Ryvyl (RVYL) - 2022 Q4 - Annual Report

Explanatory Note The company is restating 2021-2022 financial statements due to accounting errors and internal control weaknesses, engaging experts for remediation - The company concluded that its financial statements from January 2021 through September 2022 must be restated and are no longer reliable[10][11][13] - Material weaknesses in internal control over financial reporting were identified, particularly concerning complex business transactions[14] - Third-party technical accounting experts were engaged in August 2022 to support proper accounting for complex transactions[15] PART I Business RYVYL Inc. is a fintech company specializing in blockchain-based payment solutions, generating revenue from processing fees and expanding through acquisitions - RYVYL develops and markets blockchain-based payment solutions focused on monetizing disruptive applications within an end-to-end financial product suite[23] - Primary revenue drivers include payment processing services, licensing fees, and equipment sales, with processing fees being the main source[31][37] - Key products include the QuickCard Payment System, the Coyni Platform (a stablecoin), and POS Solutions, all powered by Gen3 technology[37] - Recent strategic acquisitions include Northeast Merchant Systems (May 2021), Charge Savvy LLC (July 2021), a merchant portfolio from Sky Financial (March 2022), and Transact Europe (April 2022)[26][27][28][29] - A secure token, 'coyni', a USD-pegged smart contract-based asset, was launched in Q3 2022 for transactional and custodial purposes[40][41] - RYVYL serves approximately 2,000 business customers across North America, Europe, the UK, and Asia, with no single customer exceeding 5% of processing volume or revenue[44] Risk Factors The company faces multiple risks including executive dependence, shareholder control, financial restatement impacts, funding needs, acquisition integration, intense competition, cybersecurity, and regulatory uncertainties - The company relies on a small number of key executives, and their loss could adversely affect operations; principal shareholders control approximately 38% of outstanding stock[71][72] - Restatement of historical financial statements consumed significant resources, and material weaknesses in internal controls pose a risk of future misstatements[74][76] - Substantial competition exists from larger, better-resourced payment facilitators like PayPal, Stripe, and Square[90][43] - Increasing dependence on information technology exposes the business to cyberattacks, security breaches, and evolving privacy regulations, potentially leading to significant liabilities and costs[84][85][86] - Future growth relies on acquisitions, which carry integration risks, and new product development, facing market demand and cost uncertainties[78][83] Unresolved Staff Comments There are no unresolved staff comments - Not applicable[98] Properties The company operates from leased offices in San Diego, CA, and acquired a 64,000 square foot industrial building valued at $1.36 million through acquisition - The company's executive offices are leased and located in San Diego, CA[99] - An approximately 64,000 square foot industrial building was acquired as part of the ChargeSavvy LLC transaction in July 2021[99] Legal Proceedings RYVYL is involved in various legal proceedings, including settled disputes, ongoing arbitration, litigation with a former COO, and a class-action lawsuit alleging false financial statements - The company has settled litigation with Corporate Performance Consulting, LLC and Pure Health, et al[100] - Ongoing litigation includes arbitration with The Good People Farms, LLC, and mutual complaints between the company and its former COO regarding trade secrets and wrongful termination[100] - A purported class action lawsuit (Cullen V. RYVYL Inc.) was filed on February 1, 2023, alleging violations of the Securities Exchange Act due to false and misleading financial statements[103] Mine Safety Disclosures This item is not applicable to the company - Not applicable[102] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'RVYL', with 49.7 million shares outstanding as of December 31, 2022, no cash dividends, and an active $15 million share repurchase program - The company's common stock is listed on the Nasdaq Capital Market under ticker symbol RVYL, effective October 24, 2022[105] - As of December 31, 2022, approximately 49.7 million shares of common stock were outstanding, held by about 296 record holders[106] - No cash dividends have been declared, and none are anticipated in the foreseeable future[107] Share Repurchase Program Status (as of Dec 31, 2022) | Metric | Value ($) | | :--- | :--- | | Total Authorization | $15,000,000 | | Total Shares Repurchased | 3,098,586 | | Aggregate Cost of Repurchases | $14,346,785 | | Remaining Value for Purchase | $653,215 | [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance and condition, including restatement impacts, highlighting revenue growth, increased net loss, and liquidity challenges dependent on capital raises and a 2024 convertible note Quantitative and Qualitative Disclosures about Market Risk This item is not applicable to the company - Not applicable[154] Financial Statements and Supplementary Data This section indicates the company's consolidated financial statements are included in the report, beginning on page F-1 - The consolidated financial statements required by this item begin on page F-1 of this Annual Report on Form 10-K[155] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reported no disagreements with its accountants on accounting and financial disclosures - None[156] Controls and Procedures Management concluded that as of December 31, 2022, disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, with remediation efforts including third-party experts and enhanced reviews - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were not effective[157] - One or more material weaknesses exist in internal control, related to accounting for certain complex business transactions[158] - Remediation efforts include engaging third-party technical accounting experts and implementing enhanced reconciliation reviews and reporting of payment processing activities[158][159] Other Information On April 12, 2023, three directors resigned due to a disagreement over a PrivCo related party transaction, resulting in non-compliance with Nasdaq listing rules for board and audit committee independence - Effective April 12, 2023, three directors resigned from the Board[161] - The resignations stemmed from a disagreement with the Company regarding the PrivCo related party transaction[163] - Following the resignations, the Company is not in compliance with Nasdaq Listing Rules for board and audit committee independence[161] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[164] PART III Directors, Executive Officers and Corporate Governance This section details the company's leadership, including CEO Fredi Nisan and Chairman Ben Errez, noting April 2023 director resignations that led to Nasdaq non-compliance regarding board independence and audit committee composition - Key executive officers include Fredi Nisan (CEO) and Ben Errez (Chairman of the Board and EVP)[167] - Three non-employee directors resigned on April 12, 2023, causing temporary non-compliance with Nasdaq's board independence and audit committee composition rules[161][167] - The Board determined that directors Genevieve Baer and Ezra Laniado are independent under Nasdaq rules[178] - Multiple directors and officers had late Section 16(a) filings during the 2022 fiscal year[189][190] Executive Compensation This section details Named Executive Officer (NEO) compensation for 2022 and 2021, including salary, bonus, and equity awards, with Ben Errez receiving $366,698 and Fredi Nisan $361,017 in 2022, and outlines non-employee director compensation 2022 Summary Compensation Table for Named Executive Officers | Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock/Option Awards ($) | All Other Comp ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Ben Errez, Chairman/EVP | 2022 | 201,539 | 48,000 | 66,616 | 80,496 | 366,698 | | Fredi Nisan, CEO/Director | 2022 | 201,539 | 48,000 | 66,616 | 74,816 | 361,017 | | Jacqueline Dollar, CMO | 2022 | 251,923 | 2,437 | 48,500 | 24,092 | 326,951 | - The company has not entered into formal employment agreements with its executive officers; all employment is "at will"[195] - Non-employee directors receive monthly cash compensation of $2,500 and monthly equity compensation of $2,500 in common stock[199] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of April 11, 2023, significant company control is concentrated with top executives; PrivCo, owned by Ben Errez and Fredi Nisan, beneficially owns 36.01%, with all officers and directors collectively owning 37.21% Security Ownership of Major Holders (as of April 11, 2023) | Name of Owner | Shares Owned Beneficially | Percent of Class | | :--- | :--- | :--- | | GreenBox POS LLC (1) | 18,489,208 | 36.01% | | Ben Errez (2) | 18,730,233 | 36.41% | | Fredi Nisan (2) | 18,707,018 | 36.37% | | All Officers and Directors (6 Persons) | 19,180,494 | 37.21% | - GreenBox POS LLC (PrivCo) is managed by Ben Errez and Fredi Nisan, who each own 50% and share voting power over its holdings[203][204] Certain Relationships and Related Transactions, and Director Independence The company engaged in significant related-party transactions, including 2 million share repurchases from PrivCo (controlled by CEO and Chairman), dealings with entities controlled by former SVP Kenneth Haller (including a problematic Sky Financial asset purchase), and substantial legal fees to a former director's law firm - The Company repurchased a total of 2 million shares of its common stock from PrivCo, an entity controlled by CEO Fredi Nisan and Chairman Ben Errez, in two separate transactions[209] - The company acquired a merchant portfolio from Sky Financial for $16 million cash and 500,000 shares, later writing off the purchase price due to non-delivery of assets[215] - The company acquired Charge Savvy, LLC, in which Kenneth Haller's company Sky held a 68.4% interest at the time of the transaction[216] - Former director N. Adele Hogan was a partner at Lucosky Bookman LLP, a law firm to which the company paid $817,432 in legal fees between January 2022 and April 2023[218] - The CEO's two brothers, Dan and Liron Nusonivich, are employed by the company with annual salaries of approximately $200,000 and $110,000, respectively[210][408] Principal Accounting Fees and Services In April 2022, the company dismissed BF Borgers CPA, PC and appointed Simon & Edward, LLP as its new auditor, with total fees of $475,400 in 2022 and $372,600 in 2021, all pre-approved Auditor Fees | Fee Type | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Audit Fees | $445,400 | $372,600 | | All Other Fees | $30,000 | - | | Total | $475,400 | $372,600 | - On April 19, 2022, BF Borgers CPA, PC was dismissed, and Simon & Edward, LLP was appointed as the new independent registered public accounting firm[219] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the Form 10-K, including corporate governance documents, debt instruments like the 8% Senior Convertible Note, material contracts, and officer certifications, with financial statements on page F-1 - The financial statements and the Report of Independent Registered Public Accounting Firm are included starting on page F-1[223] - Exhibits filed include corporate charters, debt indentures, material contracts (e.g., Sky Financial asset purchase agreement), and officer certifications (SOX 302 and 906)[223][224] Form 10-K Summary No summary is provided in this section - None[225] Financial Statements The audited consolidated financial statements for 2022 and 2021 are presented, with the auditor's report highlighting goodwill and convertible note accounting as critical audit matters, reflecting a significant increase in net loss and a shift to a stockholders' deficit Report of Independent Registered Public Accounting Firm The auditor, Simon & Edward, LLP, issued a fair opinion on the financial statements, identifying Goodwill impairment testing and Senior Convertible Note modification accounting as critical audit matters due to significant estimates and complex judgments - The auditor, Simon & Edward, LLP, expressed an opinion that the financial statements are fairly presented in conformity with GAAP[233] - A Critical Audit Matter was identified regarding Goodwill impairment, as its valuation relies on significant management estimates and assumptions about future revenue and operating margins[238][239] - A second Critical Audit Matter was the accounting for the modification of the Senior Convertible Note, involving complex judgments regarding its effect on future cash flows and variable conversion prices[241][242] Consolidated Financial Statements The consolidated financial statements detail the company's financial position and performance, showing $97.7 million in total assets and a $1.9 million stockholders' deficit as of December 31, 2022, with a $49.2 million net loss on $32.9 million revenue, and a $48.7 million net cash decrease Consolidated Balance Sheets As of December 31, 2022, total assets decreased to $97.7 million from $114.0 million in 2021, while total liabilities increased to $99.6 million from $84.6 million, resulting in a shift from $29.5 million stockholders' equity to a $(1.9) million deficit Consolidated Balance Sheet Highlights (as of Dec 31) | | 2022 ($ millions) | 2021 (Restated) ($ millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $14.0M | $89.0M | | Total Assets | $97.7M | $114.0M | | Total Liabilities | $99.6M | $84.6M | | Total Stockholders' Equity (Deficit) | $(1.9)M | $29.5M | Consolidated Statements of Operations For the year ended December 31, 2022, the company reported $32.9 million in net revenue but incurred a $49.2 million net loss, or $(1.08) per share, compared to a $35.3 million net loss on $26.3 million revenue in 2021, primarily due to increased expenses Consolidated Statement of Operations Highlights (Year Ended Dec 31) | | 2022 ($) | 2021 (Restated) ($) | | :--- | :--- | :--- | | Net Revenue | $32,909,112 | $26,304,502 | | Gross Profit | $16,122,519 | $16,234,841 | | Loss from Operations | $(37,838,224) | $(29,206,094) | | Net Loss | $(49,235,698) | $(35,274,905) | | Net Loss Per Share (Basic & Diluted) | $(1.08) | $(0.87) | Consolidated Statements of Cash Flows In 2022, the company used $9.3 million in operating cash, $47.6 million in investing cash (due to acquisitions), and $10.0 million in financing cash, resulting in a net cash decrease from $89.6 million to $40.8 million Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31) | | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Net cash used in operating activities | $(9,343,959) | $(27,165,885) | | Net cash used in investing activities | $(47,648,671) | $(2,658,858) | | Net cash (used in) provided by financing activities | $(10,048,781) | $116,060,635 | | Net (decrease) increase in cash | $(48,725,973) | $87,726,960 | Notes to Consolidated Financial Statements The notes provide critical context, detailing restatements (Note 3), acquisitions including a $18.1 million Sky Financial write-off (Note 4), the $100 million senior convertible note (Note 9), significant related-party transactions (Note 13), and ongoing litigation (Note 14) - Restatement (Note 3): Material misstatements were corrected for periods from Q1 2021 to Q3 2022, impacting commission revenue, stock repurchases, gateway fees, merchant liabilities, and convertible debt accounting[304][307][308][313] - Acquisitions (Note 4): The company acquired Northeast, Charge Savvy, and Transact Europe, and acquired a merchant portfolio from Sky Financial for $18.1 million, which was subsequently written off due to non-delivery of assets[324][328][331][335] - Debt (Note 9): The company holds a senior convertible note with an original principal of $100 million, issued in 2021 and maturing in 2024, featuring complex conversion terms and an 8% interest rate that increases to 15% upon default[344][349][355] - Related Party Transactions (Note 13): The company repurchased 2 million shares from PrivCo, an entity controlled by its CEO and Chairman, and engaged in transactions with companies controlled by former SVP Kenneth Haller[402][403][407] - Commitments and Contingencies (Note 14): The company is a defendant in a purported class action lawsuit filed in February 2023, alleging false and misleading statements regarding financial performance, with other ongoing litigation also disclosed[409][413]