Notes to the Condensed Consolidated Financial
Statements
September 30, 2020
(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 when compared to the overall business.
The Company also provides ecommerce development
and consulting services on a project by project basis.
COVID-19 Impact
On January 30, 2020, the World Health Organization
declared the COVID-19 (coronavirus) outbreak a “Public Health Emergency of International Concern” and on March 10,
2020, declared it to be a pandemic. The virus and actions taken to mitigate its spread have had and are expected to continue to
have a broad adverse impact on the economies and financial markets of many countries, including the geographical areas in which
the Company operates. In response to the pandemic, the Company is working with merchants to address potential changes to the purchase
patterns of consumers. In addition, it is focusing on servicing merchants that sell products with an extended delivery time frame,
that have products that are paid for in advance, and that work in the catering, ticketing, limo and travel related businesses which
have been directly impacted by the social distancing requirement of the pandemic. Further, for those of the Company’s employees
that are able to perform their job remotely, the Company has implemented a “remote work” policy and provided employees
with the technology necessary to continue to do their jobs from home and for those employees that are unable to perform their job
from a remote location, the Company has taken steps to ensure appropriate distancing and added sanitizing stations along with requiring
frequent hand washing and work station cleaning. At September 30, 2020, most employees were no longer working remotely. However,
the Company continues to monitor and follow the advice of federal and state authorities.
The Company has experienced disruptions
to its business and has observed disruptions for the Company’s customers and merchants which has resulted in a decline in
transaction volume during some months. While the volume of processing transactions by merchants in March was relatively in-line with
the Company’s expectations that the number of transactions during March would be below the prior year because states in the
United States began to implement stay-at-home orders, the number of transactions and resulting revenue was approximately
15% lower in March than in February and 30% lower in April than in March. In May, the number of transactions increased whereby
they were 5% higher than in April, and in June, transactions were 7% higher than May and in June through September, the number
and amount of transactions continued to steadily increase whereby they are meeting expectations. The Company’s revenue during
the period of time decreased and then increased in the amount similar to the percentage of month-to-month transaction volume.
We do estimate that the number of transactions
will continue to stay at a depressed level or further decline from the prior year, along with revenues, until the end of the COVID-19
pandemic or the response to the COVID-19 pandemic relaxes further stay-at-home restrictions and allows customers to make
more point of purchase transactions for merchants and/or more merchants provide for additional contactless and online purchase
options. The anticipated amount of decline from prior year is unknown, but it will be impacted until such time when consumers return
to the level of purchasing that occurred in the prior year and before the pandemic. The Company does not anticipate that the pandemic
will continue to have a material impact on the Company’s business or liquidity. However, additional closings and reopenings
of businesses in the future will likely result in a month over month decline and then increase similar to what occurred in March
through June 2020.
While it is unknown how long these conditions
will last and what the complete financial impact will have on the Company, the financial services and payment technology industries
in which we operate depend heavily upon the overall level of consumer, business and government spending. A sustained deterioration
in general economic conditions resulting in less consumer, business and government spending may adversely affect our financial
performance by reducing the number or average purchase amount of transactions we process. If our customers make fewer sales of
products and services using electronic payments, or consumers spend less money through electronic payments, whether due to the
outbreak of the COVID-19 virus, change of consumer behavior or otherwise, we will have fewer transactions to process at lower dollar
amounts, resulting in lower revenue making it reasonably possible that we are financially vulnerable to the effects of the pandemic.
If we experience lower revenue, the risk of not meeting financial covenants could exist.
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, 2019 included in the Company’s Form
10-K. The results of the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2020.
In the opinion of management, all adjustments
necessary to present fairly the financial position as of September 30, 2020 and the results of operations and cash flows presented
herein have been included in the interim 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,
impairment in fair value of goodwill, valuation allowances for income taxes, stock based compensation.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, eVance, Securus, CrowdPay, and OMNISOFT. All
significant intercompany transactions and balances have been eliminated.
Reclassifications
Certain reclassifications have been made
to the prior period financial information to conform to the presentation used in the financial statements for the three and nine
months ended September 30, 2020.
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 and nine months ended September
30, 2020 and 2019 does not include warrants to acquire 3,353,698 and 40,000 shares of common stock, respectively, because of their
anti-dilutive effect. The weighted average number of common shares for the three and nine months ended September 30, 2020 and 2019
includes 112,735 and 55,257 vested options, respectively, due to the nominal exercise price of the options. The weighted average
number of common shares for the three and nine months ended September 30, 2020 and 2019 does not include 172,437 and 223,250 unvested
options, respectively, to purchase common stock because of their anti-dilutive effect.
Revenue Recognition and Cost of Revenues
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.
Disaggregation of Revenue
The following table presents the Company’s
revenue disaggregated by revenue source:
|
|
For the
Three Months Ended
September 30,
|
|
|
For
the
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale contracts
|
|
$
|
1,293,217
|
|
|
$
|
1,544,775
|
|
|
$
|
3,759,822
|
|
|
$
|
4,715,570
|
|
Retail contracts
|
|
$
|
601,118
|
|
|
$
|
682,598
|
|
|
$
|
1,768,720
|
|
|
$
|
1,910,494
|
|
Other transaction and processing fees
|
|
$
|
413,702
|
|
|
$
|
250,059
|
|
|
$
|
1,393,523
|
|
|
$
|
1,024,202
|
|
Total Revenue
|
|
$
|
2,308,037
|
|
|
$
|
2,477,432
|
|
|
$
|
6,922,065
|
|
|
$
|
7,650,266
|
|
The Company recognizes revenue under ASC
606, “Revenue from Contracts with Customers” (“ASC 606”). The Company determines revenue recognition through
the following steps:
|
●
|
Identification of a contract with a customer;
|
|
|
|
|
●
|
Identification of the performance obligations in the contract;
|
|
|
|
|
●
|
Determination of the transaction price;
|
|
|
|
|
●
|
Allocation of the transaction price to the performance obligations in the contract; and
|
|
|
|
|
●
|
Recognition of revenue when or as the performance obligations are satisfied.
|
Revenue is recognized when control of the
promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be
entitled to in exchange for those goods or services. Shipping and handling activities associated with outbound freight after control
over a product has transferred to a customer are accounted for as a fulfillment activity and recognized as revenue at the point
in time at which control of the goods transfers to the customer. As a practical expedient, the Company does not adjust the transaction
price for the effects of a significant financing component if, at contract inception, the period between customer payment and the
transfer of goods or services is expected to be one year or less.
Transaction and processing fees
Fees for the Company’s transaction
and processing arrangements are typically billed and paid on a monthly basis. 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.
These merchant services represent a single performance obligation satisfied over time and that the same measure of progress should
be used to measure the Company’s progress toward complete satisfaction of the performance obligation. The Company will recognize
revenue on a monthly basis as the services are transferred to the customer in short daily increments that qualify for series guidance
as the best measure of the transfer of control.
In wholesale contracts, the Company recognizes
transaction and processing fees on a gross basis as the Company is the principal in the merchant services. The Company has concluded
it is the principal because it has a direct contractual relationship with the merchant, is primarily responsible for the delivery
of services to the merchants, including performing underwriting, has discretion in setting prices, and bears risk of chargebacks
and other merchant losses. The Company also has the unilateral ability to accept or reject a transaction based on criteria established
by the Company. As the principal, the Company records the full discount charged to the merchant as revenue and the related interchange
and other processing fees within cost of revenues.
In retail contracts, the Company is not
responsible for merchant underwriting, has no chargeback liability and has no or limited contractual relationship with the merchant.
As such, the Company records the net amount it receives from the processor, after interchange and other interchange and other processing
fees, as revenue.
Merchant equipment sales and other
The Company generates revenue through the
sale and rental of merchant equipment. The Company satisfies its performance obligation upon delivery of equipment to merchants
and recognizes revenue at a point in time. The Company allows for customer returns which are accounted for as variable consideration.
The Company estimates these amounts based on historical experience and reduces revenue recognized. The Company invoices customers
upon delivery of the equipment to merchants, and payments from such customers are due upon invoicing. The Company offers hardware
installment sales to customers with terms ranging from three to forty-eight months. The Company allocates a portion of the
consideration received from these arrangements to a financing component when it determines that a significant financing component
exists. The financing component is subsequently recognized as financing revenue separate from hardware revenue, within subscription
and services-based revenue, over the terms of the arrangement with the customer. Pursuant to practical expedients afforded under
ASC 606, the Company does not recognize a financing component for hardware installment sales that have a term of one year or less.
Deferred Revenue
From time to time the Company may launch
new products or services to its merchants. In the event step 1 under ASC 606 is not met, the Company will record deferred revenue
upon receipt of the payment by the customer. In November 2019, the Company began billing existing merchants for its cloud-based
omni-channels software, ShopFast. Merchants are billed monthly with the ability to opt out and receive a refund for up to 30 days
after they are billed. Due to the lack of historical data related to these services, customer activity and the associated billings
and refunds, $99,594 was recorded as deferred revenue as of December 31, 2019. All of the deferred revenue, net of any refunds,
was recognized in the nine months ended September 30, 2020. During the nine months ended September 30, 2020, the Company determined
it had sufficient information to determine Step 1 was achieved, and therefore recognized all revenue that was previously deferred.
As such, $99,594 of revenue recognized during the nine months ended September 30, 2020 pertained to services provided in the prior
period.
Recently Adopted 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. We adopted the ASU effective January 1, 2020, using the modified retrospective transition method. Under this
method, there was no cumulative impact adjustment necessary with the adoption to our accumulated deficit on January 1, 2020. Our
condensed consolidated financial statements for periods ending after January 1, 2020 are presented in accordance with the requirements
of Topic 842, while comparative prior period amounts have not been adjusted and continue to be reported in accordance with Topic
840.
Recent Accounting Standards
In November 2019,
the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivative and Hedging (Topic 815), and Leases
(Topic 842). This new guidance became effective for us on January 1, 2020. The adoption of this guidance did not have a material
impact on our condensed consolidated financial statements.
NOTE 3 – LIQUIDITY AND CAPITAL
RESOURCES
In connection with the response to the
COVID-19 pandemic in the United States, the Company has experienced disruptions to its business and has observed disruptions with
its customers and merchants, which has resulted in a decline in transaction volume. While the volume of processing transactions
by merchants in March was relatively in-line with the Company’s expectations that the number of transactions during
March would be below the prior year because states in the United States began to implement stay-at-home orders, the number
of transactions and resulting revenue was approximately 15% lower in March than in February and 30% lower in April than in March.
In May, the number of transactions began to increase whereby they were 5% higher than in April, and in June, transactions were
7% higher than May and in June through September, the number and amount of transactions continued to steadily increase whereby
they are meeting expectations. The Company’s revenue during the period of time decreased and then increased in the amount
similar to the percentage of month-to-month transaction volume. The Company’s revenue during the period of time decreased
and then increased in the amount similar to the percentage of month-to-month transaction volume. Despite recent increases in volume,
the Company estimates that the number of transactions will continue to stay at a depressed level or further decline from the prior
year, along with revenues, until the end of the COVID-19 pandemic or the response to the COVID-19 pandemic fully relaxes further
stay-at-home restrictions and allows customers to make more point of purchase transactions for merchants, customers become
more comfortable shopping in stores and/or more merchants provide for additional contactless and online purchase options. The anticipated
amount of anticipated decline from prior year is unknown, but it will be impacted by when consumers return to the level of purchasing
that occurred in the prior year and before the pandemic. The Company does not anticipate that the pandemic will continue to have
a material impact on the Company’s business or liquidity. However, additional closings and reopenings of businesses or if
additional businesses cease to operate in the future will likely result in a month over month decline and then increase similar
to what occurred in March through September 2020.
At September 30, 2020, the Company had
cash of $4,122,640 and working capital of $3,412,449. For the three and nine months ended September 30, 2020, the Company’s
net loss was $657,358 and $1,709,974, respectively. In addition, as of September 30, 2020, the Company was not in compliance with
certain financial covenants required by the Credit Agreement.
As a result of these factors, the Company
determined it was necessary to review its cash flow for 2020 and an overall analysis of market trends to determine whether or not
it has sufficient liquidity to continue as a going concern for a period of at least twelve months from the date of this Quarterly
Report. The Company also determined it was necessary to take certain corporate actions, including reducing discretionary expenses
and amending its existing senior indebtedness as discussed below, in order to ensure it has sufficient liquidity to continue as
a going concern for a period of at least twelve months from the date of this Quarterly Report.
On August 11, 2020, the Company closed
an offering of its securities (the “Offering”) for gross proceeds of $6.45 million. The Company sold 700,000 units
consisting of (a) one share of our common stock; (b) two Series A Warrants, and (c) one-half of one Series
B warrant. In addition, the underwriter fully exercised its option to purchase 210,000 Series A warrants and 52,500 Series
B warrants. While 20% of the net proceeds of $5.5 million was used to repay a portion of our outstanding Term Loan, immediately
following the Offering, the Company had cash of $5.6 million on hand. As such, the Company believes it will be able fund future
liquidity and capital requirements through cash flows generated from its operating activities for a period of at least twelve months
from the date its condensed consolidated financial statements are issued.
In addition, the Company has received a Paycheck
Protection Program loan under the CARES Act for approximately $236,000 (the “PPP Loan”). The
Paycheck Protection Program provides that the use of PPP Loan proceeds were limited to certain qualifying expenses
and may be partially or wholly forgiven in accordance with the requirements set forth in the CARES Act. The Company currently intends
to use the PPP Loan for permitted uses, although no assurance can be given that the Company will obtain forgiveness
of all or any portion of amounts due under the PPP Loan.
As
a result of the improved transaction volume trends the Company experienced in the three months ended September 30, 2020,
as well as the above discussed capital raises, the Company believes it has sufficient liquidity
in order to sustain operations for a period of at least twelve months from the date its condensed consolidated financial
statements are available to be issued.
Additional Information Regarding Our
Credit Agreement
On April 24, 2020, the Company entered
into Amendment No. 4 to Loan and Security Agreement amending the Credit Agreement. The purpose of Amendment No. 4 was to extend
the Maturity Date of the indebtedness to April 9, 2022 and to waive any outstanding events of default. In consideration for
the foregoing, the Credit Agreement was amended to include a new principal repayment schedule under the note whereby the Company
paid an amount equal to $125,000 upon execution of Amendment No. 4 and the Company agreed to make a monthly payment of $25,000
per month, commencing May 1, 2020, and on the first business day of each calendar month thereafter until the required balloon
payment on April 9, 2022. In the event that the Company does not make a monthly payment, Messrs. Yakov and Herzog will have
the ability to make an equity contribution to the Company for the sole purpose of paying the monthly payment obligation of the
Company under the Credit Agreement.
Although, we believe we are currently in
compliance, we have not complied with these obligations at certain times since the Credit Agreement was entered into and were obligated
to obtain certain waivers and modifications of these provisions to avoid an acceleration event under the Credit Agreement. If we
are not able to remain in compliance with these obligations, the creditor may accelerate the maturity of the loan or may require
us to adhere to stricter financial covenants in exchange for a waiver. While we expect to comply with these financial covenants,
we cannot guarantee our ability to do so. Although it has entered into Amendment No. 4 which extended the maturity date, the Company
is exploring refinancing solutions for more advantageous terms for its long-term debt with new debtholders. If the Company is unable
to refinance its debt or is unable to satisfy its obligations as they become due, the Company may be required to sell assets to
repay all or part of the debt or replace the debt with less favorable terms.
Pursuant to the terms of the Credit Agreement,
the Company is required to maintain the following financial covenants in order to avoid an event of default: (1) a Fixed Charge
Coverage Ratio (“FCCR”) not less than 1.20:1.00, measured in each case on a trailing twelve month basis and (2) net
revenue of the Company shall not be less than (x) until June 30, 2021 $9,000,000 and (y) from and after July 1, 2021, $10,000,000.
on a trailing twelve-month basis. The Fixed Charge Coverage Ratio is defined as the ratio of (A) EBITDA for each fiscal month minus
unfinanced capital expenditures (but not less than zero) for such fiscal month to (B) the sum of (i) all principal payments scheduled
to be made during or with respect to such period, plus (ii) all interest expense for such period paid or required to be paid in
cash during such period, plus (iii) all federal, state, and local income taxes paid or required to be paid for such period, plus
(iv) all cash distributions, dividends, redemptions and other cash payments made or required to be made during such period with
respect to equity issued by the Company. On August 10, 2020 GACP, as agent to the senior lenders, waived the Company’s default
on June 30, 2020 of the financial covenant relating to the FCCR. GACP further acknowledged and agreed that the Company’s
payment of 20% of the net proceeds of its public offering which closed on August 11, 2020 does not constitute a scheduled payment
required to be included when calculating the Fixed Charge Coverage Ratio.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets, net, consist of the
following as of:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Merchant Portfolios
|
|
$
|
2,340,000
|
|
|
$
|
2,190,000
|
|
Less Accumulated Amortization
|
|
|
(1,108,280
|
)
|
|
|
(854,761
|
)
|
Net residual portfolios
|
|
$
|
1,231,720
|
|
|
$
|
1,335,239
|
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Trade name
|
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Less Accumulated Amortization
|
|
|
(875,000
|
)
|
|
|
(500,000
|
)
|
Net trade name
|
|
$
|
1,625,000
|
|
|
$
|
2,000,000
|
|
Amortization expense for the three months
ended September 30, 2020 and 2019 was $222,090 and $203,214, respectively.
Amortization expense for the nine months
ended September 30, 2020 and 2019 was $628,519 and $609,643, respectively.
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:
2020 (remainder of year)
|
|
$
|
215,904
|
|
2021
|
|
|
863,615
|
|
2022
|
|
|
863,615
|
|
2023
|
|
|
496,443
|
|
2024
|
|
|
312,857
|
|
Thereafter
|
|
|
104,286
|
|
Total
|
|
$
|
2,856,720
|
|
The weighted average remaining useful life
of amortizing intangible assets was 3.33 years at September 30, 2020.
NOTE 5 – NOTE PAYABLE
On April 8, 2018, eVance, Omnisoft, and
CrowdPay, (collectively, the “Borrowers”), entered into a term loan of $12,500,000 with GACP (the “Term Loan”)
to the which obligations are guaranteed by the Company (collectively with the Borrowers, the “Loan Parties”), under
the Loan and Security Agreement (the “Credit Agreement”).
On April 24, 2020, the Company entered
into Amendment No. 4 to Loan and Security Agreement amending the Credit Agreement. The purpose of Amendment No. 4 was to extend
the Maturity Date of the indebtedness and to waive certain outstanding events of default. Specifically, the Maturity Date of the
indebtedness was extended for one year to April 9, 2022. The lenders also waived the Company’s existing default under the
Credit Agreement from the date the default occurred until the date of Amendment No. 4. These defaults were: (i) failure to notify
the Agent that one or more of the Loan Parties received proceeds from litigation above $99,999.99 and use the proceeds to make
a prepayment of the Loans, (ii) one or more of the Loan Parties incurred indebtedness in an aggregate amount of $386,467 during
fiscal year 2019 as a result of not reimbursing business expenses paid by Mr. Yakov in the ordinary course, which indebtedness
is not permitted under Section 5.23(f) of the Credit Agreement (“Debt Default”) and (iii) Lender had not received
financial statements and covenant compliance certificate of the Company as parent guarantor and the Borrowers for the fiscal year
ended December 31, 2019 within 90-days of such fiscal year end as required by Section 5.15(a) of the Credit Agreement. In addition,
Amendment No. 4 provides the Company with a limited waiver permitting the Company to incur government funded indebtedness from
the United States CARES Act loan programs. Further, the financial covenants were amended whereby Consolidated Net Revenue for any
rolling 12-month period shall not be less than $9,000,000 until June 30, 2021 and $10,000,000 from and after July 1, 2021. Further,
Amendment No. 4 requires that the Company pay 100% of the proceeds from any favorable judgments from ongoing litigation and 20%
of the net proceeds from any future equity offering completed by the Company to reduce the principal of the Term Loan and such
payment was made following the closing of the Offering.
The Term Loan matures in full on April
9, 2022, the third anniversary of the Closing. $1,000,000 of the principal amount under the Term Loan was repaid on to July 31,
2018, and an additional $2,000,000 in principal was paid on November 14, 2018. Additionally, the Company paid $125,000 of the Term
Loan upon execution of Amendment No. 4 in April 2020 and the Company agreed to make a monthly payment of $25,000 per month, commencing
May 1, 2020 and on the first business day of each calendar month thereafter, 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.
Although, following the execution of Amendment
No. 4, we are in compliance, we have not complied with these obligations at certain times since the Credit Agreement was entered
into, including at June 30, 2020, and were obligated to obtain certain waivers and modifications of these provisions to avoid an
acceleration event under the Credit Agreement. If we are not able to remain in compliance with these obligations, the creditor
may accelerate the maturity of the loan or may require us to adhere to stricter financial covenants in exchange for a waiver. While
we expect to comply with these financial covenants, we cannot guarantee our ability to do so. Although it has entered into Amendment
No. 4 which extended the maturity date, the Company is exploring refinancing solutions for more advantageous terms for its long-term
debt either with new debtholders. If the Company is unable to refinance its debt or is unable to satisfy its obligations as they
become due, the Company may be required to sell assets to repay all or part of the debt or replace the debt with less favorable
terms Total interest expense for the three and nine months ended September 30, 2020 was $199,890 and $629,446, respectively, $60,974
of which is accrued as of September 30, 2020. Total interest expense for the GACP loan incurred during the three and nine months
ended September 30, 2019 was $218,500 and $648,375, respectively. Accrued interest as of December 31, 2019 was $73,625.
See Note 12- Subsequent Events for additional
information about the Credit Agreement.
On May
6, 2020, the Company received a Paycheck Protection Program loan under the CARES Act for $236,231 (the “PPP Loan”).
The PPP Loan matures on May 7, 2022 and bears interest at 1% per annum. Monthly amortized principal and interest
payments are deferred for 6 months after the date of the agreement. The Paycheck Protection Program provides that the use of PPP Loan proceeds
were limited to certain qualifying expenses and may be partially or wholly forgiven in accordance with the requirements set forth
in the CARES Act. The Company believes it has used the PPP Loan for permitted uses, although no assurance can be
given that the Company will obtain forgiveness of all or any portion of amounts due under the PPP Loan. The loan has
been accounted for as long-term debt, which, if forgiven will result in a gain on forgiveness of debt in the period forgiveness
is obtained.
NOTE 6 – STOCK OPTIONS
On January 1, 2020, pursuant to the terms
on the employment agreement with Mr. Yakov he was granted 6,667 common stock options. 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 $99,994 based on the Black Scholes Merton pricing model using the
following estimates: exercise price of $0.001, 1.63% risk free rate, 95.3% volatility and expected life of the options of 3 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 nine months ended September 30, 2020 is presented below:
Stock Options
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate Intrinsic
Value
|
|
Options outstanding at January 1, 2020
|
|
|
278,506
|
|
|
$
|
0.0001
|
|
|
|
-
|
|
Granted
|
|
|
6,667
|
|
|
$
|
0.001
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Options outstanding September 30, 2020
|
|
|
285,173
|
|
|
$
|
0.0001
|
|
|
$
|
1,069,399
|
|
Shares exercisable at September 30, 2020
|
|
|
112,735
|
|
|
$
|
0.0001
|
|
|
$
|
422,755
|
|
NOTE 7 – WARRANTS
On August 6, 2020, the Company entered
into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp., acting as representative of
the underwriters (“Aegis”), pursuant to which the Company agreed to sell to the underwriters in a firm commitment underwritten
public offering (the “Offering”) an aggregate of 700,000 units (the “Units”), with each Unit consisting
of: (a) one share of our common stock; (b) two Series A warrants (the “Series A Warrants”), with each Series A Warrant
entitling the holder thereof to purchase one share of our common stock at an exercise price equal to $9.00 per share, exercisable
until the fifth anniversary of the issuance date, subject to their earlier redemption as described therein; and (c) one-half of
one Series B warrant (the “Series B Warrants,” and together with the Series A Warrants, the “Warrants”),
with each whole Series B Warrant entitling the holder thereof to purchase one share of common stock at an exercise price equal
to $4.50 per share, exercisable until the fifth anniversary of the issuance date and subject to their earlier redemption as described
therein. The Company also granted the underwriters a 45-day option to purchase up to an additional 105,000 shares of common stock,
and/or an additional 210,000 Class A Warrants to purchase shares of common stock and/or an additional 52,500 Class B Warrants to
purchase shares of common stock as may be necessary to cover over-allotments in connection with the Offering. The Offering, including
the exercise in full of the over-allotment option for the Warrants, closed on August 11, 2020.
The Units and the securities underlying
the Units were offered by the Company pursuant to a registration statement on Form S-1, as amended (File No. 333-232368), filed
with the Securities and Exchange Commission (the “Commission”), which was declared effective by the Commission on August
6, 2020 (the “Registration Statement”).
The net proceeds to the Company from the
Offering, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s Offering
expenses, was approximately $5.6 million. The Company utilized $1,120,155 of the net proceeds to repay a portion of the Company’s
long-term indebtedness (the “Term Loan”) and anticipates using the remainder of the net proceeds from the Offering
to invest in or acquire companies or technologies that are synergistic with or complimentary to our business, expand and market
our current products and for working capital and other general corporate purposes (including payment of outstanding accounts payable).
Warrants
The Warrants were issued in registered
form under separate warrant agent agreements (each a “Warrant Agent Agreement”) between us and our warrant agent, Transfer
Online, Inc. (the “Warrant Agent”).
Each Series A Warrant entitles the registered
holder to purchase one share of our common stock at a price equal to $9.00 per share, subject to adjustment as discussed below,
terminating at 5:00 p.m., New York City time, on the fifth (5th) anniversary of the date of issuance. No fractional warrants will
be issued and only whole warrants are exercisable. The exercise price and number of shares of common stock issuable upon exercise
of the Series A Warrants may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary dividend
on or recapitalization, reorganization, merger or consolidation. If we fail to maintain a current prospectus or prospectus relating
to the common stock issuable upon the exercise of the Series A Warrants, such holders may exercise their Series A warrants on a
“cashless” basis pursuant to a formula set forth in the terms of the Series A Warrants.
Each whole Series B Warrant entitles the
holder thereof to purchase one share of our common stock at an exercise price of $4.50 per share, subject to adjustment as discussed
below, terminating at 5:00 p.m., New York City time, on the fifth (5th) anniversary of the date of issuance. No fractional warrants
will be issued and only whole warrants are exercisable. The exercise price and number of shares of common stock issuable upon exercise
of a whole Series B Warrant may be adjusted in certain circumstances, including in the event of a stock dividend, extraordinary
dividend on or recapitalization, reorganization, merger or consolidation. If we fail to maintain a current prospectus or prospectus
relating to the common stock issuable upon the exercise of the Series B Warrants, such holders may exercise their Series B warrants
on a “cashless” basis pursuant to a formula set forth in the terms of the Series B Warrants.
Each holder of the Warrants will be subject
to a requirement that they will not have the right to exercise the Warrants to the extent that, after giving effect to such exercise,
such holder (together with its affiliates) would beneficially own in excess of 4.99% (subject to increase to 9.99%) of the shares
of our common stock outstanding immediately after giving effect to such exercise.
The Warrants are callable in the event
that the last sales price of our common stock for any twenty (20) consecutive trading day period on or after the date of issuance
(the “Measurement Period”) exceeds $9.00. The Company may, within ten (10) trading days of the end of such Measurement
Period, call for the redemption of all or any portion of the outstanding and unexercised Warrants for consideration equal to the
Black Scholes Value (as defined therein) of the remaining unexercised portion of the Warrants called for redemption on such date.
Pursuant to the Underwriting Agreement,
the Company issued to Aegis a warrant (the “Representative’s Warrants”) to purchase 35,000 shares of common stock.
The Representative’s Warrants will be exercisable at a per share exercise price equal to $11.25 and is exercisable at any
time and from time to time, in whole or in part, during the four-year period commencing twelve months from the effective date of
the Registration Statement. The Representative’s Warrants also provide for one demand registration right of the shares underlying
the Representative’s Warrants, and unlimited “piggyback” registration rights with respect to the registration
of the shares of common stock underlying the Representative’s Warrants and customary anti-dilution provisions.
The aggregate fair value of the 35,000
warrants, totaled $363,958 based on the Black Scholes Merton pricing model using the following estimates: exercise price of $11.25,
0.21% risk free rate, 315.6% volatility and expected life of the warrants of 6 years. The value of the warrants has been netted
against the proceeds of the offering proceeds and accounted for in additional paid in capital.
|
|
Number of Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining Contract Term
|
|
Outstanding, December 31, 2019
|
|
|
40,000
|
|
|
$
|
7.50
|
|
|
|
0.52
|
|
Warrant A Granted (1)
|
|
|
2,639,848
|
|
|
$
|
9.00
|
|
|
|
9.00
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Warrant B Granted (2)
|
|
|
659,970
|
|
|
$
|
4.50
|
|
|
|
4.50
|
|
Warrant B Exercised
|
|
|
(21,150
|
)
|
|
$
|
4.50
|
|
|
|
-
|
|
Underwriter Warrant
|
|
|
35,000
|
|
|
$
|
11.25
|
|
|
|
11.25
|
|
Underwriter Warrant Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
3,353,698
|
|
|
|
4.61
|
|
|
|
4.81
|
|
|
(1)
|
Includes 210,000 Warrant A granted to Underwriters upon exercise of overallotment in connection
with the Offering
|
|
(2)
|
Includes 52,5000 Warrant B granted to Underwriters upon exercise of overallotment in connection
with the Offering
|
NOTE 8 – RELATED PARTY TRANSACTIONS
On July 30, 2018, pursuant to the terms
of the Amendment, 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 had 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. On June 25, 2019, the Company entered into Amendment No. 2 to the subordinated promissory note with Mr. Herzog. The purpose
of the amendment was to amend the maturity date of such subordinated promissory note such that it will be extended until September
30, 2022.
Total interest expense on the two loans
from Mr. Herzog for the three and nine months ended September 30, 2019 was $90,740 and $269,260, respectively.
Total interest expense on the loans from
Mr. Herzog for the three and nine months ended September 30, 2020 was $33,321 and $212,827, respectively. Total accrued interest
as of September 30, 2020 and December 31, 2019 was $0 and $402,849, respectively.
On May 13, 2020, Mr. Herzog agreed
to convert, concurrently with the public offering of the Company’s securities, $3,522,191 in principal amount of indebtedness
(plus any additional accrued interest and other fees thereon that accrues prior to the offering) into shares of convertible Series
A Preferred Stock to be designated concurrently with the offering. On July 24, 2020, the terms of such conversion were amended
such that Mr. Herzog agreed to convert such an aggregate of $3,582,355 of indebtedness and accrued interest into Series A
Preferred Stock and warrants to purchase common stock at an exercise price determined by the public offering (“Conversion
Warrants”), which Series A Preferred Stock and conversion warrants would be issued concurrently with the closing of
the public offering. The Company has determined Mr. Herzog’s debt is being extinguished in order to protect his equity investment
in the Company. Mr. Herzog is considered a principal owner with 10.3% of voting interests of the Company prior a conversion. The
Company believes the equity investment in the Company is significant and indicates that Mr. Herzog entered into the exchange to
protect his equity investment. In accordance with ASC 470-50-40-2, an extinguishment transaction between related entities may be
capital transactions. If the extinguishment accounting is applied, any gain or loss that results should be reflected in equity.
As a result, we believe the extinguishment did not and will not have any impact to the Company’s future financial statements.
As of September 30, 2020 and December 31,
2019, the Company has total accrued compensation due to Mr. Yakov of $0 and $568,027, respectively, and advances to be repaid to
Mr. Yakov of $0 and $17,684, respectively.
Mr. Yakov, CEO has loaned funds to the
Company for working capital purposes. As of September 30, 2020 and December 31, 2019 the balance on these loans is $0 and $386,467,
respectively. The loans are unsecured, bear interest at 12% and are due on demand. As of September 30, 2020 and December 31, 2019
there is $0 and $22,279 of interest accrued, respectively, on these loans. Interest expense for the three months ended September
30, 2020 and 2019 was $0 and $4,375, respectively. Interest expense for the nine months ended September 30, 2020 and 2019 was $23,125
and $10,538, respectively.
On May 13, 2020, Mr. Yakov agreed
to convert, concurrently with the public offering of the Company’s securities, $1,011,016 in principal amount of indebtedness
and accrued interest, which includes deferred salary and unreimbursed expenses, most of which was outstanding for more than one
year, (plus any additional accrued interest and other fees thereon that accrues prior to the offering), into shares of convertible
Series A Preferred Stock to be designated concurrently with the offering. On July 24, 2020, the terms of such conversion were
amended such that Mr. Yakov agreed to convert an aggregate of $1,017,573 of accrued salary, indebtedness and accrued interest
into Series A Preferred Stock and Conversion Warrants, which Series A Preferred Stock and conversion warrants were issued concurrently
with the closing of the offering. In accordance with ASC 470-50-40-2, an extinguishment transaction between related entities
may be a capital transaction. As the extinguishment accounting is applied, any gain or loss that results will be reflected in equity.
As a result, the extinguishment did not have any impact to the Company’s future financial statements and further disclosures
related to ASC 855-10-50-2 is not necessary.
On July 24, 2020, the terms of the
agreement whereby Mr. Herzog agreed to convert, concurrently with the public offering of the Company’s securities, $3,522,191
in principal amount of indebtedness (plus any additional accrued interest and other fees thereon that accrues prior to the offering)
into shares of convertible Series A Preferred were amended such that Mr. Herzog agreed to convert such an aggregate of $3,582,355
of indebtedness and accrued interest into Series A Preferred Stock and Conversion Warrants, which Series A Preferred Stock
and Conversion Warrants would be issued concurrently with the closing of the public offering. On August 11, 2020, Mr. Herzog converted
$3,612,940 of indebtedness into 3,612 shares of Series A Preferred Stock (the terms of which are described below) and 802,875 Series
A Conversion Warrants with an exercise price of $9.00 and 200,719 Series B Conversion Warrants with an exercise price of $4.50.
On July 24, 2020, the terms of the
agreement whereby Mr. Yakov agreed to convert, concurrently with the public offering of the Company’s securities, $1,017,753
in principal amount of indebtedness and accrued interest, which includes deferred salary and unreimbursed expenses (plus any additional
accrued interest and other fees thereon that accrues prior to the offering), into shares of convertible Series A Preferred Stock
to be designated concurrently with the offering such conversion were amended such that Mr. Yakov agreed to convert an aggregate
of $1,017,573 of accrued salary, indebtedness and accrued interest into Series A Preferred Stock and conversion warrants, which
Series A Preferred Stock and conversion warrants would be issued concurrently with the closing of the offering. On August
11, 2020, Mr. Yakov converted $1,021,512 of indebtedness into 1,021 shares of Series A Preferred Stock (the terms of which are
described in Note 10 below) and 227,003 Series A Conversion Warrants with an exercise price of $9.00 and 56,751 Series B Conversion
Warrants with an exercise price of $4.50.
NOTE 9 – OPERATING LEASE
On June 24, 2020, eVance, Inc. (“eVance”),
a Delaware corporation and an indirect, wholly owned subsidiary of The OLB Group, Inc. (the “Company”), entered
into a Lease Agreement dated June 24, 2020 (the “Lease”) with Pergament Lodi, LLC (the “Lessor”) relating
to approximately 4,277 square feet of property located at 960 Northpoint Parkway, Alpharetta, Georgia, Suite 400. The term of the
Lease is for thirty-nine (39) months commencing September 1, 2020. The monthly base rent is $8,019 for the first twelve (12)
months increasing thereafter to $8,768. The total rent for the entire lease term is $315,044 and $8,768 is payable as a security
deposit. The first three months of rent will be abated so long as eVance is not in default of any portion of the Lease.
|
|
Balance Sheet Classification
|
|
September 30,
2020
|
|
Asset
|
|
|
|
|
|
Operating lease asset
|
|
Right of use asset
|
|
$
|
290,863
|
|
Total lease asset
|
|
|
|
$
|
290,863
|
|
|
|
|
|
|
|
|
Liability
|
|
|
|
|
|
|
Operating lease liability – current portion
|
|
Current operating lease liability
|
|
$
|
83,816
|
|
Operating lease liability – noncurrent portion
|
|
Long-term operating lease liability
|
|
|
207,330
|
|
Total lease liability
|
|
|
|
$
|
291,146
|
|
Lease
obligations at September 30, 2020 consisted of the following:
For the year ended December 31:
|
|
|
|
2020
|
|
$
|
24,058
|
|
2021
|
|
|
97,202
|
|
2022
|
|
|
100,139
|
|
2023
|
|
|
94,393
|
|
Total payments
|
|
$
|
315,792
|
|
Amount representing interest
|
|
$
|
(24,646
|
)
|
Lease obligation, net
|
|
|
291,146
|
|
Less current portion
|
|
|
(83,816
|
)
|
Lease obligation – long term
|
|
$
|
207,330
|
|
Rent
expense for the three-and-nine months ended September 30, 2020 was $26,848 and $83,300,
respectively. Rent expense for the three and nine months ended September 30, 2019
was $24,777 and $70,908, respectively.
At
September 30, 2020, the weighted average remaining lease term is 3.17 years and the
weighted average discount rate is 5%.
NOTE 10 – PREFERRED STOCK
Our certificate of incorporation authorizes
the issuance of 50,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined
from time to time by our board of directors. No shares of preferred stock are currently issued or outstanding.
Series A Preferred Stock
On August 7, 2020, we filed a Certificate
of Designations, Preferences and Rights of Series A Preferred Stock (the “Certificate of Designations”) with the Secretary
of State of Delaware. The Certificate of Designations will provide that the Company may issue up to 10,000 shares of Series A Preferred
Stock at a stated value (the “Stated Value”) of $1,000.00 per share. Holders of Series A Preferred Stock are entitled
to the following rights and preferences:
Dividends
The Series A Preferred Stockholders are
entitled to receive cash dividends at a rate per share (as a percentage of the Stated Value per share) of 12% per annum. Dividends
accrue quarterly. Dividends are to be paid to the holders from funds legally available for payment and as approved for payment
by the Board of Directors of the Company.
Conversion
The Series A Preferred Stock holders may
convert, at their option, on or after the date on which the Term Loan is repaid in full, each share of Series A Preferred Stock
(along with accrued but unpaid dividends thereon) into such number of shares of common stock as determined by dividing the Stated
Value by the conversion price. The conversion price for the Series A Preferred Stock will be equal to the offering price per Unit
in this offering and will be subject to adjustment for splits and the like. The holders of Series A Preferred Stock will only be
permitted to convert their shares of Series A Preferred Stock into shares of common stock at such time as the Term Loan has been
repaid in full and there is no further outstanding obligations regarding such indebtedness.
Voting
Each holder of a share of Series A Preferred
Stock will have the right to vote its shares of Series A Preferred Stock with the common stock on an as-converted basis, and with
respect to such votes, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders
of common stock, and shall be entitled, to notice of any stockholders’ meeting in accordance with the Company’s bylaws,
and shall be entitled to vote, together with holders of common stock, with respect to any question upon which holders of common
stock have the right to vote. Fractional votes shall not be permitted, and such shares shall be rounded up.
Liquidation Preference
Each share of Series A Preferred Stock
will have a liquidation preference equal to the Stated Value plus any accrued but unpaid dividends thereon. In the event of a liquidation,
dissolution or winding up of the Company (which includes any merger, reorganization, sale of assets in which control of the Company
is transferred or event which results in all or substantially all of the Company’s assets being transferred), the holders
of Series A Preferred Stock shall be entitled to receive out of the assets of the Company, before any payment is made to the holders
of the Company’s common stock and either in preference to or pari pasu with the holders of any other series of preferred
stock that may be issued in the future, a per share amount equal to the liquidation preference.
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 September 30, 2020, no bonuses have been earned or paid.
NOTE 12 – SUBSEQUENT EVENTS
Amendment No. 5 to Loan and Security
Agreement
On October 23, 2020,
the Company entered into Amendment No. 5 to Loan and Security Agreement (“Amendment No. 5”) amending the Loan and Security
Agreement (as amended by Amendment No. 1 to Loan and Security Agreement dated July 30, 2018, Amendment No. 3 to Loan and Security
Agreement dated February 5, 2019, Amendment No. 4 to Loan and Security Agreement dated April 24, 2020, the “Credit Agreement”),
dated as of April 9, 2018, by and among the Company’s subsidiaries Securus365, Inc., eVance Capital, Inc., and eVance
Inc., (the “Purchasers”) and GACP Finance Co., LLC, a Delaware limited liability company (“GACP”), as administrative
agent and collateral agent (“Agent”), and as the initial sole lender thereunder. The purpose of Amendment No. 5 was
to remove the financial covenant whereby the Company’s was required to have a Fixed Charge Coverage Ratio not be less than
1.20:1.00, measured in each case on a trailing twelve-month basis.
In consideration for the removal of the
financial covenant requirement, the Credit Agreement was amended to include a requirement that the Company maintain a cash balance
in its controlled operating bank account of not less than $1,000,000. Further, the repayment schedule under the note was amended
whereby the Company paid an amount equal to $450,000 upon execution of Amendment No. 5.