Notes to the Condensed Consolidated Financial
Statements
March 31, 2019
(Unaudited)
NOTE 1 - BACKGROUND
Background
The OLB Group, Inc. (“OLB”
the “Company”) was incorporated in the State of Delaware on November 18, 2004 and provides services through its wholly-owned
subsidiaries.
The Company provides integrated financial
and transaction processing services to businesses throughout the United States. Through its eVance Capital, Inc. subsidiary (“eVance”),
the Company provides an integrated suite of third-party merchant payment processing services and related proprietary software enabling
products that deliver credit and debit card-based internet payment processing solutions primarily to small and mid-sized merchants
operating in physical “brick and mortar” business environments, on the internet and in retail settings requiring both
wired and wireless mobile payment solutions. eVance operates as an independent sales organization (“ISO”) generating
individual merchant processing contracts in exchange for future residual payments. As a wholesale ISO, eVance has a direct contractual
relationship with the merchants and takes greater responsibility in the approval and monitoring of merchants than do retail ISOs
and as a result, receives additional consideration for this service and risk. The Company’s Securus365, Inc. subsidiary operates
as a retail ISO and receives residual income as commission for merchants it places with third party processors.
CrowdPay.us, Inc. (“CrowdPay”)
is a Crowdfunding platform used to facilitate a capital raise anywhere from $1,000,0000 -$50,000,000 of various types of securities
under Regulation D, Regulation Crowdfunding, Regulation A and the Securities Act of 1933. To date, the activities of this subsidiary
have been insignificant.
Omnisoft.io, Inc. (“Omnisoft”)
operates a software platform for small merchants The Omnicommerce applications work on an iPad, mobile device and the web and allows
you to sell a store’s products in a physical, retail setting. To date, the activities of this subsidiary have been insignificant.
We also provide ecommerce development and
consulting services on a project by project basis.
Memorandum of Sale
On April 9, 2018, Securus365, Inc., a Delaware
corporation (“Securus”), eVance Capital, Inc., a Delaware corporation (“eVance Capital”), and eVance Inc.,
a Delaware corporation (“eVance”, and collectively with Securus and eVance Capital, the “Purchasers”),
each of which Purchaser is a newly formed wholly-owned subsidiary of OLB, entered into a Memorandum of Sale (the “Memorandum
of Sale”) by and among the Purchasers and GACP Finance Co., LLC, a Delaware limited liability company (“GACP”),
in its capacity as administrative agent and collateral agent to certain secured lenders of the Debtors (as defined below), pursuant
to which the Purchasers acquired substantially all of the assets of the Debtors (the “Asset Acquisition”) through a
foreclosure sale arranged by GACP under the Uniform Commercial Code of the State of New York (“UCC”) of the collateral
of Excel Corporation (“Excel”) and its subsidiaries Payprotec Oregon, LLC, Excel Business Solutions, Inc. and eVance
Processing, Inc. (Excel and such subsidiaries, collectively, the “Debtors”) under the Loan and Security Agreement,
dated as of November 2, 2016, by and among GACP, the lenders thereunder and the Debtors and related loan documents, as amended
(the “Excel Loan and Security Agreement”).
GACP exercised its post-default remedies
and realized on the collateral securing the Debtors’ obligations under the Excel Loan and Security Agreement by conducting
a public auction of certain assets of the Debtors on April 9, 2018 in accordance with the UCC. The Purchasers submitted the Memorandum
of Sale at such auction, which constituted the Purchasers’ bid for substantially all of the assets of the Debtors (“Acquired
Assets”), which bid was accepted by GACP on April 9, 2018 in connection with the simultaneous signing and closing (the “Closing”)
of the transactions contemplated under the Memorandum of Sale and the Credit Agreement (defined below).
In consideration for the sale and transfer
of the Acquired Assets at the Closing, the Purchasers assumed certain post-Closing obligations under assigned contracts and issued
GACP a note payable in the amount of $12,500,000, through the deemed simultaneous financing of such purchase price to the Purchasers
under the Credit Agreement. Pursuant to the Memorandum of Sale, the Purchasers purchased from GACP and accepted all of the Debtors’
right, title and interest in and to the Acquired Assets “as is”, “where is” and “with all faults”
and without any representations or warranties, express or implied, of any nature whatsoever. Any representations made by the parties
in the Memorandum of Sale did not survive the Closing, and there is no indemnification rights for either party’s breach.
Common Control Mergers
Effective May 9, 2018, the Company entered
into a share exchange agreement with Crowdpay.US, Inc., a New York corporation for which the Company issued 87,500,000 shares of
common stock for all of the authorized stock of Crowdpay. Crowdpay became a wholly owned subsidiary of OLB. The Company’s
two majority stockholders were the two stockholders of Crowdpay and as a result this transaction was accounted for as a common
control merger. See Note 7.
Effective May 9, 2018, the Company entered
into a share exchange agreement with Omnisoft, Inc., a Delaware corporation for which the Company issued 55,000,000 shares of common
stock for all of the authorized stock of Omnisoft. Omnisoft became a wholly owned subsidiary of OLB. The Company’s two majority
stockholders were the two stockholders of Omnisoft and as a result this transaction was accounted for as a common control merger.
See Note 6.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction
with the audited financial statements and footnotes for the year ended December 31, 2018 included on the Company’s Form 10-K.
The results of the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full
year ending December 31, 2019.
In the opinion of management, all adjustments
necessary to present fairly the financial position as of March 31, 2019 and the results of operations and cash flows presented
herein have been included in the financial statements. All such adjustments are of a normal and recurring nature. Interim results
are not necessarily indicative of results of operations for the full year.
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s
accounting estimates include the collectability of receivables, useful lives of long lived assets and recoverability of those assets,
valuation allowances for income taxes, stock based compensation and estimates made for business combinations.
Net Loss per Share
Basic net loss per common share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding
shares of common stock during the period. The weighted average number of common shares for the three months ended March 31, 2019
does not include warrants to acquire 1,200,000 shares of common stock and options to acquire 8,355,168 shares of commons stock
because of their anti-dilutive effect. There were no potentially dilutive shares for the three months ended March 31, 2018 .
Revenue Recognition and Cost of Revenues
The Company will recognize revenue when
it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the
following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services
have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
The Company receives a percentage of recurring
monthly transaction related fees comprised of credit and debit card fees charged to merchants, net of association fees, otherwise
known as Interchange, as well as certain service charges and convenience fees, for payment processing services, including authorization,
capture, clearing, settlement and information reporting of electronic transactions. Fees are calculated on either a percentage
of the dollar volume of the transaction or a fixed fee or a hybrid of the two and are recognized at the time of the transaction.
In the case of “wholesale” residual revenue in which the Company has a direct contractual relationship with the merchant,
bears risk of chargebacks and performs underwriting on the merchants, the Company records the full discount charged to the merchant
as revenue and the related interchange and other processing fees as expenses. In cases of residual revenue where the Company is
not responsible for merchant underwriting and has no chargeback liability and has no or limited contractual relationship with the
merchant, the Company records the amount it receives from the processor net of interchange and other processing fees as revenue.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, eVance, Securus, Crowdpay.US, and OMNISOFT, Inc.
All significant intercompany transactions and balances have been eliminated.
Segments
Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision
maker, or decision–making group in deciding how to allocate resources and in assessing performance. Our chief operating decision–making
group is composed of the chief executive officer. We currently operate in one segment surrounding our ISO operations.
Recent Accounting Standards
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The ASU requires that a lessee recognize the assets and liabilities that arise from operating leases.
A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or
less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and
lease liabilities. This new guidance will be effective for annual reporting periods beginning after December 15, 2019, including
interim periods within those annual reporting periods, and early adoption is permitted. In transition, lessees and lessors are
required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.
The Company is currently in the process of evaluating the potential effect that the adoption of this standard will have on its
consolidated financial position and results of operations.
In May 2014, the Financial Accounting Standards
Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, to establish ASC Topic 606, (ASC 606). ASU 2014-09
supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition and most industry-specific guidance throughout
the Industry Topics of the Codification. 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 guidance includes a five-step framework that requires an entity
to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine
the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize
revenue when the entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In August 2015, the FASB issued ASU 2015-14,
Deferral of the Effective Date, which amended the effective date for nonpublic entities to annual reporting periods beginning after
December 15, 2018. In March 2016, the FASB issued an update (ASU 2016-08) to ASC 606, Principal versus Agent Considerations
(Reporting Revenue Gross versus Net), which clarifies the guidance on principal versus agent considerations. In April 2016, the
FASB issued an update (ASU 2016-10) to ASC 606, Identifying Performance Obligations and Licensing, which provides clarification
related to identifying performance obligations and licensing implementation guidance under ASU 2014-09. In May 2016, the FASB issued
an update (ASU 2016-12) to ASC 606, Narrow-Scope Improvements and Practical Expedients, which amends guidance on transition, collectability,
noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB issued an update (ASU 2016-20)
to ASC 606, Technical Corrections and Improvements, which outlines technical corrections to certain aspects of the new revenue
recognition standard such as provisions for losses on construction type contracts and disclosure of remaining performance obligations,
among other aspects. The effective date and transition requirements are the same as those in ASU 2014-09 for all subsequent clarifying
guidance discussed herein.
The guidance permits two methods of adoption:
retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect
of initially applying the guidance recognized at the date of initial application (modified retrospective method). As an Emerging Growth Company, the standard is effective for the Company’s 2019 annual reporting
period and for interim periods after 2019. The Company is currently in the initial phase of analyzing the potential impact this
standard will have on its consolidated financial position and results of operations. The Company expects to apply the modified
retrospective method upon adoption.
The Company has reviewed other recently
issued accounting pronouncements and plans to adopt those that are applicable to it. The Company does not expect the adoption of
any other pronouncements to have an impact on its results of operations or financial position.
NOTE 3 – LIQUIDITY AND CAPITAL
RESOURCES
At March 31, 2019,
the Company had cash of $42,845 and a working capital deficit of $783,788. For the three months ended March 31, 2019,
the Company’s net loss and cash used in operating activities was $406,945 and $113,741, respectively.
T
he
Company expects to fund future liquidity and capital requirements through cash flow generated from its operating activities resulting
from increases in its merchants and revenues generated. Additionally, included in the working capital deficit as of March 31, 2019
was accrued payroll, a note payable and other expenses due to the Company’s Chief Executive Officer, Mr. Ronny Yakov, in
the amount of $657,229, which he has agreed to defer receiving payment until the Company has sufficient working capital. As a result
of the recent amendments to its long-term and related party long-term debt arrangements, coupled with its operations acquired
in the business combination and commitment from a related party and significant stockholder that he will provide any additional
financial support, if needed, to satisfy the Company’s debt or other obligations through May 2020, the Company has alleviated
its previously reported substantial doubt regarding its ability to continue as a going concern. The Company’s future
capital requirements could depend on many factors, including the need to expand its services, competing technological and market
developments, and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance
or complement the Company’s product and service offerings. If the Company is unable to secure additional capital, it may
be required to curtail its future plans and take additional measures to reduce costs in order to conserve cash.
NOTE 4 – INTANGIBLE ASSETS
Other assets consist of the following as of:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Merchant Portfolios
|
|
$
|
2,190,000
|
|
|
$
|
2,190,000
|
|
Less Accumulated Amortization
|
|
|
(311,218
|
)
|
|
|
(208,571
|
)
|
Net residual portfolios
|
|
$
|
1,878,782
|
|
|
$
|
1,981,429
|
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Trade name
|
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Less Accumulated Amortization
|
|
|
(458,333
|
)
|
|
|
(333,333
|
)
|
Net trade name
|
|
$
|
2,041,667
|
|
|
$
|
2,166,667
|
|
Amortization expense was $227,647 and $0 for the three months
ended March 31, 2019 and $90,739 for the predecessor three months ended March 31, 2018.
The Company’s merchant portfolios
and tradename are being amortized over respective useful lives of 7 and 5 years.
The following sets forth the estimated
amortization expense related to amortizing intangible assets for the years ended December 31:
2019 (remainder of year)
|
|
$
|
585,210
|
|
2020
|
|
$
|
812,857
|
|
2021
|
|
$
|
812,857
|
|
2022
|
|
$
|
812,857
|
|
2023
|
|
$
|
479,524
|
|
Thereafter
|
|
$
|
417,144
|
|
Total
|
|
$
|
3,920,449
|
|
The weighted average remaining useful life of amortizing intangible
assets was 5.75 years at March 31, 2019.
NOTE 5 – BUSINESS COMBINATIONS
As disclosed in Note 1, on April 9, 2018,
the Company entered into a Memorandum of Sale by and among the Purchasers and GACP. In consideration for the sale and transfer
of the Acquired Assets at the Closing, the Company assumed certain post-Closing obligations under assigned contracts and issued
GACP a note payable for $12,500,000, through the deemed simultaneous financing of such purchase price to the Purchasers under the
Credit Agreement.
The Company accounted for the transaction
as a business combination under ASC 805 and as a result, allocated the fair value of the identifiable assets acquired and liabilities
assumed as of the acquisition date as outlined in the table below. The results of operations of the business acquired by the Company
have been included in the consolidated statements of operations since the date of acquisition. The excess of the purchase price
over the estimated fair values of the underlying identifiable assets acquired and liabilities assumed was allocated to goodwill.
The amount assigned to goodwill was deemed appropriate based on several factors, including: (i) the multiple paid by market participants
for businesses in the merchant card processing business; (ii) levels of eVance Payments, current and future projected cash flows;
and (iii) the Company’s strategic business plan. Goodwill is expected to be deductible for tax purposes.
The allocation of the purchase price and
the estimated fair market values of the assets acquired and liabilities assumed are shown below:
Consideration
|
|
|
|
Consideration issued
|
|
$
|
12,500,000
|
|
Identified assets and liabilities
|
|
|
|
|
Cash
|
|
|
42,711
|
|
Accounts and other receivables
|
|
|
480,302
|
|
Note receivable
|
|
|
174,967
|
|
Prepaid expenses
|
|
|
84,945
|
|
Long-term assets
|
|
|
348,367
|
|
Property and equipment
|
|
|
106,600
|
|
Accounts payable
|
|
|
(180,231
|
)
|
Accrued Expenses
|
|
|
(105,877
|
)
|
Merchant portfolios
|
|
|
2,190,000
|
|
Tradename
|
|
|
2,500,000
|
|
Total identified assets and liabilities
|
|
|
5,641,784
|
|
|
|
|
|
|
Excess purchase price allocated to goodwill
|
|
$
|
6,858,216
|
|
Unaudited pro forma results of operations
for the three months ended March 31, 2018, as if the Company and its subsidiaries had been combined on January 1, 2018, follow.
The pro forma results include estimates and assumptions which management believes are reasonable. The pro forma results do not
include any anticipated cost savings or other effects of the planned integration of these entities, and are not necessarily indicative
of the results that would have occurred if the business combination had been in effect on the date indicated, or which may result
in the future. The unaudited pro forma results of operations are as follows:
|
|
Three Months Ended
March 31,
2018
|
|
Revenues
|
|
$
|
3,251,564
|
|
Operating loss
|
|
$
|
(153,315
|
)
|
Net loss
|
|
$
|
(985,267
|
)
|
Net loss per share – basic and diluted
|
|
$
|
(0.01
|
)
|
NOTE 6 – COMMON CONTROL MERGERS
On May 9, 2018, the Company acquired 100%
of Omnisoft in exchange for the issuance of 55,000,000 shares of common stock. The acquisition of Omnisoft., was determined to
be a common control transaction as each Company has the same two shareholder with a majority ownership. As a result, the assets
and liabilities assumed were recorded on the Company’s consolidated financial statements at their respective carry-over basis.
Under ASC 805, “Business Combinations,” the Company recorded the common control merger as of the earliest date presented
in these consolidated financial statements, or March 31, 2018 as follows:
The results of operations included in the
condensed consolidated statement of operations for the three months ended March 31, 2018 as a result of the common control merger
were as follows:
Revenue
|
|
$
|
4,500
|
|
Operating expenses
|
|
|
(43,274
|
)
|
Net loss
|
|
$
|
(38,774
|
)
|
On May 9, 2018, the Company acquired 100%
of Crowdpay in exchange for 87,500,000 shares of common stock. The acquisition of Crowdpay., as a wholly owned subsidiary is considered
a common control transaction as each Company has the same shareholder with a majority ownership. As a result, the assets and liabilities
assumed were recorded on the Company’s consolidated financial statements at their respective carry-over basis. Under ASC
805, “Business Combinations,” the Company recorded the common control merger as of the earliest date presented in these
condensed consolidated financial statements, or March 31, 2018 as follows:
The results of operations included in the
condensed consolidated statement of operations for the three months ended March 31, 2018 as a result of the common control merger
were as follows:
Revenue
|
|
$
|
62,621
|
|
Operating expenses
|
|
|
(42,035
|
)
|
Net income
|
|
$
|
20,586
|
|
NOTE 7 – NOTE PAYABLE
In order to finance the Asset Acquisition,
GACP, as administrative agent and collateral agent (“Agent”), and as the initial sole lender thereunder, provided a
term loan of $12,500,000 (the “Term Loan”) to the Purchasers, Omnisoft, Inc., a Delaware corporation and CrowdPay.us,
Inc., a New York corporation, each of Omnisoft and Crowdpay being affiliates of the Company’s majority stockholder, which
obligations are guaranteed by the Company (collectively with the Borrowers, the “Loan Parties”), under the Loan and
Security Agreement (the “Credit Agreement”), dated as of April 9, 2018, by and among the Loan Parties, the lenders
from time to time party thereto as lenders (the “Lenders”) and the Agent.
The Term Loan matures in full on April
9, 2021, the third anniversary of the Closing. $1,000,000 of the principal amount under the Term Loan must be repaid on or prior
to July 15, 2018, and an additional $2,000,000 in principal due on or prior to October 31, 2018 (in each case subject to earlier
repayment under certain circumstances, including if a Loan Party consummates an equity financing), with the remaining principal
due upon maturity. The Term Loan can be prepaid without penalty in part by the Loan Parties with ten days’ prior written
notice to the Agent, and in full within thirty days’ prior written notice. The Term Loan is subject to an interest rate of
9.0% per annum, payable monthly in arrears.
The obligations of the Loan Parties under
the Credit Agreement are secured by all of their respective assets and the Loan Parties pledged all of their assets as collateral
for their obligations under the Credit Agreement. Additionally, the Company pledged its ownership interests in the Purchasers and
any of its other subsidiaries that it may form or acquire from time to time.
The Credit Agreement includes customary
representations, warranties and financial and other covenants of the Loan Parties for the benefit of the Lenders and the Agent.
The obligations of the Loan Parties under the Credit Agreement are subject to customary events of default for a secured term loan.
Each Loan Party is jointly and severally liable for the obligations under the Credit Agreement.
On July 30, 2018, the Company entered into
Amendment No. 1 to the Loan and Security Agreement (the “Amendment”) amending that certain Loan and Security Agreement,
dated as of April 9, 2018 (the “Original Credit Agreement,” and as amended by the Amendment, the “Credit Agreement”),
by and among GACP Finance Co., LLC, as administrative agent and collateral agent, the lenders party thereto, Securus365, Inc.,
eVance, Inc., eVance Capital, Inc., OMNISOFT, Inc., and Crowdpay.us, Inc., as borrowers, and the Company, as parent guarantor.
Pursuant to the Amendment, among other things, the lenders (i) waived the Company’s existing defaults under the Original
Credit Agreement for its failure to make payment of $1,000,000 (the “initial payment”) under the Original Credit Agreement
on or prior to July 15, 2018 and to deliver to the lenders unaudited monthly financial statements and compliance certificates of
the Company, (ii) extended the date on which the initial payment was required to be made to July 30, 2018 and extended the date
on which the Company is required to provide audited financial statements for the fiscal years ended December 31, 2017 and 2018,
(iii) permitted the Company to enter into a subordinated loan arrangement for the Note concurrently with the Amendment such that
the Company could make the initial payment under the terms of the Credit Agreement, and permitted the Note to be repaid either
from the sale of the Note Collateral Shares or at any time after the second payment under the Credit Agreement. The Company borrowed
$1,000,000 from a related party (Note 11) in order to make its first scheduled payment.
On November 14, 2018, the $2,000,000 second
payment due under the Original Credit Agreement that was due by October 31, 2018 was paid. The Company borrowed $2,000,000 from
a related party (Note 10) in order to make its second scheduled payment. Total interest expense for the GACP loan incurred during
the three months ended March 31, 2019 was $213,750, $73,625 of which is accrued as of March 31, 2019. Total interest expense for
the GACP loan incurred during the year ended December 31, 2018 was $791,625, $73,625 of which is accrued as of December 31, 2018.
On February 5, 2019, the Company entered
into Amendment No. 3 to Loan and Security Agreement (the “Amendment”) amending that certain Loan and Security Agreement,
dated as of April 9, 2018 (the “Original Credit Agreement,” and as amended, including by the Amendment, the “Credit
Agreement”), by and among GACP Finance Co., LLC, as administrative agent and collateral agent, the lenders party thereto,
Securus365, Inc., eVance, Inc., eVance Capital, Inc., OMNISOFT, Inc., and Crowdpay.us, Inc., as borrowers, and the Company, as
parent guarantor. Pursuant to the Amendment, among other things, the lenders waived the Company’s existing default under
the Original Credit Agreement for its failure to comply with certain financial covenants set forth in the Original Credit Agreement
and the parties amended the terms of the financial covenants that the Company must comply with.
NOTE 8 - WARRANTS
Pursuant to and as additional consideration
for the Term Loan under the Credit Agreement, on April 9, 2018 the Company issued to GACP a Warrant to purchase 1,200,000 shares
of common stock of the Company at an exercise price of $0.25 per share, subject to adjustment as set forth in the Warrant. The
Warrant is exercisable by GACP at any time from the Issuance Date until the later of (i) the third (3
rd
) anniversary
of the Issuance Date and (ii) the date on which all obligations under the Credit Agreement have been satisfied in full. The Warrant
may be redeemed for $0.0001 per Warrant Share, at the sole discretion of the Company, at any time after the six (6) month anniversary
of the Issuance Date if the closing sales price of the Company’s common stock equals or exceeds $5.00 per share on each of
the 20 trading days within any 30 day trading day period ending on the third (3
rd
) trading day prior to the date on
which the Company provides a notice of redemption. GACP has certain piggy-back registration rights as set forth in the Warrant
with respect to the Warrant Shares to be issued upon exercise of the Warrant. After the six (6) month anniversary of the Issuance
Date, GACP can exercise the Warrant using a “cashless exercise” feature to the extent that GACP exercises the Warrant
for a number of Warrant Shares in excess of the number Warrant Shares that have been registered for resale under U.S. securities
laws.
As additional consideration for the Term
Loan under the Credit Agreement, on April 9, 2018 the Company also entered into a letter agreement (the “Additional Warrants
Agreement”) with GACP, pursuant to which the Company agreed that if the Company at any time after the Closing and prior to
the satisfaction of all outstanding obligations under the Credit Agreement requests for GACP to provide debt financing for the
acquisition of a company or operating business by the Company or its subsidiaries, and GACP or its affiliates provide all of the
debt financing for such acquisition, the Company will issue to GACP a warrant to purchase 200,000 shares of the Company’s
common stock (an “Additional Warrant”) upon the closing of such debt-financing, with such Additional Warrant in substantially
the same form as the Warrant, up to a total of four (4) Additional Warrants for four debt-financed acquisitions under the Additional
Warrants Agreement. The exercise price of the Additional Warrants, if issued, will be $0.30 per share for the first Additional
Warrant, $0.35 per share for the second Additional Warrant, $0.40 per share for the third Additional Warrant and $0.45 per share
for the fourth Additional Warrant, with the number of shares and exercise price subject to adjustment as set forth in the Additional
Warrants Agreement and the Additional Warrant.
The warrants have an exercise price of
$0.25 and expire in three years. The aggregate fair value of the warrants, which was charged to interest expense, totaled
$7,660 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $0.25, 2.28% risk free
rate, 114.11% volatility and expected life of the warrants of 3 years.
A summary of the status of the Company’s
outstanding stock warrants as of March 31, 2019 is presented below:
Range of Exercise Prices
|
|
Number Outstanding 3/31/2019
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price
|
|
$0.25
|
|
1,200,000
|
|
|
2.00 years
|
|
|
$0.25
|
|
The aggregate intrinsic value represents
the total pretax intrinsic value, based on warrants with an exercise price less than the Company’s stock price as of March
31, 2019, which would have been received by the warrant holder had the warrant holder exercised their warrants as of that date.
NOTE 9 – STOCK OPTIONS
Pursuant to the terms on the employment
agreement with Mr. Yakov he was granted 200,000 common stock options on January 1, 2019. The grant shall vest at the rate of 1/3
beginning on each anniversary of the effective date of grant. The options have an exercise price of $0.001 and expire in three
years after each vest date. The aggregate fair value of the options totaled $39,814 based on the Black Scholes Merton pricing
model using the following estimates: exercise price of $0.001, 2.47% risk free rate, 104.8% volatility and expected life of the
options of 4 years. The fair value is being amortized over the applicable vesting period and credited to additional paid in capital.
A summary of the status of the Company’s
outstanding stock options and changes during the year is presented below:
Stock Options
|
|
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding at January 1, 2019
|
|
|
8,155,168
|
|
|
$
|
0.0001
|
|
|
|
-
|
|
Granted
|
|
|
200,000
|
|
|
$
|
0.001
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options outstanding March 31, 2019
|
|
|
8,355,168
|
|
|
$
|
0.0001
|
|
|
$
|
1,126,752
|
|
Shares exercisable at March 31, 2019
|
|
|
66,667
|
|
|
$
|
0.001
|
|
|
$
|
8,933
|
|
NOTE 10 – RELATED PARTY TRANSACTIONS
On July 30, 2018, pursuant to the terms
of the Amendment (Note 7), the Company issued to Mr. John Herzog, a significant stockholder of the Company a subordinated promissory
note in the principal amount of $1,000,000 (the “Note”) for cash proceeds of $1,000,000. The Note initially matured
on March 31, 2019 (though the Company has the right to prepay the Note, in whole or in part, at any time prior to maturity) and
bears interest at a rate of 12% per annum, compounding annually. The Note is subordinated to the Credit Agreement. The Company
used the proceeds received to make the initial payment under the Credit Agreement.
On November 14, 2018, the Company issued
to John Herzog, a subordinated promissory note in the principal amount of $2,000,000 for cash proceeds of $2,000,000.
On
March 1, 2019, the Company entered into Amendment No. 1 to Subordinated Promissory Note (the “
Subordinated Note Amendment
”)
with Mr. Herzog. The purpose of the Subordinated Note Amendment was to amend that certain subordinated promissory note issued on
July 26, 2018 in the principal amount of $1,000,000 to reflect an increase in the amount of principal due under the note from $1,000,000
to $3,000,000 reflecting a payment made by the payee to the Company of $2,000,000 on November 14, 2018 (the proceeds of which were
used by the Company to make a second required payment under the Credit Agreement) and to extend the maturity date of the Note from
March 31, 2019 to September 30, 2020.
Total interest expense on the two loans
from Mr. Herzog for the three months ended March 31, 2019 was $88,767. Total accrued interest as of March 31, 2019 and December
31, 2018 is $131,616 and $52,849, respectively.
As of March 31, 2019 and December 31, 2018,
the Company has total accrued compensation due to Mr. Yakov of $568,080 and $568,292, respectively, and advances to be repaid to
Mr. Yakov of $17,684 and $17,684, respectively.
On August 10, 2018, Ronny Yakov, the CEO,
loaned the Company $25,000, in order to pay for audit services. Mr. Yakov loaned the Company an additional $45,000 to the Company
during the three months ended March 31, 2019. The loans are unsecured, bears interest at 12% and are due on demand. As of March
31, 2019, there is $2,367 of interest accrued on these loans.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company
may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. The Company records legal
costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.
On October 20, 2017, the Company entered
into a new employment agreement with its founder and president for 7 years effective January 1, 2018 through December 31, 2024.
The agreement provides for an annual salary of $375,000, fringe benefits ($2,500 monthly automobile allowance, any benefit plans
of the Company and 4 weeks paid vacation), an incentive bonus of $200,000 based on the achievement of certain performance criteria
and an acquisition bonus equal to two (2%) percent of the gross purchase price paid in connection therewith upon the closing of
any acquisition directly or indirectly by the Company or its subsidiaries during the Employment Period of any company or business
(including purchases of all or substantially all of the assets of any such entity) having then existing sales of not less than
three million five hundred thousand dollars ($3,500,000). As of March 31, 2019, no bonuses have been paid or accrued.
Office Lease
The Company leases its Georgia office facilities
under an operating lease expiring in November 2019. Monthly lease payments range from $8,278 to $9,046 throughout the term of the
lease.