Exhibit List PartyCal. Super. - 6th Dist.December 7, 2020REBECTED Exhibit 2 Electronically Filed by Superior Court of CA, County of Santa Clara, on 2/2/2022 3:08 PM Reviewed By: R. Walker Case #20CV373916 Envelope: 8200424 20CV373916 Santa Clara - Civil DA xhibi Velocity Portfolio Group, inc. and Subsidiaries Consolidated Financial Statements Years Ended December 31, 2019 and 2018 yh ponos omp ny ath f i I t t m nt siss dby BDollsR,LLp,aD*l ar y tedl bltyp n hips&thous.mama rofBDD CON ENTIAL IBDQ VE L0001 cJ Velocity Portfolio Group, Inc. and Subsidiaries Consolidated Financial Statements Years Ended December 31, 2019 and 2018 CONFIDENTIAL VEL00020 el ci ort r p, . ubsidiar onsoli i ci ement ear e ber , F A L00 Velocity Portfolio Group, Inc. and Subsidiaries Contents Independent Auditor's Report 3-4 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018 7 Consolidated Statements of Changes in Stockholders'eficit for the Years Ended December 31, 2019 and 2018 Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018 9 Notes to Consolidated Financial Statements 10-30 2 CONFIDENTIAL VEL00021 IBDO Tef'32-750-0900Fax: 732-750i1222 www.bdo.tom 90 Udoodbrldse Center br., Be'iaor INoodbridge, tu 07095 Independent Auditor's Report Board of Directors Velocity Portfolio Group, Inc. and Subsidiaries Wall, New Jersey 07719 We have audited the accompanying consolidated financial statements of Velocity Portfolio Group, Inc. and its Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders'eficit, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibihty is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overaH presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDDUBA,LLp, D I I h&l bltrpan hp, th UB. emb fBDolnt rn I an. d, UK o p nil»t dbra aranle, %f p nofth t*matBoa ete k I &*panda I b hm Boaltth b nd fo«h BDO kandft«h ftl BDamemb fnn CONFIDENTIAL VEL00022 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Velocity Portfolio Group, Inc. and its Subsidiaries as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. &30 L44,~P June 30, 2020 4 CONFIDENTIAL VEL00023 Consolidated Financial Statements CONFIDENTIAL VEL00024 onsoli i ci l ement F A L00 Velocity Portfolio Group, Inc. and Subsidiaries Consolidated Balance Sheets December 31, Assets Cash and cash equivalents S Restricted cash Consumer receivables, net Prepaid expenses Property and equipment, net Deferred income tax asset, net of valuation allowance Income tax receivable Other assets Total assets S Liabilities and Stockholders'eficit Accounts payable and accrued expenses S Accrued court costs Debt Notes payable Notes payable to related parties, net of SO and S16,000 discount, respectively Convertible subordinated notes Other liabilities Total Habilities Commitments and Contingencies Stockholders'eficit; Common stock, S0.001 par value, 12,000,000 and 12,000,000 shares authorized, 9,808,221 and 9,458,221 shares issued and outstanding, respectively Treasury stock Additional paid-in capital Accumulated deficit Total stockholders'eficit Total liabilities and stockholders'eficit S See occompanying notes to con. 2019 2018 6 CONFIDENTIAL VEL00025 Velocity Portfolio Group, Inc. and Subsidiaries Consolidated Statements of Operations Years ended December 31, Revenues: Income on consumer receivables S Third party servicing revenue Total revenues Operating expenses: Professional fees, including fees paid to related parties of 531,815 and $40,073, respectively General and administrative expenses Total operating expenses Income from operations Other income (expense): Other income Interest expense, including interest to related parties of S'I,294,530 and S1,724,441, respectively Total other expense Income (loss) before income taxes Provision from income taxes Net income (loss) S Basic earnings per share: Net income (loss) S Weighted-average common shares outstanding: Basic weighted average shares outstanding gee accompanying notes to con 2019 2018 7 CONFIDENTIAL VEL00026 Velocity Portfolio Group, lnc. and Subsidiaries Consolidated Statements of Changes in Stockholders'eficit Balance, December 31, 2017 Stock based compensation expense Net loss Balance, December 31, 2018 Warrant exercise Share repurchase Issuance of restricted stock Stock based compensation exp. rye Distributions Net income Balance, December 31, 2019 Common Stock Treasuw Stock Number of Number of Shares Amount Shares Amount Additional Paid-in CONFIDENTIAL VEL00027 Velocity Portfolio Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows 2018201 9 Years ended December 31, Cash flows from operating activities: Net income (loss) Adjustment to reconcile net income (loss) to net cash pr (used in) operating activities: Depreciation expense Deferred income tax (benefit) expense Loss on sale of asset Share repurchase compensation expense Stock-based compensation Gain on redemption of equity investment Amortization of debt discount Fair value adjustment of residual interest liability (increase)/decrease in: Prepaid expenses Income tax receivable Other assets Increase/(decrease) in: Accounts payable and accrued expenses Accrued court costs Income taxes payable Other liabilities Net cash provided by (used in) operating activities Cash flows from investing activities: Acquisition of property and equipment Proceeds from redemption of equity investment Acquisition of investment Acquisition of, and capitalized to, consumer receivables Collections applied to principal on consumer receivables Net cash (used in) provided by investing activities Cash flows from financing activities: Debt proceeds Debt repayments Distribution Repayments of notes payable Proceeds of notes payable from related parties Repayment of notes payable to related parties Proceed from stock warrant exercises Payment in connection with share repurchase Net cash provided by financing activities Net increase in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash beginning of year Cash, cash equivalent and restricted cash, end of y Cash and cash equivalents, end of year Restricted cash, end of year Supplemental disclosure of cash paid: Interest Income taxes Non-cash financing activities Share repurchase S ovided by ear S See accompanying notes to conso(iuocea financia( statements. 9 CONFIDENTIAL VEL00028 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Nature of Business Velocity Portfolio Group, Inc. (the "Company" ) consists of the following entities: Velocity Investments, L.L.C. ("Velocity" ) was established to invest in consumer receivable portfolios purchased in the secondary market. Velocity purchases consumer receivable portfolios at a discount and then liquidates these portfolios through legal collection means. Velocity Investments SPV I, LLC ("Velocity SPV") was formed on February 12, 2010 to invest in consumer receivable portfolios purchased in the secondary market. On October 12, 2010, the Company acquired full interest in the Veiocity SPV. Velocity Servicing, LLC ("VS") was formed on August 18, 2010 to provide servicing of third party accounts receivable through the legal collection process. 2. Basis of Presentation and Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less, when acquired, to be cash equivalents. Restricted Cash Under the terms of the Credit Facility (as defined in Note 5), collection proceeds from the consumer receivables portfolios securing loans are maintained in a separate account until disbursed. Disbursements of these funds are generaily performed monthly for debt and interest payments. In addition, under the Credit Facility, the Company maintains a restricted reserve account from which funds are held solely to remit to lender for disbursement through distributionlrepayment arrangement under Credit Facility. Restricted cash was 5 't December 31, 2019 and 2018, respectively. Concentration of Credit Risk Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash, cash equivalents, restricted cash and consumer receivables. The Company places its cash and cash equivalents primariiy in three financial institutions. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation ("FDIC" ). Management considers the risk of loss to be minimal. As of December 31, 2019 and 2018, there were no significant concentrations of receivables, payables, or related credit risks. During the years ended December 31, 2019 and 2018, four entities accounted for 96% and three entities accounted for 85K of portfolio purchases, respectively. 10 CONFIDENTIAL VEL00029 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Revenue Recognition Consumer Receivables, net The Company purchases consumer receivable portfolios at a substantial discount from their face amount due to a deterioration of credit quality between the time of origination and the Company's acquisition of the portfolios. Upon acquisition, the Company reviews each consumer receivable portfolio to determine whether each such portfolio is to be accounted for individually or whether such portfolio wiil be assembled into static pools of consumer receivable portfolios based on common risk characteristics. The Company is unable to develop reasonable estimates of the customer receivable portfolios cash flows due to uncertainties related to the timing of the collections of the older judgments purchased as a result of the economic environment, and the lack of validation of certain account components, and therefore, records revenue using the cost recovery method. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the pool. There can be no assurance as to when or if the carrying value will be recovered. The Company estimates and capitalizes certain fees paid and to be paid to third parties related to the direct acquisition and coHection of a portfolio of accounts. These fees are added to the cost of the individual portfolio. An offsetting liability is included as "Accrued court costs" on the Consolidated Balance Sheets which is reduced by actual expenditures as paid. The Company records consumer receivables net of valuation allowances for aH acquired loans subject to ASC 310-30 "Loan and Debt Securities Acquired with Deteriorated Credit Quality" to reflect only those losses incurred after acquisition. Third Party Servicing Revenue The Company pays certain legal costs in advance on behalf of its third-party servicing revenue customers and these costs are included within other assets in the accompanying Consolidated Balance Sheets. All cash received against the third-party receivables are offset against the advance until the advance is satisfied. As warranted by facts and circumstances, the Company annualiy assesses the recoverability of the advanced legal costs. The Company did not have any impairment indicators during the years ended December 31, 2019 and 2018. Advanced court costs at December 31, 2019 and 2018 were 578,966 and 5-, respectively, and are recorded within Other Assets in the Consolidated Balance Sheets. During the years ended December 31, 2019 and 2018, VS generated 100% of its revenue from recovery of delinquent accounts receivable on behalf of its customers through a contingency based fee. The contingency fee revenue is recognized upon collection of funds by VS or its client as this is when all revenue recognition criteria have been met. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 materially differ from those estimates. Significant estimates 11 CONFIDENTIAL VEL00030 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements include the useful lives of capital assets and depreciation expense, residual interest liability and accrued court costs. Fair Value of Financial Instruments Fair value is a market-based measurement, which is defined as the price that would be received to seli an asset or transfer a liabiiity in an orderly transaction between market participants at the measurement date. Valuation techniques for fair value measurements include the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost), which are each based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. The Company utilizea'a fair value hierarchy that prioritizes inputs to fair value measurement techniques into three broad levels: ~ Level 1: Observable inputs such as quoted prices for identicai assets or liabilities in active markets. ~ Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or (iabi(ity, including quoted prices for similar asset or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and mode-derived valuations whose inputs are observable or whose significant value drivers are observable. ~ Level 3: Unobservable inputs that reflect the reporting entity's own assumptions. The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value of long-term debt approximates the carrying value, as the Company's credit facilities bear interest at market-based interest rates. The changes in the carrying amount of the residual interest liability for the years ended December 31, 2019 and 201 8 are as foilows: Balance as of December 31, 2017 Fair value adjustment Balance as of December 31, 2018 Fair value adjustment Balance as of December 31, 2019 12 CONF IDENTIAL VEL00031 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Fair Value Measurement as of December 31, 2019 Quoted Prices Significant In Active Other Markets for Observable Identical Assets Inputs 1 2 Significant Unobservable Inputs 3 Residual Interest Total Residual interest liability measured at fair value on a recurring basis is summarized below: Total Residuai Interest Liability Total Fair Value Measurement as of December 31, 2018 Quoted Prices Significant In Active Other Significant Markets for Observable Unobservabie Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) 5 - S 5 - S - S Total The foHowing is quantitative information about significant unobservable inputs (level 3) for the Company as of December 31, 2019 and 201 8: Fair value at 12/31/2019 Va(uation technique Unobservable Inputs Value Residual Interest Liability Discounted Cash Flow Discount rate 20K Fair value at 12/31/2018 Valuation technique Unobservable inputs Value Residual Interest Liability Discounted Cash Flow Discount rate 20K The remainder of this page intentionaiiy left b(ank 13 CONFIDENTIAL VEL00032 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Property and Equipment, net Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. The Company provides for depreciation, as follows: Software and computer equipment Furniture and fixtures Office equipment Leasehold improvements Estimated Useful Life 3-5 years 5 years 5-7 years Shorter of estimated useful life or lease term income Taxes In accordance with ASC-740 "Income Taxes" the Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company records a valuation allowance against any portion of the deferred income tax asset when it believes, based upon the weight of available evidence, it is more likely than not that some portion of the deferred asset will not be realized. The Company recognizes a tax benefit from an uncertain position only if it is more likely than not the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority's widely understood administrative practices and precedents. If this threshold is met, the Company measures the tax benefit as the largest amount of benefit that is greater than fifty percent likely being realized upon ultimate settlement. The Company is subject to potential examination by taxing authorities in various jurisdictions. The open tax years under potential examination vary by jurisdiction. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. As of December 31, 2019 and 2018, the Company did not record any uncertain tax liability. Debt Discount In December 2016, as noted below, the Company issued 300,000 warrants to a related party, for the purchase of Common Stock in connection with a 51,500,000 promissory note payable. The fair value of the warrants was 548,000 was recorded as Additional Paid-In Capital and a debt discount against the related party note payable. As of December 31, 2019 and 2018, the debt discount recorded against the related party note payable was 5- and 516,000, respectively. Amortization of the debt discount for the years ended December 31, 2019 and 2018 was $ 16,000. 14 CONFIDENTIAL VEL00033 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial. Statements Residual Interest Liability The Company records the fair value of the residual interest (Notes 5 and 6) as a component of debt in the accompanying Consolidated Balance Sheets. The liability is marked to market each reporting period and the change is reflected as an increase/decrease in interest expense in the Consolidated Statements of Operations. The residual interest liability was $26,099,583 and 521,602,303 as of December 31, 2019 and 2018, respectively. The residual interest liability is calculated based upon a discounted cash flows model and includes assumptions such as discount rates, time to collection, participation interest percentages, and various other assumptions. Warrants The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify convertible instruments, such as the Company's warrants. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares. Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the consolidated balance sheet ("temporary equity"). The Company will determine temporary equity classification if the redemption of the warrants or other financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity. On December 21, 2016, the Company issued 300,000 warrants to a related party, for the purchase of Common Stock in connection with a 51,500,000 promissory note payable. The warrants vested upon issuance and have a three-year term with an exercise price of $0.50 and are classified as equity. The 548,000 fair value of the warrants was recorded as Additional Paid-In Capital and a debt discount against the related party note payable, respectively. On December 31, 2019, the related party exercised the warrant and purchased 300,000 shares of common stock at the exercise price of 50.50. The Company received cash proceeds of $ 150,000 of which 5300 was recorded as Common Stock at par value 50.001, and 5149,700 was recorded as Additional Paid-In Capital. Notes Receivable Notes receivable are valued at management's estimate of the amount that will ultimately be collected which approximate fair value. The Company ceases accrual of interest when the Company can no longer assert that the likelihood of collection is probable. Accounts are written off when they are deemed uncollectible. During the year ended December 31, 2014, the Company entered into agreements with various parties for the purchases of consumer receivable portfolios. Under these agreements, the Company loans the parties funds for the purchase of portfolios. The loans were to be repaid through proceeds from portfolio collections and had various maturity dates ranging from March to June 2016. The loans bear interest at a rate of 13K per annum. Due to collection uncertainty, the Company placed a reserve in the amount of 523,585 and $30,156 to fully reserve these notes receivable at December 31, 2019 and 2018, respectively. 15 CONFIDENTIAL VEL00034 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Earnings per Share Basic earnings per share are computed based on the weighted average number of common stock shares outstanding during each period. Outstanding shares of common stock were 9,808,221 and 9,458,221 for the years ended December 31, 2019 and 2018, respectively. Dilutive shares have not been presented as the effect would be anti-dilutive. Legal The Company is party to various legal proceedings that arise in the normal course of business. In the present opinion of management, none of these proceedings, individually or in the aggregate, are likely to have a material adverse effect on the financial position or results of operations or cash flows of the Company. However, management cannot provide assurance that any adverse outcome would not be material to the Company's financial position or consolidated resuits of operations or cash flows. Investment in Galaxy Asset Management, LLC On January 15, 2017, the Company purchased 20,000 membership units or 20% of Galaxy Asset Management LLC. In acquiring this interest, the Company is also responsible for 20/ of the operating costs of Galaxy Asset Management. Additionally, Galaxy Asset Management, LLC performing services for the Company. The Company accounts for its 20X equity interest in Galaxy Asset Management under the equity method of accounting. At December 31, 2017, the carrying value of the investment was 5279,472 and is recorded within Other Assets in the Consolidated Balance Sheets. The change in value of the equity investment during the year ended December 31, 2017 was deminimus to the consolidated financial statements. On June 27, 2/18, the Company redeemed all of its'nvestment interest in Gaiaxy Asset Management for " " nf whici "epresented a gain from redemption is recorded within Other IncomMin the Consolidated Statement of Operations. Investment in CDYNE Corporation On April 20, 2018, the Company acquired 125 shares of common stock or 12.5X ownership interest in CDYNE Corporation. The Company accounts for its 12. 57'wnership interest in CDYNE Corporation under the cost method of accounting. At December 31, 2019 and 2018, the carrying value of the investment was - - and is recorded within Other Assets in the Consolidated Balance Sheets. Recently Issued Accounting Pronouncements In May 2014, the FASB issued Accounting Standard Update ("ASU") 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that 16 CONFIDENTIAL VEL00035 Velocity Portfolio Group, inc. and Subsidiaries Notes to Consolidated Financial Statements reporting period. The Company evaluated the new guidance and notes that the Company's investment in consumer receivable portfolios is outside of the scope of Topic 606 since it is accounted for in accordance with ASC 310-30 "I oans and Debt Securities Acquired with Deteriorated Credit Quality." In February 2016, the FASB issued ASU 2016-02, Leases. The new standard establishes a right-of use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases wili be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The guidance was initially effective for annual reporting periods beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses, Derivatives and Hedging, and Leases: Effective Dates. The amendment deferred the effective dates for Leases by an additional year to annual reporting periods beginning after December 15, 2020. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers and Leases. The amendment deferred the effective dates for leases by an additional year to annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the new guidance to determine the impact, if any, it will have on its financial statements and related disclosures. In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The guidance addresses the classification of cash flows related to debt repayment or extinguishment costs, settlement of zero-coupon debt instruments or debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance, distributions received from equity method investees and beneficial interest in securitization transactions. This update is effective for all annual periods beginning after December 15, 2018. Early adoption is permitted. The adoption of this standard did not have material impact on the consolidated financial statements and related disclosures. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, that includes specific guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash flows. The ASU will be applied using a retrospective transition method to each period presented. The Company adopted the amendments in this ASU on January 1, 2019. The adoption did not have a material impact on the Company's consoiidated balance sheets and results of operations. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financiai assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. This update was initially effective for annual periods beginning after December 17 CONF IOENTIAL VEL00036 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 15, 2020. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses, Derivatives and Hedging, and Leases: Effective Dates. The amendment deferred the effective dates for Credit Losses to annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows. 3. Consumer Receivables, net Consumer receivables activity is as follows: Years ended December 31, Balance, beginning of year Acquisitions and capitalized costs Cash collections Income recognized Balance, end of year 2019 2018 In any given period, the Company may be required to record valuation allowances due to poois of receivables which are not expected to be recovered. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overail profitability of purchased pools of defaulted consumer receivables would include: overall market pricing for pools of consumer receivables (which is driven by both supply and demand), new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both the cogection floor of the Company and external channels), as well as decreases in productivity related to turnover and tenure of the Company's collection staff. For the years ended, December 31, 2019 and 2018, the Company did not incur any allowance charges. The remainder of this page intentionally left blank 18 CONFIDENTIAL VEL00037 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Portfolio purchases and performance since inception is as follows: Yeor 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ Cumulative Cumulative Gross Gross Cash Purchase Cash Collections as Price "'ollections" & a SS of Cost (1) Purchase Price represents the cash paid to sellers to acquire portfolios and does not include certain capitalized acquisition costs. (2) Gross cash collections represent cash codections on portfolios of consumer receivables prior to any third porty vvi thholdinys. 4. Property and Equipment, net Property and equipment consist the following: December 31, Software and computer equipment Office equipment Furniture and fixtures Leasehoid improvements Accumulated depreciation and amortization Property and equipment, net 2019 S 139,536 $ 114,019 67,285 40,588 361,428 (321,824) S 39 604 S 2018 139,536 107,733 67,285 40,588 355,142 (310,700) 44,442 Depreciation expense for the years ended December 31, 2019 and 2018 was $11,124 and $8,551, respectiveiy. 19 CONFIDENTIAL VEL00038 Velocity Portfolio Group, inc. and Subsidiaries Notes to Consolidated Financial Statements 5. Debt Credit Facility and Debt Refinancing On April 30, 2015, the Company entered into a Credit Facility ("Credit Facility" ) with Javlin One LLC ("Javlin"). On July 31, 2015, the Company and Javiin amended the Credit Facility to provide for a total facihty of 5 " On November 30, 2016, the Company and Javlin amended the Credit Facility to provide for a totai facility of $ On August 29, 2017, Insolve Global Credit Fund III, LP ("IGCF III") acquired all Javlin's rights, title and interest in and to the Javlin Credit Facility notes above. In connection with the debt modification, ~' was paid by the lender to Javlin to exit the facility, of which related to the p~ut~or Javlin's participation interesting in the consumer portfolio ass . n October 31, 2017, the Company and IGCF III amended the Credit Facility to provide for a total facility of During January and February 2017, the Company entered three financing arrangements which contain participation interest agreements inclusive of residual interest with Matterhorn 2017-1 LLC ("Matterhorn") whereby the Company would acquire approximately ' - of consumer receivable portfolios. Approximately has been provided bymatternorn towards the purchase of these consumer portfolio which bear interest of 12K per annum for funding use in financing the portfolios purchase and matures 36 months after each borrowing date. The financing arrangements with Matterhorn are collateralized by the Company's Consumer Receivables and other assets which the Company has right, titles and interest in. In September 2018, the Company had paid down all its loan with Matterhorn. Both the Credit Facility with IGCF III and the Loans from Matterhorn bear interest of 12% per annum for funding use in financing the portfolios purchase and matures 36 months after each borrowing date. The Credit Facility and the Loans are collateralized by the Company's Consumer Receivables and other assets which the Company has right, titles and interest in. The terms of the Credit Facility and the Loans provide for the Company to repay the loan monthly based on the monthly asset proceeds relating to an asset pool as calculated and distributed by a co-owner Balbec Capital, LP ("Balbec"), an affiliate of IGCF III, and Velocity on each distribution date. The Credit Facility and the Loans contain participation arrangements whereby IGCF III and Matterhorn would receive residual interest in the right to receive future cash flows to be generated by the consumer receivables in excess of the interest and principal paid to IGCF iii and Matterhorn on the indebtedness issued in connection with the Credit Facility and the Loans. The fair value of the residual interest is recorded as a component of debt in the Consolidated Balance Sheets. The residual interest is marked to market each reporting period and the change is reflected as an increase/decrease in interest expense in the Consolidated Statements of Operations. At December 31, 2019 and 2018, the residual interest liability recorded as a component of debt in the Consolidated Balance Sheets was -nd The mark-to-market adjustment of and ~t December 31, 2019 respectively was recorded through inTerest expense Irrme consolidated Statements of Operations. Total debt outstanding, inclusive of the residual interest, to IGCF III and Matterhorn at December 31, 2019 and 2018 wasand: -espectively. Additionaily, at December 31, 2019 and 2018, the Comp c'r, " "'f interest within accrued expenses in the Consolidated Balance Sheets, respectively. 20 CONFIDENTIAL VEL00039 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Credit Facility is subject to certain financial reporting covenants. At December 31, 2019, the Company was in compliance with its financial reporting covenant requirements with respect to delivering the independent auditor's report for the Company's 2019 financial statements by June 30, 2020. 6. Notes Payable CONFIDENTIAL VEL00040 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 22 CONFI DENT IAL VEL00043 eloci ort r p, . ubsidiar ot onsoli i ci em t ' NFIDENTI L00 1 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Notes above related to financing for consumer portfolio purchases contain participation arrangements whereby the related party lender would receive residual interest in the right to receive future cash flows to be generated by the respective consumer receivables in excess of the interest, principal, and residual interest paid to IGCF III on the indebtedness issued in connection with the Credit Facility. At December 31, 2019 and 2018, the residual interest liability recorded as a component ofnotes payable to related parties in the Consolidated Balance Sheets was and '„ respectively. The mark-to-market adjustment of (, and, was recordetl through interest expense in the Consolidated Statements of ITperations at December 31, 2019 and 2018, respectively. As noted in Note 2', the Company issued warrants which had a fair value of; ~nd was recorded as a debt discount against the related party notes payable, respectively. Future note commitments at December 31, 2019 are summarized as follows: 2020 2021 2022 2023 7. Convertible Subordinated Notes On June 29, 2007 and July 27, 2007, the Company closed on its private placement offering of 10% Convertible Subordinated Notes, maturing in June 2017, subsequently extended through July 1, 2020, in the aggregate principal amount of The Notes may be converted, at the option of the holder, into shares of the Company's common stock at a price of~ per share, subject to certain adjustments. Total costs of 5224,500 related to this offering were capitalized and were amortized straight line over the life of the notes. Capitalized costs were fully amortized at December 31, 2014. 23 CONFIDENTIAL VEL00042 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements On January 17, 2014, the Company commenced a tender offer to purchase up to $1,800,000 aggregate principai amount of the outstanding 10% Convertible Subordinated Notes due 2017, subsequently extended through Juiy 1, 2022, at a price of $800 per $ 1,000 principal amount. Of the $2,350,000 aggregate principal amount of the outstanding notes, $925,000 remains outstanding as of December 31, 2019 and 2018. 8. Related Party Transactions V j& I UP+Cl LIVClx, The Company engages Ragan a Ragan, P.C., an entity owned by Messrs. Ragan ft Ragan, Secretary of the Board, to pursue legal collection of its receivable portfolios with respect to obligors and properties located in the State of New Jersey. Ragan and Ragan, P.C. routinely advances court costs associated with their servicing of consumer receivable portfolios, which are subsequently reimbursed by the Company. These costs are included in professional fees in the accompanying Consolidated Statements of Operations. Legal fees paid to Ragan a Ragan, P.C., by the Company were and for the years ended December 31, 2019 and 2018, respectively. On October 29, 2019, the Company made distributions to two board members totaling The parties agreed that at the option of the Company in writing demand for the members To return 24 CONFIDENTIAL VEL00043 Velocity Portfolio Group, inc. and Subsidiaries Notes to Consolidated Financial Statements the distribution, the member can return the distribution in form of cash or surrendered the members'ommon stocks valued at $3.35 per share. The $335,000 distribution was recorded as a reduction of additional paid-in capital at December 31, 2019. 9. Preferred Stock Offering On May 18, 2006, the Company issued 1,800,000 shares of Series A 10% Convertible Preferred Stock ("Preferred Stock" ) at $10 per share. Each share of Preferred Stock is convertible into one-fifth of one share of the Company's Common Stock. The Company has the right to redeem the stock after May 18, 2008 for cash, at the Company's option, at $ 10 per share, plus accrued and unpaid dividends to the redemption date. The shares of Series A Convertible Preferred Stock are listed on the Pink Sheets under the symbol VPGI.P. On February 26, 2009, the Company suspended the payment of 10% cumulative monthly dividends on its Series A Preferred Stock to preserve capital. No dividends have been declared subsequent to this date. On July 7, 2016, the Company retired 293,326 shares of Series A Preferred Stock. In August 2016, the Board of Directors of the Company approved a mandatory conversion of ag Series A Preferred Stock to Common Stock at an exchange rate of 1 Series A Stock share to 6 Common Stock shares. On September 20, 2016, 1,073,674 shares of Series A Preferred Stock, the balance of outstanding preferred stock, were converted into 6,442,044 shares of Common Stock. After the conversion, no preferred stock shares remain outstanding. In September 2016, the Company amended and restated its Certificate of Incorporation. The amendment provides for the authority to issue two classes of stock designated as Common Stock and Preferred Stock. The total number of shares which the Company shall have the authority to issue is 14,000,000. The total number of shares of Common Stock and Preferred Stock that the Company is authorized to issue is 12,000,000 and 2,000,000, respectively, with a par value of $0.001 per share. The amendment also states that dividends will no longer accrue or be payable to any Preferred Stockholders, even those of record prior to conversion. As such, the related liquidation preference amount of accrued undeclared dividends at December 31, 2019 and 2018 is $0. 10. Restricted Stock The 2017 Equity Incentive Plan of the Company (the "Plan" ) authorizes the issuance of up to 3,000,000 shares of common stock in connection with the issuance of restricted stock awards. In 2017 fiscal year, 2,053,000 shares of restricted stock were granted to certain Board members and employees of the Company. The shares of restricted stock vest 1/3 per year over a term of 3 years from the date of grant. In accordance with ASC 718, Compensations-Stock Compensation, the Company measures compensation cost for stock awards at fair value and recognizes it as compensation expense over the requite service period for which the awards are expected to vest. The fair value of the restricted stock awards is determined based on the number of shares granted and the quoted price of the Company's common stock. At December 31, 2019 and 2018, approximately 1,369,000 and 685,000 shares of restricted stock, respectively, have vested and approximately stock-based compensation expense was recorded in each year in the 25 CONFIDENTIAL VEL00044 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Consolidated Statements of Operations. Unrecognized compensation expense at December 31, 2019 and 2018 was approximately, and respectively. In January 2019, the Company awarded 50,000 shares of restricted stock to an employee. The Company measures compensation cost for stock a~ward at fair value and recognizes it as compensation expense. In connection with this grant,; of stock-based compensation expense was recorded in the Consolidated Statement of Operations. As part of an employment agreement with an executive officer on October 1 2019, the Company agreed to buy back 450,000 shares of restricted stock at ~er share which wa's above the fair value of 51.53 per share. The Company foHows the guidance provided by ASC 505-30, Treasury Stock, to aHocate the repurchase price to other elements of the repurchase transaction when purchasing treasury shares at a stated price significantly in excess of the current market price of the shares. 3'he air value of the repurchased shares was recorded as treasury stock and the & excess was recorded as compensation expense, within the Consolidated Statement of Operations. At December 31, 2019, 51,000,000 remains to be paid in connection with the share repurchase and is reflected as an other liability in the Consolidated Balance Sheets. 11. Income Taxes On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into legislation. A key provision within the TCJA is the reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Alternative minimum tax credits wiH be fully refundable. The Company has decreased its valuation allowances by 51,363,378 for 2019, and increased by 53,725,861 for 2018, against its deferred tax assets leaving only the portion of its alternative minimum tax credits that are now fully refundable as a result of tax reform. The provision for corporate income taxes consists of the following: Years ended December 31, Current tax expense (benefit) Federal State Total current tax expense (benefit) Deferred tax (benefit) expense Total current tax expense 5 2019 2018 26 CONFIDENTIAL VEL00045 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements The tax effect of temporary differences that make up the significant components of the deferred tax assets and liability for financial reporting purposes: December 3 1, Net operating loss carryforwards Consumer receivables Impairment of assets AMT credit Allowance for bad debt Other Capital loss carryforward Stock based compensation expenses Total deferred tax asset Valuation allowance Net deferred tax asset 2019 2018 i2 I g3 1 A reconciliation of the provision (benefit) for income taxes attributable to income (loss) computed at the Federal statutory rate to the reported provision for income taxes is as follows: Years ended December 31, Tax provision at Federal statutory rate State income taxes net of Federal benefit Permanent differences and other Deferred rate change Deferred true-up Valuation aHowance Total 2019 21 00% 1. 61% 2. 93% 0.00% (0.43%) (23.14%) 1. 97% 2018 21.00% 0. 04% (0. 35%) (0. 70%) (1.01%) (19.05%) (0. 07%) At December 31, 2019 and 2018, the Company has a full deferred tax asset valuation allowance for federal and state purposes in the amount of ~nd respectively. At December 31, 2019 and 2018, the Company had unused net a~crating loss carryfgrwards of and for Federal purposes and 'nd $ for state purposes, respecti . I net operating loss carryovers roryears prior 201YyrTII start to expire in 2032, losses generated in 2018 year do not have expiration date but has limitations on use. The ability to utilize losses is dependent upon the Company's ability to generate future taxable income as well as the annual limit per the Internal Revenue Code Section 382 versus the expiration dates of the losses. Because some of the losses are due to expire prior to fully utilizing the carryforwards, a valuation reserve has been established for estimated amounts not expected to be utilized prior to expiration. The Company files Federal and State income tax returns in jurisdictions with varying statutes of limitations. As of December 31, 2019, the 2016 through 2019 tax years remain subject to examination by Federal taxing authorities and various 2015 through 2019 tax years generally remain subject to examination by State taxing authorities. 27 CONFIDENTIAL VEL00046 Velocity Portfolio Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table provides a reconciliation of revenue and segment operating income by reportable segment to consolidated results and was derived from the segment's internal financial information as used for management purposes: Year ended December 31, 2019 Portfolio purchasing of consumer receivable 5 Servicing of third-party accounts receivable Operating Revenues Operating Other Income/(Loss) Expense, net Other"* Total Company Year ended December 31, 2018 Portfolio purchasing of consumer receivable 5 Servicing of third-party accounts receivable Operating Revenues Operating Other Income/(Loss) Expense, net Other * Total Company 5 *"Parent company expenses, primarily interest, corporate salaries, and other related overneaa expenses. Other does not represent a business segment. 14. Subsequent Events New Credit Facility On January 16, 2020, the Company entered a new 'edit Facility (" New Credit Facility" ) with Insolve Global credit Fund Iv, LP ("IGcF lv"), replacing the previous credit facility defined in Note 5. All terms in the agreement are the same as in the prior credit facility with Insolve Global Credit Fund ill, LP. The New Credit Facility bears interest of 12% per annum for funding use in financing the portfolios purchase and matures 36 months after each borrowing date. The New Credit Facility is collateralized by the Company's Consumer Receivables and other assets which the Company has right, titles and interest in. The terms of the New Credit Facility provide for the Company to repay the loan monthly based on the monthly asset proceeds relating to an asset pool as calculated and distributed by a co-owner Balbec Capital, LP ("6a(bec"), an affiliate of IGCF IV, and Velocity on each distribution date. The New Credit Facility contain participation arrangements whereby IGCF IV would receive residual interest in the right to receive future cash flows to be generated by the consumer receivables in excess of the interest and principal paid to IGCF IV on the indebtedness issued in connection with the New Credit Facility. COV/D-19 On January 30, 2020, the World Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the "COVID-19 outbreak") and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the fug magnitude that the pandemic will have on the Company's financial 29 CONFIDENTIAL VEL00047 Velocity Portfolio Group, inc. and Subsidiaries Notes to Consolidated Financial Statements condition, future results of operations, and liquidity. The Company is dependent on its workforce and its legal network and agencies to collect consumer debts. Developments such as social distancing and shelter-in-place directives may impact the Company's ability to have its workforce effectively. While expected to be temporary, prolonged workforce disruptions may negatively impact collection in fiscal year 2020. Management is actively monitoring the global situation on its financial condition, operations, industry, and workforce. Given the daily evolution of the COVID-19 outbreak, and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal 2020. Coronavirus Aid, Relief, and Economic Security ("CARES") Act. On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitabie contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the SBA Paycheck Protection Program ("PPP") loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company applied and was approved for the SBA loan in April 2020, receiving net proceeds of $468,805 in April 2020. Pursuant to the CARES Act, certain funds received may be forgiven to the extent the Company complies with such requirements. We continue to examine the impact that the CARES Act may have on our business. Currently, we are unable to determine the impact, if any, that the CARES Act will have on our financial condition, results of operation or liquidity. As noted above, the Company has applied for, and has received, funds under the Paycheck Protection Program after the period end in the amount of The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. Restricted Stock Repurchase On June 16, 2020, the Company agreed to buy back 50,000 shares of restricted stock at~ per share from an executive of the Company. The Company has evaluated subsequent events through June 30, 2020, which is the date the financial statements were available to be issued. 30 CONFIDENTIAL VEL00048
