Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operation
The following discussion and analysis of our
consolidated financial condition and results of operations for years ended December 31, 2023 and 2023 should be read in conjunction
with the consolidated financial statements and notes related thereto included elsewhere in this report.
Overview
We are a FinTech company that focuses on a suite
of products in the merchant services marketplace that seeks to provide integrated business solutions to merchants throughout the United States.
We seek to accomplish this by providing merchants with a wide range of products and services through our various online platforms, including
financial and transaction processing services. We also have products that provide support for crowdfunding and other capital raising initiatives.
We supplement our online platforms with certain hardware solutions that are integrated with our online platforms. Our business functions
primarily through three wholly-owned subsidiaries, eVance, OmniSoft, and CrowdPay, though substantially all of our revenue has been
generated from our eVance business (we began generating revenue from our OmniSoft and CrowdPay businesses in the second half of 2019).
We expect to build out our OmniSoft software business and to rely more on individualized merchant services offerings for revenue so that
we are not dependent on our revenue from our eVance business but there is no guarantee that we will be able to do so.
With respect to our eVance business, our merchants
are currently processing over $100,000,000 in gross transactions monthly and average approximately 1,400,000 transactions a month. These
transactions come from a variety of sources including direct accounts and ISO channels. The accounts consist of businesses across the
United States with no concentration of industries or merchants.
We have integrated all the applications for OmniSoft
and the ShopFast Omnicommerce solution with the eVance mobile payment gateway, SecurePay.comTM. SecurePay.comTM, is currently used by
approximately 3,000 merchants processing over 32,000 transactions and approximately $9,000,000 of monthly gross transactions (though our
revenue from these transactions is limited). In July 2019, we launched a new merchant and ISO boarding system that will be able to onboard
merchants instantly. This provides the merchant with an automated approval and ISOs will have the ability to see all their merchants and
their residuals as they load to the system.
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On May 22, 2020, the Company purchased certain
assets from POSaBIT Inc. (“POSaBIT”), including its contracts and arrangements with the Doublebeam merchant payment processing
platform (the “POSaBIT Asset Acquisition”). The assets included, but were not limited to, software source codes, customer
lists, customer contracts, hardware and website domains.
On May 14, 2021, the Company formed OLBit, Inc.,
a wholly owned subsidiary (“OLBit”). The purpose of OLBit is to hold the Company’s assets and operate its business related
to its emerging money transmission and transactional business.
On July 23, 2021, we formed DMINT, Inc., a wholly
owned subsidiary (“DMINT”) to operate in the Bitcoin mining industry, specifically the mining of Bitcoin. DMINT initiated
the first phase of the Bitcoin mining operation by placing data centers and ASIC-based Antminer S19J Pro mining computers specifically
configured to mine Bitcoin in Pennsylvania. As of December 31, 2022, DMINT has purchased 1,000 computers. In February 2023, it re-deployed
all of the computers to its Selmer, Tennessee location. At December 31, 2023, DMINT had mined 31.06 Bitcoin.
On January 3, 2022, the Company entered into a
share exchange agreement with all of the shareholders of Crowd Ignition, Inc. (“Crowd Ignition”) whereby the Company would
purchase 100% of the equity of Crowd Ignition in exchange for 1,318,408 shares of the common stock, par value $0.0001 of the Company (the
“CI Issued Shares”). The value of the CI Issued Shares was, for purposes of the Agreement, based on the closing trading price
of the Company on October 1, 2021 (the date on which a third-party fairness opinion was issued), resulting in an aggregate purchase price
for Crowd Ignition of $5.3 million.
Crowd Ignition is a web-based crowdfunding software
system. Ronny Yakov, Chairman and CEO of the Company and John Herzog, a significant shareholder of the Company, own 100% of the equity
of Crowd Ignition. The software provides broker-dealer, merchant banks and law firms a platform to market crowdfunding offerings, collect
payments and issue securities. The software has been developed in response to, and to comply with, recent changes in investment regulations
including Regulation D 506(b) and 506(v), Regulation A+ and Title III of the Jobs Act (Regulation CF), including raising the crowdfunding
limit from $1.07 million to $5.0 million. Crowd Ignition is one of only about 50 companies registered with the SEC to provide the services
permitted under Regulation CF.
Results of Operations
Year Ended December 31, 2023 Compared to
the Year Ended December 31, 2022
For the year ended December 31, 2023, we had total
revenue of $30,571,637 compared to $30,368,979 of revenue for the year ended December 31, 2022, an increase of $202,658 or 0.1%. We earned
$27,096,245 in transaction and processing fees, $89,532 in merchant equipment sales, $312,565 in revenue from monthly recurring subscriptions,
$538,718 of revenue from the Bitcoin Mining segment, and $2,534,577 of digital product revenue; compared to $28,950,785 in transaction
and processing fees, $64,900 in merchant equipment sales, $627,1115 in revenue from monthly recurring subscriptions and $726,179 of revenue
from the Bitcoin Mining Segment. We had a decrease of revenue for our transaction and processing fees of $1,854,540, a decrease of $187,461
of bitcoin mining revenue and a decrease of $314,550 from the monthly recurring subscriptions. These decreases were offset with an increase
in our digital product revenue of $2,534,577. Transaction and processing revenue decreased due to a decrease in the in merchants and volume
processed. Bitcoin revenue decreased due to the price of bitcoin dropping in 2023 compared to 2022. Monthly recurring subscription revenue
decreased due to less subscriptions.
For the year ended December 31, 2023, we had processing
and servicing costs of $21,181,499 compared to $23,152,397 of processing and servicing costs for the year ended December 31, 2022, a decrease
of $1,970,898 or 8.5%. Processing and servicing costs decreased in conjunction with the decreased revenue.
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Amortization and depreciation expense for the
year ended December 31, 2023 was $4,172,117 compared to $3,664,488 for the year ended December 31, 2022, an increase of $507,629 or 13.9%.
We record amortization expense on our merchant portfolio, trademarks and natural gas purchase rights. Our amortization expense for the
year ended December 31, 2023, was higher due to a onetime adjustment.
Depreciation expense for our Bitcoin Mining Segment
was $2,560,015 for the year ended December 31, 2023 compared to $3,193,683 for the year ended December 31, 2022, a decrease of $633,668
or 19.8%. The majority of the decrease was due to reclassing items to construction in process and not deprecating miners until the
construction on the Selmer, TN building is completed.
Salary and wage expense for the year ended December
31, 2023 was $3,817,508 compared to $3,073,598 for the year ended December 31, 2022, an increase of $743,910 or 24.2%. The increase is
due to an increase in staff from the Cuentas SDI acquisition and also accrued bonus expense.
Professional fees for the year ended December
31, 2023 were $2,336,785 compared to $964,541 for the year ended December 31, 2022, an increase of $1,372,244 or 142%. Professional fees
consist mainly of audit and legal fees. The increase in the current period is due to an increase in legal fees of approximately $1,333,600
and auditor expenses of approximately $45,800. Our increase in legal fees can be attributed to the ongoing litigation relating to the
FFS Acquired Merchant Portfolio. Our increase in audit fees is primarily due to the stand-alone audit of our DMINT subsidiary in connection
with the planned spin-off of the entity.
General and Administrative (“G&A”)
expense for the year ended December 31, 2023, was $7,078,947 compared to $4,490,731 for the year ended December 31, 2022, an increase
of $2,588,216 or 57.6%. Some of our larger G&A expenses include insurance policy expense of $404,400 from $319,500 in the prior year.
Insurance expense has increased as a result of the cost to insure the Bitcoin mining machines and the increase in the size of the Company’s
business. We had credit card processing and bank fees of $1,137,000 from $39,000 in the prior year, contracted services of $913,000 from
$656,000 in the prior year, utilities of $679,500 from $565,000 in the prior year and computer and internet expense of $933,700 from $730,000
in the prior year. We also had an increase in stock-based compensation of $104,000 for stock option expense.
For the year ended December 31, 2023, we had
total impairment expense of $12,902,787. $12,642,857 was for the write down of the Acquired Merchant Portfolio. There was also an
impairment of $259,931 related to the Bitcoin miners owned by DMINT.
For the year ended December 31, 2023, we recognized
a realized gain from the sale of bitcoin of $288,584 and an unrealized gain on investment of $23,662. We also had other income of $40,320
and interest expense of $148,483. In the prior year we had other income of $383,190.
Our net loss for year ended December 31, 2023,
was $23,273,939 compared to $7,787,269 for year ended December 31, 2022. We had an increase in our net loss of $15,486,670 for the reasons
discussed above.
Liquidity and Capital Resources
Changes in Cash Flows
For the year ended December 31, 2023, we received
$2,046,922 of cash in operating activities, which included our net loss offset by $6,732,132 for amortization and depreciation expense,
$727,758 for stock-based compensation, impairment expense of $12,902,788, a realized gain of $288,584 from the sale of bitcoin
of $288,584 and an unrealized gain on investment of $23,662 and net changes in operating assets and liabilities of $5,274,238.
For the year ended December 31, 2022, we used
$1,921,318 of cash in operating activities, which included our net loss offset by $6,858,171 for amortization and depreciation expense,
$624,683 for stock-based compensation, stock to be issued for services of $164,999 and net changes in operating assets and liabilities
of ($1,781,965).
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For the year ended December 31, 2023, we used
$2,080,113 of cash used for investing activities. We used $1,225,148 for property and equipment, $4,965 for purchase of intangible assets
and $850,000 the purchase of an 80.01% interest in Cuentas SDI, LLC.
For the year ended December 31, 2022, we used
$1,562,361 of cash used for investing activities to acquire property and equipment.
For the year ended December 31, 2023, we used
net cash of $221,829 in financing activities as a result of a cash overdraft obtained in an acquisition of $8,050 and payments on a note
payable of $226,457 along with $12,678 in advances from related parties.
For the year ended December 31, 2022, we received
net cash of $447,429 from financing activities. We received a loan payable of $875,000, of which we repaid $317,571 and used $110,000
in cash for the acquisition of treasury stock
Liquidity and Capital Resources
At December 31, 2023, the Company had cash of
$179,006 and negative working capital of $5,413,927.
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.
On March 2, 2021, the Company, utilizing a portion
of funds received from the exercise of outstanding warrants, paid approximately $7.7 million to the pay off the entire outstanding amount
of the Term Loan. In connection with the extinguishment of the obligations under the Term Loan, 40,000 warrants to purchase Common Stock
were cancelled.
In addition, the Company has received a Paycheck
Protection Program loan under the CARES Act for approximately $236,000 (the “PPP Loan”). On October 11, 2021, the Company
obtained forgiveness of all amounts due under the PPP Loan.
On November 2, 2021, the Company entered into
a series of securities purchase agreements with certain institutional accredited investors pursuant to which the Company issued and sold,
in a private placement (i) 1,969,091 shares (the “Shares”) of the Company’s Common Stock (ii) pre-funded warrants exercisable
for a total of 2,576,364 shares of Common Stock (the “Prefunded Warrant Shares”) with an exercise price of $0.0001 per Prefunded
Warrant Share, and (iii) warrants exercisable for a total of 4,545,455 shares of Common Stock (the “Common Warrant Shares”
and together with the Prefunded Warrant Shares, the “Warrant Shares”) with an exercise price of $6.50 per Common Warrant Share.
The offering closed on November 5, 2021 and the Company received net proceeds of approximately $22.9 million, after deducting placement
agent fees and other offering expenses. The Company intends to use the net proceeds from the offering to invest in or acquire companies
or technologies that are synergistic with or complimentary to its business, to expand and market its current products and for working
capital and general corporate purposes.
The Company has reviewed its cash flow activity
during 2023 and projected cash flow forecast for 2024 and performed 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 Annual Report. As
a result of (a) the improved transaction volume trends the Company experienced during 2022 and 2023, (b) the increase in the number of
merchants after the acquisitions of several portfolios during 2021 and 2023, and (c) the funds received from the capital raises and PPP
Loan, as discussed above, the Company believes it has sufficient liquidity in order to sustain operations for at least the twelve months
following the filing of this Annual Report.
Significant Accounting Policies
Refer to Note 2 of our financial statements
contained elsewhere in this Form 10-K for a summary of our significant accounting policies and recently adopting and issued
accounting standards.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
We are a smaller reporting company as defined
by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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