ryvyl20230930

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, 2023

☐	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

RYVYL INC.

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

Nevada	22-3962936
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

3131 Camino Del Rio North, Suite 1400
San Diego, CA	92108
(Address of principal executive offices)	(Zip Code)

(619)-631-8261

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	RVYL	The Nasdaq Stock Market LLC (Nasdaq Capital Market)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2023, the Registrant had 5,386,141 shares of common stock, $0.001 par value per share, outstanding.

TABLE OF CONTENTS

PART I Financial Information		Page
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	3
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity/(Deficit) for the Three Months and Nine Months Ended September 30, 2023 and 2022 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II Other Information
Item 1.	Legal Proceedings	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39
Signatures		40

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RYVYL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

	September 30, 2023			December 31, 2022
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	15,845		$	13,961
Restricted cash		52,510			26,873
Accounts receivable, net of allowance of $111 and $82, respectively		698			1,156
Cash due from gateways, net of allowance of $2,211 and $3,917, respectively		8,324			7,427
Prepaid and other current assets		2,959			9,798
Total current assets		80,336			59,215
Non-current Assets:
Property and equipment, net		1,660			1,696
Other assets		1,826			197
Goodwill		26,753			26,753
Intangible assets, net		5,678			6,739
Operating lease right-of-use assets, net		3,784			1,533
Investments		227			1,524
Total non-current assets		39,928			38,442
Total Assets	$	120,264		$	97,657

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	3,592		$	1,630
Other current liabilities		5,133			3,662
Accrued interest		8			1,728
Payment processing liabilities, net		63,805			28,912
Short-term notes payable		15			14
Derivative liability		45			255
Current portion of operating lease liabilities		572			534
Total current liabilities		73,170			36,735
Long-term debt, net of debt discount		61,549			61,735
Operating lease liabilities, less current portion		3,567			1,109
Total liabilities		138,286			99,579
Commitments and contingencies

Series A Convertible Preferred Stock, par value $0.01 per share, 15,000 shares authorized, shares issued and outstanding of 6,000 and 0, respectively		6,664			-

Stockholders’ Deficit:
Common stock, par value $0.001, 17,500,000 shares authorized, shares issued and outstanding of 5,212,586 and 4,972,736, respectively		5			5
Common stock issuable, par value $0.001		-			-
Additional paid-in capital		96,741			96,256
Deferred stock compensation		(62	)		-
Accumulated other comprehensive income		1,208			1,596
Accumulated deficit		(122,578	)		(99,772	)
Less: Shares to be returned		-			(7	)
Total stockholders’ deficit		(24,686	)		(1,922	)
Total liabilities, convertible preferred stock and stockholders’ deficit	$	120,264		$	97,657

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

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RYVYL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

(Dollars in thousands, except share and per share data)

	*(dollars in thousands, except per share data)*
	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
				(as restated)						(as restated)
Revenue	$	17,480		$	10,630		$	43,620		$	21,806
Cost of revenue		10,800			4,333			25,703			11,343
Gross profit		6,680			6,297			17,917			10,463

Operating expenses:
Advertising and marketing		45			438			153			1,106
Research and development		1,315			1,442			4,434			5,300
General and administrative		3,041			1,186			6,709			4,332
Payroll and payroll taxes		2,605			2,385			8,232			7,481
Professional fees		1,234			1,032			5,651			3,704
Stock compensation expense		147			641			309			2,729
Depreciation and amortization		657			2,299			1,899			4,880
Total operating expenses		9,044			9,423			27,387			29,532

Loss from operations		(2,364	)		(3,126	)		(9,470	)		(19,069	)

Other income (expense):
Interest expense		(65	)		(1,802	)		(3,310	)		(7,415	)
Interest expense - debt discount		(4,183	)		1,632			(9,626	)		(11,540	)
Loss on extinguishment and derecognition expense on conversion of convertible debt		(1,331	)		(8,105	)		(1,518	)		(9,762	)
Changes in fair value of derivative liability		6,909			(4,143	)		6,580			14,592
Legal settlements expense		(1,929	)		-			(4,142	)		-
Merchant fines and penalty income		-			(368	)		-			(286	)
Other income or expense		(25	)		63			(1,474	)		298
Total other income (expense), net		(624	)		(12,723	)		(13,490	)		(14,113	)

Loss before provision for income taxes		(2,988	)		(15,849	)		(22,960	)		(33,182	)

Income tax provision		128			35			138			37

Net loss	$	(3,116	)	$	(15,884	)	$	(23,098	)	$	(33,219	)

Comprehensive income statement:
Net loss	$	(3,116	)	$	(15,884	)	$	(23,098	)	$	(33,219	)
Foreign currency translation loss		(317	)		(311	)		(389	)		(708	)
Total comprehensive loss	$	(3,433	)	$	(16,195	)	$	(23,487	)	$	(33,927	)

Net loss per share:
Basic and diluted	$	(0.60	)	$	(3.37	)	$	(4.48	)	$	(7.54	)
Weighted average number of common shares outstanding:
Basic and diluted		5,231,588			4,710,495			5,160,499			4,407,280

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

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RYVYL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/(DEFICIT)

(UNAUDITED)

(Dollars in thousands, except share data)

	Common Stock											Treasury Stock
	Shares			Amount		To be Issued			Amount			To be returned			Amount			Shares		at Cost		Deferred Stock Compensation			Additional Paid In Capital			Other Accumulated Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity/(Deficit)
Balance at December 31, 2022		4,972,736		$	5		175,392		$	-			(13,689	)	$	(7	)		-	$	-	$	-		$	96,256		$	1,596		$	(99,772	)	$	(1,922	)

Common stock issued to employees for compensation		(891	)		-		-			-			-			-			-		-		-			31			-			-			31

Common stock issued for interest on convertible debt		175,392			-		(175,392	)		(175	)		-			-			-		-		-			-			-			-			-

Carryover effects of financial statement restatements in prior periods		-			-		-			-			-			-			-		-		-			-			-			294			294

Share repurchase		(13,672	)		-		-			-			13,689			7			-		-		-			(7	)		-			-			-

Net loss and comprehensive loss		-			-		-			-			-			-			-		-		-			-			(58	)		(7,979	)		(8,037	)

Balance at March 31, 2023		5,133,565			5		-			-			-			-			-		-		-			96,280			1,538			(107,457	)		(9,634	)

Common stock issued to employees for compensation		9,511			-		-			-			-			-			-		-		-			130			-			-			130

Common stock issued for conversion of convertible debt		56,265			-		-			-			-			-			-		-		-			416			-			-			416

Common stock issued for interest on convertible debt		738			-		-			-			-			-			-		-		-			5			-			-			5

Restricted common stock issued for compensation		13,166			-		-			-			-			-			-		-		(67	)		100			-			-			33

Shares forfeited		(16,865	)		-		-			-			-			-			-		-		-			(315	)		-			-			(315	)

Net loss and comprehensive loss		-			-		-			-			-			-			-		-		-			-			(13	)		(12,005	)		(12,018	)

Balance at June 30, 2023		5,196,380			5		-			-			-			-			-		-		(67	)		96,616			1,525			(119,462	)		(21,383	)

Common stock issued to employees for compensation		8,878			-		-			-			-			-			-		-		-			20			-			-			20

Restricted common stock issued for compensation		7,328			-		-			-			-			-			-		-		5			105			-			-			110

Shares forfeited		-			-		-			-			-			-			-		-		-			-			-			-			-

Net loss and comprehensive loss		-			-		-			-			-			-			-		-		-			-			(317	)		(3,116	)		(3,433	)

Balance at September 30, 2023		5,212,586			5		-		$	-			-		$	-			-	$	-	$	(62	)	$	96,741		$	1,208		$	(122,578	)	$	(24,686	)

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

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RYVYL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/ (DEFICIT)

(UNAUDITED)

(Dollars in thousands, except share data)

	Common Stock										Treasury Stock
	Shares			Amount		To be Issued			Amount		To be returned			Amount			Shares			At Cost			Additional Paid-In Capital			Other Accumulated Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity/(Deficit)

Balance at December 31, 2021		4,354,665		$	4		-		$	-		(143,689	)	$	(985	)		(71,484	)	$	(493	)	$	81,479		$	-		$	(50,537	)	$	29,468

Common stock issued for services		3,051			-		891			-		-			-			-			-			126			-			-			126

Common stock issued to shareholder		3,334			-		-			-		-			-			-			-			-			-			-			-

Common stock issued for stock options exercised		1,242			-		-			-		-			-			-			-			5			-			-			5

Common stock contributed and cancelled from shareholder		(33,334	)		-		-			-		80,000			699			(148,376	)		(354	)		(3,582	)		-			-			(3,237	)

Common stock issuable - Acquisition of Sky assets		-			-		50,000			-		-			-			-			-			2,110			-			-			2,110

Common stock shares contributed by shareholder		-			-		(50,000	)		-		-			-			-			-			-			-			-			-

Common stock shares issuable to shareholder		-			-		53,334			-		-			-			-			-			-			-			-			-

Stock compensation expense		-			-		-			-		-			-			-			-			167			-			-			167

Net loss		-			-		-			-		-			-			-			-			-			-			(29,427	)		(29,427	)

Balance at March 31, 2022		4,328,958			4		54,225			-		(63,689	)		(286	)		(219,860	)		(847	)		80,305			-			(79,964	)		(786	)

Common stock issued for services		2,419					(891	)		-		-			-			-			-			79			-			-			79
					-
Common stock issued to employees as stock compensation		27,226					22,109			-		-			-			-			-			1,497			-			-			1,496

Common stock issued - acquisition of Sky assets		50,000			-		(50,000	)		-		-			-			-			-			-			-			-			-

Common stock shares contributed by shareholder		(50,000	)		-		50,000			-		-			-			-			-			-			-			-			-

Common stock shares contributed and cancelled from shareholder		(139,859	)		-		-			-		50,000			280			89,859			817			(1,096	)		-			-			-

Common stock issued for conversion of convertible debt		241,310			-		-			-		-			-			-			-			9,826			-			-			9,826

Other comprehensive loss		-			-		-			-		-			-			-			-			-			(398	)		-			(398	)

Net income		-			-		-			-		-			-			-			-			-			-			12,091			12,091

Balance at June 30, 2022		4,460,054			4		75,443			-		(13,689	)		(7	)		(130,001	)		(30	)		90,611			(398	)		(67,873	)		22,308

Common stock issued for services		15,020			-		-			-		-			-			-			-			133						-			133
																											-
Common stock issued to employees as stock compensation		58,696			-		(20,834	)		-		-			-			-			-			459						-			459
																											-
Common shares stock contributed by shareholder		(41,250	)		-		-			-		-			-			-			-			-						-			-
																											-
Common stock issued for conversion of convertible debt		357,386			-		-			-		-			-			-			-			7,088						-			7,088
																											-
Common stock issued for interest on convertible debt		3,054			-		-			-		-			-			-			-			110						-			110
																											-
Common stock issuable for interest on convertible debt		-			-		186,594			-		-			-			-			-			1,709						-			1,709
																											-
Share repurchase from previous shareholders		-			-		-			-		-			(82	)		-			-			(738	)					-			(820	)

Other comprehensive loss		-			-		-			-		-			-			-			-						(311	)		-			(311	)

Net loss		-			-		-			-		-			-			-			-			-			-			(15,884	)		(15,884	)

Balance at September 30, 2022		4,852,960		$	4		241,203		$	-		(13,689	)	$	(89	)		(130,001	)	$	(30	)	$	99,373		$	(708	)	$	(83,756	)	$	14,792

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

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RYVYL INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(Dollars in thousands)

	Nine Months Ended September 30
	2023			2022
				(as restated)
Cash flows from operating activities:
Net loss	$	(23,098	)	$	(33,219	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense		1,899			4,880
Noncash lease expense		246			54
Stock compensation expense		309			2,729
Interest expense - debt discount		9,626			11,540
Changes in fair value of derivative liability		(6,580	)		(14,592	)
Loss on extinguishment and derecognition expense upon conversion of debt		1,518			9,762
Changes in assets and liabilities:
Accounts receivable, net		457			(308	)
Prepaid and other current assets		6,841			(1,227	)
Cash due from gateways		(896	)		(20	)
Other assets		(1,480	)		48
Accounts payable		1,962			(442	)
Other current liabilities		1,333			348
Accrued interest		554			534
Payment processing liabilities		34,893			7,566
Net cash provided by (used in) operating activities		27,584			(12,347	)
Cash flows from investing activities:
Purchases of property and equipment		(78	)		(102	)
Deposits on acquisitions.		-			(1,451	)
Purchase of intangibles		-			(500	)
Cash provided for Transact Europe Holdings OOD acquisition		-			(28,811	)
Cash provided for Sky Financial & Intelligence asset acquisition		-			(16,000	)
Net cash used in investing activities		(78	)		(46,864	)
Cash flows from financing activities:
Treasury stock purchases		-			(4,057	)
Proceeds from stock option exercises		-			5
Repayments on convertible debt		-			(6,000	)
Repayments on long-term debt		(11	)		-
Net cash used in financing activities		(11	)		(10,052	)

Restricted cash acquired from Transact Europe		-			18,677
Net increase (decrease) in cash, cash equivalents, and restricted cash		27,495			(50,586	)
Foreign currency translation adjustment		26			(1,410	)
Cash, cash equivalents, and restricted cash – beginning of period		40,834			89,559

Cash, cash equivalents, and restricted cash – end of period	$	68,355		$	37,563

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	2,709		$	4,907
Income taxes	$	-		$	-

Non-cash financing and investing activities:
Convertible debt conversion to common stock	$	300		$	8,550
Convertible debt conversion to preferred stock	$	4,297		$	-
Interest accrual from convertible debt converted to preferred stock	$	2,271		$	-
Interest accrual from convertible debt converted to common stock	$	3		$	-

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

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RYVYL INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Description of the Business and Basis of Presentation

Organization

RYVYL Inc. (the “Company”) is a financial technology company that develops, markets, and sells innovative blockchain-based payment solutions, which offer significant improvements for the payment solutions marketplace. The Company’s core focus is developing and monetizing 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 limitless volume of tokenized assets, representing cash or data, on a secured, immutable blockchain-based ledger.

Please refer to Note 16 entitled “Subsequent Events.”

2.	Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.

Unaudited Interim Financial Information

Certain information and footnote disclosures normally included in the Company’s annual audited financial statements and accompanying notes have been condensed or omitted in this accompanying interim consolidated financial statements and footnotes. Accordingly, the accompanying interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on August 10, 2023 (the “2022 Annual Report”).

In the opinion of management, these unaudited consolidated financial statements include all adjustments and accruals, consisting only of normal, recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein. The results of the interim periods are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.

Reverse Stock Split

On September 6, 2023, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Nevada to effect a 1-for-10 reverse stock split (the “Reverse Stock Split”) of the Company’s shares of common stock, par value $0.001 per share (the “common stock”). Such amendment and ratio were previously approved by the board of directors. Under Nevada Revised Statutes Section 78.207, stockholder approval of the Reverse Stock Split was not required because (i) both the number of authorized shares of the common stock and the number of issued and outstanding shares of the common stock were proportionally reduced as a result of the Reverse Stock Split; (ii) the Reverse Stock Split did not adversely affect any other class of stock of the Company; and (iii) the Company did not pay money or issue scrip to stockholders who would otherwise be entitled to receive a fractional share as a result of the Reverse Stock Split. As a result of the Reverse Stock Split, which was effective September 6, 2023, every ten shares of the Company’s pre-reverse split outstanding common stock were combined and reclassified into one share of common stock. Proportionate voting rights and other rights of common stockholders were not affected by the Reverse Stock Split. Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the nearest whole share. All stock options outstanding and common stock reserved for issuance under the Company’s equity incentive plans outstanding immediately prior to the Reverse Stock Split were adjusted by dividing the number of affected shares of common stock by ten and, as applicable, multiplying the exercise price by ten. All share numbers, share prices, exercise prices and per share amounts have been adjusted, on a retroactive basis to reflect this 1-for-10 Reverse Stock Split.

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RYVYL INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

The preparation of financial statements in conformity with 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.

Reclassifications

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

Cash, Cash Equivalents and Restricted Cash

The Company’s cash, cash equivalents 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 an original maturity of three months or less.

● Restricted cash – The Company’s technology enables transactional blockchain ledger to instantly reflect all transaction 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 arrears, the Company holds funds in a trust account as cash deemed restricted. The Company’s records reflect such restricted cash as restricted cash and trust accounts, and the balances due to merchants and ISOs as settlement liabilities.

Cash Due from Gateways and Payment Processing Liabilities

The Company’s primary source of revenue consists of payment processing services for its merchant clients. When a 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 collects fees.

The Company utilized several gateways during the nine months ended September 30, 2023 and the year ended December 31, 2022. These gateways have strict guidelines pertaining to scheduling of the release of funds to merchants which are based on several criteria, such as, and among other things, return and chargeback history, associated risks for specific business verticals, and average transaction size. To mitigate processing risks, these policies determine reserve requirements and payment-in-arrears strategies. While reserve and payment-in-arrears restrictions are in effect for a merchant payout, the Company records receivables from the gateways against these amounts until released.

Cash due from gateways balances presented in the accompanying consolidated balance sheets represent the amount due to the Company for transactions processed wherein the funds have not been distributed.

Research and Development Costs

Research and development costs are expensed as incurred. They consist primarily of salaries and benefits for research and development personnel and outsourced contracted services, as well as associated supplies and materials.

Revenue Recognition

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

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

Accounts Receivable and Allowance for Credit Losses

The Company maintains an allowance for credit losses for estimated losses from the inability of gateways to make required payments. The allowance for credit losses is evaluated periodically based on the aging of accounts receivable, the operational relationship with gateways and their payment histories, historical charge-off experiences and other assumptions, such as current assessments of economic conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.

Prepaid Expenses

Prepaid expenses primarily consist of deposits made with credit card companies under Transact Europe Holdings OOD (“Transact Europe Holdings”) and the prepayment associated with other acquisitions.

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 recognized in the period the transaction occurs.

Fair Value of Financial Instruments

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

ASC 820 describes three levels of inputs that may be used to measure fair value:

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

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

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

The following table describes the valuation techniques used to calculate the fair value for assets in Level 3. The significant unobservable input used in the fair value measurement of the Company’s identifiable intangible assets is the discount rate. The change in this input could result in a change of fair value measurement (dollars in thousands):

	Fair Value at		Fair Value at
	September 30, 2023		December 31, 2022

Customer relationships	$	4,197	$	4,857
Business intellectual properties		1,481		1,882
Derivative liability		45		255

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Goodwill and Other Intangible Assets

The Company accounts for acquisitions of businesses in accordance with the acquisition method of accounting which requires assets and liabilities to be recognized at their fair values on the acquisition date. Goodwill represents the excess of the purchase price of acquired businesses over the fair value of the identifiable assets acquired and liabilities assumed. Acquisition costs are expensed as incurred.

Under the guidance of FASB ASC Topic 350, Intangibles — Goodwill and Other, goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit and would be measured as the excess carrying value of goodwill over the derived fair value of goodwill. The Company’s policy is to perform an annual impairment testing for its reporting units on December 31 of each fiscal year.

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

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

Impairment of Long-Lived Assets

The Company follows FASB ASC Topic 360, Property, Plant, and Equipment, in accounting for finite-lived intangible assets, which requires impairment losses to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the assets’ carrying amounts. As of September 30, 2023, the Company determined there were no indicators of impairment of its intangible assets.

Long-lived assets are reviewed for impairment whenever management believes that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent that the carrying value is determined to be unrecoverable, an impairment loss is recognized through a charge to expense. As of September 30, 2023, other than a charge-off of the entire consideration paid in connection with the contracted acquisition of the Sky Financial and Intelligence, LLC (“Sky Financial”) portfolio, the Company performed an impairment analysis on the other acquired goodwill and other long-lived assets and concluded that their values are supportable and recoverable.

Classification of Series A Convertible Preferred Stock

The Company has Series A Convertible Preferred Stock, par value $0.01 per share (“Series A Preferred Stock”) that contains certain redemption features that are not solely within the control of the Company and therefore is classified outside of permanent equity in temporary equity in the accompanying consolidated balance sheets. Costs incurred in connection with the issuance of Series A Preferred Stock are recorded as a reduction of gross proceeds from issuance. The carrying values of the outstanding shares of Series A Preferred Stock were determined by third-party experts, and are not being subsequently adjusted to their respective redemption values as the Company has determined that the Series A Preferred Stock is not currently redeemable or probable of becoming redeemable (it is only redeemable upon liquidation or a change of control of the Company).

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 of or all the deferred tax assets will not be realized. Judgment is required in determining and evaluating income tax provisions and valuation allowances for deferred income tax assets. We recognize an income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position.

Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. As of September 30, 2023 and December 31, 2022, we have valuation allowances which serve to reduce net deferred tax assets.

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Earnings Per Share

Basic income or (loss) per share is computed by dividing net income or loss by the weighted average number of common shares outstanding for the periods presented. Diluted earnings per share includes the effect of any potentially dilutive debt or equity under the treasury stock method, if including such instruments is dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the year ended December 31, 2022, and three- and nine-month periods ended September 30, 2023, and 2022, since there are no common stock equivalents outstanding that would have a dilutive effect.

Leases

On February 25, 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 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 net present value of lease payments for all lease agreements with terms that are greater than twelve months.

ASU 842 distinguishes leases as either a finance lease or an operating lease that affects how the leases are measured and presented in the statements of operations and statements of changes in cash flows. ASU 842 supersedes nearly all existing lease accounting guidance under GAAP issued by the FASB including ASC Topic 840, Leases.

For operating leases, we calculated right-of-use assets and lease liabilities based on the net present value of the remaining lease payments as of the adoption date using our incremental borrowing rate as of that date.

Segment Reporting

The Company has organized its operations into two segments: North America and International. These segments reflect the way management evaluates its business performance and manages its operations.

The Company’s Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer. Management has determined that the operational data used by the Company’s CODM is that of the two reportable segments. Management bases strategic goals and decisions on these segments.

Management evaluates the performance of its segments and allocates resources based on operating income or loss as compared to prior periods and current performance levels.

Recent Accounting Standard Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”). The standard, including subsequently issued amendments (ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10 and No. ASU 2019-11), requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In November 2019, the FASB issued ASU No. 2019-10 to postpone the effective date of ASU 2016-13 for public business entities eligible to be smaller reporting companies defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company has adopted this accounting standard, effective January 1, 2023. Management assessed the adoption of this standard on the effective date and concluded that the adoption did not have a material effect on the Company’s consolidated financial condition, results of operations, and cash flows during the three and nine-month periods ended September 30, 2023.

Recent Accounting Standards and Guidance Not Adopted

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years and interim reporting periods within those fiscal years beginning after December 15, 2022. The Company has not acquired any businesses during the effective period and, accordingly, is currently evaluating the effect, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows and disclosures.

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The FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) to simplify the accounting for convertible instruments by eliminating large sections of the existing guidance in this area. It also eliminates several triggers for derivative accounting, including a requirement to settle certain contracts by delivering registered shares. These changes are intended to make GAAP easier to apply and, therefore, reduce the frequency of errors in this part of the literature. Early adoption is permitted for fiscal years beginning after December 15, 2020. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, this ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods therein. The Company is evaluating the impact of this guidance on its consolidated financial statements.

3.	Restatements of Previously Issued Consolidated Financial Statements

During the preparation of its 2022 Annual Report, the Company determined that it had not appropriately accounted for certain historical transactions under GAAP. In accordance with the SEC’s Staff Accounting Bulletin (“SAB”) 99, Materiality, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the materiality of the errors from qualitative and quantitative perspectives, individually and in aggregate, and concluded that the errors were material to the Consolidated Statements of Operations for the quarters ending March 31, 2021, June 30, 2021, September 30, 2021, March 31, 2022, June 30, 2022, and September 30, 2022, and for the annual period ending December 31, 2021. Based on this evaluation, on January 13, 2023, the Company’s Audit Committee, with the concurrence of management, concluded that the Company’s previously issued consolidated financial statements for the aforementioned periods would need to be restated and could no longer be relied upon. The Company has restated the impacted financial statements for each of these periods and presented the effects of the restatement adjustments in its 2022 Annual Report.

4.	Acquisitions

Logicquest Technology, Inc.

In April 2023, the Company executed a purchase agreement for 99.4 million shares of restricted common stock of Logicquest Technology, Inc., a Nevada corporation (“Logicquest”) representing ownership of 99.1% of Logicquest, 48 shares of Series C Convertible Non-Redeemable Preferred Stock of Logicquest and 10 shares of Series D Convertible Non-Redeemable Preferred Stock of Logicquest, in exchange for an aggregate purchase price of $225,000. Logicquest was a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) quoted on the OTC Pink Open Market under the symbol “LOGQ” and is required to file reports and other information with the SEC pursuant to the Exchange Act. In June 2023, the Company merged the assets of Coyni, Inc., a wholly-owned subsidiary of the Company, and Logicquest, with Logicquest as the surviving entity. Subsequently, Logicquest changed its name to Coyni, Inc. (“Coyni PubCo”). The Company expects to close on the purchase in the fourth quarter of 2023. The Company intends to spin-off assets of the Company into Coyni PubCo at a later date. The details of the spin-off are being finalized and will be subject to corporate governance. There can be no assurance as to the timing or whether the Company will be able to consummate the spin-off of Logicquest. Since the timing or completion of the transaction is uncertain, the Company’s investment in Coyni PubCo has not been reclassified as assets held for sale, in accordance with FASB ASC Topic 205, Presentation of Financial Statements. The Company has engaged Kingswood, a division of Kingswood Capital Partners, LLC as the non-exclusive placement agent pursuant to an Engagement Agreement dated as of April 21, 2023, to advise the Company in connection with an offering on a reasonable best-efforts basis of Coyni PubCo as a separate publicly traded company (the “Offering”). The Offering is subject to completion of the anticipated spin-off, subject to market conditions. The Company expects to raise approximately $40 million in the Offering based on the valuation of Coyni PubCo’s assets and liabilities of approximately $200 million. The Company has not obtained an independent third-party valuation of Coyni PubCo.

Merchant Payment Solutions LLC

In November 2021, the Company executed a term sheet to acquire certain Automated Clearing House (“ACH”) business of Merchant Payment Solutions LLC (“MPS”). Upon execution of the term sheet, the Company made a refundable earnest money deposit in the amount of $725,000 toward the total purchase price. After conducting due diligence, the Company elected to terminate the term sheet on April 21, 2023. In June 2023, the Company and MPS agreed to finalize a Portfolio Purchase Agreement (“Purchase Agreement”). Pursuant to the Purchase Agreement, the Company acquired the ACH portfolio of MPS for $725,000.

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Transact Europe Holdings

On April 1, 2022, the Company acquired Transact Europe Holdings for $28.8 million (€26.0 million) in cash. Transact Europe Holdings, an EU-regulated electronic money institution headquartered in Sofia, Bulgaria, offers an array of licenses such as principal level membership of Visa, worldwide membership of MasterCard, and principal membership of China UnionPay. Transact Europe Holdings is also part of the direct Single Euro Payments Area, a payment system enabling cashless payments across continental Europe.

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

Tangible assets (liabilities):
Net assets and liabilities	$	7,339

Intangible assets:
Customer relationships		1,267
Goodwill		20,205
		21,472

Total net assets acquired	$	28,811

Sky Financial & Intelligence

On March 31, 2022, the Company contracted to acquire a portfolio of merchant accounts from Sky Financial for $18.1 million. The Company paid $16.0 million in cash in March 2022 and issued 500,000 shares of restricted common stock for the transaction on May 12, 2022. The entire amount tendered in both cash and stock was recorded as a customer relationships asset.

As of the date of this filing, the Company has not received delivery of the acquired merchant list and the associated ISO management portal access. The Company charged off the entire purchase price in 2022. Also, during 2022, the Company suspended its reporting of revenue from the Sky Financial portfolio.

The Company is vigorously pursuing its entitlements under the purchase agreement entered into with Sky Financial.

5.	Settlement Processing

The Company’s proprietary blockchain-based technology serves as the settlement engine for all transactions within the Company’s ecosystem. The blockchain ledger provides a robust and secure platform to log large volumes of immutable transactional records in real time. In summary, 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, the Company uses proprietary, private ledger technology to verify every transaction conducted within the Company ecosystem. The verification of transaction data comes from trusted partners, all of whom have been extensively vetted by the Company. The Company facilitates all financial elements of its closed-loop ecosystem, and it acts as the administrator for all related accounts. Using the Company’s TrustGateway technology, the Company seeks authorization and settlement for each transaction from Gateways to the issuing bank responsible for the credit/debit card used in the transaction. When a gateway settles the transaction, the Company’s TrustGateway technology composes a chain of blockchain instructions to the Company’s ledger manager system.

When consumers use credit or debit cards to pay for transactions with merchants who use our ecosystem, the transaction starts with the consumer purchasing tokens from the Company. The issuance of tokens is accomplished when the Company loads 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 or debit card transaction to the consumer and merchant. While the Company’s blockchain ledger records transaction details instantaneously, the final cash settlement of each transaction can take days to weeks, depending upon contract terms between the Company and the gateways the Company uses, between the Company and its ISOs, and between the Company and/or its ISOs and merchants who use the Company’s services. In the case where the Company has received transaction funds, but not yet paid a merchant or an ISO, the Company holds funds in either a trust account or as cash deemed restricted within the Company’s operating accounts. The Company records the total of such funds as cash due from gateways, net – a current asset. Of these funds, the Company records the balance due to merchants and ISOs as payment processing liabilities, net – a current liability.

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6.	Property and Equipment

Property and equipment consisted of the following as of September 30, 2023, and December 31, 2022 (dollars in thousands):

	September 30, 2023			December 31, 2022

Buildings	$	1,360		$	1,360
Computers and equipment		284			247
Furniture and fixtures		190			149
Improvements		164			164
Total property and equipment		1,998			1,920
Less: accumulated depreciation		(338	)		(224	)
Net property and equipment	$	1,660		$	1,696

Depreciation expense was $37,503 and $35,217 for the three-month periods ended September 30, 2023 and 2022, respectively, and $113,568 and $102,334 for the nine-month periods ended September 30, 2023 and 2022, respectively.

7.	Goodwill

Goodwill assets consisted of the following, as of September 30, 2023, and December 31, 2022 (dollars in thousands):

	September 30, 2023		December 31, 2022
Acquisition of Northeast	$	2,793	$	2,793
Acquisition of Charge Savvy		3,755		3,755
Acquisition of Transact Europe Holdings		20,205		20,205

Total goodwill	$	26,753	$	26,753

8.	Intangible Assets

Intangible assets consisted of the following, as of September 30, 2023, and December 31, 2022 (dollars in thousands):

		As of September 30, 2023							As of December 31, 2022
Intangible Assets	Amortization Period	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Customer relationships – North America	5 years	$	6,545	$	(2,665	)	$	3,880	$	5,820	$	(1,755	)	$	4,065
Customer relationships - International	2 years		1,267		(950	)		317		1,267		(475	)		792
Business technology/IP	5 years		2,675		(1,194	)		1,481		2,675		(793	)		1,882

Total intangible assets		$	10,487	$	(4,809	)	$	5,678	$	9,762	$	(3,023	)	$	6,739

Amortization expense was $0.6 million and $0.5 million for the three months ended September 30, 2023, and the three months ended September 30, 2022, respectively and $1.8 million and $2.1 million for the nine months ended September 30, 2023, and the nine months ended June 30, 2022, respectively.

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Amortization expense for each of the years ending December 31 is as follows (dollars in thousands):

Year	Amount
2023 (remainder)	$	619
2024		2,002
2025		1,844
2026		992
2027		148
Thereafter		73
Total	$	5,678

9.	Long-Term Debt

Long-term debt consisted of the following, as of September 30, 2023, and December 31, 2022 (dollars in thousands):

	As of September 30, 2023			As of December 31, 2022
$100,000,000 8% senior convertible note due November 5, 2024	$	60,927		$	61,101
$149,900 Economic Injury Disaster Loan (EIDL), interest rate of 3.75%, due June 1, 2050		147			149
$500,000 EIDL, interest rate of 3.75%, due May 8, 2050		490			499

Total debt		61,564			61,749

Less: current portion		(15	)		(14	)

Net long-term debt	$	61,549		$	61,735

The following is a rollforward of the senior convertible note balance (dollars in thousands):

Balance, December 31, 2020	$	-
Convertible debentures issued		100,000
Derivative liability		(