10-Q 1 greenbox20200930_10q.htm FORM 10-Q greenbox20200930_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, 2020

 

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 and post 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 November 9, 2020 was 181,050,238 Shares of Common Stock (One Class)

 

 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I   Consolidated Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets 

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Stockholders’ Deficit

5

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis or Plan of Operation

28

Item 3.

Controls and Procedures

34

 

 

 

PART II  Other Information

 

 

 

 

Item 1.

Legal Proceedings

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

Signatures

36

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GREENBOX POS

 

CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

         
   

September 30,

   

December 31,

 
   

2020

   

2019

 
                 

ASSETS

               
                 

Current Assets:

               

Cash and cash equivalents

  $ -     $ -  

Restricted cash

    124,834       763,110  

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

    10,000       70,257  

Accounts receivables from fines and penalties from merchants, net of allowance for bad debt of $6,665,031

    2,789,230       2,776,687  

Cash due from gateways, net

    5,680,356       8,426,844  

Prepaid and other current assets

    59,766       24,888  

Total current assets

    8,664,186       12,061,786  
                 

Non-current Assets:

               

Property and equipment, net

    62,555       66,491  

Other assets

    87,174       17,174  

Operating lease right-of-use assets, net

    146,984       229,639  

Total non-current assets

    296,713       313,304  
                 

Total assets

  $ 8,960,899     $ 12,375,090  
                 
                 
                 

Current Liabilities:

               

Accounts payable

  $ 725,558     $ 504,505  

Other current liabilities

    47,207       15,100  

Accrued interest

    87,560       368,071  

Payment processing liabilities, net

    12,624,082       14,021,892  

Short-term notes payable, net of debt discount of $39,000 and $32,418, respectively

    731,232       741,253  

Convertible debt, net of debt discount of $133,500 and $0, respectively

    44,500       807,500  

Derivative liability

    284,210       1,050,063  

Current portion of operating lease liabilities

    30,314       113,935  

Total current liabilities

    14,574,663       17,622,319  

Operating lease liabilities, less current portion

    120,110       120,110  
                 

Total liabilities

    14,694,773       17,742,429  
                 

Commitments and contingencies

               
                 

Stockholders' Equity:

               

Common stock, par value $0.001, 495,000,000 shares authorized, shares issued and outstanding of 181,6550,138 and 169,862,933, respectively

    181,650       169,863  

Common stock - issuable

    -       695  

Additional paid-in capital

    1,590,993       1,179,272  

Accumulated deficit

    (7,506,517 )     (6,717,169 )

Total stockholders' equity

    (5,733,874 )     (5,367,339 )
                 

Total liabilities and stockholder's equity

  $ 8,960,899     $ 12,375,090  

 

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,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Revenue

  $ 3,056,271     $ 14,793,117     $ 5,536,335     $ 19,070,861  
                                 

Cost of revenue

    1,845,295       6,834,198       3,504,283       10,602,555  
                                 

Gross profit

    1,210,976       7,958,919       2,032,052       8,468,306  
                                 

Operating expenses:

                               

Advertising and marketing

    59,099       10,319       86,368       35,928  

Research and development

    243,923       381,112       798,157       1,085,298  

Cash due from gateway reserve expense

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

General and administrative

    366,734       176,120       613,156       375,373  

Payroll and payroll taxes

    436,216       420,074       1,279,174       967,121  

Professional fees

    344,641       281,659       852,234       588,677  

Depreciation and amortization

    5,764       4,897       16,856       11,352  

Total operating expenses

    1,456,377       6,939,212       3,645,945       8,728,780  
                                 

Loss from operations

    (245,401 )     1,019,707       (1,613,893 )     (260,474 )
                                 

Other income (expense):

                               

Interest expense

    (48,931 )     3,837       (372,553 )     (171,193 )

Interest expense - debt discount

    (83,500 )     -       (121,918 )     (188,273 )

Derivative expense

    (925,576 )     -       (925,576 )     (634,689 )

Changes in fair value of derivative liability

    819,366       236,184       (383,769 )     (129,186 )

Gain from extinguishment of convertible debt

    -       -       2,630,795       -  

Other income or expense

    (5,768 )     -       (2,434 )     -  

Total other expense, net

    (244,409 )     240,021       824,545       (1,123,341 )
                                 

Loss before provision for income taxes

    (489,810 )     1,259,728       (789,348 )     (1,383,815 )
                                 

Income tax provision

    -       -       -       -  
                                 

Net loss

  $ (489,810 )   $ 1,259,728     $ (789,348 )   $ (1,383,815 )
                                 
                                 

Earnings (loss) per share:

                               

Basic and diluted

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

Weighted average number of common shares outstanding:

                               

Basic and diluted

    176,930,358       168,492,966       176,930,358       167,136,344  

 

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, 2020

    181,150,138     $ 181,150       -     $ -     $ 1,396,360     $ (7,016,707 )   $ (5,439,197 )
                                                         

Common stock issued for stock options exercised

    500,000       500       -       -       32,000       -       32,500  
                                                         

Stock compensation expense

    -       -       -       -       162,633       -       162,633  
                                                         

Common stock repurchased from common stock issued

    (6,000,000 )     (6,000 )     -       -       (804,000 )     -       (810,000 )
                                                         

Common stock issued upon conversion of note payable

    6,000,000       6,000       -       -       804,000       -       810,000  
                                                         

Net loss

    -       -       -       -       -       (489,810 )     (489,810 )
                                                         

Balance at September 30, 2020

    181,650,138     $ 181,650       -     $ -     $ 1,590,993     $ (7,506,517 )   $ (5,733,874 )

 

   

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 loss

    -       -       -       -       -       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 )

 

 

 

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 December 31, 2019

    169,862,933     $ 169,863       695,122     $ 695.00     $ 1,179,272     $ (6,717,169 )   $ (5,367,339 )
                                                         

Shares issuable adjustment

    -       -       (695,122 )   $ (695 )     695       -       -  
                                                         

Common stocks issued from conversion of convertible debt

    11,128,205       11,128       -       -       204,422       -       215,550  
                                                         

Common stocks issued for professional fees

    59,000       59       -       -       4,071       -       4,130  
                                                         

Common stocks - issued donation

    100,000       100       -       -       7,900       -       8,000  
                                                         

Stock compensation expense

    -       -       -       -       162,633       -       162,633  
                                                         

Common stock issued for stock options exercised

    500,000       500       -       -       32,000       -       32,500  
                                                         

Common stock repurchased from common stock issued

    (6,000,000 )     (6,000 )     -       -       (804,000 )     -       (810,000 )
                                                         

Common stock issued upon conversion of note payable

    6,000,000       6,000       -       -       804,000       -       810,000  
                                                         

Net loss

    -       -       -       -       -       (789,348 )     (789,348 )
                                                         

Balance at September 30, 2020

    181,650,138     $ 181,650     $ -     $ -     $ 1,590,993     $ (7,506,517 )   $ (5,733,874 )

 

   

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 )

 

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,

 
   

2020

   

2019

 
                 

Cash flows from operating activities:

               

Net loss

  $ (789,348

)

  $ (1,383,815

)

                 

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

               

Depreciation expense

    16,856       11,352  

Noncash lease expense

    (966

)

    4,292  

Stock compensation expense

    162,633       85,640  

Common stocks issued for professional fees

    4,130       -  

Common stocks - issued donation

    8,000       -  

Proceeds from exercise of stock options

    32,500       -  

Interest expense - debt discount

    121,918       188,273  

Derivative expense

    925,576       634,766  

Gain (loss) on extinguishment of debt

    (2,630,795

)

    -  

Changes in fair value of derivative liability

    383,769       129,186  

Changes in assets and liabilities:

               

Other receivable, net

    47,714       (3,810,776 )

Prepaid and other current assets

    (34,878

)

    (4,919 )

Cash due from gateways, net

    3,124,085       (12,562,634

)

Other assets

    (70,000

)

    -  

Accounts payable

    220,465       79,768  

Other current liabilities

    32,107       (6,609

)

Accrued interest

    (286,461

)

    20,243  

Payment processing liabilities, net

    (1,397,810

)

    16,678,995  

Net cash provided by (used in) operating activities

    (130,505

)

    64,622  
                 

Cash flows from investing activities:

               

Purchases of property and equipment

    (12,332

)

    (5,984

)

Net cash used in investing activities

    (12,332

)

    (5,984

)

                 

Cash flows from financing activities:

               

Borrowings from convertible debt

    178,000       482,500  

Repayments on convertible debt

    (670,000

)

    (496,500

)

Borrowings from notes payable

    1,954,480       -  

Principal payments on notes payable

    (1,147,919

)

    -  

Repayment on long-term debt

    -       (75,000

)

Repurchase of common stocks outstanding

    (810,000

)

    -  

Net cash used in financing activities

    (495,439

)

    (89,000

)

                 

Net increase in cash, cash equivalents, and restricted cash

    (638,276

)

    (30,362

)

                 

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

    763,110       284,978  
                 

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

  $ 124,834     $ 254,616  
                 

Supplemental disclosures of cash flow information

               

Cash paid during the period for:

               

Interest

  $ 575,014     $ 110,873  

Income taxes

  $ 800     $ 800  
                 
                 

Non-cash financing activities:

               

Convertible debt conversion to common stock

  $ 137,500     $ (150,000

)

Interest accrual from convertible debt converted to common stock

  $ 78,050     $ -  

Short-term notes payable converted to common stock

  $ 810,000     $ -  

 

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, 2020.

 

The balance sheets and certain comparative information as of December 31, 2019 are derived from the audited financial statements and related notes for the year ended December 31, 2019 (“2019 Annual Financial Statements”), included in the Company’s 2019 Annual Report on Form 10-K. These unaudited interim financial statements should be read in conjunction with the 2019 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, 2020, the Company had cash and cash equivalents of $0, has incurred a net loss of $789,348 for the nine months ended September 30, 2020, and has accumulated a deficit of $7,506,517. 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.

 

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.

 

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 $0, excluding cash held for settlement liabilities, as of September 30, 2020 and December 31, 2019, respectively.

 

 

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

 

The following table provides a reconciliation of cash, 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, 2020

   

December 31, 2019

 
                 

Cash and cash equivalents

  $ -     $ -  

Restricted cash

    124,834       763,110  
                 

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

  $ 124,834     $ 763,110  

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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 $59,099 and $10,319 for the three months ended September 30, 2020 and 2019, respectively, and $86,368 and $35,928 for the nine months ended September 30, 2020 and 2019, respectively.

 

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 $243,923 and $381,112 for the three months ended September 30, 2020 and 2019, respectively, and $798,157 and $1,085,298 for the nine months ended September 30, 2020 and 2019, 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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Accounts Receivables from Fines and Fees from Merchants

 

The fines and penalties charged to the Company’s merchants is a normal course of business and historically, the Company has had more than 90% collections success rate.   These fees and penalties represent certain chargebacks which are at fault by the Company’s merchants and are imposed as the merchant agreement between the Company and the merchant.  The Company has legal rights under the merchant agreement to claim the chargeback.  These chargebacks, fees, and fines are earned and delivered because the Company has been “chargebacked” by the Gateways and the Company has legal rights under the agreement to claim this against the merchants.

 

At the end of Q3 2019, GreenBox received constructive notice of potential violations of its Terms of Service by a merchant, The Good People Farms (“TGPF”).   An ongoing audit and investigation of this account resulted in the discovery of a number of violations GreenBox believes TGPF is responsible for, including but not limited to violations of VISA, Mastercard, and American Express’s rules.

 

This investigation is ongoing, but initial results indicate that excessively high chargeback percentages are connected with fraudulent activity and / or transaction laundering. These issues lead to the implementation of aggressive bank reserves, stunting GreenBox’s ability to conduct business and contributed to undetermined consequential damages. GreenBox promptly terminated the merchant account and placed all processed funds on reserve.

 

Although the investigation is ongoing, GreenBox estimates that the total amount of fees, fines, and chargebacks are currently $9,441,718.  The Company has provided for an allowance for bad debt of $6,665,031 on the gross balance of $9,441,718 bringing to net balance of $2,776,687 which is included as accounts receivables from fines and penalties from merchants.  To date, GreenBox has successfully recouped $840,739.33 (collected in 2019).  The Company may assess $100,000 per fraudulent transactions but the Company used $5,000 per transaction to calculate the fees and fines.

 

The Company recorded net balance of $2,776,687 as other income in the statements of operations for the year ended December 31, 2019.

 

Accounts Receivable and Allowance for Bad Debt

 

The Company maintains an allowance for doubtful accounts for estimated losses from the inability of customers to make required payments. The allowance for doubtful accounts is evaluated periodically based on the aging of accounts receivable, the financial condition of customers and their payment history, historical write-off experience and other assumptions, such as current assessment of economic conditions.

 

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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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, 2020

 

Level 1

   

Level 2

   

Level 3

 
                         

Derivative liability

  $ -     $ -     $ 284,210  

 

December 31, 2019

 

Level 1

   

Level 2

   

Level 3

 
                         

Derivative liability

  $ -     $ -     $ 1,050,063  

 

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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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, 2020 and 2019, 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.

 

Recently Issued 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 $307,531 and $309,677, respectively as of March 31, 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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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.

 

3.

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, 2020

   

December 31, 2019

 

Settlement Processing Assets:

               

Cash held for settlements

  $ 124,834     $ 763,110  

Cash due from gateways

    2,377,909       3,073,183  

Amount due from gateways and merchants – hold and fees

    6,818,892       4,831,938  

Reserves (2)

    3,302,447       5,353,661  

Total before allowance for uncollectable

    12,624,082       14,021,892  

Allowance for uncollectable – hold and fees

    (6,818,892 )     (4,831,938 )

Cash held for settlement

    (124,834 )     (763,110 )

Total – settlement processing assets

  $ 5,680,356     $ 8,426,844  
                 

Settlement Processing Liabilities:

               

Settlement liabilities to merchants

    12,624,082       14,021,892  

Totals

  $ 12,624,082     $ 14,021,892  

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

4.

CASH DUE FROM GATEWAYS

 

Cash due from gateways consisted of the following:

 

   

September 30, 2020

   

December 31, 2019

 
                 

Cash due from Gateways

  $ 2,377,909     $ 3,073,183  

Amount due from gateways and merchants – hold and fees

    6,818,892       4,824,223  

Reserves (2)

    3,302,447       5,353,661  
                 

Total cash due from gateways

    12,499,248       13,251,067  

Chargeback Allowances (1)

    -       -  

Allowance of uncollectable – hold and fees

    (6,818,892 )     (4,824,223 )
                 

Total cash due from gateways, net

  $ 5,680,356     $ 8,426,844  

  

(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.

 

5.

PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   

September 30, 2020

   

December 31, 2019

 
                 

Computers

  $ 48,289     $ 38,938  

Furniture

    40,320       37,339  

Kiosks

    6,472       12,750  

Vehicles

    4,578       4,578  
                 

Total property and equipment

    99,659       93,605  

Less: Accumulated depreciation

    (37,104 )     (27,114 )
                 

Total property and equipment, net

  $ 62,555     $ 66,491  

 

Depreciation expense was $5,764 and $4,897 for the three months ended September 30, 2020 and 2019, respectively, and $16,856 and $11,352 for the nine months ended September 30, 2020 and 2019, respectively.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

6.

PAYMENT PROCESSING LIABILITIES, NET

 

Payment processing liabilities consisted of the following:

 

   

September 30, 2020

   

December 31, 2019

 
                 

Settlement liabilities to merchants

  $ 12,624,082     $ 14,021,892  

Settlement liabilities to ISOs

    -       -  
                 

Total processing liabilities

    12,624,082       14,021,892  

Refund allowances

    -       -  
                 

Total payment processing liabilities

  $ 12,624,082     $ 14,021,892  

 

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.

 

7.

CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consisted of the following:

 

   

September 30, 2020

   

December 31, 2019

 
                 

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

  $ -     $ 500,000  

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

    -       200,000  

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

    -       107,500  

June 22, 2020 ($178,000) – 8% interest per annum with outstanding principal and interest due June 22, 2021

    178,000       -  
                 

Total convertible notes payable

    178,000       807,500  

Debt discount

    (133,500 )     -  
                 

Total convertible notes payable

  $ 44,500     $ 807,500  

 

 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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

7.

CONVERTIBLE NOTES PAYABLE (continued)

 

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.

 

On April 21, 2020, Vista converted $100,000 of convertible debt by receiving 5,128,205 common shares. On June 15, 2020, the Company and Vista entered into a settlement agreement, whereby, the Company will pay $225,000 on June 19, 2020 and $225,000 on July 19, 2020 and issuing 5,128,205 common shares to settle all of the outstanding balance including accrued interest. The Company has provided payment on those dates to fully settle the balance accordingly.

 

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. The Company paid the loan with full settlement during the quarter ended March 31, 2020. As part of the payment settlement for all RB Cap convertible notes, the Company collectively provided 6,000,000 common shares.

 

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. The Company paid the loan of $50,000 during the quarter ended March 31, 2020 and settled the rest of the outstanding balance including interest with shares issuances. As part of the payment settlement for all RB Cap convertible notes, the Company collectively provided 6,000,000 common shares.

 

Power Lending – $178,000

 

On June 22, 2020 (funded in July 2020), PubCo issued a convertible promissory note for $178,000 to Power Lending. The note incurs interest at 8% per year and the outstanding principal and accrued interest are due June 22, 2021. Power Lending may elect to convert the note at any time from the date issuance at a fixed price per share of $0.01.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

8.

SHORT-TERM NOTES PAYABLE

 

Short-term notes payable consisted of the following:

 

   

September 30, 2020

   

December 31, 2019

 
                 

December 10, 2019 ($260,000) – Total interest charge of $106,000 with daily installments (5 days per week) of $4,073 for four months totaling $366,000.

  $ -     $ 213,671  

December 9, 2019 ($200,000) – Total interest charge of $40,000 with 15 weekly installments of $16,000 totaling $240,000.

    -       160,000  

November 12, 2019 ($400,000) – Total interest charge of $196,000 with daily installments (5 days per week) of $5,960 for four months totaling $596,000.

    -       400,000  
                 

June 3, 2020 ($300,000) – Total weekly payment of $13,714 for total of 28 payments.

    94,286       -  

June 9, 2020 ($150,000) – Monthly payment of $731 after 12 months with maturity date of June 1, 2050 with interest rate at 3.75% per annum.

    149,900       -  

April 29, 2020 ($272,713) – Paycheck protection program (“PPP”) loan provided by SBA under CARES Act with interest rate at 1.00% per annum with maturity date of April 29, 2022.

    272,713       -  
                 

July 10, 2020 ($400,000) – Total weekly payment of $17,867 (includes principal and interest) for total of 30 payments with imputed interest of 25%.

    253,333       -  
                 

Total short-term notes payable

  $ 770,232       773,671  
                 

Debt discount

    (39,000 )     (32,418 )
                 

Total short-term notes payable, net of debt discount

  $ 731,232     $ 741,253  

 

Fox Capital Group, Inc. - $260,000

 

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, the Company 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, for $260,000, from which $26,000 in fees was deducted, providing the Company with net cash of $234,000. For accounting purposes, the Company 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. The amount was fully paid and settled as of September 30, 2020.

 

Complete Business Solutions Group, Inc. - $200,000

 

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 $199,965. 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. The amount was fully paid and settled as of September 30, 2020.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

8.

SHORT-TERM NOTES PAYABLE (continued)

 

West Coast Business Capital, LLC - $400,000

 

On or about November 12, 2019, the Company entered into a Purchase Agreement with West Coast Business Capital, LLC (“West Coast”). Under the terms of the Purchase Agreement, the Company 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 the Company with net cash of $384,000. For accounting purposes, the Company 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.

 

Itria Ventures - $300,000

 

On June 3, 2020, the Company entered into a loan agreement with Itria Ventures in the amount of $300,000. The loan requires weekly payment of $13,714 for total of 28 payments until fully paid. The loan bears 4.09% interest per annum. Both Nisan and Errez, individually, signed personal guarantees for this Purchase Agreement.

 

SBA CARES Act Loan - $150,000

 

On June 9, 2020, the Company entered into a loan agreement with SBA under CARES Act in the amount of $150,000. The loan requires monthly payment of $731 after 12 months with maturity date of June 1, 2050 with interest rate at 3.75% per annum. Both Nisan and Errez, individually, signed personal guarantees for this Purchase Agreement.

 

Preferred Bank - Paycheck Protection Program – CARES Act - $272,713

 

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

 

West Coast Business Capital, LLC - $400,000

 

On or about July 10, 2020, the Company entered into a Purchase Agreement with West Coast Business Capital, LLC (“West Coast”). Under the terms of the Purchase Agreement, the Company agreed to sell West Coast $536,000 of future incoming cashflow from the GreenBox Business, to be delivered to West Coast in weekly installments of $17,867 (includes principal and interest) for 30 weeks, which includes imputed interest of 25% per annum. Both Nisan and Errez, individually, signed personal guarantees for this Purchase Agreement.

 

9.

DERIVATIVE LIABILITY

 

Derivative liability consisted of the following:

 

   

September 30, 2020

   

December 31, 2019

 
                 

Beneficial conversion feature – convertible debt

  $ 284,210     $ 1,050,063  
                 

Total derivative liability

  $ 284,210     $ 1,050,063  

 

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

9.

DERIVATIVE LIABILITY (continued)

 

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”).

 

On June 22, 2020, PubCo issued a convertible promissory note for $178,000 to Power Up Lending (“Power Note”), due June 22, 2021 (the “Maturity Date”). The Power Note provides for interest charge of 8% per annum and is due upon payback of the Power Note. The Power Note can be converted with the conversion price of 65% of the 5 days lowest traded price for the Company’s common stock in the 10 consecutive trading days preceding the notice of conversion.

 

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, 2020 and 2019.

 

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 and Nine Months Ended

September 30,

 
   

2020

   

2019

 
                 

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, 2020

   

December 31, 2019

 
                 

Deferred tax assets (liabilities):

               

Charitable contributions

  $ -     $ -  

Unearned revenue

    -       -  

Depreciation

    -       -  

Net operating loss carryforward

    777,000       498,888  
                 

Total deferred tax assets, net

    777,000       498,888  

Valuation allowance

    (777,000 )     (498,888 )
                 

Net deferred tax assets (liabilities)

  $ -     $ -  

 

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, 2020, the Company had federal and California net operating loss carryforwards of approximately $3.7 million. The federal and California net operating loss carryforwards will expire at various dates from 2026 through 2028; however, $3.7 million of the Federal operating loss does not expire and will be carried forward indefinitely.

 

As of September 30, 2020 and December 31, 2019, 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)

 

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.

 

 

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 months ended March 31, 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.

 

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 one transference of 1.6 million shares not two). 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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

12.

RELATED PARTY TRANSACTIONS (continued)

 

 

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.

 

 

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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

12.

RELATED PARTY TRANSACTIONS (continued)

 

 

Kenneth Haller and the Haller Companies (continued)

 

 

§

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.

 

 

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.

 

 

GREENBOX POS

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued) 

 

12.

RELATED PARTY TRANSACTIONS (continued)

  

 

Kenneth Haller and the Haller Companies (continued)

 

 

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. . As of June 30, 2020, the Haller agreement concluded with Mr. Kenneth Haller receiving 17M shares of GRBX common stock. This was completed by the LLC (PrivCo) transferring these shares from its own book entry account with the transfer agent (VStock) to Haller’s book.

 

The Company did not pay any commissions to Charge Savvy or Cultivate for the three and nine months ended September 30, 2020 and 2019.

 

13.

COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company has the following 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, 2020.

 

 

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. As of March 31, 2020, both parties have abandoned the matter and no further action was required by either party.

 

 

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)

 

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

 

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 $146,984 and $150,424 respectively, as of September 30, 2020. 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,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Amortization of right-of-use assets, net of liability amortization

  $ 115     $ 1,073     $ 344     $ (3,219 )

Operating lease expense

    32,904       31,945       98,711       102,273  
                                 

Total lease expense

  $ 33,018     $ 33,018     $ 99,054     $ 99,054  

 

 

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:

 

October 27, 2020 (Convertible Debentures) – On October 27, 2020, GreenBox POS (the “Company”) consummated the initial closing of a private placement offering (the “Offering”) whereby pursuant to the Securities Purchase Agreements (the “Purchase Agreements”) entered into by the Company with thirteen (13) accredited investors (the “Investors”), the Company issued certain Convertible Debentures for an aggregate purchase price of $3,019,550 (each a “Debenture”, collectively, the “Debentures”) and five (5) year warrants (the “Warrants”) to purchase shares of the Company’s common stock, par value $0.001 per share (“Common Stock”). The second closing occurred on October 28, 2020 for an aggregate purchase price of $480,450 for a total purchase price of $3,500,000. The total principal of the Debentures is $3,850,000.

 

These Convertible Debentures were used to pay-off the following loans outstanding:

 

 

Itria Venture - $123,428 (includes interest)

 

Power Up Lending - $228,059 (includes interest)

 

West Coast Business Capital -$285,862 (includes interest)

 

The Debentures include a 10% original issuance discount, carry an interest rate of 10% per annum and mature on July 27, 2021 (the “Maturity Date”). The Debentures contain a voluntary conversion mechanism whereby the holders may convert, in whole or in part, the outstanding balance of the Debentures into shares of the Common Stock at a conversion price of $0.33 per share, subject to adjustment as provided therein. Additionally, the Debentures contain a mandatory conversion mechanism whereby any principal and accrued interest on the Debentures converts into shares of the Company’s Common Stock on the date in which the Company’s Common Stock is listed for trading on a senior national exchange. The mandatory conversion mechanism shall take effect only if (i) the shares of Common Stock underlying the Debentures are registered on an effective registration statement, (ii) the average closing bid price of the Common Stock over the preceding 5 Trading Days is above $0.80 per share and (iii) the average trading volume of Common Stock over the preceding 5 Trading Days is at least $200,000. The mandatory conversion mechanism contains a conversion price of $0.33 per share, subject to adjustment as provided therein. The Debentures contain customary events of default (each an “Event of Default”). If an Event of Default occurs, interest under the Debentures will accrue at a rate of eighteen percent (18%) per annum and the outstanding principal amount of the Debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing with respect to the Debentures will become, at the Debenture holder’s election, immediately due and payable in cash.

 

Pursuant to the Purchase Agreements, each investor received a Warrant in an amount equal to 100% of the shares of Common Stock initially issuable to each Investor pursuant to such Investor’s Debenture. The Warrants contain an exercise price of $0.33 per share, subject to adjustment as provided therein. In connection with the closing of the Offering, Warrants were issued to purchase an aggregate of 11,666,666 shares of Common Stock.

 

 

 

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.

 

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 discussion the financial activity disclosed from the perspectives of on-going Q3/20 and plans and projections for the remainder of 2020.

 

Q1/20 signified the return of operations in full scale for the Company. In Q4/2019 and Q1/2020, the Company continued to invest 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, and was essentially flat for Q1/2020, the improved platform is performing better than its predecessor platform and increase total volumes while increasing profit margins and operating sustainability is observed and expected to persist through 2020. 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 continued to execute on these management directives.

 

Q2/20 also symbolized the transition into large scale operations with increased capacity of the payment processing platform, and with the addition of two new platforms, Crypto payouts and FOREX, allowing the Company to expand licensed operations in Europe and beyond. It is anticipated that European operation will match and could exceed USA operational volume for the Company. While Covid-19 virus impacted of the rate of increase in operational figures was observed in Q2/2020, Q3/2020 figures are as expected, and the projections for the rest of the year remain unchanged.

 

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

 

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 Q1/2021 and will ramp up the targeted Average Daily Volumes in Q1/2021. We believe the current operational bandwidth for the Company is virtually unlimited. Covid-19 will push the ATPV forward, likely by a quarter or two, but the projected figures for daily processing are still anticipated to materialize during 2021.

 

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 in Q4/2020 the Company plans on uplisting to a senior exchange within the next 18 months and, at this time, and the Company 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 company has filed to reserve a NASDAQ ticker – GBOX.

 

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2020 (Unaudited) Compared to Three Months Ended September 30, 2019 (Unaudited):

  

   

Three Months Ended September 30,

                 
   

2020

   

2019

   

Changes

 
           

% of

           

% of

                 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 
                                                 

Revenue

  $ 3,056,271       100.0 %   $ 14,793,117       100.0 %   $ (11,736,846 )     -79.3 %

Cost of revenue

    1,845,295       60.4 %     6,834,198       46.2 %     (4,988,903 )     -73.0 %

Gross profit

    1,210,976       39.6 %     7,958,919       53.8 %     (6,747,943 )     -84.8 %
                                                 

Operating expenses:

                                               

Advertising and marketing

    59,099       1.9 %     10,319       0.1 %     48,780       472.7 %

Research and development

    243,923       8.0 %     381,112       2.6 %     (137,189 )     -36.0 %

Cash due from gateway reserve expense

    -       0.0 %     5,665,031       38.3 %     (5,665,031 )     -100.0 %

General and administrative

    436,216       14.3 %     176,120       1.2 %     260,096       147.7 %

Payroll and payroll taxes

    344,641       11.3 %     420,074       2.8 %     (75,433 )     -18.0 %

Professional fees

    366,734       12.0 %     281,659       1.9 %     85,075       30.2 %

Depreciation and amortization

    5,764       0.2 %     4,897       0.0 %     867       17.7 %

Total operating expenses

    1,456,377       47.7 %     6,939,212       46.9 %     (5,482,835 )     -79.0 %
                                                 

Loss from operations

    (245,401 )     -8.0 %     1,019,707       6.9 %     (1,265,108 )     -124.1 %
                                                 

Other Income (Expense):

                                               

Interest expense

    (48,931 )     -1.6 %     3,837       0.0 %     (52,768 )     -1375.2 %

Interest expense - debt discount

    (83,500 )     -2.7 %     -       0.0 %     (83,500 )     n/a  

Derivative expense

    (925,576 )     -30.3 %     -       0.0 %     (925,576 )     n/a  

Changes in fair value of derivative liability

    819,366       26.8 %     236,184       1.6 %     583,182       246.9 %

Gain from extinguishment of convertible debt

    -       0.0 %     -       0.0 %     -          

Other income or expense

    (5,768 )     -0.2 %     -       0.0 %     (5,768 )     n/a  

Total other income (expense)

    (244,409 )     -8.0 %     240,021       1.6 %     (484,430 )     -201.8 %
                                                 

Loss before provision for income taxes

    (489,810 )     -16.0 %     1,259,728       8.5 %     (1,749,538 )     -138.9 %
                                                 

Provision for income taxes

    -       0.0 %     -       0.0 %     -       0.0 %
                                                 

Net loss

  $ (489,810 )     -16.0 %   $ 1,259,728       8.5 %   $ (1,749,538 )     -138.9 %

 

Revenue

 

Revenue decreased by $11,736,846 or 79.3%, to $3,056,271 in the third quarter of fiscal 2020 from $14,793,117 in the third quarter previous year. The decrease in net sales reflected the following: Q3 revenues reflects an ecosystem exit from ChargeSavvy, one of the Independent Sales Organizations (ISO). That volume is now transferred to an alternative ISO and processing gateway. In addition, the company placed a high priority towards completion of compliance and integration with Fiserv, one of its largest accounts, and pushed to expedite the development and future release of its third-generation technology, code name Gen3. The Company raised capital in October to support these two directions specifically.

 

 

Cost of Revenue

 

Cost of revenue decreased by $4,988,903, or 73.0%, to $1,845,295 in the third quarter of fiscal 2020 from $6,834,198 in the third quarter last year. 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. Most orders are delivered directly to the customer, without any handling, storage or processing by us. Q3/20 shows a reduction in COR as a result of increased processing efficiency and decreased cost to scale. Upcoming release of the Company’s next generation technology, Gen3, is further designed to impact the Company’s Cost of Revenues and is projected to materially increase the Company’s operating margins significantly and positively.

 

Operating Expenses

 

Operating expenses decreased by $5,482,835, or 79.0%, to $1,456,377 in the third quarter of fiscal 2020 from $6,939,212 in the third quarter last year. The decrease was primarily due to decease in research and development of $137,189, cash due from gateway reserve expense of $5,665,031 in third quarter of prior year, and off-set by increase in payroll and professional fees.

 

Non-Operating Expenses

 

We incurred interest expense related to various debt in the amount of $132,431 and $391,431 for the three months ended September 30, 2020 and 2019, respectively. We incurred a gain from changes in fair value of derivative liability of $819,366 and $236,184 for the three months ended September 30, 2020 and 2019, respectively, and derivative expense of $925,576 for the three months ended September 30, 2020.

 

 

Nine Months Ended September 30, 2020 (Unaudited) Compared to Nine Months Ended September 30, 2019 (Unaudited):

 

   

Nine Months Ended September 30,

                 
   

2020

   

2019

   

Changes

 
           

% of

           

% of

                 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 
                                                 

Revenue

  $ 5,536,335       100.0 %   $ 19,070,861       100.0 %   $ (13,534,526 )     -71.0 %

Cost of revenue

    3,504,283       114.7 %     10,602,555       55.6 %     (7,098,272 )     -66.9 %

Gross profit

    2,032,052       66.5 %     8,468,306       44.4 %     (6,436,254 )     -76.0 %
                                                 

Operating expenses:

                                               

Advertising and marketing

    86,368       2.8 %     35,928       0.2 %     50,440       140.4 %

Research and development

    798,157       26.1 %     1,085,298       5.7 %     (287,141 )     -26.5 %

Cash due from gateway reserve expense

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

Payroll and payroll taxes

    1,279,174       41.9 %     967,121       5.1 %     312,053       32.3 %

Professional fees

    852,234       27.9 %     588,677       3.1 %     263,557       44.8 %

General and administrative

    613,156       20.1 %     375,373       2.0 %     237,783       63.3 %

Depreciation and amortization

    16,856       0.6 %     11,352       0.1 %     5,504       48.5 %

Total operating expenses

    3,645,945       119.3 %     8,728,780       45.8 %     (5,082,835 )     -58.2 %
                                                 

Loss from operations

    (1,613,893 )     -52.8 %     (260,474 )     -1.4 %     (1,353,419 )     519.6 %
                                        &nbs