10-Q 1 greenbox20190930_10q.htm FORM 10-Q greenbox20190930_10q.htm

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 September 30, 2019

 

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)

 

8880 Rio San Diego Dr, Suite 102

San Diego, CA 

92108

 (Address of principal executive offices)

 (Zip Code)

 

 (619)-631-8261

(Registrant’s telephone number, including area code)

 

N/A

(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 exchange on

which registered

None

 

None

 

None

 

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 April 1, 2020, was 176,202,055 Shares of Common Stock (One Class)

 

 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I   Consolidated Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

3

 

Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (restated) 

3

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)

4

  Condensed Consolidated Statements of Stockholders’ Deficit for the Nine Months Ended September 30, 2019 and 2018 (unaudited) 5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)

7

 

Notes to (unaudited) Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis or Plan of Operation

29

Item 3.

Controls and Procedures

35

 

 

 

PART II  Other Information

 

 

 

 

Item 1.

Legal Proceedings

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

36

     

Signatures

37

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GREENBOX POS

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

   

(Restated)

 
   

September 30,

   

December 31,

 
   

2019

   

2018

 
                 

ASSETS

               
                 

Current Assets:

               

Cash and cash equivalents

  $ -     $ 45,854  

Restricted cash

    254,616       239,124  

Accounts receivable, net of allowance for bad debt of $5,627,692 and $0, respectively

    3,860,774       49,998  

Cash due from gateways, net

    13,193,333       630,699  

Prepaid and other current assets

    42,151       37,232  

Total current assets

    17,350,874       1,002,907  
                 

Non-current Assets:

               

Property and equipment, net

    25,347       30,715  

Operating lease right-of-use assets, net

    256,242       -  

Total non-current assets

    281,589       30,715  
                 

Total assets

  $ 17,632,463     $ 1,033,622  
                 
                 
                 

Current Liabilities:

               

Accounts payable

  $ 230,070     $ 127,029  

Other current liabilities

    2,792       9,401  

Accrued interest

    90,114       29,871  

Payment processing liabilities, net

    17,544,081       865,086  

Convertible debt

    807,500       846,500  

Derivative liability

    763,952       -  

Current portion of operating lease liabilities

    26,489       -  
                 

Total current liabilities

    19,464,998       1,877,887  

Operating lease liabilities, less current portion

    234,045       -  

Long-term debt

    -       75,000  
                 

Total liabilities

    19,699,043       1,952,887  
                 

Commitments and contingencies

               
                 

Stockholders' Equity:

               

Common stock, par value $0.001, 495,000,000 shares authorized, shares issued and

outstanding of 169,558,055 and 166,390,363, respectively

    169,558       166,390  

Common stock - issuable

    1,000       1,000  

Additional paid-in capital

    1,179,272       945,940  

Accumulated deficit

    (3,416,410 )     (2,032,595 )

Total stockholders' equity

    (2,066,580 )     (919,265 )
                 

Total liabilities and stockholder's equity

  $ 17,632,463     $ 1,033,622  

 

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

 

 

GREENBOX POS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Revenue

  $ 14,793,117     $ 191,010     $ 19,070,861     $ 305,935  
                                 

Cost of revenue

    6,834,198       232,251       10,602,555       250,173  
                                 

Gross profit

    7,958,919       (41,241 )     8,468,306       55,762  
                                 

Operating expenses:

                               

Advertising and marketing

    10,319       30,652       35,928       135,757  

Research and development

    381,112       124,897       1,085,298       287,919  

Cash due from gateway reserve expense

    5,665,031       -       5,665,031       -  

Payroll and payroll taxes

    420,074       140,137       967,121       178,116  

Professional fees

    281,659       168,067       588,677       515,419  

General and administrative

    176,120       53,220       375,373       232,777  

Depreciation and amortization

    4,897       1,937       11,352       4,431  

Total operating expenses

    6,939,212       518,910       8,728,780       1,354,419  
                                 

Income (loss) from operations

    1,019,707       (560,151 )     (260,474 )     (1,298,657 )
                                 

Other income (expense):

                               

Interest expense - debt discount

    -       -       (188,273 )     -  

Interest (expense) income

    3,837       (7,082 )     (171,116 )     (92,930 )

Derivative expense

    -       -       (634,766 )     -  

Changes in fair value of derivative liability

    236,184       -       (129,186 )     -  

Asset impairment

    -       -       -       (75,000 )

Total other expense, net

    240,021       (7,082 )     (1,123,341 )     (167,930 )
                                 

Income (loss) before provision for income taxes

    1,259,728       (567,233 )     (1,383,815 )     (1,466,587 )
                                 

Income tax provision

    -       -       -       -  
                                 

Net income (loss)

  $ 1,259,728     $ (567,233 )   $ (1,383,815 )   $ (1,466,587 )
                                 
                                 

Earnings (loss) per share:

                               

Basic and diluted

  $ 0.01     $ (0.00 )   $ (0.01 )   $ (0.02 )
                                 

Weighted average number of common shares outstanding:

                               

Basic and diluted

    168,492,966       158,890,363       167,136,344       88,662,960  

 

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

 

 

GREENBOX POS

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(UNAUDITED)

 

   

Common Stock

   

Additional

Paid-In

   

Accumulated

   

Total

Stockholders'

Equity

 
   

Shares

   

Amount

   

To be Issued

   

Amount

   

Capital

   

Deficit

   

(Deficit)

 
                                                         

Balance at June 30, 2019

    167,250,363     $ 167,250       3,307,692     $ 3,308     $ 1,179,272     $ (4,676,138 )   $ (3,326,308 )
                                                         

Shares issued from conversion of convertible debt

    2,307,692       2,308       (2,307,692 )     (2,308 )     -       -       -  
                                                         

Net income

    -       -       -       -       -       1,259,728       1,259,728  
                                                         

Balance at September 30, 2019

    169,558,055     $ 169,558       1,000,000     $ 1,000     $ 1,179,272     $ (3,416,410 )   $ (2,066,580 )

 

   

Common Stock

   

Additional Paid-In

   

Accumulated

   

Total Stockholders' Equity

 
   

Shares

   

Amount

   

To be Issued

   

Amount

   

Capital

   

Deficit

   

(Deficit)

 
                                                         

Balance at June 30, 2018

    158,890,363     $ 158,890       -     $ -     $ 796,940     $ (1,038,673 )   $ (82,843 )
                                                         

Net loss

    -       -       -       -       -       (567,233 )     (567,233 )
                                                         

Balance at September 30, 2018

    158,890,363     $ 158,890       -     $ -     $ 796,940     $ (1,605,906 )   $ (650,076 )

 

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

 

 

GREENBOX POS

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(UNAUDITED)

(continued)

 

   

Common Stock

   

Additional Paid-In

   

Accumulated

   

Total Stockholders' Equity

 
   

Shares

   

Amount

   

To be Issued

   

Amount

   

Capital

   

Deficit

   

(Deficit)

 
                                                         

Balance at December 31, 2018

    166,390,363     $ 166,390       1,000,000     $ 1,000     $ 945,940     $ (2,032,595 )   $ (919,265 )
                                                         

Common stock issuable under convertible debt

    -       -       25,000       4,500       -       -       4,500  
                                                         

Warrants issuable under convertible debt

    -       -       125,000       -       55,311       -       55,311  
                                                         

Common stock and warrants issuable forfeited

    -       -       (150,000 )     (4,500 )     (55,311 )     -       (59,811 )
                                                         

Share issued to employees and vendor

    860,000       860       -       -       85,640       -       86,500  
                                                         

Shares issuable from conversion of convertible debt

    -       -       2,307,692       2,308       147,692       -       150,000  
                                                         

Shares issued from conversion of convertible debt

    2,307,692       2,308       (2,307,692 )     (2,308 )     -       -       -  
                                                         

Net loss

    -       -       -       -       -       (1,383,815 )     (1,383,815 )
                                                         

Balance at September 30, 2019

    169,558,055     $ 169,558       1,000,000     $ 1,000     $ 1,179,272     $ (3,416,410 )   $ (2,066,580 )

 

 

   

Common Stock

   

Additional Paid-In

   

Accumulated

   

Total Stockholders' Equity

 
   

Shares

   

Amount

   

To be Issued

   

Amount

   

Capital

   

Deficit

   

(Deficit)

 
                                                         

Balance at December 31, 2017

    14,445,363     $ 14,445       -     $ -     $ 185,655     $ (139,319 )   $ 60,781  
                                                         

Common stock issued

    144,445,000       144,445       -       -       611,285       -       755,730  
                                                         

Net loss

    -       -       -       -       -       (1,466,587 )     (1,466,587 )
                                                         

Balance at September 30, 2018

    158,890,363     $ 158,890       -     $ -     $ 796,940     $ (1,605,906 )   $ (650,076 )

 

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

 

 

GREENBOX POS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net loss

  $ (1,383,815 )   $ (1,466,587 )
                 

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

               

Depreciation expense

    11,352       4,431  

Interest expense - debt discount

    188,273       -  

Stock compensation expense

    86,500       -  

Derivative expense

    634,766       -  

Changes in fair value of derivative liability

    129,186       -  

Noncash lease expense

    4,292       -  

Changes in assets and liabilities:

               

Accounts receivable

    (3,810,776 )     (139,940 )

Prepaid and other current assets

    (4,919 )     (15,738 )

Cash due from gateways, net

    (12,562,634 )     (132,104 )

Accounts payable

    79,768       93,146  

Other current liabilities

    (6,609 )     10,603  

Accrued interest

    20,243       16,176  

Payment processing liabilities, net

    16,678,995       132,943  

Deferred income

    -       270,000  

Net cash provided by (used in) operating activities

    64,622       (1,227,070 )
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (5,984 )     (26,267 )

Net cash used in investing activities

    (5,984 )     (26,267 )
                 

Cash flows from financing activities:

               

Borrowings from convertible debt

    482,500       443,000  

Repayments on convertible debt

    (496,500 )     -  

Repayment on long-term debt

    (75,000 )     -  

Proceeds from issuances of common stock

    -       755,730  

Net cash provided by financing activities

    (89,000 )     1,198,730  
                 

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

    (30,362 )     (54,607 )
                 

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

    284,978       83,353  
                 

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

  $ 254,616     $ 28,746  
                 

Supplemental disclosures of cash flow information

               

Cash paid during the period for:

               

Interest

  $ 110,873     $ 92,930  

Income taxes

  $ 800     $ 800  
                 

Non-cash financing activities:

               

Convertible debt conversion to common stock

  $ (150,000 )   $ -  

 

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

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Organization

 

GreenBox POS (the “Company” or “PubCo”) is a tech company formed with the intent of developing, marketing and selling innovative blockchain-based payment solutions, which the Company believes will cause favorable disruption in 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 GreenBox POS, Inc (“ASAP”), which was incorporated April 10, 2007 under the laws of the State of Nevada. 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, which was formed on August 10, 2017 (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, and 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 (collectively, the “GreenBox Acquisition”).

 

For accounting and reporting purposes, PubCo deemed the GreenBox Acquisition a “Reverse Acquisition” with PrivCo designated the “accounting acquirer” and PubCo designated the “accounting acquiree.”

 

Name Change

 

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. Unless the context otherwise requires, all references to “the Company,” “we,” “our”, “us” and “PubCo” refer to GreenBox POS. Unless the context otherwise requires, all references to “PrivCo” or the “Private Company” refer to GreenBox POS LLC, a limited liability company, formed in the state of Washington.

 

Unaudited Interim Financial Information

 

These unaudited interim financial statements have been prepared in accordance with GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. Therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2018.

 

The balance sheets and certain comparative information as of December 31, 2018 are derived from the audited financial statements and related notes for the year ended December 31, 2018 (“2018 Annual Financial Statements”), included in the Company’s 2018 Annual Report on Form 10-K. These unaudited interim financial statements should be read in conjunction with the 2018 Annual Financial Statements.

 

Basis of Presentation and Consolidation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

 

The financial statements include the combined accounts of PubCo and PrivCo. All amounts are presented in U.S. Dollars unless otherwise stated. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”).

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (continued)

 

Going Concern

 

As of September 30, 2019, the Company had cash, cash equivalents, and restricted cash of $254,616, has incurred a net loss of $1,383,815 for the nine months ended September 30, 2019, and has accumulated a deficit of $3,416,410 as of September 30, 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Additionally, as the GreenBox ecosystem grows, substantially larger volumes of working capital financing will be required to support our platform’s growth.

 

The Company intends to raise additional capital through private placements of debt and equity securities, but there can be no assurance that these funds will be available on terms acceptable to the Company, or will be sufficient to enable the Company to fully complete its development activities or sustain operations. If the Company is unable to raise sufficient additional funds, we will have to develop and implement a plan to further extend payables, reduce overhead or scale back our business plan until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

 

Accordingly, the accompanying financial statements have been prepared in conformity with GAAP, which contemplate our continuation as a going concern, and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

Restatement

 

On April 12, 2018, pursuant to a verbal agreement (the “Verbal Agreement”), PubCo acquired PrivCo’s blockchain gateway and payment system business, point of sale system business, delivery business and kiosk business, and 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 (collectively, the “GreenBox Acquisition”).

 

From April 12, 2018 through January 4, 2020 (the “In Between Period”), because there was ambiguity regarding the validity of the Verbal Agreement, PubCo filed required quarterly and annual reports with the Securities and Exchange Commission as if there had not been a Reverse Acquisition. During the In Between Period, PrivCo continued to operate as if it still owned the GreenBox Business, which included maintaining records of GreenBox Business financial transactions on PrivCo’s accounting software, and entering into contracts and agreements as PrivCo, while PubCo paid all expenses, including expenses related to PrivCo contracts entered into prior to April 12, 2018 and after April 12, 2018, as well as expenses incurred as a result of litigation resulting from disagreements between PrivCo and other parties. During the In Between Period, PubCo represented itself in press releases, as being the owner/operator of the GreenBox Business. Additionally, from April 12, 2018 through approximately December 31, 2018, PubCo and PrivCo shared control of PrivCo’s bank accounts, and on approximately January 1, 2019, PubCo assumed control of PrivCo’s bank accounts.

 

By virtue of the payment of PrivCo’s litigation expenses by PubCo, by virtue of PubCo representing itself in press releases, as being the owner/operator of the GreenBox Business, and by virtue of the shared control of PrivCo’s bank accounts starting on April 12, 2018, both PubCo and PrivCo concluded that the Verbal Agreement was valid and the GreenBox Business asset acquisition took place on April 12, 2018.

 

On January 4, 2020, PubCo and PrivCo entered into an Asset Purchase Agreement (the “Agreement”), to memorialize the Verbal Agreement. For accounting and reporting purposes, PubCo deemed the GreenBox Acquisition a “Reverse Acquisition” with PrivCo designated the “accounting acquirer” and PubCo designated the “accounting acquiree.”

 

Because PubCo previously filed quarterly and annual reports for 2018 with the Securities and Exchange Commission as if there had not been a Reverse Acquisition, PubCo was required to file amended Form 10-Qs for the periods ending June 30, 2018 and September 30, 2018, and an amended Form 10-K for the year ending December 31, 2018 (collectively the “Amended Reports”). These Amended Reports differ substantially from previously filed reports in that PubCo’s financials are presented on a combined basis with PrivCo. Additionally, the previous business operations of PubCo prior to April 12, 2018 are disregarded.

 

The Company therefore filed, on February 7, 2020, an amended 10-K (“Amended 10-K”) to the Company’s audited financial statements for the year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K, originally filed with the SEC on April 16, 2019 (the “2018 Report”) to restate the Company’s financial statements and revise related disclosures. As a substantial part of the Amended 10-K was amended and/or restated, the Company presented the entire text of the 2018 Report, as amended and/or restated by the Amended 10-K. Readers should therefore read and rely only on the Amended 10-K in lieu of the original 2018 Report.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 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 differ from those estimates.

 

Reclassification

 

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flows.

 

Cash, Cash Equivalents and Restricted Cash

 

The Company’s cash, 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. The Company has cash equivalents of $0 and $45,854, excluding cash held for settlement liabilities, as of September 30, 2019 and December 31, 2018, respectively.

 

 

Restricted CashThe 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, 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.

 

   

September 30, 2019

   

September 30, 2018

 
                 

Cash and cash equivalents

  $ -     $ 27,907  

Restricted cash

    254,616       839  
                 

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows

  $ 254,616     $ 28,746  

 

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 2019 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 arear 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.

 

Advertising and Marketing Costs

 

Advertising and marketing costs are recorded as general and administrative expenses when they are incurred. Advertising and marketing expenses were $10,319 and $30,652 for the three months ended September 30, 2019 and 2018, respectively, and $35,928 and $135,757 for the nine months ended September 30, 2019 and 2018, respectively.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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. Research and development expenses were $381,112 and $124,897 for the three months ended September 30, 2019 and 2018, respectively, and $1,085,298 and $287,919 for the nine months ended September 30, 2019 and 2018, respectively.

 

Revenue Recognition

 

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 in financial statements filed with the Securities and Exchange Commission. Management believes the Company’s revenue recognition policies conform to ASC 606.

 

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 monthly over the period of the licensing agreement.

 

Equipment revenue is generated from the sale of POS products, which is recognized when goods are shipped.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets, which range from three to eight years. Leasehold improvements are amortized over the shorter of the useful life of the related assets or the lease term. Expenditures for repairs and maintenance are charged to expense as incurred. For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any related gain or loss is reflected in income for the period.

 

Fair Value of Financial Instruments

 

The Company utilizes ASC 820-10, Fair Value Measurement and Disclosure, for valuing financial assets and liabilities measured on a recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The Company’s financial instruments consisted of cash, accounts payable and accrued liabilities, advances to due to or from affiliated companies, notes payable to officers.  The estimated fair value of cash, accounts payable and accrued liabilities, due to or from affiliated companies, and notes payable approximates its carrying amount due to the short maturity of these instruments.

 

The table below describes the Company’s valuation of financial instruments using guidance from ASC 820-10:

 

September 30, 2019

 

Level 1

   

Level 2

   

Level 3

 
                         

Derivative liability

  $ -             $ 763,952  

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 not more likely than not that some portion or all of the deferred tax assets will be realized.  Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

Long-Lived Asset Impairments

 

The Company reviews long-lived assets, including property and equipment and intangible assets, for impairment when events or changes in business conditions indicate that their carrying value may not be recovered, and at least annually. The Company considers assets to be impaired and writes them down to estimated fair value if expected associated undiscounted cash flows are less than the carrying amounts. Fair value is the present value of the associated cash flows.

 

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 nine months ended September 30, 2019 and 2018, as there are no potential shares outstanding that would have a dilutive effect.

 

Leases

 

Prior to January 1, 2019, the Company accounted for leases under Accounting Standards Codification (ASC) 840, Accounting for Leases. Effective from January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases

 

On February 25, 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. ASC 842 requires that lessees recognize right of use assets and lease liabilities calculated based on the present value of lease payments for all lease agreements with terms that are greater than twelve months.

 

ASC 842 distinguishes leases as either a finance lease or an operating lease that affects how the leases are measured and presented in the statement of operations and statement of cash flows. ASC 842 supersedes nearly all existing lease accounting guidance under GAAP issued by the Financial Accounting Standards Board (“FASB”) including ASC Topic 840, 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 IBR as of that date.

 

The adoption of ASC 842 resulted in recording an adjustment to operating lease right of use assets and operating lease liabilities of liabilities of $256,242 and $260,534, respectively as of September 30, 2019. The difference between the operating lease ROU assets and operating lease liabilities at transition represented tenant improvements, and indirect costs that was derecognized. The adoption of ASC 842 did not materially impact our results of operations, cash flows, or presentation thereof.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recently Adopted Accounting Updates

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with prior GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease. However, unlike prior GAAP—which required only finance (formerly capital) leases to be recognized on the balance sheet—the new ASU requires both types of leases to be recognized on the balance sheet. The ASU took effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. This standard can be applied at the beginning of the earliest period presented using the modified retrospective approach, which includes certain practical expedients that an entity may elect to apply, including an election to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which make improvements to Accounting Standards Codification (“ASC”) 842 and allow entities to not restate comparative periods in transition to ASC 842 and instead report the comparative periods under ASC 840.

 

The adoption of ASC 842 resulted in recording an adjustment to operating lease right of use assets and operating lease liabilities of liabilities of $256,242 and $260,534, respectively as of September 30, 2019. The difference between the operating lease ROU assets and operating lease liabilities at transition represented tenant improvements, and indirect costs that was derecognized. The adoption of ASC 842 did not materially impact our results of operations, cash flows, or presentation thereof.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The standard removes, modifies, and adds certain disclosure requirements for fair value measurements. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. While the Company is currently in the process of evaluating the effects of this standard on the consolidated financial statements, the Company plans to adopt ASU No. 2018-13 in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and expects the impact from this standard to be immaterial.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company’s accounting for the service element of a hosting arrangement that is a service contract is not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This standard does not expand on existing disclosure requirements except to require a description of the nature of hosting arrangements that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company plans to adopt the updated disclosure requirements of ASU No. 2018-15 prospectively in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and expects the impact from this standard to be immaterial.

 

Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

3.

REVERSE ACQUISITION

 

On January 4, 2020, PubCo and PrivCo entered into the Agreement to memorialize the Verbal Agreement. 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, and 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 (collectively, the “GreenBox Acquisition”).

 

For accounting and reporting purposes, PubCo deemed the GreenBox Acquisition a “Reverse Acquisition” with PrivCo designated the “accounting acquirer” and PubCo designated the “accounting acquiree.”

 

The value of the assets acquired and liabilities assumed was $843,694 and $589,078, respectively, on April 12, 208. Exclusions from the Agreement included shares in PubCo held by PrivCo, which remain a PrivCo asset, and $185,000 of a $300,000 convertible promissory note issued by PrivCo.

 

The following is the purchase price allocation on April 12, 2018: 

 

   

April 12, 2018

 
         

Cash and Cash Equivalents

  $ 752,393  

Customer Accounts

    83  

Inventory

    56,988  

Security Deposits

    3,990  

Fixed Assets, net

    17,697  

Prepaid Expense

    12,543  
         

Assets Acquired

    843,694  
         

Total Consideration – Liabilities Assumed

    589,078  
         

Gain on Bargain Purchase

  $ 254,616  

 

This acquisition resulted in a “Gain on Bargain Purchase” for PubCo because the fair value of assets we acquired exceeded the total of the fair value of consideration we paid by $254,616. However, as we deemed the acquisition a Reverse Acquisition for accounting purposes, the $254,616 gain was rerecorded and presented as Paid in Capital within our Consolidated Balance Sheet on the date of acquisition. The operating results of the GreenBox Business for the period from April 12, 2018 going forward have been included in the Company’s Consolidated Statements of Operations. The Company did not incur a significant amount in transaction costs in connection with the acquisition, but any and all costs were expensed as incurred and are included within the Consolidated Statement of Operations.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

4.

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 held for Settlements – a Current Asset. Of these funds, we record the sum balance due to Merchants and ISOs as Settlement Liabilities to Merchants and Settlement Liabilities to ISOs, respectively.

 

The table below shows the status of transaction settlements:

 

   

September 30, 2019

   

December 31, 2018

 

Settlement Processing Assets:

               

Cash held for settlements

  $ 254,616     $ 239,124  

Cash due from gateways

    5,570,480       291,112  

Amount due from gateways and merchants – hold and fees

    4,096,132       -  

Chargeback allowances (1)

    -       (134,638

)

Reserves (2)

    7,622,853       474,224  

Total before allowance for uncollectable

    17,544,081       869,822  

Allowance for uncollectable – hold and fees

    (4,350,748

)

    -  

Total – settlement processing assets

  $ 13,193,333     $ 869,822  
                 

Settlement Processing Liabilities:

               

Settlement liabilities to merchants

    17,544,081       786,425  

Settlement liabilities to ISOs

    -       107,342  

Refund allowances (3)

    -       (28,681

)

Totals

  $ 17,544,081     $ 865,086  

 

(1) During 2018, the Company absorbed all chargeback costs as a cost of services provided – essentially a sales promotion tool to onboard customers in 2018. The Chargeback Allowance shown in the table above reflects our estimate of potential chargebacks that are likely to be realized in 2019, which are connected to sales transactions that occurred in 2018. The allowance decreases the amount that GreenBox is owed from the Gateways we use in our proprietary ecosystem. In 2019, the actual dollar amount of chargebacks will be reconciled with our allowance.

 

(2) Reserves are essentially an escrow fund that protects a gateway/card issuer from financial losses. In the Reserve, funds are held until chargeback time limits expire.

 

(3) The Refund Allowance shown in the table above reflects our estimate of potential refunds that may be realized in 2019, which are connected to sales transactions that occurred in 2018. The allowance decreases the amount that GreenBox owes to Merchants using our proprietary ecosystem. In 2019, the actual dollar amount of refunds with be reconciled with our allowance.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

5.

CASH DUE FROM GATEWAYS

 

Cash due from gateways consisted of the following:

 

   

September 30, 2019

   

December 31, 2018

 
                 

Cash due from Gateways

  $ 5,570,480     $ 291,112  

Amount due from gateways and merchants – hold and fees

    4,096,132       -  

Reserves (2)

    7,622,853       474,224  
                 

Total cash due from gateways

    17,289,465       765,336  

Chargeback Allowances (1)

    -       (134,637 )

Allowance of uncollectable – hold and fees

    (4,096,132 )     -  
                 

Total cash due from gateways, net

  $ 13,193,333     $ 630,699  

 

(1) During 2018, the Company absorbed all chargeback costs as a cost of services provided – essentially a sales promotion tool to onboard customers in 2018. The Chargeback Allowance shown in the table above reflects our estimate of potential chargebacks that are likely to be realized in 2019, which are connected to sales transactions that occurred in 2018. The allowance decreases the amount that GreenBox is owed from the Gateways we use in our proprietary ecosystem. In 2019, the actual dollar amount of chargebacks will be reconciled with our allowance.

 

(2) Reserves are essentially an escrow fund that protects a gateway/card issuer from financial losses. In the Reserve, funds are held until chargeback time limits expire.

 

6.

PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   

September 30, 2019

   

December 31, 2018

 
                 

Computers

  $ 38,938     $ 15,285  

Furniture

    -       4,919  

Kiosks

    -       12,750  

Vehicles

    4,578       4,578  
                 

Total property and equipment

    43,516       37,532  

Less: Accumulated depreciation

    (18,169 )     (6,817 )
                 

Total property and equipment, net

  $ 25,347     $ 30,715  

 

Depreciation expense was $4,897 and $1,937 for the three months ended September 30, 2019 and 2018, respectively, and $11,352 and $4,431 for the nine months ended September 30, 2019 and 2018, respectively.

 

7.

PAYMENT PROCESSING LIABILITIES, NET

 

Payment processing liabilities consisted of the following:

 

   

September 30, 2019

   

December 31, 2018

 
                 

Settlement liabilities to merchants

  $ 17,544,081     $ 786,425  

Settlement liabilities to ISOs

    -       107,342  
                 

Total processing liabilities

    17,544,081       893,767  

Refund allowances

    -       (28,681 )
                 

Total payment processing liabilities

  $ 17,544,081     $ 865,086  

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

7.

PAYMENT PROCESSING LIABILITIES, NET (continued)

 

The Refund Allowance shown in the table above reflects our estimate of potential refunds that may be realized in 2019, which are connected to sales transactions that occurred in 2018. The allowance decreases the amount that GreenBox owes to Merchants using our proprietary ecosystem. In 2019, the actual dollar amount of refunds with be reconciled with our allowance.

 

 

8.

CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consisted of the following:

 

   

September 30, 2019

   

December 31, 2018

 
                 

March 11, 2019 ($500,000) – 8% one-time interest charge with outstanding principal and interest due October 6, 2019.

  $ 500,000     $ -  

December 27, 2018 ($150,000) – 12% interest per annum paid quarterly with outstanding principal and remaining interest due December 12, 2019.

    -       150,000  

December 13, 2018 ($83,000) – 10% interest per annum with outstanding principal and interest due December 13, 2019.

    -       83,000  

November 26, 2018 ($200,000) – 12% interest per annum with outstanding principal and interest due November 26, 2019.

    200,000       200,000  

September 27, 2018 ($53,000) – 10% interest per annum with outstanding principal and interest due September 27, 2019.

    -       53,000  

August 6, 2018 ($253,000) – 10% interest per annum with outstanding principal and interest due August 6, 2019.

    -       253,000  

March 15, 2018 ($300,00) – 12% interest per annum with outstanding principal and interest due March 15, 2019.

    107,500       107,500  
                 

Total convertible notes payable

  $ 807,500     $ 846,500  

 

Vista Capital Investments, LLC - $500,000 (original received $375k)

 

On March 11, 2019, PubCo issued a convertible promissory note for $500,000 to Vista Capital Investments, LLC (“Vista”) (the “Vista Note”), due October 6, 2019 (the “Maturity Date”). The Vista Note incurred a onetime interest charge of 8%, which was recorded at issuance, and was due upon repayment of the Vista Note. The Vista Note included an original issue discount of $125,000, netting the balance received by PubCo from Vista at $375,000. The Vista transaction included commitment fees, which took the form of an obligation by PubCo to issue Vista 25,0000 shares and a four-year warrant to purchase 125,000 shares (the “Commitment Shares”) which are only provided in the event of default. Upon the occurrence of an event of default, as defined in the Vista Note, the conversion price shall become equal to a 65% of the lowest traded price for the Company’s common stock in the 25 consecutive trading days preceding the notice of conversion and the balance due shall be multiplied by 130% (the “Default Provision”). The Vista Note’s principal and interest were due to be paid October 6, 2019.

  

The Company and Vista amended the convertible debt agreement as follows:

  

 

First Amendment – On or about October 16, 2019, the parties amended the Vista Note to extend the Maturity Date to November 6, 2019, reduce the principal and interest due to $464,625 and cancel the Commitment Shares.

 

Second Amendment – On or about December 11, 2019, the parties agreed to a second amendment of the Vista Note, which extended the Maturity Date to January 15, 2020, required the Company to make a one-time payment of $10,000, changed the principal and interest balance due to $487,858, and waived Vista’s default rights through January 15, 2020. On January 22, 2020, Vista issued a default notice to the Company, which included an increase in the balance due to $634,213.

 

Third Amendment – On or about January 28, 2020, the parties agreed upon a third amendment to the Vista Note, which extended the Maturity Date to February 29, 2020, reduced the principal and interest due to $482,856 and required the Company to make a one-time $20,000 payment on or before January 29, 2020, of which $5,000 is to be applied to principal due. All other terms of the note remain in full force and effect.

 

The Vista Note has matured as of September 30, 2019. The Company has defaulted on the Vista Note and subsequently the Vista Note has not been extended. The Company is currently negotiating with Vista on extension of the Vista Note.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

8.

CONVERTIBLE NOTES PAYABLE (continued)

 

Saskatchewan Ltd$150,000

 

On December 27, 2018, PubCo issued a convertible promissory note for $150,000 to Saskatchewan Ltd (“Sask”) (the “Sask Note”). The note incurs interest at 12% per year, paid quarterly, in advance. The outstanding principal and any remaining interest are due December 12, 2019. The note includes a conversion feature where, beginning six months after the issuance date, at which time the lender may convert all or a portion of the outstanding principal and any accrued interest balance into shares of PubCo’s common stock at a discounted rate of 50%. This note holder issued a notice of conversion to the Company on June 27, 2019 to convert the outstanding principal into 2,307,692 shares of the Company’s stock. The shares were subsequently issued to Sask on August 14, 2019.

 

Power Up Lending Ltd

 

On August 6, 2018, the Company entered into a Securities Purchase Agreement with Power Up Lending Up Ltd (“PULG”) under which PULG agreed to issue notes of up to $1,500,000 in aggregate over twelve months at the discretion of PULG (the “PULG SPA”). Under this agreement, the Company issued the following convertible notes:

 

 

PULG$253,000

On August 6, 2018, the Company issued a convertible note for $253,000 to PULG, with a net $250,000 received by the Company. The note incurs interest at 10% per year and the outstanding principal and accrued interest are due August 6, 2019. The note includes a conversion feature where, beginning 180 days after the issuance date, at which time the lender may convert all or a portion of the outstanding principal and accrued interest balance into shares of the Company’s common stock at a discounted rate of 65%. The Company incurred $3,000 in financing fees associated with the loan. The Company paid this note on January 30, 2019, at which time it repaid the principal, accrued interest and an early repayment penalty of $93,333, which was recorded as interest expense.

 

PULG$53,000

On September 27, 2018, the Company issued a convertible note for $53,000 to PULG, with a net $50,000 received by the Company. The note incurs interest at 10% per year and the outstanding principal and accrued interest are due September 27, 2019. The note includes a conversion feature where, beginning 180 days after the issuance date, at which time the lender may convert all or a portion of the outstanding principal and accrued interest balance into shares of the Company’s common stock at a discounted rate of 65%. The Company incurred $3,000 in financing fees associated with the loan. The Company paid this note on March 13, 2019, at which time it repaid the principal, accrued interest and an early repayment penalty of $19,378, which was recorded as interest expense.

 

PULG$83,000

On December 13, 2018, PubCo issued a convertible note for $83,000 to PULG, with a net $80,000 received by PubCo. The note incurs interest at 10% per year and the outstanding principal and accrued interest are due December 13, 2019. The note includes a conversion feature where, beginning 180 days after the issuance date, at which time the lender may convert all or a portion of the outstanding principal and accrued interest balance into shares of the PubCo’s common stock at a discounted rate of 65%. PubCo incurred $3,000 in financing fees associated with the loan. The Company paid this note on March 13, 2019, at which time it repaid the principal, accrued interest and an early repayment penalty of $17,005, which was recorded as interest expense.

 

RB Cap $200,000

 

On November 26, 2018, PubCo issued a convertible promissory note for $200,000 to RB Cap (the “RB Cap $200K Note”). The note incurs interest at 12% per year and the outstanding principal and accrued interest are due November 26, 2019. RB Cap may elect to convert the note at any time from six months from the date of issuance at a fixed price per share of $4.50. This note became part of a claim/counter claim suit with RB Capital (See Section C. Legal Matters below.)

 

RB Cap $300,000

 

On or about March 15, 2018, PrivCo issued a twelve-month, $300,000 convertible promissory note to RB Capital Partners (“RB Cap”), with an interest rate of 12% per annum (“RB Cap 300K Note”). The note’s convertibility feature commenced six months after the note’s issuance, at a conversion rate of $0.001 per share of the Company’s common stock. Under the terms of the Agreement which memorialized the Verbal Agreement, we assumed the note, however, PrivCo agreed to pay $185,000 of the principal balance due on this note. On or about June 8, 2018, PrivCo transferred 440,476 restricted shares of Common Stock from the Control Block, with a market value of $185,000, to a purported designee of RB Cap, as a payment of principal of the note. Subsequently, RB Cap disputed the reduction in principal and subsequently, and we, along with PrivCo, disputed whether these shares should have been issued by PrivCo, and sought their return. On or about October 23, 2018, we issued 7,500,000 newly issued, restricted shares of our stock to RB Cap, in repayment of $7,500 of the RB Cap $300,000 Note. Subsequently, we disputed whether these shares should have been issued to RB Cap. As of December 31, 2018, our recorded principal balance for the note was $107,500 and accrued interest on the note was $15,880. On or about March 13, 2019, we issued a final cash payment towards the RB Cap 300K Note of approximately $126,092 (the “Payoff Funds”). However, RB Cap contested the amount of the Payoff Funds. (See Section C. Legal Matters below, under Note 12 – Subsequent Events)

  

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

9.

DERIVATIVE LIABILITY

 

Derivative liability consisted of the following:

 

   

September 30, 2019

   

December 31, 2018

 
                 

Beneficial conversion feature – convertible debt

  $ 763,952     $ -  
                 

Total derivative liability

  $ 763,952     $ -  

 

On March 11, 2019, PubCo issued a convertible promissory note for $500,000 to Vista Capital Investments, LLC (“Vista”) (the “Vista Note”), due October 6, 2019 (the “Maturity Date”). The Vista Note incurred a onetime interest charge of 8%, which was recorded at issuance, and was due upon payback of the Vista Note. The Vista Note included an original issue discount of $125,000, netting the balance received by PubCo from Vista at $375,000. The Vista transaction included commitment fees, which took the form of an obligation by PubCo to issue Vista 25,0000 shares and a four-year warrant to purchase 125,000 shares (the “Commitment Shares”) which are only provided in the event of default. Upon the occurrence of an event of default, as defined in the Vista Note, the conversion price shall become equal to a 65% of the lowest traded price for the Company’s common stock in the 25 consecutive trading days preceding the notice of conversion and the balance due shall be multiplied by 130% (the “Default Provision”).

 

Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

 

The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As a result of entering into warrant agreements, for which such instruments contained a variable conversion feature with no floor, the Company has adopted a sequencing policy in accordance with ASC 815-40-35-12 whereby all future instruments may be classified as a derivative liability with the exception of instruments related to share-based compensation issued to employees or directors.

 

Based on ASC 815, the Company determined that the convertible debt contained embedded derivatives and valued the derivative using the Black-Scholes method. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates (such as volatility, estimated life and interest rates) that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s operating results will reflect the volatility in these estimate and assumption changes.

 

The Company performs valuation of derivative instruments at the end of each reporting period. The fair value of derivative instruments is recorded and shown separately under current liabilities as these instruments can be converted anytime. Changes in fair value are recorded in the consolidated statement of income under other income (expenses). 

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

10.

INCOME TAXES

 

The Company did not have income tax provision (benefit) due to net loss and deferred tax assets having a full valuation allowances as of and for the three and nine months ended September 30, 2019 and 2018.

 

The provision for income taxes differs from the amounts computed by applying the federal statutory tax rate of 21% to earnings before income taxes, as follows:

 

   

Three Months Ended September 30,

 
   

2019

   

2018

 
                 

Book income at statutory rate

    21.00 %     21.00 %

Others

    0 %     -0.80 %

Change in Valuation Allowance

    -21.00 %     -20.14 %
                 

Effective income tax rate

    0 %     0.06 %

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
                 

Book income at statutory rate

    21.00 %     21.00 %

Others

    0 %     -0.80 %

Change in Valuation Allowance

    -21.00 %     -20.14 %
                 

Effective income tax rate

    0 %     0.06 %

 

Deferred tax assets and liabilities consist of the following tax-effected temporary differences:

 

   

September 30, 2019

   

December 31, 2018

 
                 

Deferred tax assets (liabilities):

               

Charitable contributions

  $ -     $ (3,700 )

Unearned revenue

    -       (75,600 )

Depreciation

    -       (26,300 )

Net operating loss carryforward

    498,888       612,800  
                 

Total deferred tax assets, net

    498,888       507,200  

Valuation allowance

    (498,888 )     (507,300 )
                 

Net deferred tax assets (liabilities)

  $ -     $ (100 )

 

The Company uses the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. As of September 30, 2019, the Company had federal and California net operating loss carryforwards of approximately $2.4 million. The federal and California net operating loss carryforwards will expire at various dates from 2026 through 2028; however, $2.4 million of the Federal operating loss does not expire and will be carried forward indefinitely.

 

As of September 30, 2019 and December 31, 2018, the Company maintained full valuation allowance for net operating loss carryforward deferred tax asset. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income are reduced.

 

The Company files a consolidated federal income tax return and files tax returns in various state and local jurisdictions. The statutes of limitations for its consolidated federal income tax returns are open for years 2016 and after, and state and local income tax returns are open for years 2015 and after.  

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

11.

EQUITY TRANSACTIONS

  

The Company issued the following common shares:

 

 

On or about May 10, 2019, PubCo issued 10,000 shares to a non-affiliated legal consultant for services rendered.

 

On or about June 18, 2019, PubCo issued a total of 850,000 shares to nine PubCo employees as performance bonuses. The shares were fully vested upon issuance and worth $0.10 per share, at closing, on the day of issuance.

 

On or about August 14, 2019, PubCo issued 2,307,692 shares to a lender, that chose to convert a $150,000 promissory note at a 50% discount into shares of PubCo.

 

On or about August 14, 2019, PubCo issued 1,085,000 shares to PrivCo, as repayment of shares inadvertently transferred by PrivCo to third parties on behalf of PubCo as follows

 

o

On or about December 27, 2018, PrivCo inadvertently transferred 1,000,000 restricted PubCo shares, with a market value of $150,000, which money was deposited into PrivCo’s bank accounts (control of which bank accounts were shared by PubCo and PrivCo from April 12, 2018 through approximately December 31, 2018).

 

o

On or about January 4, 2019, PrivCo inadvertently transferred 50,000 restricted PubCo shares to a non-affiliated service provider to PubCo for services rendered to PubCo.

 

o

On or about January 4, 2019, PrivCo inadvertently transferred 35,000 PubCo shares of to a non-affiliated service provider to PubCo for services rendered to PubCo.

 

12.

RELATED PARTY TRANSACTIONS

 

The Company had the following related party transactions:

 

 

Related Party Employees and Employee Entity:

 

Dan Nusinovich – The Company hired Dan Nusinovich on or about February 19, 2018 as the Company’s Development and Testing Manager. Dan is the brother of Fredi Nisan, our CEO and Director. Subsequently, the Company entered into a Referral Commission Agreement with Dan in November 2018, which expired November 2019, under which Dan is to receive 10% for new business resulting from his direct introductions. To date, no new business has been generated by Dan, thus Dan has not been paid under the Referral Agreement. On or about June 18, 2019, the Company issued 160,000 restricted shares to Dan, who was one of nine employees to receive a performance bonus in stock on this day. The shares were fully vested upon issuance and worth $16,000 at closing, on the day of issuance. The Company currently pays Dan approximately $96,000 per year.

 

Liron Nusinovich – The Company hired Liron Nusinovich on or about July 16, 2018 as our Risk Analyst. Liron is the brother of Fredi Nisan, our CEO and Director. On or about June 18, 2019, the Company issued 110,000 restricted shares to Liron, who was one of nine employees to receive a performance bonus in stock on this day. The shares were fully vested upon issuance and worth $11,000 at closing, on the day of issuance. The Company currently pays Liron approximately $92,000 per year.

 

Pop N Pay, LLC – In addition to his employment with the Company, Dan Nusinovich owns 100% of Pop N Pay, LLC (“PNP”), a Delaware registered limited liability company, that he formed on August 20, 2018. During the late summer of 2018, when both market opportunity and demand necessitated opening additional bank accounts to support our payment processing products and services, we turned to PNP to open new accounts, as a trustee, on our behalf. For his assistance, Dan, through his ownership of PNP, received approximately $3,000 (in addition to Dan’s salary) in early 2019, for services rendered in the fourth quarter of 2018.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

12.

RELATED PARTY TRANSACTIONS (continued)

 

 

Related Party Entities:

 

IPX Referral Payments, LLC – Pouya Moghavem, an employee since August 1, 2018, owns 25% of IPX Referral Payments, LLC (“IPX”). In addition to the $5,000 monthly salary we pay Moghavem, the Company entered into a Referral Agreement with IPX wherein the Company agreed to compensate IPX for referrals, which subsequently become the Company’s customer. For the three and nine months ended September 30, 2019 and 2018, IPX did not earn any commissions. Additionally, in or about October 2018, IPX provided GreenBox with a merchant trust account in Mexico through Affinitas Bank, one of the Gateways that process payment transactions on the Company’s behalf. The Company did not pay IPX for this service, however, IPX reported that Affinitas paid IPX approximately $1,830.

 

RB Capital – Because PrivCo agreed to sell RB Cap 4% of PrivCo in January 2018, which currently purportedly gives RB Cap a claim to approximately six million PubCo shares, RB Cap is deemed an affiliated Party. In March 2018, PrivCo issued a $300,000 convertible promissory note to RB Cap, the balance of which PubCo assumed when we acquired the GreenBox Business from PrivCo. On November 26, 2018, we issued a $200,000 convertible promissory to RB Cap. Subsequently, RB Cap and GreenBox disputed the implications of the share purchase and promissory notes. The implications of this ownership and RB Cap’s claim to PubCo shares are in dispute, which became the subject of a lawsuit with RB Cap (see Legal Matters under Subsequent Events). This was settled on February 27, 2020.

 

America 2030 Capital Limited and Bentley Rothschild Capital Limited – On or about July 30, 2018, Nisan and Errez, the sole officers and directors of PubCo, and the majority owners of PrivCo, each entered into a separate Master Loan Agreement (each an "MLA"): Errez with America 2030 Capital Limited (“America 2030”) and Nisan with Bentley Rothschild Capital Limited ("Bentley"), a company affiliated with America 2030, both located in Nevis, West Indies. Each MLA was for a $5,700,000 loan, at 5.85% interest, maturing in ten years. Per the MLA’s terms, Nisan and Errez caused PrivCo to transfer 1,600,000 PubCo shares, valued at $2,144,000 at close of trading on the day of issuance, as "Transferred Collateral" from the Control Block (not a new issuance by PubCo) to Bentley (although both contracts acknowledge receipt of 1.6 million shares, there was only was transference of 1.6 million shares). The transfer occurred on or about August 1, 2018. To date, there has been no funding under either of the MLAs. Subsequently, both Nisan and Errez received constitutive notice, regarding arbitration of an alleged breach of their respective MLAs. As of March 31, 2020, both parties have abandoned the matter and no further action was required by either party.

 

 

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, which the Company believes, are capable of processing $1 billion transactions annually (the “Haller Network”). The Haller Network is an amalgamation of the collective networks of Haller and three companies owned or majority-owned by Haller, which are Sky Financial & Intelligence, LLC (“Sky”), Charge Savvy, LLC, Cultivate, 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 and Cultivate, LLC, with whom we do business indirectly, through their respective business relationship with MTrac. We also do business directly with Cultivate LLC, through a three-party agreement, which includes us, MTrac and Cultivate.

 

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

 

 

o

MTrac Agreement – On or about May 4, 2018, Sky entered into a two year, Associate/Referral Agreement-E-Commerce with MTrac, wherein Sky agreed to promote MTrac’s solution payment platform (which is based on the GreenBox platform) and related services; to provide new sales, sales leads, introductions to merchants and ISOs, and other potential customers of MTrac’s services, for which Sky receives ongoing commissions from all credit card transactions processed as a result of new business generated by Sky for MTrac. Most services provided under this contract are executed by Sky’s majority owned subsidiary, Charge Savvy, LLC (see Charge Savvy, LLC below). The agreement noted MTrac’s license of GreenBox’s payment processing technology and contained terms whereby Sky could (but was not required to) refer certain customers to MTrac in exchange for various referral fees. Sky never referred customers to MTrac, and therefore, did not collect, and is not collecting, any referral fees from MTrac.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

12.

RELATED PARTY TRANSACTIONS (continued)

 

 

Kenneth Haller and the Haller Companies (continued)

 

 

o

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 (see Sky - MTrac Agreement above). 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”). This relationship was referenced in press releases as GreenBox’s “acquisition of Sky MIDs Technologies” (see Sky MIDs below). We accrued and/or paid Haller $55,365 in the quarter ending December 31, 2018, which included $30,000 in consulting fees and $23,365 in travel and relocation expense reimbursement. As our relationship with Haller / Sky is non-exclusive, Haller and the Haller Companies provide services to other companies, including those listed below. Any revenue generated by Haller and/or the Haller Companies through these other relationships is in addition to the Haller Consulting Fee.

 

 

§

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%). It is through Charge Savvy, that the Haller Network is most visible as part of our operations, as Charge Savvy is the ISO through which revenue generated from Haller Network Agents is processed, under a contract between Sky and MTrac, who in turn, has a contract with us. The three managing members of Charge Savvy own the same percentages of Cultivate (see below), as they do Charge Savvy.

 

 

§

Cultivate, LLC – Sky owns 68.4% of Cultivate, LLC (“Cultivate”), an Illinois limited liability company, and serves as one of three Managing Members, along with Higher Ground Capital, LLC (owns 14%), and Jeff Nickel (owns 17.4%). When Cultivate was first formed, it was the licensor of certain proprietary point of sale software, retail point of sale operations, and complementary support of Cultivate’s software and related hardware for on-site credit and debit card processing. Subsequently, Cultivate the entity became exclusively a software provider, ceasing all service and support operations. Eventually certain beneficial aspects of the Cultivate software functionality were integrated into QuickCard, then upgraded and replaced with certain updates. On or about May 4, 2018, Cultivate entered into a two year, Associate/Referral Agreement-E-Commerce with MTrac, wherein Cultivate agreed to promote MTrac’s solution payment platform and related services; to provide new sales, leads, merchants, ISO Agents, and other potential customers of MTrac services, for which Cultivate receives ongoing commissions from all credit card transactions processed as a result of new business generated by Cultivate for MTrac, who in turn has a contract with us. The Associate/Referral Agreement-E-Commerce between Cultivate and MTrac noted MTrac’s license of GreenBox’s payment processing technology, and contained terms whereby Cultivate could (but was not required to) refer certain customers to MTrac in exchange for various referral fees. Cultivate never referred customers to MTrac, and therefore, did not collect, and is not collecting, any referral fees from MTrac.

 

 

o

Haller Commissions – Under a verbal agreement in Spring 2018, we offered Haller commissions on any referrals that resulted in new business for the Company (“Haller Commissions”). Under this agreement, Haller introduced us to three merchants who became three of the first merchants to use our system. Under the verbal agreement, we paid Haller commissions from transactions processed by these three merchants, summing to approximately $210 in June 2018, $8,396 in July 2018 and $321 in August 2018. In or about September 2018, we commenced discussions with Haller to join our management team and discontinued paying Haller commissions related to these three merchants.

 

 

o

GreenBox, Cultivate and MTrac Agreement – On or about December 17, 2018, PubCo entered into a 5-year exclusive three-party license agreement with MTrac and Cultivate (see Section E. MTrac above). The three Managing Members of Cultivate and Charge Savvy, owning the same percentages in each entity, subsequently decided to collect all revenue through Charge Savvy instead of Cultivate.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

12.

RELATED PARTY TRANSACTIONS (continued)

 

 

Kenneth Haller and the Haller Companies (continued)

 

 

o

Sky Mids –Previous references in press releases issued by PubCo in or about August 2018 regarding a “Sky Mids Acquisition” are references to the non-exclusive working relationship between PrivCo (and subsequently, PubCo) and Sky / Haller. The designation “Sky MIDs” was a colloquial reference to Sky, based upon a Sky-owned and operated website, which is no longer in use. While an acquisition of Sky has not formally been executed, nor have we (nor subsequently, PubCo) executed a formal engagement with Haller nor Sky, previous statements regarding the nature of our relationship with Sky Mids, which include our beliefs in the advantages of this relationship, accurately represent the working relationship between the Company and Sky / Haller.

 

 

o

Verbal Agreement – As part of Haller’s remuneration, the Company and Haller have a verbal agreement for Haller to be issued approximately 14 to 18 million shares of the Company’s stock. While a formalized remuneration agreement has not yet been executed as of February 3, 2020, the Company does not foresee the issuance to be dilutive, as PrivCo will likely surrender an equal number of shares to PubCo, as a means of compensating PubCo for the issuance.

 

The Company did not pay any commissions to Charge Savvy or Cultivate for the three and nine months ended September 30, 2019 and 2018.

 

13.

COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company has the legal proceedings:

 

 

MTrac, Global Payout, Inc. and Cultivate Technologies, LLC – On November 25, 2019, five companies (the “Plaintiffs”) filed a complaint against us, MTrac, Global Payout, Inc. and Cultivate Technologies, LLC in the Superior Court of the State of California. The Plaintiffs filed suit to recover processed funds and processing fees alleged to be withheld illegally. This was dismissed by both parties as of September 30, 2019.

 

 

America 2030 Capital Limited and Bentley Rothschild Capital Limited – On or about October 31, 2018, Nisan and Errez received constitutive notice, regarding arbitration against Nisan, Errez, PrivCo and possibly PubCo, from Bentley Rothschild Capital Limited ("Bentley") and America 2030 Capital Limited (“America 2030”), both located in Nevis, West Indies, and both claiming breach of contract by Nisan and Errez of Nisan and Errez’s respective individual Master Loan Agreements (see Note 7 – Related Party Transactions above) and seeking forfeiture of 1,600,000 PubCo shares that PrivCo had transferred, on or about August 1, 2018, from PrivCo’s Control Shares under the terms of the MLAs. To date, only informal conversational proceedings have ensued.

 

 

RB Capital Partners, Inc. – On April 24, 2019, RB Cap and related parties (the “RB Cap Parties”) filed a complaint in the San Diego Superior Court against PrivCo, PubCo, Ben Errez and Fredi Nisan (collectively, the “GreenBox Parties”); and on October 1, 2019, the RB Cap Parties filed an amended complaint against the GreenBox Parties alleging claims of fraud, breach of fiduciary duty, breach of contract and other, related claims in the Superior Court for the State of California, County of San Diego. The GreenBox Parties filed a cross-complaint against the RB Capital Parties, alleging claims of fraud, breach of contract, tortious interference, and other, related claims. On or about December 15, 2019, the GreenBox Parties and RB Cap Parties resolved to negotiate a settlement and agreed in principal to settlements terms. The documentation of the settlement terms was underway as of February 3, 2020. This was dismissed by both parties on February 27, 2020.

 

 

Dahan – Yoram Dahan, Melissa Dahan, Forty8 Ltd., and Trustees of the Melissa H. Dahan Living Trust (collectively, “the Dahan Parties”) were also named by RB Capital in the suit listed in the previous paragraph. On October 31, 2019, the GreenBox Parties filed a cross-complaint against the Dahan Parties, alleging claims of fraud, securities fraud, misrepresentation, promissory estoppel, and other related claims, in the Superior Court for the State of California, County of San Diego. On or about December 15, 2019, the GreenBox Parties and the Dahan Parties resolved to negotiate a settlement and agreed in principal to settlements terms. The documentation of the settlement terms was underway as of February 3, 2020. This was dismissed by both parties on February 27, 2020.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

13.

COMMITMENTS AND CONTINGENCIES (continued)

 

Legal Proceedings (continued) 

 

 

Withholding Suit – On November 25, 2019, five companies (the “Plaintiffs”) filed a complaint against us, Global Payout, Inc., MTrac Tech Corporation and Cultivate Technologies, LLC (collectively the “Defendants”) in the Superior Court of the State of California. Plaintiffs filed suit to recover processed funds and processing fees alleged to be withheld illegally (collectively, the “Withholding Suit”). Pursuant to a mandatory arbitration clause in the controlling agreement, the parties to the Withholding Suit have agreed to arbitrate their claims. We do not dispute the funds owed; however, we do believe it’s within our rights to hold the funds, per the terms of agreements signed by Plaintiffs. We disagree with any allegations of any wrongdoing and will aggressively defend ourselves against the Withholding Suit. Ideally, we will settle this claim in the near term. While the results of this matter cannot be predicted with certainty, especially at this early stage, we believe that losses, if any, resulting from resolution of this matter will not have a materially adverse effect on operations or cash flow. This was dismissed by both parties as of March 30, 2020.

 

Operating Leases

 

The Company entered into the following operating facility lases:

 

 

Hyundai Rio Vista – On October 4, 2018, the Company entered into an operating facility lease for its corporate office located in San Diego with 38 months term and with option to renew. The lease started on October 4, 2018 and expires on October 3, 2021

 

The Company entered into an operating lease for corporate location on October 4, 2018. Rent expense paid under the lease agreements for the three months ended September 30, 2019 was $33,249 and for the nine months ended September 30, 2019 was $94,377.

 

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. The adoption of ASC 842 resulted in recording an adjustment to operating lease right of use asset and operating lease liabilities of $256,242 and $260,534, respectively, as of September 30, 2019. The difference between the operating lease ROU asset and operating lease liabilities at transition represented existing deferred rent expenses and tenant improvements, and indirect costs that was derecognized. The adoption of ASC 842 did not materially impact our results of operations, cash flows, or presentation thereof.

 

In accordance with ASC 842, the components of lease expense were as follows:

 

   

Three Months Ended September 30,

 
   

2019

   

2018

 
                 

Operating lease expense – Hyundai Rio Vista

  $ 1,073     $ -  
                 

Total lease expense

  $ 1,073     $ -  

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
                 

Operating lease expense – Hyundai Rio Vista

  $ 4,292     $ -  
                 

Total lease expense

  $ 4,292     $ -  

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

13.

COMMITMENTS AND CONTINGENCIES (continued)

 

In accordance with ASC 842, maturities and operating lease liabilities as of September 30, 2019 were as follows:

 

For the year ended

 

Hyundai Rio Vista, Inc.

 
         

Undiscounted cash flows:

       

2019

  $ 29,295  

2020

    110,948  

2021

    95,026  

2022

    -  

2023

    -  

2024

    -  

Thereafter

    -  

Total undiscounted cash flows

    235,269  
         

Discounted cash flows:

       

Lease liabilities - current

    26,489  

Lease liabilities - long-term

    234,045  

Total discounted cash flows

    260,534  
         

Difference between undiscounted and discounted cash flows

  $ 25,265  

 

In accordance with ASC 842, future minimum lease payments as of September 30, 2019 were as follows:

 

For the year ended

 

Hyundai Rio Vista, Inc.

 
         

2019

  $ 32,904  

2020

    132,601  

2021

    124,944  

2022

    -  

2023

    -  

Thereafter

    -  
         

Total

  $ 290,449  

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

14.

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:

 

 

Formalizing the Reverse Acquisition – On January 4, 2020, PubCo and PrivCo entered into an Asset Purchase Agreement (the “Agreement”), to formalize and memorialize a verbal agreement (the “Verbal Agreement”) entered into on April 12, 2018, by and among PubCo and PrivCo. The Agreement was disclosed in a Form 8-K filed with the Securities and Exchange Commission on January 7, 2020.

 

 

Product Development, Launch and Sales – In 2019, we commenced a larger deployment of our blockchain-based, payment and ledger system, which we believe was enthusiastically received. As we increased our Independent Sales Organizations (“ISO”) relationships, we were able to on-board clients at an increasing pace, resulting in increasing revenues. As client acquisitions accelerated, we experienced significant growth in payment processing volume through the third quarter of 2019. Servicing our quickly growing customer base required us to grow our “acquiring bandwidth” proportionally. Acquiring bandwidth is the technology nomenclature for the ability to push transactional volume to an accumulation account held by a commercial bank, sponsoring such activity for a company. We work with several acquiring banks, each of which provides this support to us, as well as setting support limits and/or transactional volume limits, for each account. Additionally, each account comes with policies for disbursements and reserves set by each sponsor bank, under which we operate. We then apply these policies, limits and reserve requirements to each of our client accounts. In some cases, we experienced challenging reserve policies from certain acquirers, which in turn created challenging situations for us. Where we couldn’t negotiate more favorable conditions with an acquirer, we formed relations with new acquirers, which better suited our needs. As we grew, it became apparent to us that market demand for our services could be substantial and that we would need to upgrade and reengineer certain technology modules of our acquiring engine. As a result, we scaled back our acquiring capabilities in the fourth quarter of 2019, which allowed us to focus on the technology upgrades. As anticipated, this shift in focus resulted in a reduction of revenues in the fourth quarter. However, we anticipate these upgrades will enable growth acceleration in 2020 and beyond.

 

 

Kenneth Haller and the Haller Companies / Affiliated Party Transactions – Kenneth Haller (“Haller”) became our Senior Vice President of Payment Systems, a key member of our management team, in November 2018. Haller brings considerable advantages to our platform’s development and our business development efforts and capabilities, including transactional business relations and a large network of agents, which we believe capable of processing $1 billion annually (the “Haller Network”). The Haller Network is an amalgamation of the collective networks of Haller and three companies owned or majority-owned by Haller: Sky Financial & Intelligence, LLC (“Sky”), Charge Savvy, LLC and Cultivate, LLC (collectively, the “Haller Companies”), each of which has formalized business relationships with us, as well as with some of our partners (for example, MTrac), which we believe allows us to maximize and diversify our market penetration capabilities. We pay Haller a monthly consulting fee, through Sky, a company 100% owned by Haller, of $10,000, which was subsequently increased to $16,667 per month commencing September 2019 (“Haller Consulting Fee”). In 2019, we paid Sky consulting fees of $30,000 in the quarter ending March 31, $30,000 in the quarter ending June 30, $36,667 in consulting fees in the quarter ending September 30, and $124,150 in the quarter ending December 31, which included $50,000 in consulting fees and $74,150 in expense reimbursement. In 2019, Sky facilitated $1,397,822 in payments (using our funds) on our behalf during the quarter ending September 30, and similarly $184,056 in the quarter ending December 31. During the quarters ending June 30 and September 30 of 2019, Charge Savvy, a company 68.4% owned by Sky, PubCo POS-related equipment totaling $22,450 and $16,000, respectively.

 

 

Lawsuit – On November 25, 2019, five companies (the “Plaintiffs”) filed a complaint against us, Cultivate Technologies, LLC (a company 68.4% owned by Sky), Global Payout, Inc. and MTrac Tech Corporation in the Superior Court of the State of California. Plaintiffs filed suit to recover processed funds and processing fees alleged to be withheld illegally (see Withholding Suit in Section C. Legal Matters above).

 

 

 

Issuance of Unregistered Securities – PubCo issued the following securities that were not registered under the Securities Act. Except where noted, all the securities stated below were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.

 

o

On or about December 12, 2019, PubCo entered into an agreement to issue 600,000 restricted shares to a non-affiliated service provider as renumeration in lieu of cash fees, on a vesting schedule as follows: 200,000 shares vest upon each of the following milestones: the Company filing its Form 10-K for 2018, the Company filing its three interim Form 10-Qs for 2019, and the Company filing its Form 10-K for 2019.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

14.

SUBSEQUENT EVENTS (continued)

 

 

Purchase Agreements – The Company entered into the following purchase agreements:

 

o

West Coast Business Capital, LLC – On or about November 12, 2019, PubCo entered into a Purchase Agreement with West Coast Business Capital, LLC (“West Coast”). Under the terms of the Purchase Agreement, we agreed to sell West Coast $596,000 of future incoming cashflow from the GreenBox Business, to be delivered to West Coast in daily installments of $5,960, for $400,000, from which $16,000 in fees was deducted, providing us with net cash of $384,000. For accounting purposes, we recorded this transaction as a loan of $400,000, with interest of $196,000, which will be repaid over the following four months. Both Nisan and Errez, individually, signed personal guarantees for this Purchase Agreement.

 

o

Fox Capital Group, Inc. – On or about December 5, 2019, PubCo entered into a Secured Merchant Agreement with Fox Capital Group, Inc. (“Fox”). Under the terms of the Secured Merchant Agreement, we agreed to sell Fox $366,000 of future incoming cashflow from the GreenBox Business, to be delivered to Fox in daily installments of $4,073.33, for $260,000, from which $26,000 in fees was deducted, providing us with net cash of $234,000. For accounting purposes, we recorded this transaction as a loan of $260,000, with interest of $106,000, which will be repaid over the following four months. Both Nisan and Errez, individually, signed personal guarantees for this Secured Merchant Agreement.

 

o

Complete Business Solutions Group, Inc. – On or about December 9, 2019, PubCo entered into an Agreement for the Purchase and Sale of Future Receivables (the “Purchase and Sale Agreement”) with Complete Business Solutions Group Inc, (“CBSG”). Under the terms of the Purchase and Sale Agreement, we agreed to sell CBSG $240,000 of future incoming cashflow from the GreenBox Business, to be delivered to CBSG in weekly installments of $16,000, for $200,000, from which $35 in fees was deducted, providing us with net cash of $19,965. For accounting purposes, we recorded this transaction as a loan of $200,000, with interest of $40,000, which will be repaid over the following four months. Both Nisan and Errez, individually, signed personal guarantees for this Purchase and Sale Agreement.

 

 

 

ITEM 2. MANAGEMENT’S 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 New Name

 

Organization – GreenBox POS (the “Company” or “PubCo”) was formerly known as ASAP Expo, Inc (“ASAP”), which was incorporated April 10, 2007 under the laws of the State of Nevada. On January 4, 2020, PrivCo and GreenBox POS, a Nevada corporation (“PubCo”) entered into the Agreement to memorialize the Verbal Agreement with PrivCo which was formed on August 10, 2017 (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, and 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 (collectively, the “GreenBox Acquisition”). For accounting and reporting purposes, PubCo deemed the GreenBox Acquisition a “Reverse Acquisition” with PrivCo designated the “accounting acquirer” and PubCo designated the “accounting acquiree.”

 

New Name – 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.

 

 

Management Discussion and Analysis

 

This MD&A section was prepared by the management of GreenBox POS (OTC: GRBX) (“GreenBox”, “GRBX”, the “Company”), in conjunction with the fiscal year ended December 31, 2019 financial activities and as part of the 10-K disclosure. The intent of this section is to discuss the financial activity disclosed from the perspectives of on-going Q1/20 and plans and projections for the remainder of 2020.

 

Q1/20 signify the return of operations in full scale for the Company. In Q4/2019, the Company invested in research and development, improving its acquiring platform and enabling safer, faster and significantly more scalable services. These technology improvements allow for major new capabilities, including Real Time Payments (RTP), a very sought-after payment feature. This change also reduces the Company COGS. Although the Company saw a decrease in operations in Q4/2019, the improved platform is expected to perform better than its predecessor platform and increase total volumes while increasing profit margins and operating sustainability. The Company returned to ramping up commercial large-scale operations, on-boarding large number of clients, and increasing the Company operational bandwidth to accommodate the needs of its clients. Q1/2020 continues to execute on these management directives.

 

Management is focused on the following KPI (Key Performance Indices):

 

KPI

Description

Annual Transactional Processing Volume (ATPV)

The Company plans on processing an amount greater than $1B in FY2020. The Company’s Book of Business exceeds the processing goals for the year. By Q4/2020, the Company projects daily volumes to reach multimillion USD.

Annual Gross Profit Margin (AGPM)

This index matches the Company goals and remains at levels supporting the Company’s financial projections.

Annual Gross Profit (AGP)

At the targeted Annual Transactional Processing Volume goal and targeted Annual Gross Profit Margin, projected Annual Gross Profit is $18-20M for FY2020.

Annual EBITDA

The Company objective is to stay at or above 3% of Total Transactional Volume. At the targeted Annual Transactional Processing Volume goal, the Annual EBITDA equals $18-20M.

[Table 1]

 

In order to process the targeted ATPV goal, $1B, the Company must be able to process close to $90M/month, or $3M/day, in a consistent fashion. The Company needed to invest further in its core technologies to reach this capacity, a task now completed. The Company now has the required bandwidth and technical capabilities to achieve this goal. The Company projects it will process transactions in volumes greater than $1M/day within Q2/2020 and will ramp up the targeted Average Daily Volumes in Q4/2020. We believe the current operational bandwidth for the Company is virtually unlimited.

 

KPI

Description

Average Monthly Transaction Count (AMTC)

The Company projects an AMTC of more than 500,000

New Clients Backlog (NCB)

The Company will continue to invest in on-boarding technologies in order to expedite the process and reduce backlog. There are five client statuses: application, KYC, on-boarding, integration, processing. Current backlog of clients at application stage is greater than 2,000. Our goal is to bring the NCB down to 200.

Client Attrition

Current attrition rates are under 5%. Company goal is to reduce it further and keep it under 3%.

[Table 2]

 

Based on the above and the current traction in Q1/20, the Company is comfortable projecting approximately $18-20M EBITDA in FY20. 

 

The Company owns all the IP rights for operations in its space: tokenizer, gateway, ledger manager and blockchain substrate. Other, supporting patents, such as fraud proofing, on-boarding accelerators, and an all new blockchain implementation, are pending.

 

With the visibility into the Company’s operation management has at the end of Q1/2020 the Company plans on uplisting to a senior exchange by Q1 of FY21 and does not plan on an artificial stock price increase, such as a reverse split. The current plan is to grow the company organically to the size and value required by the exchange.

 

The ATPV, Profitability and other major KPIs remain sensitive to regulatory changes global and national economic trends. These will impact and influence the Company’s product line, its potential mergers and acquisitions targets, its joint ventures and the Company’s technology emphasis.

 

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2019 (Unaudited) Compared to Three Months Ended September 30, 2019 (Unaudited):

 

   

Three Months Ended September 30,

                 
   

2019

   

2018

   

Changes

 
           

% of

           

% of

                 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 
                                                 

Revenue

    14,793,117       100.0 %   $ 191,010       100.0 %   $ 14,602,107       7644.7 %

Cost of revenue

    6,834,198       35.8 %     232,251       121.6 %     6,601,947       2842.6 %

Gross profit

    7,958,919       41.7 %     (41,241 )     -21.6 %     8,000,160       -19398.6 %
                                                 

Operating expenses:

                                               

Advertising and marketing

    10,319       0.1 %     30,652       16.0 %     (20,333 )     -66.3 %

Research and development

    381,112       2.0 %     124,897       65.4 %     256,215       205.1 %

TGPF Bed Debt Reserve - 60%

    5,665,031       29.7 %     -       0.0 %     5,665,031       100.0 %

Payroll and payroll taxes

    420,074       2.2 %     140,137       73.4 %     279,937       199.8 %

Professional fees

    281,659       1.5 %     168,067       88.0 %     113,592       67.6 %

General and administrative

    176,120       0.9 %     53,220       27.9 %     122,900       230.9 %

Depreciation and amortization

    4,897       0.0 %     1,937       1.0 %     2,960       152.8 %

Total operating expenses

    6,939,212       36.4 %     518,910       271.7 %     6,420,302       1237.3 %
                                                 

Income (loss) from operations

    1,019,707       5.3 %     (560,151 )     -293.3 %     1,579,858       -282.0 %
                                                 

Other Income (Expense):

                                               

Interest (expense) income

    3,837       0.0 %     (7,082 )     -3.7 %     10,919       -154.2 %

Interest expense - Vista convertible note

    -       0.0 %     -       0.0 %     -       0.0 %

Derivative expense

    -       0.0 %     -       0.0 %     -       0.0 %

Changes in fair value of derivative liability

    236,184       1.2 %     -       0.0 %     236,184       0.0 %

Asset impairment

    -       0.0 %     -       0.0 %     -       0.0 %

Interest Income

    -       0.0 %     -       0.0 %     -       0.0 %

Total other income (expense)

    240,021       1.3 %     (7,082 )     -3.7 %     247,103       -3489.2 %
                                                 

Income (loss) before provision for income taxes

    1,259,728       6.6 %     (567,233 )     -297.0 %     1,826,961       -322.1 %
                                                 

Provision for income taxes

    -       0.0 %     -       0.0 %     -       0.0 %
                                                 

Net income (loss)

  $ 1,259,728       6.6 %   $ (567,233 )     -297.0 %   $ 1,826,961       -322.1 %

 

Revenue

 

For the three months ended September 30, 2019 and 2018, we recognized revenue of $14,793,117 and $191,010, respectively. Throughout 2018, we conducted numerous tests of our products and services, and began to sign up our initial customers. After a soft launch of the GreenBox Network during the last few days of June 2018, when we began processing transactions, we processed approximately $5,100,000 in completed transactions on behalf of merchants. We believe this accomplishment to be indicative of the validity of our proprietary blockchain-based systems, which are the foundation of the GreenBox Network, and indicative of our future potential.

 

Cost of Goods Sold

 

Our Cost of Goods Sold (“COGS”) for 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. For the three months ended September 30, 2019 and 2018, our COGS associated with payment processing was $6,834,198 and $232,251, respectively, in which included the absorption by us, of chargebacks, which was limited to 2018, as a promotional tool. As regards Licensing Revenue, we do not incur any direct costs of services or products, thus we did not record COGS for Licensing Revenue.

 

 

Operating Expenses

 

Overall, operating expenses increased during 2019 as the Company ramped up operations. For the three months ended September 30, 2019 and 2018, our general and administrative expense was $6,939,212 and $518,910, respectively, which was primarily due to our legal and professional expenses, most of which were outsourced, were $281,659 and $168,067, respectively; and our R&D expense was $381,112 and $124,897, respectively.

 

Non-Operating Expenses

 

For the three months ended September 30, 2019 and 2018, we recorded non-operating income (expense) of $240,021 and ($7,082), respectively, of which primarily represented $236,184 of changes in derivative liability for the three months ended September 30, 2019.

 

RESULTS OF OPERATIONS

 

Nine Months Ended September 30, 2019 (Unaudited) Compared to Nine Months Ended September 30, 2018 (Unaudited):

 

   

Nine Months Ended September 30,

                 
   

2019

   

2018

   

Changes

 
           

% of

           

% of

                 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 
                                                 

Revenue

  $ 19,070,861       100.0 %   $ 305,935       100.0 %   $ 18,764,926       6133.6 %

Cost of revenue

    10,602,555       55.6 %     250,173       81.8 %     10,352,382       4138.1 %

Gross profit

    8,468,306       44.4 %     55,762       18.2 %     8,412,544       15086.5 %
                                                 

Operating expenses:

                                               

Advertising and marketing

    35,928       0.2 %     135,757       44.4 %     (99,829 )     -73.5 %

Research and development

    1,085,298       5.7 %     287,919       94.1 %     797,379       276.9 %

Cash due from gateway reserve expense

    5,665,031       29.7 %     -       0.0 %     5,665,031       1000.0 %

Payroll and payroll taxes

    967,121       5.1 %     178,116       58.2 %     789,005       443.0 %

Professional fees

    588,677       3.1 %     515,419       168.5 %     73,258       14.2 %

General and administrative

    375,373       2.0 %     232,777       76.1 %     142,596       61.3 %

Depreciation and amortization

    11,352       0.1 %     4,431       1.4 %     6,921       156.2 %

Total operating expenses

    8,728,780       45.8 %     1,354,419       442.7 %     7,374,361       544.5 %
                                                 

Loss from operations

    (260,474 )     -1.4 %     (1,298,657 )     -424.5 %     1,038,183       -79.9 %
                                                 

Other Income (Expense):

                                               

Interest (expense) income

    (171,116 )     -0.9 %     (92,930 )     -30.4 %     (78,186 )     84.1 %

Interest expense - debt discount

    (188,273 )     -1.0 %     -       0.0 %     (188,273 )     0.0 %

Derivative expense

    (634,766 )     -3.3 %     -       0.0 %     (634,766 )     0.0 %

Changes in fair value of derivative liability

    (129,186 )     -0.7 %     -       0.0 %     (129,186 )     -100.0 %

Asset impairment

    -       0.0 %     (75,000 )     -24.5 %     75,000       -100.0 %

Interest Income

    -       0.0 %     -       0.0 %     -       0.0 %

Total other income (expense)

    (1,123,341 )     -5.9 %     (167,930 )     -54.9 %     (955,411 )     568.9 %
                                                 

Loss before provision for income taxes

    (1,383,815 )     -7.3 %     (1,466,587 )     -479.4 %     82,772       -5.6 %
                                                 

Provision for income taxes

    -       0.0 %     -       0.0 %     -       0.0 %
                                                 

Net loss

  $ (1,383,815 )     -7.3 %   $ (1,466,587 )     -479.4 %   $ 82,772       -5.6 %

 

 

Revenue

 

For the nine months ended September 30, 2019 and 2018, we recognized revenue of $19,070,861 and $305,935, respectively. Throughout 2018, we conducted numerous tests of our products and services, and began to sign up our initial customers. After a soft launch of the GreenBox Network during the last few days of June 2018, when we began processing transactions, we processed approximately $5,100,000 in completed transactions on behalf of merchants. We believe this accomplishment to be indicative of the validity of our proprietary blockchain-based systems, which are the foundation of the GreenBox Network, and indicative of our future potential.

 

Cost of Goods Sold