7 %
                                                 

Other Income (Expense):

                                               

Interest expense

    (1,866,016 )     -26.8 %     -       0.0 %     (1,866,016 )     n/a  

Interest expense - debt discount

    (5,582,164 )     -80.1 %     -       0.0 %     (5,582,164 )     n/a  

Changes in fair value of derivative liability

    26,373,994       378.6 %     -       0.0 %     26,373,994       n/a  

Merchant liability settlement

    -       0.0 %     -       0.0 %     -       n/a  

Other income or expense

    185,893       2.7 %     (3,949 )     -0.1 %     189,842       -4807.3 %

Total other income (expense)

    19,111,707       274.4 %     (3,949 )     -0.1 %     19,115,656       -484063.2 %
                                                 

Income (Loss) before provision for income taxes

    10,332,642       148.3 %     (39,560 )     -0.6 %     10,372,202       -26218.9 %
                                                 

Provision for income taxes

    (77,443 )     -1.1 %     -       0.0 %     (77,443 )     0.0 %
                                                 

Net income (loss)

  $ 10,410,085       149.5 %   $ (39,560 )     -0.6 %   $ 10,449,645       -26414.7 %

 

26

 

Net Revenue

 

Net revenue increased by $586,399, or 9.2%, to $6,965,578 for the three months ended June 30, 2022, from $6,379,179 for the three months ended June 30, 2021. The change in net revenue reflected the following:

 

 

Continued work on technology launch of new platforms in late 2020 which was fully effective in the three months ended September 30, 2021.

 

 

Increase in processing volume in the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

 

Cost of Revenue

 

Cost of revenue increased by $2,819,398, or 213.0%, to $4,142,878 for the three months ended June 30, 2022, from $1,323,480 for the three months ended June 30, 2021. Payment processing consists of various processing fees paid to Gateways, as well as commission payments to the Independent Sales Organizations (“ISO”) responsible for establishing and maintaining merchant relationships, from which the processing transactions ensue. Cost of revenues increased due to the following:

 

 

Increased volume, resulting in higher processing fees paid to Gateways and commission payments to ISOs. The gross margin decreased due to increase in fees in ISO.

 

Operating Expenses

 

Operating expenses increased by $6,510,455, or 127.9%, to $11,601,765 for the three months ended June 30, 2022, from $5,091,310 for the three months ended June 30, 2021. The increase was due primarily to higher stock grant expense, depreciation and amortization, and payroll and payroll taxes for the three months ended June 30, 2022, offset by decreases in stock compensation for employees.

 

Other Income (Expense)

 

Other income (expense) increased by $19,115,656, or 484,063.2%, to $19,111,707 for the three months ended June 30, 2022, from ($3,949) for the three months ended June 30, 2021. Interest expense increased significantly in the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due to the $100,000,000 convertible note issued in November 2021. Amortization of the discount, fees and the fair value of the derivative liability associated with the note were also contributing factors.  Furthermore, the Company changes in fair value of derivative liability expense of $26,373,994 for the three months ended June 30, 2022 and none in the previous year same quarter.

 

27

 

Six Months Ended June 30, 2022 (Unaudited) Compared to Six Months June 30, 2021 (Unaudited):

 

   

Six Months Ended June 30,

                 
   

2022

   

2021

   

Change

 
           

% of

           

% of

                 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 
                                                 

Net revenue

  $ 11,861,104       100.0 %   $ 11,128,620       100.0 %   $ 732,484       6.6 %

Cost of revenue

    6,706,708       56.5 %     2,917,251       26.2 %     3,789,457       129.9 %

Gross profit

    5,154,396       43.5 %     8,211,369       73.8 %     (3,056,973 )     -37.2 %
                                                 

Operating expenses:

                                               

Advertising and marketing

    667,818       5.6 %     47,330       0.4 %     620,488       1311.0 %

Research and development

    3,858,077       32.5 %     1,461,591       13.1 %     2,396,486       164.0 %

General and administrative

    3,145,788       26.5 %     864,225       7.8 %     2,281,563       264.0 %

Payroll and payroll taxes

    5,095,821       43.0 %     1,621,130       14.6 %     3,474,691       214.3 %

Professional fees

    2,672,359       22.5 %     1,325,224       11.9 %     1,347,135       101.7 %

Stock compensation for employees

    166,800       1.4 %     2,089,500       18.8 %     (1,922,700 )     -92.0 %

Stock grant expense

    1,715,298       14.5 %     -       0.0 %     1,715,298       n/a  

Stock compensation for services

    205,652       1.7 %     10,180,758       91.5 %     (9,975,106 )     -98.0 %

Depreciation and amortization

    2,580,948       21.8 %     20,253       0.2 %     2,560,695       12643.5 %

Total operating expenses

    20,108,561       169.5 %     17,610,011       158.2 %     2,498,550       14.2 %
                                                 

Loss from operations

    (14,954,165 )     -126.1 %     (9,398,642 )     -84.5 %     (5,555,523 )     59.1 %
                                                 

Other Income (Expense):

                                               

Interest expense

    (3,755,501 )     -31.7 %     (594,258 )     -5.3 %     (3,161,243 )     532.0 %

Interest expense - debt discount

    (11,102,986 )     -93.6 %     (2,993,408 )     -26.9 %     (8,109,578 )     270.9 %

Changes in fair value of derivative liability

    18,673,994       157.4 %     -       0.0 %     18,673,994       n/a  

Merchant liability settlement

    -       0.0 %     (364,124 )     -3.3 %     364,124       -100.0 %

Other income or expense

    235,209       2.0 %     (18,560 )     -0.2 %     253,769       -1367.3 %

Total other income (expense)

    4,050,716       34.2 %     (3,970,350 )     -35.7 %     8,021,066       -202.0 %
                                                 

Loss before provision for income taxes

    (10,903,449 )     -91.9 %     (13,368,992 )     -120.1 %     2,465,543       -18.4 %
                                                 

Provision for income taxes

    2,453       0.0 %     -       0.0 %     2,453       0.0 %
                                                 

Net loss

  $ (10,905,902 )     -91.9 %   $ (13,368,992 )     -120.1 %   $ 2,463,090       -18.4 %

 

28

 

Net Revenue

 

Net revenue increased by $732,484, or 6.6%, to $11,861,104 for the six months ended June 30, 2022, from $11,128,620 for the six months ended June 30, 2021. The change in net revenue reflected the following:

 

 

Continued work on technology launch of new platforms in late 2020 which was fully effective in the three months ended September 30, 2021.

 

 

Increase in processing volume in the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

 

Cost of Revenue

 

Cost of revenue increased by $3,789,457, or 129.9%, to $6,706,708 for the six months ended June 30, 2022, from $2,917,251 for the six months ended June 30, 2021. Payment processing consists of various processing fees paid to Gateways, as well as commission payments to the Independent Sales Organizations (“ISO”) responsible for establishing and maintaining merchant relationships, from which the processing transactions ensue. Cost of revenues increased due to the following:

 

 

Increased volume, resulting in higher processing fees paid to Gateways and commission payments to ISOs. The gross margin decreased due to increase in fees in ISO.

 

Operating Expenses

 

Operating expenses increased by $2,498,550, or 14.2%, to $20,108,561 for the six months ended June 30, 2022, from $17,610,011 for the six months ended June 30, 2021. The increase was due primarily to higher stock grant expense, depreciation and amortization, and payroll and payroll taxes for the six months ended June 30, 2022, offset by decreases in stock compensation for employees and services.

 

Other Income (Expense)

 

Other income (expense) increased by $8,021,066 or 202.0%, to $4,050,716 for the six months ended June 30, 2022, from ($3,970,350) for the six months ended June 30, 2021. Interest expense increased significantly in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 due to the $100,000,000 convertible note issued in November 2021. Amortization of the discount, fees and the fair value of the derivative liability associated with the note were also contributing factors.  Furthermore, the Company changes in fair value of derivative liability expense of $18,673,994 for the six months ended June 30, 2022 and none in the previous year same quarter.

 

Provision for Income Taxes

 

The Company estimates our annual effective income tax rate to be 0.00% for calendar 2022, which is different from the U.S. federal statutory rate, primarily due to its full valuation position. The Company recorded approximately $2,000 of tax expense. As of June 30, 2022, we have no material unrecognized tax benefits, and the Company expects no change to unrecognized tax benefits within next 12 months.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The primary sources of liquidity have historically been derived from raising capital by issuing debt or common stock. Our cash flow from operations is not yet able to cover cash needs. The Company believes current cash balances will be sufficient to cover our operating needs for the next twelve months. Our $89 million convertible note matures November 2023. There are covenants associated with the note that accelerates the conversion of tranches of the note should certain targets be met.

 

The Company may, in the future, seek to raise additional capital to fund growth, operations and other business activities, but such additional capital may not be available to us on acceptable terms, on a timely basis, or at all.

 

29

 

The following table summarizes our cash flows from operating, investing and financing activities (unaudited):

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 
                 

Net cash provided by (used in) operating activities

  $ 3,094,937     $ (13,667,974

)

Net cash provided by (used in) investing activities

    (45,559,088

)

    (2,568,411

)

Net cash provided by (used in) financing activities

    (9,231,508

)

    44,200,398  
Cash acquired from acquisition of Transact Europe     18,676,860       -  

Net increase (decrease) in cash, cash equivalents, and restricted cash

  $ (33,018,798

)

  $ 27,964,013  

 

Operating Activities For the six months ended June 30, 2022 and 2021, net cash provided by and used in operating activities was $3,094,937 and ($13,667,974), respectively. The cash provided by operating activities was primarily due to net loss and timing of settlement of assets and liabilities including stock compensation expenses.

 

Investing Activities – Net cash used in investing activities primarily consisted of the acquisition of Transact Europe and Sky Financials for the six months ended June 30, 2022.

 

Financing Activities – Net cash provided by financing activities primarily consisted of proceeds from the Offering of $45,805,491 for the six months ended June 30, 2021 and net cash used in by financing activities primarily consisted of repurchases of common stock under treasury method of $3,236,723 and repayment of convertible debt of $6,000,000 for the six months ended June 30, 2022.

 

CRITICAL ACCOUNTING ESTIMATES

 

Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers outlines the basic criteria that must be met to recognize revenue and provide guidance for presentation of revenue and for disclosure related to revenue recognition policies.

The Company recognizes revenue when 1) it is realized or realizable and earned, 2) there is persuasive evidence of an arrangement, 3) delivery and performance has occurred, 4) there is a fixed or determinable sales price, and 5) collection is reasonably assured.

 

The Company generates revenue from payment processing services, licensing fees and equipment sales.

 

 

Payment processing revenue is based on a percentage of each transaction’s value and/or upon fixed amounts specified per each transaction or service and is recognized as such transactions or services are performed.

 

Licensing revenue is paid in advance and is recorded as unearned income, which is amortized over the period of the licensing agreement.

 

Equipment sales revenue is generated from the sale of POS products, which is recognized when goods are shipped. Revenue recognized from the sale of equipment was not material.

 

Cash Due from Gateways and Payment Processing Liabilities

 

The Company’s primary source of revenues continues to be payment processing services for its merchant clients. When such merchant makes a sale, the process of receiving the payment card information, engaging the banks for transferring the proceeds to the merchant’s account via digital gateways, and recording the transaction on a blockchain ledger are the activities for which the Company gets to collect fees.

 

In 2022 and 2021 the Company utilized several gateways. The gateways have strict guidelines pertaining to scheduling of the release of funds to merchants based on several criteria, such as return and chargeback history, associated risk for the specific business vertical, average transaction amount and so on. In order to mitigate processing risks, these policies determine reserve requirements and payment in arear strategy. While reserve and payment in arrears restrictions are in effect for a merchant payout, the Company records gateway debt against these amounts until released.

 

Therefore, the total gateway balances reflected in the Company’s books represent the amount owed to the Company for processing – these are funds from transactions processed and not yet distributed.

 

30

 

ITEM 4. CONTROLS AND PROCEDURES

 

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that, as of June 30, 2022, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three and six months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

31

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The information called for by this item is incorporated herein by reference to Note 15 Commitments and Contingencies under the heading “Legal Proceedings” included in Part I, Item 1, Financial Statements (unaudited) — Notes to Unaudited Condensed Consolidated Financial Statements.

 

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

 

Share Repurchases

 

On January 6, 2022, GreenBox POS (the “Company”) announced that the Company’s Board of Directors approved an increase of $10,000,000 in its share repurchase program (the “Share Repurchase Program”), providing for the repurchase of a portion of the Company’s outstanding common stock for up to $15,000,000. From May 13, 2021 to March 31, 2022, the Company has repurchased a total of 1,098,586 shares at an aggregate cost of $7,936,785.

 

There were no share repurchases in the three months ended June 30, 2022.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

32

 

ITEM 6. EXHIBITS

 

31.1

Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).

31.2

Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).

32.1*

Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

* In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

 

33

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

GREENBOX POS

(Registrant)

 
       

Date: August 15, 2022

By:

/s/ Fredi Nisan

 
   

Fredi Nisan

Chief Executive Officer (Principal Executive Officer)

       
       

Date: August 15, 2022

By:

/s/ Benjamin Chung

 
   

Benjamin Chung

Chief Financial Officer (Principal Financial Officer)

 

 

34

 

 

 
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