Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operation
The following discussion and analysis of our
consolidated financial condition and results of operations for years ended December 31, 2021 and 2020 should be read in conjunction
with the consolidated financial statements and notes related thereto included elsewhere in this report.
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 $100,000,000 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 provides 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.
On May 14, 2021, the Company formed OLBit, Inc.,
a wholly owned subsidiary (“OLBit”). The purpose of OLBit is to hold the Company’s assets and operate its business related
to its emerging cryptocurrency-related lending and transactional business.
On July 23, 2021, we formed DMINT, Inc., a wholly
owned subsidiary (“DMINT”) to operate in the cryptocurrency mining industry. DMINT has initiated the first phase of the cryptocurrency
mining operation by placing purchase orders for data centers and ASIC-based Antminer S19J Pro mining computers specifically configured
to mine Bitcoin. The first lot of equipment is being used to establish a proof of concept before DMINT expands the number of computers
in operation. As of December 31, 2021, DMint has purchased 1,000 computers, of which 650 computers have been delivered with 250 online
and mining for Bitcoin, 400 computers are in process of being installed and 350 computers are scheduled for delivery in 2022. It has six
data centers located in Pennsylvania where it has mined ten Bitcoin. It has entered into an exclusive agreement whereby it has rights
to all of the natural gas produced by 15 mines in Bradford, Pennsylvania. The natural gas is taken directly from the well heads to generate
electricity required to power the mining computers. As configured, it is expected that the computers purchased will have a combined computing
power of approximately 100 petahash per second. If the initial mining operation results are as anticipated, DMINT plans to expand the
number of mining computers every quarter, whereby it would aim to have the computing power of 500 petahash per second by the end of 2022.
On January 3, 2022, the Company entered into
a share exchange agreement with all of the shareholders of Crowd Ignition, Inc. (“Crowd Ignition”) whereby the Company would
purchase 100% of the equity of Crowd Ignition in exchange for 1,318,408 shares of the common stock, par value $0.0001 of the Company (the
“CI Issued Shares”). The value of the CI Issued Shares was, for purposes of the Agreement, based on the closing trading price
of the Company on October 1, 2021 (the date on which a third-party fairness opinion was issued), resulting in an aggregate purchase price
for Crowd Ignition of $5.3 million.
48
Crowd Ignition is a web-based crowdfunding software
system. Ronny Yakov, Chairman and CEO of the Company and John Herzog, a significant shareholder of the Company, own 100% of the equity
of Crowd Ignition. The software provides broker-dealer, merchant banks and law firms a platform to market crowdfunding offerings, collect
payments and issue securities. The software has been developed in response to, and to comply with, recent changes in investment regulations
including Regulation D 506(b) and 506(v), Regulation A+ and Title III of the Jobs Act (Regulation CF), including raising the crowdfunding
limit from $1.07 million to $5.0 million. Crowd Ignition is one of only about 50 companies registered with the SEC to provide the services
permitted under Regulation CF.
Results of Operations
Year Ended December 31, 2021 Compared to
the Year Ended December 31, 2020
For the year ended December 31, 2021, we had total
revenue of $16,710,759 compared to $9,766,621 of revenue for the year ended December 31, 2020, an increase of $6,944,138 or 71.1%. We
earned $15,810,626 in transaction and processing fees, $131,802 in merchant equipment sales, $464,327 in other revenue from monthly recurring
subscriptions and $304,004 of other revenue from the Cryptocurrency Mining segment, compared to $8,358,459 in transaction and processing
fees, $88,538 in merchant equipment sales and $1,319,624 in other revenue during the prior year (the Company did not have revenue from
the Cryptocurrency Mining segment in 2020).
Our transaction and processing fee revenue increased
$7,452,167 in the current year. The increase was a result of an increase in the amount of fees earned from merchant processing transactions
due to an increased number of transactions during 2021 compared to the prior year and an increase in the number of rentals and sales of
merchant equipment. The increase was primarily due to the revenue attributed to the merchant portfolio acquired in the fourth quarter
ended December 31, 2021.
For the year ended December 31, 2021, we had processing
and servicing costs of $13,480,212 compared to $6,003,931 of processing and servicing costs for the year ended December 31, 2020. Processing
and servicing costs increased by $7,476,281 or 124.5%. Processing and servicing costs increased in conjunction with the increased revenue.
Amortization and depreciation expense for the
year ended December 31, 2021 was $1,890,899 compared to $844,423 for the year ended December 31, 2020, an increase of $1,046,476 or 123.9%.
We record amortization expense on our merchant portfolio, trademarks and natural gas purchase rights. Our amortization expense for the
year ended December 31, 2021, was $1,241,589, which increased in the current year due to the agreement with Cai Energy to purchase natural
gas to operate the cryptocurrency mining computers used in the Cryptocurrency Mining segment. Our deprecation increased in the current
year to $649,310, due to the acquisition of Cryptocurrency Mining equipment.
Salary and wage expense for the year ended December
31, 2021 was $2,126,451 compared to $1,363,451 for the year ended December 31, 2020, an increase of $763,000 or 56%. Salary and wage expense
increased in the current period due to bonuses paid to our CEO and President for the Company’s performance in 2020 and 2021 and
new employees hired during the year.
Professional fees for the year ended December 31, 2021 were $1,590,520
compared to $769,159 for the year ended December 31, 2020, an increase of $821,361 or 106.8%. Professional fees consist mainly of audit
and legal fees. In the current year our legal expense increased approximately $981,000, which was offset with a decrease in our audit
fees of approximately $159,000.
General and Administrative (“G&A”)
expense for the year ended December 31, 2021 was $2,387,416 compared to $1,520,362 for the year ended December 31, 2020, an increase of
$867,054 or 57%. Some of our larger G&A expenses included rent of $106,000, stock-based compensation of $461,000, contracted services
of $624,000 and computer and internet expense of $332,000.
For the year ended December 31, 2021, we incurred
$116,737 of interest expense, compared to $1,043,933 for the year ended December 31, 2020, a decrease of $927,196 or 185.6% The decrease
in interest expense is primarily due the conversion of all related party debt during the third quarter of 2020 and the repayment of the
Term Loan. In the current year we recognized a $236,231 gain on forgiveness of debt for the forgives of our PPP loan. We also recognized
litigation liability expense of $333,158.
Our net loss for year ended December 31, 2021
was $4,978,358 compared to $1,776,727 for year ended December 31, 2020. We had an increase in our net loss of $3,201,631 for the reasons
discussed above.
49
Trends and Uncertainties
The Company’s financial condition
and results of operations for the next fiscal year 2022 may be adversely affected by a further prolonging of the COVID-19 pandemic.
The New York and Atlanta areas, including the
location of the Company’s corporate headquarters and its operations business, continued to experience impacts of the COVID-19 pandemic
in the U.S. The Company is currently following the recommendations of local health authorities to minimize exposure risk for its employees
and visitors. However, the scale and duration of this pandemic remains unknown. If there was another increase in cases requiring quarantines
or closures of businesses, 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
2022 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 the future.
In 2021, as a result of the continued high transmission
of COVID-19 cases requiring quarantines and convalescence of so many people, the Company experienced some disruptions to its business
and disruptions for the Company’s customers and merchants that had an impact on 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 2022 and beyond will depend
on future developments and impacts of variants of the virus, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of the continuing economic impact of the response to the COVID-19 pandemic. Accordingly, COVID-19
could still have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during
2022 and beyond.
Liquidity and Capital Resources
Changes in Cash Flows
For the year ended December 31, 2021, we used
$3,508,082 of cash in operating activities, which included our net loss offset by $1,890,899 for amortization and depreciation expense,
$461,051 for stock-based compensation, a gain on forgiveness of debt of $236,231 and net changes in operating assets and liabilities
of ($648,117).
For the year ended December 31, 2020, we used
$327,267 of cash in operating activities, which included our net loss offset by $1,940,899 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, 2021, we used
$25,661,600 of cash used for investing activities. For the year ended December 31, 2020, we used $150,000 in connection with the POSaBIT
Asset Acquisition. During the current year we purchased $186,600 of office equipment and $9,410,000 of mining equipment for our DMINT
subsidiary.
For the year ended December 31, 2021, we received
net cash of $28,815,530 from financing activities. We received a total of $8,090,709 from the exercise of warrants issued in the offerings,
$16 from the exercise of options and we netted $28,379,650 from the sale of common stock and warrants. In addition, $7,654,845 was repaid
on our loan to GACP.
For the year ended December 31, 2020, we received
net cash of $3,793,536 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 $5,600,775 from the sale of stock and warrants and $94,500 from the exercise of warrants.
50
Liquidity and Capital Resources
At December 31, 2021, the Company had cash of
$3,470,339 and working capital of $1,834,452.
On August 11, 2020, the Company closed an offering
of its securities (the “Offering”) for gross proceeds of $6.45 million. The Company sold 700,000 units consisting of (a) one
share of our common stock; (b) two Series A Warrants, and (c) one-half of one Series B warrant. In addition, the underwriter
fully exercised its option to purchase 210,000 Series A warrants and 52,500 Series B warrants. While 20% of the net proceeds of $5.5 million
was used to repay a portion of our outstanding Term Loan, immediately following the Offering, the Company had cash of $5.6 million on
hand. As such, the Company believes it will be able fund future liquidity and capital requirements through cash flows generated from its
operating activities for a period of at least twelve months from the date its condensed consolidated financial statements are issued.
On August 11, 2020, Mr. Herzog converted $3,612,940
of indebtedness into 3,612 shares of Series A Preferred Stock (the terms of which are described below) and 802,875 Series A Conversion
Warrants with an exercise price of $9.00 and 200,719 Series B Conversion Warrants with an exercise price of $4.50.
Also, on August 11, 2020, Mr. Yakov converted
$1,021,512 of indebtedness into 1,021 shares of Series A Preferred Stock (the terms of which are described below) and 227,003 Series A
Conversion Warrants with an exercise price of $9.00 and 56,751 Series B Conversion Warrants with an exercise price of $4.50.
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”). On October 11, 2021, the Company
obtained forgiveness of all amounts due under the PPP Loan.
On November 2, 2021, the Company entered into
a series of securities purchase agreements with certain institutional accredited investors pursuant to which the Company issued and sold,
in a private placement (i) 1,969,091 shares (the “Shares”) of the Company’s Common Stock (ii) pre-funded warrants exercisable
for a total of 2,576,364 shares of Common Stock (the “Prefunded Warrant Shares”) with an exercise price of $0.0001 per Prefunded
Warrant Share, and (iii) warrants exercisable for a total of 4,545,455 shares of Common Stock (the “Common Warrant Shares”
and together with the Prefunded Warrant Shares, the “Warrant Shares”) with an exercise price of $6.50 per Common Warrant Share.
The offering closed on November 5, 2021 and the Company received net proceeds of approximately $22.9 million, after deducting placement
agent fees and other offering expenses. The Company intends to use the net proceeds from the offering to invest in or acquire companies
or technologies that are synergistic with or complimentary to its business, to expand and market its current products and for working
capital and general corporate purposes.
The Company has reviewed its cash flow for
2021, projected operating cash flows for 2022 and performed 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 during 2021 and the increase in the
number of merchants after the acquisitions of several portfolios during 2021, as well as the funds received from the capital raises
discussed above, the Company believes it has sufficient liquidity in order to sustain operations for at least the twelve months
following the filing of this Annual Report.
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.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
We are a smaller reporting company as defined
by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 8. Financial Statements and Supplementary
Data
51
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID # 229) F-2
Consolidated Balance Sheets at December 31, 2021 and 2020 F-4
Notes to the Consolidated Financial Statements F-8
F-1
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders
The OLB Group, Inc.
New York, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheet of The OLB Group, Inc. (the “Company”) at December 31, 2021 and 2020, and the related consolidated statements
operations, stockholders’ equity and cash flows for each of the two years in the periods ended December 31, 2021 and 2020, and the
related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below
is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to
the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions
on the critical audit matter or on the accounts or disclosures to which they relate.
F-2
Continued from previous page
Intangible Assets Impairment Assessments
As described in Notes 2 and 4 to the consolidated
financial statements, the Company has goodwill and intangible assets of $28.9 million at December 31, 2021. In most cases, no directly
observable market inputs are available to measure the fair value to determine if the asset is impaired. Therefore, an estimate is derived
indirectly and is based on net present value techniques utilizing post-tax cash flows and discount rates. The estimates that management
used in calculating the net present values depend on assumptions specific to the nature of the management service activities with regard
to the amount and timing of projected future cash flows; long-term forecasts; actions of competitors (competing services), future tax
and discount rates.
The principal considerations for our determination
that performing procedures relating to the intangible assets impairment assessment is a critical audit matter are the significant judgment
by management when developing the net present value of the intangible assets. This in turn led to a high degree of auditor judgment, subjectivity,
and effort in performing procedures and evaluating management’s significant assumptions related to the amount and timing of projected
future cash flows and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures
included testing management’s process for developing the fair value estimate; evaluating the appropriateness of the net present
value techniques; testing the completeness and accuracy of underlying data used in the model; and evaluating the significant assumptions
used by management, including the amount and timing of projected future cash flows and the discount rate. Evaluating management’s
assumptions related to the amount and timing of projected future cash flows and the discount rate involved evaluating whether the assumptions
used by management were reasonable considering the current and past performance of the intangible assets, the consistency with external
market and industry data, and whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ Daszkal Bolton LLP
Daszkal Bolton LLP
We have served as the Company’s auditor since 2020
Boca Raton, Florida
March 24, 2022
F-3
The OLB Group, Inc. and Subsidiaries
Consolidated
Balance Sheets
ASSETS
Current Assets:
Other Assets:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Merchant portfolio purchase installment obligation 2,000,000 —
Operating lease liability – current portion 133,180 85,598
Note payable – current portion — 450,000
Long Term Liabilities:
Notes payable, net of current portion — 7,441,076
Operating lease liability – net of current portion 273,166 185,045
Commitments and contingencies (Note 10)
Stockholders’ Equity:
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
The OLB Group, Inc. and Subsidiaries
Consolidated
Statements of Operations
For the Years Ended December 31,
Revenue:
Revenue, net - cryptocurrency mining 304,004 —
Other revenue from monthly recurring subscriptions 464,327 1,319,624
Operating expenses:
Other income (expense):
Interest expense, related party — (235,951 )
Gain on forgiveness of debt 236,231 —
Litigation expense (333,158 ) —
Net loss per share, basic and diluted $ (0.63 ) $ (0.31 )
Weighted average shares outstanding, basic and diluted 7,918,263 5,711,266
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
The OLB Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’
Equity
For the Years
ended December 31, 2021 and 2020
Preferred Stock Common Stock Additional Paid Accumulated
Shares Amount Shares Amount In Capital Deficit Total
Common stock issued exercise of warrants – related party 159,103 16 — 16
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
The OLB Group, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
For the Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Common stock issued for services – related party 165,009 203,724
Gain on forgiveness of debt (236,231 ) —
Changes in assets and liabilities:
Accrued expenses – related party — 235,952
Deferred revenue — (99,594 )
Net cash provided by (used in) operating activities (3,508,082 ) (326,661 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (9,596,599 ) —
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable — 236,231
Proceeds from exercise of options – related party 16 —
Proceeds from sale of warrants — 154,775
Payment of deferred offering costs — (292,815 )
Cash paid for:
Income taxes $ — $ —
Supplemental non-cash disclosure:
Conversion of debt – related party $ — $ 4,634,442
Merchant portfolio purchase installment obligation $ 2,000,000 —
Options issued for acquisition of natural gas rights $ 4,499,952 $ —
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
The OLB Group, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021
NOTE 1 – BACKGROUND
Background
The OLB Group, Inc. (“OLB” the “Company”)
was incorporated in the State of Delaware on November 18, 2004 and provides services through its wholly-owned subsidiaries and business
segments.
Fintech Services:
The Company provides integrated financial and
transaction processing services (“Fintech Services”) to businesses throughout the United States. Through its eVance Capital,
Inc. subsidiary (“eVance”), the Company provides an integrated suite of third-party merchant payment processing services and
related proprietary software enabling products that deliver credit and debit card-based internet payment processing solutions primarily
to small and mid-sized merchants operating in physical “brick and mortar” business environments, on the internet and in retail
settings requiring both wired and wireless mobile payment solutions. eVance operates as an independent sales organization (“ISO”)
generating individual merchant processing contracts in exchange for future residual payments. As a wholesale ISO, eVance has a direct
contractual relationship with the merchants and takes greater responsibility in the approval and monitoring of merchants than do retail
ISOs and as a result, receives additional consideration for this service and risk. The Company’s Securus365, Inc. (“Securus365”)
subsidiary operates as a retail ISO and receives residual income as commission for merchants it places with third party processors.
CrowdPay.us, Inc. (“CrowdPay”) is
a Crowdfunding platform used to facilitate a capital raise anywhere from $1,000,000 -$50,000,000 of various types of securities
under Regulation D, Regulation Crowdfunding, Regulation A and the Securities Act of 1933. To date, the activities of this subsidiary have
been nominal.
OmniSoft.io, Inc. (“OmniSoft”) operates
a software platform for small merchants. The Omnicommerce applications work on an iPad, mobile device and the web and allows customers
to sell a store’s products in a physical, retail setting. To date, the activities of this subsidiary have been nominal when compared
to the overall business.
On May 14, 2021, the Company formed OLBit, Inc.,
a wholly owned subsidiary (“OLBit”). The purpose of OLBit is to hold the Company’s assets and operate its business related
to its emerging cryptocurrency-related lending and transactional business.
Cryptocurrency Business:
On July 23, 2021, the Company formed DMINT, Inc.,
a wholly owned subsidiary (“DMINT”). The purpose of DMINT is to operate its business related to cryptocurrency mining (“Cryptocurrency
Business”).
On July 28, 2021, the Company entered into an
exclusive agreement with Cai Energy Blockchain, Inc. (“CAI”) whereby CAI provided the Company with an exclusive natural gas
supply agreement (the “Services”). In exchange for the Services, the Company granted CAI options to purchase up to 767,918 shares
of Common Stock, $0.0001 par value (with a fair value of approximately $4.5 million on the date of grant) at an exercise price
of $0.0001 per share. The natural gas will be used in connection with the Company’s, newly launched, cryptocurrency mining
business.
The Company also provides ecommerce development
and consulting services on a project-by-project basis.
The Company generates its revenue through two
business segments its Fintech Services and Cryptocurrency Business segments.
F-8
COVID-19 Impact
On January 30, 2020, the World Health Organization
declared the COVID-19 (coronavirus) outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared
it to be a pandemic. The virus and actions taken to mitigate its spread have had and are expected to continue to have a broad adverse
impact on the economies and financial markets of many countries, including the geographical areas in which the Company operates. In response
to the pandemic, the Company has been working with merchants to address potential changes to the purchase patterns of consumers. In addition,
it has been focusing on servicing merchants that sell products with an extended delivery time frame, that have products that are paid
for in advance, and that work in the catering, ticketing, limo and travel related businesses which have been directly impacted by the
social distancing requirement of the pandemic. Further, for those of the Company’s employees that are able to perform their job
remotely, the Company implemented a “remote work” policy and provided employees with the technology necessary to continue
to do their jobs from home and for those employees that are unable to perform their job from a remote location, the Company has taken
steps to ensure appropriate distancing, continue to require wearing masks in the office and added sanitizing stations along with requiring
frequent hand washing and work station cleaning. In addition, the Company has been encouraging its employees to get vaccinated, if possible.
At December 31, 2021, most employees were no longer working remotely and had returned to the office. However, the Company continues to
monitor and follow the advice of federal and state authorities. The Company has not seen a material impact on its business since states
began to roll back restrictions on businesses in the United States.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The Company’s consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The Company’s accounting estimates include the collectability
of receivables, useful lives of long-lived assets and recoverability of those assets, impairment in fair value of goodwill, valuation
allowances for income taxes, stock-based compensation.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, eVance, Securus, CrowdPay, Omnisoft, OLBit and DMINT. All significant
intercompany transactions and balances have been eliminated.
Reclassifications
Certain reclassifications have been made to the
prior year financial information to conform to the presentation used in the financial statements for year ended December 31, 2021.
Concentration of Credit Risk
Financial instruments that potentially expose
the Company to concentration of credit risk consist primarily of cash and accounts receivable. The Company’s cash is deposited with
major financial institutions. At times, such deposits may be in excess of the Federal Deposit Insurance Corporation insurable amount (“FDIC”).
As of December 31, 2021, the Company had $3,220,339 of cash in excess of the FDIC’s $250,000 coverage limit.
Operating Segments
Operating segments are defined as components of
an entity for which discrete financial information is available that is regularly reviewed by the Chief Operating Decision Maker (“CODM”),
or decision maker group, in deciding how to allocate resources to an individual segment and in assessing performance. Our chief operating
decision–making group is composed of the chief executive officer and Vice President. The Company has two operating segments as of
December 31, 2021. See Note 15, “Segment Information”.
F-9
Stock-based compensation
We account for equity-based transactions with
employees and non-employees under the provisions of FASB ASC Topic 718, “Compensation – Stock Compensation” (Topic
718), which establishes that equity-based payments to employees and non-employees are recorded at the grant date the fair value of
the equity instruments the entity is obligated to issue when the employees and non-employees have rendered the requisite service and satisfied
any other conditions necessary to earn the right to benefit from the instruments. Topic 718 also states that observable market prices
of identical or similar equity or liability instruments in active markets are the best evidence of fair value and, if available, should
be used as the basis for the measurement for equity and liability instruments awarded in these share-based payment transactions. However,
if observable market prices of identical or similar equity or liability instruments are not available, the fair value shall be estimated
by using a valuation technique or model that complies with the measurement objective, as described in FASB ASC Topic 718.
Net Loss per Share
Basic net loss per share of common stock is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common
share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive potentially outstanding shares
of common stock during the period. The weighted average number of common shares for the year ended December 31, 2021 and 2020 does not
include warrants to acquire 9,963,127 and 3,353,698 shares of common stock, respectively, because of their anti-dilutive effect. The weighted
average number of common shares for the year ended December 31, 2021 and 2020 does not include 772,362 and 172,438 options, respectively,
to purchase common stock because of their anti-dilutive effect.
Property and Equipment
Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized over the lesser of the
remaining term of the lease or the estimated useful life of the asset. Expenditures for repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying
value of its long-lived assets held and used at least annually or when events and circumstances warrant such a review. If significant
events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable, the Company performs
a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. Cash
flow projections are sometimes based on a group of assets, rather than a single asset. If cash flows cannot be separately and independently
identified for a single asset, the Company determines whether impairment has occurred for the group of assets for which it can identify
the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, it measures any impairment
by comparing the fair value of the asset group to its carrying value. If the fair value of an asset or asset group is determined to be
less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded.
Merchant Portfolios
Merchant portfolios are valued at fair value of
merchant customers on the date of acquisition and are amortized over their estimated useful lives (7 years).
Goodwill
The Company accounts for business combinations
under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business
Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities
assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted,
up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed
and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets
acquired less liabilities assumed is recognized as goodwill.
The Company tests for indefinite lived intangibles
and goodwill impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the
asset exceeds its fair value and may not be recoverable. In accordance with ASU 2017-04, Intangibles - Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment, the Company performed a quantitative assessment of indefinite lived intangibles
and goodwill and determined there was no impairment at December 31, 2021 and 2020.
F-10
Accounts Receivable
Accounts receivable represent contractual residual
payments due from the Company’s processing partners or other customers. Residual payments are determined based on transaction fees
and revenues from the credit and debit card processing activity of merchants for which the Company’s processing partners pay the
Company. Based on collection experience and periodic reviews of outstanding receivables, management considers all accounts receivable
for our residual payments to be fully collectible and accordingly, no allowance for doubtful accounts is required; however, CrowdPay has
a recorded an allowance of approximately $0 and $38,000 as of December 31, 2021 and 2020, respectively.
Reserve for Chargeback Losses
Disputes between a cardholder and a merchant periodically
arise as a result of, among other things, cardholder dissatisfaction with merchandise quality or merchant services. Such disputes may
not be resolved in the merchant’s favor. In these cases, the transaction is “charged back” to the merchant, which means
the purchase price is refunded to the customer through the merchant’s bank and charged to the merchant. If the merchant has inadequate
funds, the Company must bear the credit risk for the full amount of the transaction. The Company evaluates the risk for such transactions
and estimates the potential loss for chargebacks based primarily on historical experience and records a loss reserve accordingly.
Revenue Recognition and Cost of Revenues
The Company receives a percentage of recurring
monthly transaction related fees comprised of credit and debit card fees charged to merchants, net of association fees, otherwise known
as Interchange, as well as certain service charges and convenience fees, for payment processing services, including authorization, capture,
clearing, settlement and information reporting of electronic transactions. Fees are calculated on either a percentage of the dollar volume
of the transaction or a fixed fee or a hybrid of the two and are recognized at the time of the transaction. In the case of “wholesale”
residual revenue in which the Company has a direct contractual relationship with the merchant, bears risk of chargebacks and performs
underwriting on the merchants, the Company records the full discount charged to the merchant as revenue and the related interchange and
other processing fees as expenses. In cases of residual revenue where the Company is not responsible for merchant underwriting and has
no chargeback liability and has no or limited contractual relationship with the merchant, the Company records the amount it receives from
the processor net of interchange and other processing fees as revenue.
Disaggregation of Revenue
The following table presents the Company’s
revenue disaggregated by revenue source:
For the Years Ended December 31,
Revenue from contracts with customers:
F-11
The Company recognizes revenue under ASC 606,
“Revenue from Contracts with Customers” (“ASC 606”). The Company determines revenue recognition through the following
steps:
● Identification of a contract with a customer;
● Identification of the performance obligations in the contract;
● Determination of the transaction price;
● Recognition of revenue when or as the performance obligations are satisfied.
Revenue is recognized when control of the promised
goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange
for those goods or services. Shipping and handling activities associated with outbound freight after control over a product has transferred
to a customer are accounted for as a fulfillment activity and recognized as revenue at the point in time at which control of the goods
transfers to the customer. As a practical expedient, the Company does not adjust the transaction price for the effects of a significant
financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to
be one year or less.
Transaction and processing fees
Fees for the Company’s transaction and processing
arrangements are typically billed and paid on a monthly basis. The Company receives a percentage of recurring monthly transaction related
fees comprised of credit and debit card fees charged to merchants, net of association fees, otherwise known as Interchange, as well as
certain service charges and convenience fees, for payment processing services, including authorization, capture, clearing, settlement
and information reporting of electronic transactions. Fees are calculated on either a percentage of the dollar, volume of the transaction
or a fixed fee or a hybrid of the two and are recognized at the time of the transaction. These merchant services represent a single performance
obligation satisfied over time and that the same measure of progress should be used to measure the Company’s progress toward complete
satisfaction of the performance obligation. The Company will recognize revenue on a monthly basis as the services are transferred to the
customer in short daily increments that qualify for series guidance as the best measure of the transfer of control.
In wholesale contracts, the Company recognizes
transaction and processing fees on a gross basis as the Company is the principal in the merchant services. The Company has concluded it
is the principal because it has a direct contractual relationship with the merchant, is primarily responsible for the delivery of services
to the merchants, including performing underwriting, has discretion in setting prices, and bears risk of chargebacks and other merchant
losses. The Company also has the unilateral ability to accept or reject a transaction based on criteria established by the Company. As
the principal, the Company records the full discount charged to the merchant as revenue and the related interchange and other processing
fees within cost of revenues.
In retail contracts, the Company is not responsible
for merchant underwriting, has no chargeback liability and has no or limited contractual relationship with the merchant. As such, the
Company records the net amount it receives from the processor, after interchange and other interchange and other processing fees, as revenue.
Merchant equipment sales and other
The Company generates revenue through the sale
and rental of merchant equipment. The Company satisfies its performance obligation upon delivery of equipment to merchants and recognizes
revenue at a point in time. The Company allows for customer returns which are accounted for as variable consideration. The Company estimates
these amounts based on historical experience and reduces revenue recognized. The Company invoices customers upon delivery of the equipment
to merchants, and payments from such customers are due upon invoicing. The Company offers hardware installment sales to customers with
terms ranging from three to forty-eight months. The Company allocates a portion of the consideration received from these arrangements
to a financing component when it determines that a significant financing component exists. The financing component is subsequently recognized
as financing revenue separate from hardware revenue, within subscription and services-based revenue, over the terms of the arrangement
with the customer. Pursuant to practical expedients afforded under ASC 606, the Company does not recognize a financing component for hardware
installment sales that have a term of one year or less.
Cryptocurrency mining
The Company has entered into digital asset mining
pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool.
The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the
Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a
fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining
pool operator which are immaterial and are recorded as a deduction from revenue), for successfully adding a block to the blockchain. The
Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to
the total computing power contributed by all mining pool participants in solving the current algorithm.
F-12
Providing computing power to solve complex cryptographic
algorithms in support of the Bitcoin blockchain (in a process known as “solving a block”) is an output of the Company’s
ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts
with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures
at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company
has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative
revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first
to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized.
There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received
is determined using the quoted price of the related cryptocurrency at the time of receipt. Each individual unit of cryptocurrency held
by the Company is a separate unit of account. There is currently no specific definitive guidance under GAAP or alternative accounting
framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in
determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards
Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s consolidated
financial position and results from operations.
NOTE 3 – LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2021, the Company had cash of
approximately $3.5 million and working capital of approximately $1,800,000. As such, the Company believes it has sufficient liquidity
to fund its future operations and capital requirements for a period of at least twelve months from the date these consolidated financial
statements are issued.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets, net, consist of the following
as of:
Less accumulated amortization (190,476 ) —
Exclusive agreement to purchase natural gas $ 4,499,952 $ —
Less accumulated amortization (187,498 ) —
Amortization expense for the years ended December
31, 2021 and 2020 was $1,241,589 and $844,423, respectively.
The Company’s merchant portfolios