Exhibit 99.1
PUNCHH, INC.
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2020
PUNCHH, INC.
TABLE OF CONTENTS
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Page
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INDEPENDENT AUDITOR’S REPORT
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1
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CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Balance Sheet
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2
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Consolidated Statement of Operation
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3
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Consolidated Statement of Stockholders’ Equity
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4
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Consolidated Statement of Cash Flows
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5
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Notes to Consolidated Financial Statements
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6-28
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INDEPENDENT AUDITOR’S REPORT
To the Board of Directors of
Punchh, Inc.
San Mateo, California
Report on the Financial Statements
We have audited the accompanying consolidated financial
statements of Punchh, Inc. and its subsidiaries (the “Company”), which comprise the balance sheet as of December 31, 2020, the related
consolidated statements of operations, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with
accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of the Punchh, Inc. and its subsidiaries as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 3 to the financial statements, the 2019 consolidated financial statements have been restated to correct a
misstatement. Our opinion is not modified with respect to this matter.
As discussed in Note 3 to the consolidated financial statements, the Company adopted new accounting guidance ASC Topic 606, Revenue from Contracts with Customers. Our opinion is not modified with respect to this matter.
/s/ SingerLewak LLP
April 20, 2021
San Jose, California
1
PUNCHH, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2020
| ASSETS | ||||
| 2020 |
||||
| Current assets | ||||
|
Cash and cash equivalents
|
$ | 27,917,028 | ||
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Accounts receivable, net
|
3,412,380 |
|||
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Prepaid expenses and other current assets
|
724,899 |
|||
|
Deferred commission costs
|
814,501 |
|||
|
Deferred implementation
costs
|
2,704,119 |
|||
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Total current assets
|
35,572,927 |
|||
|
Property and equipment, net
|
561,925
|
|||
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Deferred commission costs, less current portion
|
461,992
|
|||
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Deferred implementation costs, less current portion
|
2,758,364
|
|||
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Other assets
|
481,581
|
|||
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Total assets
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$
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39,836,789
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||
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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||||
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Current liabilities
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||||
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Notes payable, current portion
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$
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2,434,626
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||
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Accounts payable
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2,964,997
|
|||
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Accrued payroll
|
3,469,831
|
|||
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Accrued sales tax liability
|
1,791,325
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|||
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Accrued liabilities
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1,232,516
|
|||
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Deferred rent
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60,858
|
|||
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Deferred revenue
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3,792,213
|
|||
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Total current liabilities
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15,746,366 |
|||
| Long-term liabilities | ||||
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Notes payable, less current portion
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1,122,425
|
|||
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Deferred revenue, less current portion
|
2,325,486
|
|||
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Total liabilities
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19,194,277 | |||
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Commitments and contingencies (Note 9)
|
||||
| Stockholders’ equity | ||||
|
Convertible Series C preferred stock, $0.0001
par value; 3,521,999 shares authorized ; 3,458,608 shares issued and outstanding ($39,250,013 liquidation preference)
|
346 |
|||
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Convertible Series B preferred stock, $0.0001 par value; 3,281,264 shares authorized ; 3,281,264 shares issued and outstanding ($18,800,002 liquidation preference)
|
328 |
|||
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Convertible Series A-1 preferred stock, $0.0001 par value; 4,525,635 shares authorized; 4,525,635 shares issued and outstanding ($4,161,512 liquidation preference)
|
453 |
|||
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Convertible Series A preferred stock, $0.0001
par value; 6,718,085 shares authorized; 6,718,085 shares issued and outstanding ($6,177,548 liquidation preference)
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672 |
|||
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Common stock, $0.0001
par value, 31,520,000 shares authorized; 7,308,815 shares issued and outstanding
|
731 |
|||
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Additional paid-in capital
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71,044,037 |
|||
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Note receivable from stockholder
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(512,934 | ) | ||
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Accumulated deficit
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(49,891,121 | ) | ||
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Total stockholders’ equity
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20,642,512 | |||
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Total liabilities and stockholders’ equity
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$ | 39,836,789 | ||
See notes to financial statements.
2
PUNCHH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2020
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2020
|
||||
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Net revenues
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$
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27,228,644
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||
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Cost of revenues
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10,108,987
|
|||
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Gross profit
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17,119,657
|
|||
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Operating expenses
|
||||
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Research and development
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8,947,813
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|||
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Sales and marketing
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11,410,234
|
|||
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General and administrative expense
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9,671,151
|
|||
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Total operating expenses
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30,029,198
|
|||
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Loss from operations
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(12,909,541
|
)
|
||
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Interest and other income (expense), net
|
||||
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Interest income
|
169,812
|
|||
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Interest expense
|
(63,233
|
)
|
||
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Other expense
|
(5,066
|
)
|
||
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Total other income
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101,513
|
|||
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Net loss
|
$
|
(12,808,028
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)
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|
See notes to financial statements.
3
PUNCHH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Year Ended December 31, 2020
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|
Convertible
Preferred Stock
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Common Stock
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Additional
Paid-In |
Note
Receivable
from
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Accumulated
|
Total
Stockholders’
|
||||||||||||||||||||||||||
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Shares
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Amount
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Shares
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Amount
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Capital
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Stockholder
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Deficit
|
Equity
|
|||||||||||||||||||||||||
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Balance, December 31, 2019 (restated)
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||||||||||||||||||||||||||||||||
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Restated balance prior to adoption of new accounting standard
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17,983,592
|
1,799
|
6,988,034
|
699
|
70,395,994
|
(397,624
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) |
(43,516,804
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)
|
26,484,064
|
||||||||||||||||||||||
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Adoption of new accounting standard (Note 3)
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- |
- |
- |
- |
- |
- |
6,433,711
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6,433,711
|
||||||||||||||||||||||||
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Balance, January 1, 2020 (restated including adoption of new accounting standard)
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17,983,592
|
1,799
|
6,988,034
|
699
|
70,395,994
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(397,624
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) |
(37,083,093
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) |
32,917,775
|
||||||||||||||||||||||
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Exercise of stock options
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- |
- |
320,781
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32
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153,805
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- |
- |
153,837
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||||||||||||||||||||||||
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Advances to stockholder
|
- | - | - |
- |
- |
(124,000
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)
|
- |
(124,000
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)
|
||||||||||||||||||||||
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Employee stock-based compensation
|
- | - | - | - |
494,238
|
- | - |
494,238
|
||||||||||||||||||||||||
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Interest on note receivable from stockholder
|
- | - | - | - | - |
(11,277
|
)
|
- |
(11,277
|
)
|
||||||||||||||||||||||
|
Repayment of note receivable from stockholder
|
- | - | - | - | - |
19,967
|
- |
19,967
|
||||||||||||||||||||||||
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Net loss for the year
|
- | - | - | - | - | - |
(12,808,028
|
)
|
(12,808,028
|
)
|
||||||||||||||||||||||
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Balance, December 31, 2020
|
17,983,592
|
$
|
1,799
|
7,308,815
|
$
|
731
|
$
|
71,044,037
|
$
|
(512,934
|
)
|
$
|
(49,891,121
|
)
|
$
|
20,642,512
|
||||||||||||||||
See notes to financial statements.
4
PUNCHH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2020
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2020
|
||||
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Cash flows from operating activities
|
||||
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Net loss
|
$
|
(12,808,028
|
)
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||
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Depreciation
|
346,050
|
|||
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Provision for bad debts
|
53,548
|
|||
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Stock-based compensation
|
494,238
|
|||
|
Noncash interest income
|
(11,277
|
)
|
||
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Changes in operating assets and liabilities
|
||||
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Accounts receivable
|
(1,585,937
|
)
|
||
|
Prepaid expenses and other current assets
|
15,270
|
|||
|
Deferred commission costs
|
450,162
|
|||
|
Deferred implementation costs
|
(755,427
|
)
|
||
|
Other assets
|
(59,496
|
)
|
||
|
Accounts payable
|
287,449
|
|||
|
Accrued payroll
|
1,737,851
|
|||
|
Accrued sales tax liability
|
698,595
|
|||
|
Accrued liabilities
|
33,031
|
|||
|
Deferred rent
|
(17,588
|
)
|
||
|
Deferred revenue
|
941,579
|
|||
|
Net cash used in operating activities
|
(10,179,980
|
)
|
||
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Cash flows from investing activities
|
||||
|
Purchase of property and equipment
|
(157,101
|
)
|
||
|
Repayment of note receivable from stockholder
|
19,967
|
|||
|
Advance to stockholder
|
(124,000
|
)
|
||
|
Net cash used in investing activities
|
(261,134
|
)
|
||
|
Cash flows from financing activities
|
||||
|
Proceeds from notes payable
|
3,314,627
|
|||
|
Repayment of notes payable
|
(333,334
|
)
|
||
|
Repurchase of common stock
|
||||
|
Proceeds from exercise of stock options
|
153,837
|
|||
|
Proceeds from sale of series C convertible preferred stock for cash, net of issuance costs
|
- |
|||
|
Net cash provided by financing activities
|
3,135,130
|
|||
|
Net decrease in cash and cash equivalents
|
(7,305,984
|
)
|
||
|
Cash and cash equivalents, beginning of year
|
35,223,012
|
|||
|
Cash and cash equivalents, end of year
|
$
|
27,917,028
|
||
|
Supplemental cash flow information
|
||||
|
Cash paid for interest
|
$
|
55,554
|
||
|
Cash paid for income taxes
|
$
|
14,035
|
||
|
Noncash investing and financing activities:
|
||||
|
Receipt of note receivable for exercise of stock option
|
$
|
124,000 |
||
See notes to financial statements.
5
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - HISTORY, ORGANIZATION AND OPERATIONS
Punchh, Inc. (the “Company”), is a Delaware corporation, that was originally incorporated under the General Incorporation Law of the State of
Delaware on April 16, 2010. The Company offers a mobile phone-based referral and loyalty program that allows users to win rewards at restaurants for their loyalty and referrals.
Punchh Tech India Private Limited is a private India company incorporated on September 13, 2013. It is a wholly-owned
subsidiary of Punchh, Inc. and provides the Company a customer support and research and development team that works on current and future product offerings.
Punchh Canada, Inc. is a Canadian corporation established on February 7, 2019. The entity is a
wholly-owned subsidiary of Punchh, Inc. The subsidiary provides a research and development team to provide technical services for future products.
The Company was acquired on April 8, 2021 (See Note 11).
NOTE 2 - LIQUIDITY
As shown in the accompanying consolidated financial statements, the Company has suffered net operating
losses and negative cash flows from operations and as of December 31, 2020, had an accumulated deficit of $49,891,121.
Since inception, the Company has incurred
net losses and cash flow deficits from operations. Management believes that operating losses and negative cash flows from operations will continue into the foreseeable future as the Company continues to devote significant efforts to growing the
Company’s customer base and developing its software as a
service platform. Management plans to continue to finance the Company’s operations with a combination of equity issuances, debt arrangements and revenue. However, there is no assurance that such additional capital can be raised and at terms that are advantageous to the Company. The consolidated financial statements do not include any adjustments that may result
from the outcome of this uncertainty. The Company was acquired on April 8, 2021 (See Note 11).
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Basis of Presentation
The accompanying consolidated financial statements were prepared
on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
6
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Principles of Consolidation
The accompanying consolidated financial
statements include all the accounts of the Company and its wholly-owned subsidiaries in India and Canada, Punchh Tech India Private Limited and Punchh Canada, Inc. All significant intercompany transactions and balances have been eliminated in
consolidation.
Restatement
In 2020, the Company determined that it did
not fully identify all states in which the Company should have been collecting sales tax from customers for 2020 and prior years. Although it was unable to collect the required sales tax from its customers, the Company is still required to pay the required sales tax. Accordingly, the Company
recorded accrued sales tax and the related penalties and interest.
The total sales tax due by each year are as follows:
|
2020
|
$
|
583,310
|
||
|
2019
|
509,498
|
|||
|
2018 and prior years
|
421,732
|
|||
| Total |
$ |
1,514,540 |
The total penalties and interest accrued by year are as follows:
|
2020
|
$
|
115,285
|
||
|
2019
|
96,678
|
|||
|
2018 and prior years
|
64,822
|
|||
| Total |
$ |
276,785 |
7
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Restatement
(Continued)
The following table summarize the corrections on each of the affected financial statement line items for the year ended December
31, 2019.
|
Balance sheet
|
||||||||||||
|
Previously
Reported
|
Adjustment
|
As Restated
|
||||||||||
|
Accrued sales tax liability
|
$
|
- |
$
|
1,092,730
|
$
|
1,092,730
|
||||||
|
Total liabilities
|
11,439,337
|
1,092,730
|
12,532,067
|
|||||||||
|
Accumulated deficit
|
(42,424,074
|
)
|
(1,092,730
|
)
|
(43,516,804
|
)
|
||||||
|
Total stockholders’ equity
|
$
|
27,576,794
|
$
|
(1,092,730
|
)
|
$
|
26,484,064
|
|||||
|
Statement of operations
|
||||||||||||
|
Previously
Reported |
Adjustment
|
As Restated
|
||||||||||
|
Sales tax expense
|
$
|
- |
$
|
606,176
|
$
|
606,176
|
||||||
|
Total operating expenses
|
33,109,188
|
606,176
|
33,715,364
|
|||||||||
|
Net loss
|
$
|
(19,972,682
|
)
|
$
|
(606,176
|
)
|
$
|
(20,578,858
|
)
|
|||
|
Statement of cash flows
|
||||||||||||
|
Previously
Reported |
Adjustment
|
As Restated
|
||||||||||
|
Net loss
|
$
|
(19,972,682
|
)
|
$
|
(606,176
|
)
|
$
|
(20,578,858
|
)
|
|||
|
Change in accrued sales tax liability
|
$ |
- |
|
606,176
|
$
|
606,176
|
||||||
8
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Foreign Currency Translation
The functional currency of the Company’s subsidiaries in India and Canada is the U.S. dollar. The Company
remeasures their foreign assets and liabilities to U.S. dollars. Nonmonetary assets and liabilities are translated at historical exchange rates and monetary assets and liabilities are translated at period end exchange rates. Revenues and expenses
are translated at the average exchange rate for the period. The
gains and losses from foreign currency remeasurement are recorded in the consolidated statement of operations as part of other expense.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. The company’s most significant estimates relate to valuation of its common stock and stock options, estimates of customer life used in recognizing custom services revenue, amortizing deferred commissions and implementation
costs, deferred tax assets and the related valuation allowance and the Company’s evaluation of the Company’s ability to continue as a going concern.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less
to be cash equivalents.
Accounts Receivable
Accounts receivable are recorded at the
invoiced amount are unsecured and do not bear interest. The allowance for doubtful accounts is based on management’s best estimate of the amount of probable credit losses in existing accounts receivable. The Company writes off accounts receivable against the allowance once all efforts at collection have
been exhausted. The provision for doubtful accounts was $659,571 as of December 31, 2020.
Concentrations of Credit Risk
Financial instruments that potentially
subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents. The Company’s cash and cash equivalents consist of cash deposits with high credit-quality financial institutions in the United States of America and in India. As of December 31, 2020, the Company’s cash balance exceeded the federally insured limit.
It is the opinion of management that there is little risk related to these cash concentrations due to the creditworthiness of the financial institutions where the cash balances are maintained.
9
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets, generally three to five years. Repairs and maintenance are charged to expense as incurred. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation,
with any resulting gain or loss included in the consolidated statements of operations.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of
carrying amount or the fair value less costs to sell. No such impairments have been identified in 2020 and 2019.
Internal-use Software
The Company develops internal-use software as required to support its operations. Costs incurred to
develop internal-use software during the application development stage are capitalized and reported at cost, subject to an impairment test. Application development stage costs generally include costs associated with software configuration, coding,
installation, and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized
costs are amortized using the straight-line method over three years. The Company assesses the potential impairment of capitalized internal-use software whenever events or changes in circumstances indicate that the carrying value of the internal-use
software may not be recoverable. As of December 31, 2020, there were no capitalized internal-use software costs.
10
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
2020 Revenue Recognition
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, Topic
606 (ASC 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The Company adopted
this accounting standard on January 1, 2020 using the modified retrospective method applying the standard to uncompleted contracts at the date of adoption. The effect of adoption on revenue recognition was not significant. The principal effects
of adoption were due to the deferral and amortization of costs to obtain and fulfill contracts. There was no significant difference in 2020 between revenue recognized under ASC 606 and the legacy revenue recognition guidance under ASC 605.
The Company provides subscription software licensing on its online software-as-a-service
(SAAS) platform to assist its customers with customer’s
acquisition, customer retention and marketing programs. The term of the subscriptions generally range from 12 to 36 months and the Company’s revenue arrangements are documented in contractual arrangements that typically include a master services agreement and associated statements of work. The Company’s contracts typically include a fixed initial term with
renewal provisions and cancellation for convenience after the initial contractual term. Payment arrangements generally require an up-front payment related to implementation and customization and monthly payments for the SAAS and third-party
services and certain contracts include a fixed annual fee. Payment terms are net 30. In
multiple-year contracts payment terms can be spread over several years. The Company has concluded that such multi-year payment terms do not represent a significant financing component as the payments align with the Company’s performance under the contract.
The Company’s SAAS offering generally include the following
elements:
| • |
Access to the Company’s SAAS platform
|
| • |
Implementation and customization of the SAAS platform
|
| • |
Maintenance and support of the SAAS platform
|
| • |
Third-party services
|
| • |
Professional services
|
The Company’s has concluded that the SAAS, implementation and customization and
maintenance and support of its platform are a single combined performance obligation as these elements are highly integrated and interrelated and the third-party services and professional services are separate performance obligations as the
customer can benefit from the SAAS with our without these services. The professional services historically have not been significant. The Company allocates contract consideration between these performance obligations based upon the stand-alone
selling price of each element.
11
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
The Company’s contracts include variable consideration related to the number of customer locations each month and monthly
transaction-based fees from the third-party services. The variable consideration in each of these contracts resets each month. The Company has concluded that such forms of variable consideration meet the variable consideration allocation exception
as each month’s variable fees relate specifically to the Company’s efforts to satisfy the performance obligation for that discrete monthly period, meets the overall allocation objective of the revenue standard and the SAAS service represents a
series of distinct monthly service periods which form a part of the overall SAAS performance obligation. The Company’s contracts also contain variable consideration in the form of service/uptime credits. Such variable consideration has historically
not been significant.
For third-party services the Company
presents such revenue on a gross basis with the cost of such third-party services included in cost of revenues. The Company concluded that they control the third-party services prior to delivery to customers.
The Company excludes from revenue sales taxes the Company bills and collects from customers. The Company recognizes revenue as
follows:
| • |
Implementation and customization fees- these fees are deferred and recognized ratably over the estimated customer life.
|
| • |
SAAS monthly and annual fees are recognized ratably over the contract term.
|
| • |
Third-party fees are recognized each month based upon the transactions occurring each month.
|
| • |
Professional services are recognized monthly as services are rendered.
|
All of the Company’s 2020 revenues were recognized over time.
The table below summarizes contract assets and liabilities as of December 31, 2020 and January 1, 2020
(adoption date of ASC 606):
|
December 31, 2020
|
January 1, 2020
|
|||||||
|
Deferred commissions
|
$
|
1,276,493
|
$
|
1,726,655
|
||||
|
Deferred implementation costs
|
$
|
5,462,483
|
$
|
4,707,056
|
||||
|
Deferred revenue
|
$
|
6,117,699
|
$
|
5,176,120
|
||||
12
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Below summarizes by financial statement line items the effects of adoption as of January 1, 2020 and for the year ended December
31, 2020:
|
January 1, 2020
|
||||
|
Increase in deferred commissions
|
$
|
1,726,655
|
||
|
Increase in deferred implementation costs
|
$
|
4,707,056
|
||
|
December 31, 2020 (change from adoption date)
|
||||
|
Decrease in deferred commissions
|
$
|
450,162
|
||
|
Increase in deferred implementation costs
|
$
|
755,427
|
||
|
Year ended December 31, 2020
|
|
|||||||
|
Expense under ASC 606
|
Expense under ASC 605
|
|||||||
|
Commission expense
|
$ | 1,105,335 | $ | 655,173 | ||||
| Implementation costs | $ | 2,183,800 | $ | 2,939,227 | ||||
Costs to obtain and fulfill contracts
The Company capitalizes certain contract acquisition costs,
consisting primarily of commissions and related payroll taxes, when customer contracts are signed (“deferred commission”). The Company also capitalizes certain contract fulfillment costs, consisting primarily of the
portion of the payroll and fringe benefits of the Company’s professional services team that relates directly to performing the implementation and customization services for new and existing customers and certain other related costs (“deferred implementation costs”).
The deferred costs to obtain and fulfill contracts are amortized
over the expected period of benefit, which the Company has determined to be approximately 36 months. This expected period of benefit takes into consideration the duration of the Company’s customer contracts, historical contract renewal rates, the underlying technology and other factors. Amortization
expense for deferred commission costs is included in sales and marketing expense in the accompanying consolidated statement of operations. Amortization expense for deferred implementation costs is included in cost of sales in the accompanying
consolidated statements of operation. There were no impairment losses related to costs capitalized in 2020.
The Company classifies deferred costs to obtain and fulfill contracts as current or non-current based on the timing of when the
related amortization expense is expected to be recognized.
13
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Cost of Revenues
Cost of revenues consists primarily of costs related to providing subscription services to customers, including employee
compensation and other employee-related costs for customer service staff, hosting costs, licensed data costs, networking expenses and the cost of third-party services, and amortization of deferred implementation costs.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the year ended December 31, 2020 was
insignificant.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on fair value of the award, determined using the
Black-Scholes option pricing model, and is recognized as expense over the applicable vesting period of the stock award using the straight-line method for awards that are expected to vest.
Fair Value of Financial Instruments
U.S. GAAP clarifies fair value as an exit price, establishes a hierarchal disclosure framework for
measuring fair value, and requires extended disclosures about fair value measurements. U.S. GAAP applies to all financial assets and liabilities measured at fair value.
As defined by U.S. GAAP, fair value
represents the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset
or a liability.
14
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Fair Value of Financial Instruments (Continued)
As a basis for considering these assumptions, U.S. GAAP defines a three-tier value hierarchy that
prioritizes the inputs used in the valuation methodologies in measuring fair value.
|
Level 1 –
|
Quoted prices in active markets for identical assets or liabilities.
|
|
Level 2 –
|
Inputs other than Level 1 that are observable, either directly or indirectly, 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 fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
The Company’s only financial instrument measured at fair value in these consolidated financial statements is its cash balances
which are measured using Level 1 inputs.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred
income taxes be provided for temporary differences between the tax basis of the Company’s assets and liabilities and the financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net
operating losses and tax credit carryforwards. A valuation allowance is provided against deferred tax assets unless it is more likely than not that they will be realized.
Significant judgment is required in
determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income and the
feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that is more likely than not to be realized, the Company will adjust its valuation allowance with a
corresponding impact to the provision for income taxes in the period in which such determination is made. U.S. GAAP requires that realization of an uncertain income tax position must be more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the
consolidated financial statements. The guidance further prescribes the benefit to be realized assumes a review by tax authorities having all relevant information and applying current conventions. The interpretation also clarifies the financial
statement classification of tax related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax
expense.
15
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). The guidance in this update supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities in the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating,
with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for annual periods beginning after December 15, 2021. A modified retrospective transition approach is required for lessees for
capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the effect
of this new standard on the Company’s financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting, which expands the scope of ASC Topic 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the
guidance in ASC 505-50. The amendments in ASU 2018-07 are effective for the Company beginning on January 1, 2020. Early adoption is permitted but not prior to adopting ASC 606, Revenue from Contracts with Customers. The impact of adoption was not
significant to the financial statements.
NOTE 4 - BALANCE SHEET ACCOUNTS
Property and Equipment
Property and equipment consisted of the following as of December 31,:
|
2020
|
||||
|
Computer equipment
|
$
|
801,790
|
||
|
Furniture, fixtures and equipment
|
216,760
|
|||
|
Software and website
|
111,397
|
|||
|
Mobile
|
7,293
|
|||
|
1,137,240
|
||||
|
Accumulated depreciation
|
(575,315
|
)
|
||
|
$
|
561,925
|
|||
16
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - BALANCE SHEET ACCOUNTS (Continued)
Accrued Payroll
Accrued payroll consisted of the following as of December 31,:
| 2020 |
||||
|
Accrued payroll for India subsidiary
|
$
|
174,937
|
||
|
Accrued vacation
|
310,548
|
|||
|
Accrued employee benefits
|
762,179
|
|||
|
Accrued bonus
|
2,222,167
|
|||
| $ |
3,469,831 |
Accrued Liabilities
Accrued liabilities consisted of the following as of December 31,:
|
2020
|
||||
|
Accrued cost of sales
|
$
|
1,023,669
|
||
|
Accrued interest
|
30,133
|
|||
|
Accrued other expenses
|
178,714
|
|||
|
$
|
1,232,516
|
|||
NOTE 5 - NOTES PAYABLE
SVB Term Loan and Growth Capital Line
In October 2016, the Company entered into a Term Loan agreement with SVB bank in the amount of up to
$1,000,000. The Term Loan availability end date was August 31, 2017. The Company shall make monthly payments of interest only commencing on the first day of the month following the month in which the funding date occurs and continuing thereafter on
the first day of each successive calendar month through August 31, 2017. Commencing on September 1, 2017 and continuing thereafter on the first day of each successive calendar month through its maturity date, the Company shall make 33 monthly
payments of equal principal, plus accrued interest. The Term Loan bears a floating interest rate equal to the Prime rate and matures at its 33rd Term Loan payment date, but no later
than May 1, 2020. The Term Loan is subject to the terms and conditions of the agreement and the occurrence of certain equity and performance milestones.
17
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE (Continued)
SVB Term Loan and Growth Capital Line
In May 2017, the Term Loan with SVB bank was amended to include a Growth Capital Line with a borrowing capacity of $2,000,000.
Borrowing against the Growth Capital Line was made available through May 31, 2018. The Company shall make monthly payments of interest only commencing on the first day of the month following the month in which the funding date occurs and continuing
thereafter on the first day of each successive calendar month through May 31, 2018. Commencing on June 1, 2018 and continuing thereafter on the first day of each successive calendar month through its maturity date, the Company shall make 33 monthly
payments of equal principal, plus accrued interest. The Growth Capital Line bears a floating interest rate equal to the Prime rate and matures at its 33rd term loan payment date, but no later
than February 1, 2021. The Term Loan and Growth Line are subject to the terms and conditions of the credit agreement.
As of December 31, 2020 the total balance of the Term Loan and Growth Capital Line was $242,424. As of
December 31, 2020, the interest rates was 3.25%.
For the Term Loan and Capital Growth Line, the, “Final Payment”, a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) is due on the earlier of (a) its maturity date or (b) the prepayment or acceleration of such
Term Loan and Capital Growth Line, equal to the original principal amount of such Term Loan or Capital Growth Line multiplied by 4%. The Company is accruing this final payment as interest expense over the term of the loan and is included in
accrued liabilities in the accompanying consolidated balance sheets.
Concurrently on the effective date of the Term Loan agreement, the Company issued to the bank a warrant to purchase 38,543
shares of common stock, at an exercise price of $0.20 per share with an expiration date of October 31, 2026. On May 18, 2017, the Company issued to the bank a warrant to purchase an additional 19,506 shares of common stock, at an exercise price of
$0.193 per share with an expiration date of May 18, 2027. The value of these warrants was not significant at the date of issuance.
This credit facility is secured by substantially all assets of the Company. The term loans and the growth
capital credit line have certain financial reporting requirements of which the Company was in compliance as of and during the year ended December 31, 2020, with the exception of requirements to deliver annual projections and board decks.
18
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE (Continued)
Payroll Protection Program Loan
In April 2020, the Small Business
Administration approved the Company’s application for the
Payroll Protection Program of the Coronavirus Aid, Relief and Economic Security Act for $3,314,627. This loan program provides critical funding in the form of forgivable loans to companies adversely economically impacted by the current global
corona medical crisis. The loan under this program covers
2.5 times monthly “payroll costs” for the last 12 months up to an annual rate of $100,000 per employee.
Loans may not exceed $10 million. The portion of the loan used to cover payroll costs, interest on mortgages, rent and utilities over an eight-week period from loan origination will be forgiven. The amount of loan forgiveness is reduced by any
reductions in employees’ wages (in excess of 25%) or reduction in the number of employees, unless the employer eliminates the salary reduction or rehires employees by June 30, 2020. Any loan amounts not forgiven is carried forward as an ongoing
loan amount with a maturity of 2 years and an interest rate of 1% subject to complete repayment. There is an initial payback deferral on the loan of 6-12 months. As of December 31, 2020, the outstanding balance for this loan was $3,314,627.
In June 2020, the legislation was updated to allow current PPP borrowers to extend the eight-week period to
24 weeks. Borrowers can use the 24-week period to restore their workforce levels and wages to the pre-pandemic levels required for full forgiveness. The previous deadline for restoring workforce levels and wages of June 30, 2020 was extended to
December 31, 2020. The payroll expenditure requirement dropped from 75% to 60%. However, borrowers must spend at least 60% on payroll or none of the loan will be forgiven. Existing PPP loans can be extended up to 5 years if the lender and borrower
agree. The interest rate remains at 1%. The updated legislation also allows businesses that took a PPP loan to also delay payment of their payroll taxes.
Following are the future minimum principal payments under the Term Loan and Growth Capital Line agreements and Payroll
Protection Program Loans as of December 31, 2020:
|
For the Year Ending
December 31, |
||||
|
2021
|
2,434,626
|
|||
|
2022
|
1,122,425
|
|||
|
Total
|
$
|
3,557,051
|
||
19
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS’ EQUITY
At December 31, 2020, the authorized capital stock of the Company consisted of 49,566,983 shares as
outlined in the Restated Articles of Incorporation dated June 16, 2019. The capital stock authorized is comprised of 31,520,000 shares of common stock with a par value of $0.0001 per share and 18,046,983 shares of preferred stock with a par value
of $0.0001 per share.
Convertible Preferred Stock
At December 31, 2020 and 2019, preferred stock consisted of the following:
|
Shares
Authorized
|
Shares
Issued and Outstanding
|
Issuance
Value per
Share
|
||||||||||
|
Series A
|
6,718,085
|
6,718,085
|
$
|
0.91954
|
||||||||
|
Series A-1
|
4,525,635
|
4,525,635
|
0.91954
|
|||||||||
|
Series B
|
3,281,264
|
3,281,264
|
5.72950
|
|||||||||
|
Series C
|
3,521,999
|
3,458,608
|
11.34850
|
|||||||||
|
Total
|
18,046,983
|
17,983,592
|
||||||||||
As of December 31, 2020, the rights and preferences, privileges and restrictions of the Series C, Series B, Series A and Series A-1 convertible preferred stock are set forth in the Company’s Restated Articles of Incorporation and summarized as follows:
Non-Cumulative Preferred Stock Dividend Preference
The Corporation shall not pay or set aside any dividends on
shares of any other class or series of capital stock of the Company in any calendar year unless the holders of the Preferred Stock then outstanding shall first receive, or simultaneously receive, out of the
funds legally available therefore, a dividend on each outstanding share of Preferred Stock in an amount equal to 8% of the Original Issue Price per share of such Preferred Stock.
Liquidation Preference
In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company or any deemed liquidation events, before any payment shall be made to the holders of common stock by reason of their ownership thereof, the holders of shares of preferred stock then outstanding shall be entitled to be paid out of the funds
and assets available for distribution to its stockholders, an amount per share equal to the applicable original issue price for such series of preferred stock, plus any dividends declared but unpaid thereon. If upon any such liquidation,
dissolution, winding up or deemed liquidation event of the Company, the funds and assets available for distribution to the stockholders of the Company shall be insufficient to pay the holders of shares of preferred stock the full amount to which
they are entitled, the holders of shares of preferred stock shall share ratably in any distribution of the funds and assets available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the
shares of preferred stock held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.
20
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS’ EQUITY (Continued)
Convertible Preferred Stock (Continued)
Liquidation Preference (Continued)
After all the payment of all preferential amounts required to be paid to the holders of shares of preferred
stock as provided above, the remaining funds and assets available for distribution to the stockholders of the Company shall be distributed among the holders of shares of common stock, pro rata based on the number of shares held by each such holder.
Protective Rights
For so long as at least 3,631,000 shares of preferred stock remain outstanding, the Corporation shall not,
either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without written consent, or affirmative vote at a meeting and evidenced in writing, of the holders of a majority of the then outstanding shares
of preferred stock, consenting or voting together as a single class on an as-converted basis, and any of the following without such consent or vote shall be null and of no force or effect:
| a) |
authorize or create any new class or series of capital stock having rights, powers or preferences that are senior to or on a parity with any series of preferred stock;
|
| b) |
declare or pay any dividend or otherwise make a distribution to holders of preferred stock or common stock except as expressly authorized herein;
|
| c) |
redeem or repurchase any shares of common stock or preferred stock, other than pursuant to an agreement with an employee, consultant, director or other service provider, or an
exercise of a right of first refusal in favor of the Corporation pursuant to an agreement with any service provider approved by the Board;
|
| d) |
effect any Deemed Liquidation Event;
|
| e) |
increase or decrease the authorized number of shares of convertible preferred stock;
|
| f) |
amend the Restated Certificate or the Bylaws of the Corporation;
|
| g) |
increase or decrease the size of the Board;
|
| h) |
increase the aggregate number of shares of common stock subject to issuance under the Company’s equity incentive plan or any similar stock option plan or arrangement.
|
Conversion Rights
Each share of preferred stock shall be convertible, at the option of the holder at any time, into such number of fully paid and
nonassessable shares of common stock as is determined by dividing the original issue price by the conversion price in effect on the date the certificate is surrendered for conversion. The conversion price is subject to adjustment as specified in
the articles of incorporation.
21
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - STOCKHOLDERS’ EQUITY (Continued)
Convertible Preferred Stock (Continued)
Conversion Rights (Continued)
Each share of Series C, Series B, Series A-1 and A convertible preferred stock shall automatically be
converted into shares of common stock at the then effective conversion price upon the earlier of (i) the date, or occurrence of an event, specified by the vote or written consent of the holders of a majority of outstanding shares of preferred
stock, or (ii) the closing of a public offering that results in gross proceeds of not less than $50,000,000 at a price per share to the public of at least $22.697. The conversion price is subject to adjustment upon certain diluting issuances, stock
dividends, combinations or subdivisions of common stock, recapitalizations and reorganizations.
Voting Rights
Each holder of the convertible preferred stock shall be entitled to a number of votes equal to the number
of shares of common stock into which such shares of convertible preferred stock could be converted.
Redemption
The convertible preferred shares are not redeemable.
Common Shares Reserved
The Company has reserved shares of Common Stock for the following as of December 31, 2020:
|
Series C Preferred Stock
|
3,458,608
|
|||
|
Series B Preferred Stock
|
3,281,264
|
|||
|
Series A-1 Preferred Stock
|
4,525,635
|
|||
|
Series A Preferred Stock
|
6,718,085
|
|||
|
Warrants
|
58,049
|
|||
|
Outstanding options
|
2,655,643
|
|||
|
Options available under Option Plan 2020 for future issuance
|
1,947,108
|
|||
|
Total
|
22,644,392
|
22
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK-BASED COMPENSATION
In 2010, the Company adopted the 2010 Stock
Incentive Plan (the “2010 Plan”), which was approved by the Company’s Board of Directors in June 2010. In May 2020, the Company terminated the 2010 Stock Incentive
Plan and approved the 2020 Equity Incentive Plan (the “2020
Plan”). The purpose of this Plan is to provide incentives to attract, retain and motivate eligible personnel by offering eligible personnel an opportunity
to participate in the Company’s future performance through awards of options and restricted stock. Option granted under the Plan include Incentive Stock Options (ISOs) and Nonqualified Stock Options (NQSOs). A Restricted Stock Award is an offer
by the Company to sell to eligible personnel shares that are subject to certain specified restrictions. ISOs may be granted only to employees including officers and directors who are also employees. NQSOs and Restricted Stock Awards maybe granted
to employees, officers, directors and consultants. As of December 31, 2020, there was 1,947,108 shares reserved for issuance under the Plan. Options granted under the 2020 Plan may be either incentive stock options (“ISOs”) or non-statutory stock options (“NSOs”),
stock appreciation rights, restricted stock and restricted stock units.
Options under the 2020 Plan may be granted for periods of up to ten years. The exercise price of an option shall not be less
than 100% of the estimated fair market value of the shares on the date of grant, as determined by the Board of Directors.
The per share exercise price will be no less than one hundred ten percent 110% of the fair market value per share on the date
of grant for any incentive stock option granted to an employee who owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company. To date, options granted generally vest over four years and vest at a
rate of 25% upon the first anniversary of the issuance date and 1/48th per month thereafter.
If an option expires or is cancelled, it is surrendered pursuant to an Exchange Program, or, is forfeited
or repurchased by the Company due to the failure to vest, the unexercised shares which were subject thereto will become available for future grant or sale under the Plan.
23
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK-BASED COMPENSATION (Continued)
As of December 31, 2020, 1,947,108 shares were available for future issuance under the Plan, respectively. There were 2,655,643 options outstanding under the Plan as of December 31, 2020.
For the year ended December 31, 2020, the Company recorded stock-based compensation expense of $494,238.
Stock option activity for year ended December 31, 2020 is as follows:
|
Number of
Options
|
Weighted
Average
Exercise Price
|
Weighted
Average
RemainingContractual
Life (Years)
|
||||||||||
|
Balance, December 31, 2019
|
3,222,453
|
1.16
|
7.78
|
|||||||||
|
Granted
|
492,439
|
2.72
|
||||||||||
|
Exercised
|
(320,781
|
)
|
0.55
|
|||||||||
|
Cancelled/Expired/Forfeited
|
(738,468
|
)
|
0.75
|
|||||||||
|
Balance, December 31, 2020
|
2,655,643
|
1.51
|
7.41
|
|||||||||
|
Vested and expected to vest at December 31, 2020
|
2,497,698
|
$
|
1.40
|
7.21
|
||||||||
|
Exercisable at December 31, 2020
|
1,479,322
|
$
|
0.92
|
6.20
|
||||||||
24
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK-BASED COMPENSATION (Continued)
The weighted-average grant date fair value per share of options granted during the year ended December 31, 2020 was $1.04. As of December 31, 2020,
unamortized compensation costs related to these stock options totaled $769,548 and will be recognized over a weighted average period of 2.54
years. The fair value of shares vested during the year ended December 31, 2020 was $520,300. The intrinsic value for the options exercised during 2020 was zero.
The calculated value of option grants during the year ended December 31, 2020 was
estimated using the Black-Scholes option pricing model with the following ranges of assumptions:
| Expected dividend yield (1) | 0% |
| Risk-free interest rate (2) | 0.34% - 1.68% |
| Expected volatility (3) | 35.34% - 41.14% |
| Expected life (in years) (4) | 3.48 - 6.08 |
| (1) |
The Company has no history or expectation of paying cash dividends on its common stock.
|
| (2) |
The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.
|
| (3) |
The expected volatility of the Company’s share price based on the share price volatility of similar publicly traded entities.
|
| (4) |
The expected life represents the period of time that options granted are expected to be outstanding.
|
Restricted Stock Award
During 2019, the Company granted an option on 487,161 shares of common stock options, of which 434,734 shares were Non-qualified Stock Options (NSOs) and 52,427 shares were Incentive Stock Options (ISOs) to a Company officer. The stock options were fully vested at issuance, at an exercise price of $1.15 per share with a
ten-year term. In 2019, the Company cancelled the NSO portion of the option and replaced it with a fully vested restricted stock award on 434,734
shares with a purchase price of $1.15 per share with such purchase price being fully paid by services already rendered. At the date of grant, the fair value of the original award was $195,149, which was fully expensed at the date of issuance of the restricted stock.
Receivable from Stockholder
In March 2019 and August 2020,
an officer issued a secured partial recourse promissory note in two advances totaling $508,000 related to the exercise of his stock options and personal income taxes paid on his behalf
by the Company. The promissory note has an interest rate of 2.59% per annum and shall be payable in full in March 2027. The promissory
note shall be become immediately due and payable upon any event of acceleration, as defined.
25
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
Deferred tax assets consisted of the following as of December 31,:
|
2020
|
||||
|
Net operating loss carryforwards
|
$
|
11,748,306
|
||
|
Research and development credits
|
3,775,020
|
|||
|
Deferred implementation costs
|
(1,407,204
|
)
|
||
|
Deferred commission costs
|
(328,841
|
)
|
||
|
Other
|
519,060
|
|||
|
Total deferred tax assets
|
14,306,341
|
|||
|
Less: Valuation allowance
|
(14,306,341
|
)
|
||
|
Net deferred tax assets
|
$
|
- |
||
As of December 31, 2020, the Company had
federal and state net operating loss carryforwards (“NOLS”) of approximately $53,145,264 and $30,214,509, respectively. The 2017 and prior years federal and state NOLS expire at various times through 2037. Federal NOL carryforwards generated in 2020, 2019 and 2018 totaling $11,274,837, $20,145,830 and $10,119,596,
respectively, have an unlimited carryforward period.
As of December 31, 2020, the Company had federal and state tax credit carryforwards of $1,963,121 and
$1,811,898, respectively. The federal tax carryforward credits expire at various times through 2040, and the state credits have an unlimited carryforward period.
Due to uncertainties surrounding
realization of the Company’s net deferred tax assets, the Company has recorded a full valuation allowance against its net deferred tax assets.
The change in the valuation allowance was an increase of $1,937,606 for the year ended December 31, 2020.
The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where
changes occur in the stock ownership of a company. Due to ownership changes since inception, the Company’s net operating losses may be limited as to their usage. In the event the Company has additional changes in ownership, utilization of the
carryforwards could be further restricted.
The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple
ownership changes since the Company’s formation due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future.
26
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (Continued)
The difference between the provision for income taxes and the income tax determined by applying the statutory federal income
tax of 21% to income before taxes, is primarily due to increases in the valuation allowance and state taxes.
The Company’s tax returns since inception in 2010 are subject to examination by federal and state taxing authorities.
As of December 31, 2020, there were no potential accrued interest and penalties related to unrecognized tax
benefits.
NOTE 9 - COMMITMENTS AND CONTINGENCES
Operating Leases
The Company’s leases various offices with lease terms expiring through January 2026. Monthly rent payments range from $
5,876 to $43,472.
Rent expense totaled $1,253,457 for the year ended December 31, 2020. Future minimum lease payments due
under these operating leases are as follows:
|
For the Years Ending
December 31,
|
||||
|
2021
|
$
|
1,193,071
|
||
|
2022
|
628,529
|
|||
|
2023
|
479,741
|
|||
|
2024
|
494,179
|
|||
|
2025 and after
|
552,444
|
|||
| Total |
$ | 3,347,964 |
||
Legal Proceedings
From time to time, the Company becomes
involved in legal proceedings arising in the ordinary course of business. As of December 31, 2020, management is not aware of any legal matters that could have a material adverse effect on the Company’s financial position or results of operations.
27
PUNCHH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTY TRANSACTIONS
Operating Lease
The Company rents its facility in Jaipur, India, from one of the executive management members of the Company under a lease
which expires November 31, 2021. Terms include rent payments of $6,813 per month through November 31, 2021. The Company is responsible for all maintenance and property taxes. Rent payments to the executive management member totaled $81,758 for the
year ended December 31, 2020.
Related Party Payable
One of the Company’s major vendors in providing software services is owned by one of the
executive management members of the Company in India. As of December 31, 2020, the Company had zero payable to the related party vendor. Expenses paid to this related party vendor totaled $184,706 for the year ended December 31, 2020.
NOTE 11 - SUBSEQUENT EVENTS
In April 2021, the Company paid off the outstanding
balance of the Term Loan and Growth Capital Line and the Payroll Protection Program Loan.
On April 8, 2021, the Company was acquired by PAR Technology Corporation.
The Company has evaluated subsequent events for potential recognition and disclosure through April 20, 2021, which is the date
these consolidated financial statements were available to be issued.
28
