The following discussion and analysis of our consolidated financial condition
and results of operations for years ended December 31, 2020 and 2019 should be
read in conjunction with the consolidated financial statements and notes related
thereto included elsewhere in this report and with the unaudited pro forma
condensed combined financial information included in this Item 7.
Overview
We are a FinTech company and PayFac that focuses on a suite of products in the
merchant services and payment facilitator verticals that seeks to provide
integrated business solutions to merchants throughout the United States. We seek
to accomplish this by providing merchants with a wide range of products and
services through our various online platforms, including financial and
transaction processing services. We also have products that provide support for
crowdfunding and other capital raising initiatives. We supplement our online
platforms with certain hardware solutions that are integrated with our online
platforms. Our business functions primarily through three
wholly-owned subsidiaries, eVance, OmniSoft, and CrowdPay, though substantially
all of our revenue has been generated from our eVance business (we began
generating revenue from our OmniSoft and CrowdPay businesses in the second half
of 2019). We expect to build out our OmniSoft software business and to rely more
on our PayFac model for revenue so that we are not dependent on our revenue from
our eVance business but there is no guarantee that we will be able to do so.
With respect to our eVance business, our merchants are currently processing over
$82,000,000 in gross transactions monthly and average approximately 1,400,000
transactions a month. These transactions come from a variety of sources
including direct accounts and ISO channels. The accounts consist of businesses
across the United States with no concentration of industries or merchants.
We have integrated all the applications for OmniSoft and the ShopFast
Omnicommerce solution with the eVance mobile payment gateway, SecurePay.comTM.
SecurePay.comTM, is currently used by approximately 3,000 merchants processing
over 32,000 transactions and approximately $9,000,000 of monthly gross
transactions (though our revenue from these transactions is limited). In July
2019, we launched a new merchant and ISO boarding system that will be able to
onboard merchants instantly. This will provide the merchant with an automated
approval and ISOs will have the ability to see all their merchants and their
residuals as they load to the system.
On May 22, 2020, the Company purchased certain assets from POSaBIT Inc.
("POSaBIT"), including its contracts and arrangements with the Doublebeam
merchant payment processing platform (the "POSaBIT Asset Acquisition"). The
assets included, but were not limited to, software source codes, customer lists,
customer contracts, hardware and website domains.
Results of Operations
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
For the year ended December 31, 2020, we had total revenue of $9,766,621
compared to $10,291,524 of revenue for the year ended December 31, 2019, a
decrease of $524,903 or 5.1%. We earned $8,358,459 in transaction and processing
fees, $88,538 in merchant equipment sales and $1,319,624 in other revenue from
monthly recurring subscriptions, compared to $10,177,931 in transaction and
processing fees, $88,797 in merchant equipment sales and $24,796 in other
revenue during the prior year.
Our transaction and processing fee revenue decreased $1,819,475 in the current
year primarily due to merchant attrition and the initial impact of the COVID-19
pandemic and the reduction in transactions processed while businesses were
closed and customers stayed home. While the volume of processing transactions by
merchants in March 2020 was relatively in-line with the Company's expectations
that the number of transactions during March would be below the prior year
because states in the United States began to implement stay-at-home orders, the
number of transactions and resulting revenue was approximately 15% lower in
March than in February and 30% lower in April than in March. In May, when some
states began to reopen businesses and relax stay-at-home orders, the number of
transactions increased whereby they were 5% higher than in April, and in June,
transactions were 7% higher than May. July, August and September have shown
month over month increases of 3%, 3% and 7% respectively. This trend continued
through the year-end with the three months ended December 31, 2020 increasing 4%
compered to the three months ended September 30, 2020.
46
For the year ended December 31, 2020, we had processing and servicing costs of
$6,003,931 compared to $6,723,666 of processing and servicing costs for the year
ended December 31, 2019. Processing and servicing costs decreased by $719,735 or
10.7% because of the decrease in the number of transactions processed during the
period and the reasons discussed above relating to the COVID-19 pandemic.
Amortization expense for the year ended December 31, 2020 was $844,423 compared
to $812,857 for the year ended December 31, 2019, an increase of $31,566 or
3.9%. We record amortization expense on our merchant portfolio and trademarks.
Salary and wage expense for the year ended December 31, 2020 was $1,363,451
compared to $1,490,762 for the year ended December 31, 2019, a decrease of
$127,311 or 8.5%. Salary and wage expense decreased in the current period due to
the reductions in our sales force, and other personnel made during 2019 and 2020
and not replaced in 2020.
General and Administrative ("G&A") expense for the year ended December 31, 2020
was $2,289,521 compared to $1,533,102 for the year ended December 31, 2019, an
increase of $756,419 or 49.3%. Some of our larger G&A expenses included rent,
stock-based compensation, professional fees and computer and internet expense.
In the current period we incurred additional professional fees related to the
completions of our public offering and amendments to our senior and subordinated
loans. Audit fees were increased by approximately $39,000 and legal and other
professional fees increased by approximately $123,000. We also recognized an
additional $237,000 of stock-based compensation in the current year.
For the year ended December 31, 2020, we incurred $1,043,933 of interest
expense, compared to $1,249,154 for the year ended December 31, 2019, a decrease
of $205,221 or 45.1%. The decrease in interest expense is primarily due the
conversion of all related party debt during the third quarter of 2020.
Our net loss for year ended December 31, 2020 was $1,776,727 compared to
$1,343,412 for year ended December 31, 2019. We had an increase in our net loss
of $428,332 for the reasons discussed above.
Trends and Uncertainties
The Company's financial condition and results of operations for the next fiscal
year 2021 may be adversely affected by the recent COVID-19 outbreak.
The New York and Atlanta areas, including the location of the Company's
corporate headquarters and its operations business, continue to experience
significant impact of the COVID-19 outbreak in the U.S. The Company is currently
following the recommendations of local health authorities to minimize exposure
risk for its employees and visitors. However, the scale and duration of this
pandemic is unknown, and the duration of the business disruption and related
financial impact cannot be reasonably estimated at this time. While the Company
is currently implementing specific business continuity plans to reduce the
potential impact of COVID-19 during 2021 and believe that its business being
principally operated using digital platforms, in the long-term, will suffer
minimal ongoing negative impact, there is no guarantee that the Company's
continuity plan will be successful, that the Company's merchants will meet the
number of forecasted transactions due to a change in consumer activity around
point of sale purchasing resulting from the temporary closure of businesses.
In 2020, the Company experienced certain disruptions to its business and
disruptions for the Company's customers and merchants that may materially affect
the number of transactions processed by the Company. The extent to which
COVID-19 or any other health epidemic may impact the Company's results for 2021
and beyond will depend on future developments, which are highly uncertain and
cannot be predicted, including new information which may emerge concerning the
severity of the economic impact of the response to the COVID-19 pandemic.
Accordingly, COVID-19 could have a material adverse effect on the Company's
business, results of operations, financial condition and prospects during 2021
and beyond.
47
Liquidity and Capital Resources
Changes in Cash Flows
For the year ended December 31, 2020, we used $327,267 of cash in operating
activities, which included our net loss offset by $861,269 for amortization and
depreciation expense, $502,105 for stock-based compensation, and net changes in
operating assets and liabilities of $84,952.
For the year ended December 31, 2019, $244,868 in cash was provided by operating
activities, which included our net loss offset by $842,149 for amortization and
depreciation expense, $265,050 for stock-based compensation and net changes in
operating assets and liabilities of $481,081.
For the year ended December 31, 2020 we used $150,000 of cash used for investing
activities. The $150,000 represents the purchase price in connection with the
POSaBIT Asset Acquisition. For the year ended December 31, 2019, no cash was
used for investing activities.
For the year ended December 31, 2020, we received net cash of $3,794,142 from
financing activities. $1,845,155 was repaid on our loan to GACP. We received
$236,231 from the Paycheck Protection Program loan under the CARES Act and a
total of $5,192,761 from the sale of stock and warrants. For the year ended
December 31, 2019, $151,616 in cash was provided by financing activities. We
received $361,467 from related party loans which was offset by $210,305 of
deferred offering costs.
Liquidity and Capital Resources
At December 31, 2020, the Company had cash of $3,824,491 and working capital of
$3,205,807.
In connection with the response to the COVID-19 pandemic in the United States,
the Company has experienced disruptions to its business and has observed
disruptions with its customers and merchants, which has resulted in a decline in
transaction volume. While the volume of processing transactions by merchants in
March was relatively in-line with the Company's expectations that the number of
transactions during March would be below the prior year because states in the
United States began to implement stay-at-home orders, the number of transactions
and resulting revenue was approximately 15% lower in March than in February and
30% lower in April than in March. In May, when some states began to reopen
businesses and relax stay-at-home orders, the number of transactions increased
whereby they were 5% higher than in April, and in June, transactions were 7%
higher than May. July, August and September have shown month over month
increases of 3%, 3% and 7%, respectively. The Company's revenue during the
period of time decreased and then increased in the amount of similar to the
percentage of month-to-month transaction volume.
The Company's revenue during the period of time decreased and then increased in
the amount similar to the percentage of month-to-month transaction volume.
Despite recent increases in volume, the Company estimates that the number of
transactions will continue to stay at a depressed level, along with revenues,
until the economic impact of and response to the COVID-19 pandemic allows
customers to make more point of purchase transactions for merchants, customers
become more comfortable shopping in stores and/or more merchants provide for
additional contactless and online purchase options. The anticipated amount of
decline from prior year is unknown, but it will be impacted by when consumers
return to the level of purchasing that occurred in the prior year and before the
pandemic. However, additional closings and reopenings of businesses or if
additional businesses cease to operate in the future will likely result in a
month over month decline and then increase similar to what occurred in March
through June 2020.
On August 11, 2020, the Company closed an offering of its securities (the
"Offering") for gross proceeds of $6.45 million. The Company sold 700,000 units
consisting of (a) one share of our common stock; (b) two Series A Warrants, and
(c) one-half of one Series B warrant. In addition, the underwriter fully
exercised its option to purchase 210,000 Series A warrants and 52,500 Series B
warrants. While 20% of the net proceeds of $5.5 million was used to repay a
portion of our outstanding Term Loan, immediately following the Offering, the
Company had cash of $5.6 million on hand. As such, the Company believes it will
be able fund future liquidity and capital requirements through cash flows
generated from its operating activities for a period of at least twelve months
from the date its condensed consolidated financial statements are issued.
48
On August 11, 2020, Mr. Herzog converted $3,612,940 of indebtedness into 3,612
shares of Series A Preferred Stock (the terms of which are described below) and
802,875 Series A Conversion Warrants with an exercise price of $9.00 and 200,719
Series B Conversion Warrants with an exercise price of $4.50.
Also, on August 11, 2020, Mr. Yakov converted $1,021,512 of indebtedness into
1,021 shares of Series A Preferred Stock (the terms of which are described
below) and 227,003 Series A Conversion Warrants with an exercise price of $9.00
and 56,751 Series B Conversion Warrants with an exercise price of $4.50.
On March 2, 2021, the Company, utilizing a portion of funds received upon the
exercise of outstanding warrants, paid approximately $7.7 million to the Agent
under the Credit Agreement (the "Prepayment"). This Prepayment resulted in the
discharge in full of all of the obligations under the Credit Agreement. In
connection with the extinguishment of the obligations under the Credit
Agreement, 40,000 warrants to purchase Common Stock were cancelled.
Following the payment and discharge of the Term Loan and conversion of
indebtedness held by Messrs. Herzog and Yakov, the Company has approximately
$549,200 of outstanding liabilities.
In addition, the Company has received a Paycheck Protection Program loan under
the CARES Act for approximately $236,000 (the "PPP Loan"). The Paycheck
Protection Program provides that the use of PPP Loan proceeds was limited to
certain qualifying expenses and may be partially or wholly forgiven in
accordance with the requirements set forth in the CARES Act. The Company
believes it has used the PPP Loan for permitted uses whereby it will be forgiven
in full, although no assurance can be given that the Company will obtain
forgiveness of all or any portion of amounts due under the PPP Loan.
The Company has reviewed its cash flow for 2020, projected operating cash flows
for 2021 and an overall analysis of market trends to determine whether or not it
has sufficient liquidity to continue as a going concern for a period of at least
twelve months from the date of this Annual Report. As a result of the improved
transaction volume trends the Company experienced in the six month period ended
December 31, 2020, as well as the funds received from the capital raises
discussedabove, the Company believes it has sufficient liquidity in order to
sustain operations for at least of the following twelve months.
Off-Balance Sheet Arrangements
As of December 31, 2020, there were no off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, and results of operations, liquidity
or capital resources.
Critical Accounting Policies
Refer to Note 2 of our financial statements contained elsewhere in this Form
10-K for a summary of our critical accounting policies and recently adopting and
issued accounting standards.
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