AppTech Payments Corp 10-Q for FY2022 Q1
AppTech Payments Corp. (APCX)
About this 10-Q
AppTech Payments Corp filed this 10-Q on May 10, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $104K
- up 3.0% from $101K a year earlier
- Net loss
- $5.46M
- compared with a net loss of $66.29M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
Or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to ________________________
Commission
file number:
(Exact name of registrant as specified in its charter)
| 7389 | ||
| (State
or other jurisdiction of incorporation or organization) |
(Primary
Standard Industrial Classification Code Number) |
(I.R.S.
Employer Identification Number) |
(Address of Principal Executive Offices & Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Capital Market | ||
| Capital Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “ accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
As of May 10, 2022, the registrant had shares of common stock (par value 0.001) issued and outstanding.
AppTech Payments Corp.
Form 10-Q
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Various statements in this Quarterly on Form 10-Q of AppTech Payments Corp. (we, our, AppTech or the Company) are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. These statements are subject to risks and uncertainties and are based on information currently available to our management. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “contemplates,” “predict,” “project,” “target,” “likely,” “potential,” “continue,” “ongoing,” “will,” “would,” “should,” “could,” or the negative of these terms and similar expressions or words, identify forward-looking statements. The events and circumstances reflected in our forward-looking statements may not occur and actual results could differ materially from those projected in our forward-looking statements. Meaningful factors that could cause actual results to differ include:
| ● | uncertainty associated with anticipated launch of our text payment platform and other potential advanced payment solutions we intend to launch in the future; |
| ● | substantial investment and costs associated with new potential revenue streams and their corresponding contractual obligations; |
| ● | dependence on third-party channel and referral partners, who comprise a significant portion of our sales force, for gaining new clients; |
| ● | a slowdown or reduction in our sales in due to a reduction in end-user demand, unanticipated competition, regulatory issues, or other unexpected circumstances |
| ● | uncertainty regarding our ability to achieve profitability and positive cash flow through the commercialization of the products we offer or intend to offer in the future; |
| ● | dependence on third-party payment processors to facilitate our merchant services capabilities; |
| ● | delay in or failure to obtain regulatory approval of our text payment system or any future products in additional countries; |
| ● | current and future laws and regulations; |
| ● | the adverse effects of COVID-19 on processing volumes resulting from (a) limitations on in-person access to our merchants’ businesses or (b) the unwillingness of customers to visit our merchants’ businesses; |
All written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We caution investors not to rely too heavily on the forward-looking statements we make or that are made on our behalf. We undertake no obligation and specifically decline any obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Please see, however, any further disclosures we make on related subjects in any annual, quarterly or current reports that we may file with the Securities and Exchange Commission (SEC).
We encourage you to read the discussion and analysis of our financial condition and our financial statements contained in this Quarterly Report on Form 10-Q. There can be no assurance that we will in fact achieve the actual results or developments we anticipate or, even if we do substantially realize them, that they will have the expected consequences to, or effects on, us. Therefore, we can give no assurances that we will achieve the outcomes stated in those forward-looking statements and estimates.
Unless the context otherwise requires, throughout this Quarterly Report on Form 10-Q, the words “AppTech” “we,” “us,” the “registrant” or the “Company” refer to AppTech Payments Corp.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
APPTECH PAYMENTS CORP.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
(The financial statements have been condensed for presentation purposes)
4
APPTECH PAYMENTS CORP.
BALANCE SHEETS
MARCH 31, 2022 AND DECEMBER 31, 2021
(UNAUDITED)
(in thousands, except per share data)
| March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Prepaid License Fees - Current | ||||||||
| Total current assets | ||||||||
| Prepaid offering cost | ||||||||
| Prepaid license fees - long term | ||||||||
| Note receivable | ||||||||
| Right of use asset | ||||||||
| Security deposit | ||||||||
| Capitalized software development and license | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Right of use liability | ||||||||
| Stock repurchase liability | ||||||||
| Convertible notes payable, net of $ | ||||||||
| Notes payable | ||||||||
| Notes payable related parties | ||||||||
| Derivative liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Right of use liability | ||||||||
| Notes Payable, net of current portion | ||||||||
| Anti-dilution liability | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Series A preferred stock; $ par value; shares authorized; shares issued and outstanding at March 31, 2022 and December 31, 2021 | ||||||||
| Common stock, $par value; shares authorized; and and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
See accompanying notes to the financial statements.
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APPTECH PAYMENTS CORP.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
(in thousands, except per share data)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative, including stock based compensation of $ million and $ million, respectively | ||||||||
| Research and development | ||||||||
| Excess fair value of equity issuance over assets received | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expenses) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Other income (expenses) | ||||||||
| Total other income (expenses) | ( | ) | ||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted net loss per common share | $ | ( | ) | ( | ) | |||
| Weighted-average number of shares used basic and diluted per share amounts | ||||||||
See accompanying notes to the financial statements.
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APPTECH PAYMENTS CORP.
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
(in thousands, except per share data)
| Series A Preferred | Common Stock | Additional Paid-in | Accumulated | Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Imputed interest | — | — | ||||||||||||||||||||||||||
| Stock based compensation | — | |||||||||||||||||||||||||||
| Issuance of options for capitalized prepaid software development and license | — | — | ||||||||||||||||||||||||||
| Common stock issued for purchase of judgment | — | |||||||||||||||||||||||||||
| Common stock issued for capitalized prepaid software development and license | — | |||||||||||||||||||||||||||
| Common stock cancelled | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Net Proceeds from sale of repurchase option | — | — | ||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Common Stock Issued for Forbearance | — | |||||||||||||||||||||||||||
| Stock based compensation | — | |||||||||||||||||||||||||||
| Common stock cancelled | — | ( | ) | |||||||||||||||||||||||||
| Net Proceeds from sale of Offering Shares | — | |||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See accompanying notes to the financial statements.
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APPTECH PAYMENTS CORP.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
(in thousands, except per share data)
| March 31, 2022 | March 31, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Issuance of stock based compensation | ||||||||
| Issuance of stock for prepaid services | ||||||||
| Common Stock Issued for Forbearance | ||||||||
| Stock issued for purchase of judgment | ||||||||
| Stock issued for excess fair value of equity over assets received | ||||||||
| Imputed interest on notes payable | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ||||||
| Right of use asset and liability | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capitalized prepaid software development and license | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on loans payable - related parties | ( | ) | ||||||
| Payments on notes payable | ( | ) | ||||||
| Net Proceeds from offering | ||||||||
| Repurchase of common stock | ( | ) | ||||||
| Proceeds from sale of repurchase options | ||||||||
| Net cash provided by financing activities | ||||||||
| Changes in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing transactions related to capitalized software and licensing costs | $ | $ | ||||||
| Issuance of stock for prepaid services | $ | $ | ||||||
See accompanying notes to the financial statements.
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APPTECH PAYMENTS CORP.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
On December 23, 2021, AppTech Payments Corp. (“AppTech” or the “Company”) changed our name to AppTech Payments Corp from AppTech Corp. and re-domiciled to Delaware. We are headquartered in Carlsbad, CA and our stock trades under the symbol “APCX” and our warrants under the symbol “APCXW”.
The Company successfully completed its capital
raise and uplisting onto NASDAQ (herein referred to its “Offering”) on January 7, 2022. As part of the Offering, the
Company executed a
AppTech Payments Corp. is a FinTech company providing electronic payment processing technologies and merchant services. These technologies allow businesses to accept cashless and/or contactless payments, such as credit cards, ACH, wireless payments, and more. Their patented, exclusively licensed and/or proprietary merchant services software offers or will offer integrated solutions for frictionless digital and mobile payment acceptance; AppTech is supplementing these capabilities with software that solves for multi-use case, multi-channel, API-driven, account-based issuer processing for card, digital tokens, and payment transfer transactions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of the Company’s management, the accompanying financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended March 31, 2022 and March 31, 2021. Although management believes that the disclosures in these unaudited financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been omitted pursuant to the rules and regulations of the SEC.
The accompanying unaudited financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022. The interim results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ended December 31, 2022 or for any future interim periods.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles 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. Significant estimates include the estimated liabilities related to various vendors in which communications have ceased, contingent liabilities, and realization of tax deferred tax assets. Actual results could differ from those estimates.
Concentration of Credit Risk
Cash and cash equivalents are maintained at financial
institutions and, at times, balances may exceed federally insured limits of $
9
The accounts receivable from merchant services are
paid by the financial institutions on a monthly basis. The Company currently uses six financial institutions
to service their merchants for which represented
Software Development Costs
The Company capitalizes software development costs in developing internal use software when capitalizing requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred.
Fair Value Measurements
The Company follows FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) to measure and disclose the fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of fair value hierarchy defined by ASC 820 are described below:
Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 Pricing inputs that are generally unobservable inputs and not corroborated by market data.
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts reported in the Company’s financial statements for cash, accounts payable and accrued expenses approximate their fair value because of the immediate or short-term maturity of these financial instruments.
Transactions involving related parties cannot be presumed to be carried out on an arms-length basis, as the requisite conditions of competitive, free-marketing dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
The following table presents liabilities that are measured and recognized at fair value as of March 31, 2022 and December 31, 2021 on recurring basis (in thousands):
| Schedule of derivative liabilities | ||||||||||||||||
| March 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Carrying Value | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Carrying Value | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
See Note 6 for discussion of valuation and roll forward related to derivative liabilities.
10
Research and Development
In accordance with ASC 730, Research and Development
(“R&D”) costs are expensed when incurred. R&D costs include costs of acquiring patents and other unproven technologies,
contractor fees and other costs associated with the development of the SMS short code texting platform, contract and other outside services.
Total R&D costs for the three months ended March 31, 2022 and 2021 were $
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year, increased by the potentially dilutive common shares that were outstanding during the year. Dilutive securities include stock options, warrants granted, convertible debt and convertible preferred stock.
The number of common stock equivalents not included in diluted income per share was and for the three months ended March 31, 2022 and 2021, respectively. The weighted average number of common stock equivalents is not included in diluted income (loss) per share, because the effects are anti-dilutive.
| March 31, 2022 | March 31, 2021 | |||||||
| Series A preferred stock | ||||||||
| Convertible debt | ||||||||
| Warrants | ||||||||
| Options | ||||||||
| Restricted stock units | ||||||||
| Total | ||||||||
Derivative Liability
The Company issued debts that consist of the issuance of convertible notes with variable conversion provisions. In addition, the Company issued warrants with variable anti-dilution provisions. The conversion terms of the convertible notes and warrants are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities on the issuance date and at each reporting period.
New Accounting Pronouncements
The FASB issues ASUs to amend the authoritative literature in ASC. There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
Risks and Uncertainties
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Since the Company derives its revenues from processing of purchases from our merchant services clients, a downturn in economic activity, such as associated with the current coronavirus pandemic, could reduce the volume of purchases it processes, and thus its revenues. In addition, such a downturn could cause its merchant customers to cease operations permanently decreasing our payment processing unless new customers are found. The continuing effects of the potential impact cannot be estimated at this time.
11
NOTE 3 – PATENTS
Patents
On June 22, 2017, AppTech executed an Amendment to Asset Purchase Agreement with GlobalTel Media, Inc., the details of which were previously disclosed by AppTech. The referenced agreement acquired intellectual property assets including but not limited to USPTO 8,073,895 & 8,572,166 “System and Method for Delivering Web Content to a Mobile Device”, USPTO 8,315,184 “Computer to Mobile Two-Way Chat System and Method”, and USPTO 8,369,828 “Mobile-to-Mobile Payment System and Method”. AppTech intends to use these assets as an integral part of future business expansion and product development. As of March 31, 2022 and December 31, 2021, there were zero dollars in accounts payable related to the assumption of liabilities in connection with the patents.
See Note 8 for more information on capitalized prepaid software development and license.
NOTE 4 – ACCRUED LIABILITIES
Accrued liabilities as of March 31, 2022 and December 31, 2021 consist of the following (in thousands):
| Schedule of Accrued Liabilities | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Accrued interest – third parties | $ | $ | ||||||
| Accrued payroll | ||||||||
| Accrued residuals | ||||||||
| Anti-dilution provision | ||||||||
| Other | ||||||||
| Total accrued liabilities | $ | $ | ||||||
Accrued Interest
Notes payable and convertible notes payable incur interest at rates between 10% and 15%, per annum.
Accrued Residuals
The Company pays commissions to independent agents which refer merchant accounts. The amounts payable to these independent agents is based upon a percentage of the amounts processed on a monthly basis by these merchant accounts.
Anti-dilution provision
The agreement between the Company and Infinios, formerly NEC Payments B.S.C., has an anti-dilution provision. To remain in compliance, the Company accrued shares of its common stock at $ per share for a total value of $ million as of December 31, 2021. Further, in connection with the capital raise discussed in Note 1, the Company accrued an additional shares of its common stock at $ per share for a value of $ thousand or a total value of $2.1 million as of March 31, 2022. The 451,957 total shares were issued in May 2022, were classified as a long-term liability and treated as additional consideration to Infinios.
NOTE 5 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
The Company funded operations through cash flows generated from operations and the issuance of loans and notes payable. The following is a summary of loans and notes payable outstanding as of March 31, 2022 and 2021. Related parties noted below are either members of management, board of directors, significant shareholders or individuals in which have significant influence over the Company.
12
Subordinated Notes Payable
In 2016, the Company issued $350 thousand in subordinated notes payable to third parties that incurred interest at 10% per annum. On September 30, 2021, the Company converted the notes issued for $530 thousand of principal and interest into 55,767 shares of the Company’s common stock. Since the notes were converted to equity, there will no longer be any accrued interest related to the subordinated notes.
Convertible Notes Payable
In 2020, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to sell to the investor a $300 thousand convertible note bearing interest at 12% per annum (the “Note”). The Note matures in 365 days from the date of issuance. The Note is convertible at the option of the holder at any time into shares of the Company’s common stock at nine dollars and fifty cents $9.50 for the one hundred and eighty (180) days immediately following the issue date and thereafter shall equal the lower of: 1) the lowest closing price of the common stock during the preceding twenty-five (25) trading day, ending on the last complete trading day prior to the issue date of the Note. 2) seventy-five (75) percent of the lowest trading price for the common stock during the twenty-five (25) consecutive trading days preceding the conversion date with a minimum trading volume of one thousand (1,000) shares.
In the event of a default of the Note, the Holder in its sole discretion may elect to use a conversion price equal to the lower of: 1) the lowest trading price of the common stock on the trading day immediately preceding the issue date or 2) seventy-five (75) percent of either the lowest trading price or the closing bid price, whichever is lower during any trading day in which the event of default has not been cured.
The embedded conversion feature of this Note was deemed
to require bifurcation and liability classification, at fair value. Pursuant to the Securities Purchase Agreement, the Company also sold
warrants to the investors to purchase up to an aggregate of 21,052 shares of common stock exercisable at fourteen dollars and twenty-five
cents ($14.25) and expire in five (5) years. The fair value of the derivative liability and warrants as of the date of issuance was in
excess of the Note (see Note 6 for valuation) resulting in full discount of the Note. The conversion feature and warrants have various
reset provisions for which lower the exercise price and share and warrants issuable. As of March 31, 2022 and December 31, 2021,
the convertible note payable balance was $
Total interest expense on convertible notes payable,
inclusive of amortization of debt discount of $
See Note 6– Derivative Liabilities.
In 2015, the Company issued $50 thousand in convertible notes payable. The convertible notes payable are unsecured, were due in nine months, incur interest at 10% per annum and are convertible at $9.50 per share. The Company amended the convertible note on March 2, 2022 and an agreed offer of a $10 thousand discount on the principal and interest resulting in a $72 thousand payment in full.
In 2014, the Company issued $400 thousand in convertible
notes payable. The convertible notes payable are unsecured, due in periods ranging up to one year, incurring interest between 10% to 12%
per annum and are convertible at prices ranging from $3.14 to $9.50 per share. In addition, the Company issued 42,105 shares of common
stock in connection with the convertible notes payable. The Company had the obligation to repurchase the 42,105 shares of common stock
at $9.50 per share within one year of the note issuance date. On March 30, 2022, the Company entered into three forbearance agreements
which granted the holders 2,105 shares of our common stock in exchange for not enforcing the terms of the agreement for a period of twelve
months. As of March 31, 2022 and December 31, 2021, the Company held the obligation to repurchase the shares for $ thousand.
As of March 31, 2022 and December 31, 2021, the accrued interest related to the convertible notes was $
Notes Payable
In 2020, the Company entered into a 30-year unsecured
note payable with U.S. Small Business Administration for $68 thousand in proceeds. The notes payable incurred a $100 fee upon issuance
and incurs interest at 3.75% per annum. All payments of principal and interest are deferred for thirty months from the date of the note.
As of March 31, 2022 and December 31, 2021 the balance of the note payable was $
13
Two significant shareholders funded the Company’s
operations through notes payable in primarily 2009 and 2010. The notes payable incur interest at 10% per annum and were due on December
31, 2016. On May 2, 2021, the Company entered into a debt reduction and confirmation agreement with a significant shareholder. The parties
agreed to reduce the outstanding accrued interest in the amount of $275 thousand. On September 29, 2021, the Company converted notes issued
for $51 thousand of principal and accrued interest into 5,329 shares of the Company’s common stock. On September 29, 2021, the Company
entered into a forbearance agreement which granted the holder 3,140 shares with a current fair market value of $35 thousand in exchange
for not enforcing the terms of the agreement for a period of twelve months. On February 4, 2022, the Company entered into an amended forbearance
agreement. The parties agreed to reduce the outstanding accrued interest in the amount of $
In Q3 of 2021, the Company converted notes issued for $503 thousand into 52,942 shares of the Company’s common stock. Also, the Company entered into a forbearance agreement which granted the holders 2,760 shares of the Company’s common stock with a current fair market value of $120 thousand in exchange for not enforcing the terms of the agreement for a period of twelve months.
NOTE 6–DERIVATIVE LIABILITIES
The Company issued debts that consist of the issuance of convertible notes with variable conversion provisions. In addition, the Company issued warrants with variable conversion provisions. The conversion terms of the convertible notes and warrants are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants were recorded as derivative liabilities on the issuance date and revalued at March 31, 2022 and December 31, 2021.
Based on the convertible notes described in Note 6,
the derivative liability day one loss is $
Schedule of fair value of derivative liabilities | ||||||||||||
| Derivative Liability Convertible Notes | Derivative Liability Warrants | Total | ||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | |||||||||
| Change in fair value | ( | ) | ( | ) | ( | ) | ||||||
| Balance as of March 31, 2022 | $ | $ | $ | |||||||||
As of March 31, 2022, the fair value of the derivative liability convertible notes is estimated using a Monte Carlo pricing model with the following assumptions:
| Schedule of pricing mode with assumptions | ||||
| Market value of common stock | $ | |||
| Expected volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % |
As of March 31, 2022, the fair value of the derivative liability – warrants is estimated using a Monte Carlo pricing model with the following assumptions:
| Market value of common stock | $ | |||
| Expected volatility | % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % |
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NOTE 7–RIGHT OF USE ASSET
Lease Agreement
In January 2020, the Company entered into a lease agreement commencing February 8, 2020 for its current facility which expires in 2025. The term of the lease is for five years. At inception of the lease, the Company recorded a right of use asset and liability. The Company used an effective borrowing rate of 12% within the calculation. The following are the expected lease payments as of March 31, 2022, including the total amount of related imputed interest (in thousands):
Years ended December 31:
| Schedule of Future Minimum Rental Payments for Operating Leases | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Operating Lease Total | ||||
| Less: Imputed interest | ( | ) | ||
| Total | $ |
The rent expense was $
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Litigation
Former Shareholders Lawsuit
In November 2017, two shareholders of AppTech, Laura
Farris and Eric Ottens, filed a lawsuit against the Company in the State of California, claiming conversion, aiding and abetting conversion,
breach of fiduciary duty, breach of contract, breach of implied covenant of good faith and fair dealing and declaratory relief. The lawsuit
was removed to the United States District Court for the Southern District of California. On December 19, 2019, the Company entered into
a settlement and release agreement with the plaintiffs pursuant to which the Company will pay the plaintiffs an aggregate of $
Other Lawsuit
In July of 2020, an owner and corporation having a non-binding Memorandum of Understanding (“MOU”) filed a lawsuit against AppTech Payments Corp. (formally “AppTech Corp.”) in the County of San Diego, State of California. Plaintiffs amended the Complaint on March 11, 2021. The claims include breach of contract, intentional misrepresentation, negligent misrepresentation, and unjust enrichment. Service of process occurred on January 8, 2021. Management believes the non-binding MOU terminated after no Definite Agreement was executed between the parties, and negotiations ceased December 20, 2016. We filed an answer to the Amended Complaint on April 27, 2021 and began discovery. Management does not believe Plaintiffs’ claims for damages have merit or are supported by Plaintiffs’ evidence. We filed a Summary Judgment requesting an Order from the Court to narrow the issues in the Amended Complaint. This matter is scheduled for trial on July 8, 2022. We currently own a judgment dated February 17, 2017, against the owner and corporation in the amount of $517 thousand plus interest. The judgment was assigned to AppTech Payments Corp. and Management plans to use the judgment to assist in the possible settlement and dismissal of this case prior to trial.
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Convertible Note and Warrant Lawsuit
On July 14, 2021, EMA Financial LLC, a Delaware limited liability company (“EMAF”), filed a complaint in the Southern District of New York against the Company. In its complaint, EMAF alleged that the Company breached the terms of a convertible note and a related warrant agreement purchased by EMAF pursuant to a securities purchase agreement between the parties. EMAF sought specific performance, payment of damages to be determined but not in excess of $2.75 million, reimbursement of costs and expenses, including reasonable legal fees, and non-interference. On September 2, 2021, EMAF filed a motion for summary judgment. On September 9, 2021, AppTech filed a motion to dismiss on the grounds the agreements were void as a result of the illegal activity by the plaintiff. On October 15, 2021, the parties filed memorandums in opposition to the respective motion. On October 25, 2021, the parties filed memorandums of law in further support of their respective motions. We believe EMAF’s claims are meritless and intend to vigorously defend against this lawsuit. The parties have engaged in settlement discussions with an expected range of potential liability between $400 thousand and $550 thousand, which includes principal and accrued interest of the convertible notes payable.
Significant Contracts
Capital Raise
In February 2021, the Company entered into an engagement letter with Maxim Group LLC (“Maxim”) as the lead management underwriter for a follow-on offering which is non-binding. On October 27, 2021, Maxim and the Company terminated all relevant agreements and the Company issued Maxim shares of the Company’s common stock in association with the termination.
On October 18, 2021, the Company entered into an engagement letter with EF Hutton, division of Benchmark Investments, LLC. (“EF Hutton”) to act as lead underwriter, deal manager and investment banker for the Company’s proposed firm commitment follow-on public offering and uplisting. This engaged EF Hutton through the earlier of (i) October 2022 or (ii) the closing of a follow-on offering. The Company completed its offering on January 7, 2022. The Company sold 3,614,201 units of our common stock (a unit consisted of one share of common stock and a warrant to purchase one share of common stock) at $4.15 per unit. The offering provided net proceeds of approximately $13.4 million. See note 1 for information on the capital raise completed in January 2022.
Silver Alert Services, LLC
In August 2020, the Company entered into a strategic partnership with Silver Alert Services, LLC doing business as Lifelight Systems (“Lifelight”). The partnership would expand AppTech’s reach into new markets and provide advanced technological solutions for the telehealth and personal emergency response systems markets.
The strategic partnership was cancelled on February 17, 2022.
Infinios Financial Services (formerly NEC Payments B.S.C.)
On October 1, 2020, the Company entered into a strategic partnership with Infinios Financial Services BSC (formally NEC Payments B.S.C) (“Infinios”) through a series of agreements, which included the following: (a) Subscription License and Services Agreement; (b) Digital Banking Platform Operating Agreement; (c) Subscription License Order Form; and (d) Registration Rights Agreement (collectively the “Agreements”).
On February 11, 2021, the Company entered into an amended and restated Subscription License and Services Agreement, Digital Banking Platform Operating Agreement and Subscription License Order Form with Infinios (collectively the “Restated Agreements”). The gross total fees due under the Restated Agreements are $2.2 million excluding pass-through costs associated with infrastructure hosting fees.
On February 19, 2021, the Company completed and validated
its contractual obligations and paid to Infinios the $100 thousand engagement fee. On February 28, 2021, the Company paid the initial
fee of $708 thousand to Infinios prior to the Funding Date. On March 25, 2021, the Company issued 1,895,948 shares of common stock to
an Infinios affiliate on a fully diluted basis with piggyback rights. The Company valued the common stock issuance at $67.5 million based
upon the closing market price on the effective date of the transaction based on the closing market price of the Company’s common
stock. The issuance was recorded as a $3.8 million asset and $63.8 million expense in excess fair value of equity issuance over assets
received. The capitalized asset was classified as capitalized prepaid software development of $
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As of March 31, 2022, the following fees were paid (in thousands):
| Schedule of fees paid to NECP platform | ||||
| Engagement Fee (prepaid licensing cost) | $ | |||
| License subscription fee (prepaid licensing cost) | ||||
| Annual maintenance subscription fee (prepaid licensing cost) | ||||
| Implementation fee (capitalized software cost) | ||||
| Infrastructure implementation fee (capitalized software cost) | ||||
| Training fee (50% due at Funding Date) | ||||
| Total | $ |
The annual maintenance subscription fee of $
Innovations Realized LLC
On October 2, 2020, the Company entered into an independent contractor services agreement with Innovations Realized, LLC (“IR”) to develop a strategic operating plan focused on the design, execution and go-to-market implementation of the Infinios platform to enter the United States market.
Under the agreement, the Company granted options to purchase 42,105 shares at a price of $0.095 and 263,157 shares at $2.375 and exercisable for two years after vesting. These options vest in equal monthly installments over 24 months. These options had a grant date fair value of $1.4 million and $8.7 million using a Black Scholes pricing model. The estimated amortization is a 5-year life based on the term of the licensing agreement.
On February 18, 2021, the Company entered into an amended independent contractor services agreement for $760 thousand with IR. The final payment owed to IR of $171 thousand was paid in January 2022.
Investor Relations
On January 2, 2022, the Company entered into an agreement with an investor relations firm (“IR Firm”) that compensated IR Firm $50 thousand and 100,000 shares upon the successful uplisting onto NASDAQ. In addition, on January 31, 2022, the Company entered into a consulting agreement with IR Firm. The Company agreed to a six-month commitment with IR Firm that pays $5 thousand per month, grants IR Firm a stock purchase agreement to buy 45,000 shares of the Company stock at $0.001 per share and grants a monthly budget of approximately $100 thousand (with monthly automatic renewals unless the agreement were canceled in writing). In return, IR Firm agrees to provide investor relations outreach, public relations, advisory and consulting services, to AppTech. Payment for the two agreements was made in February 2022.
NOTE 9 – STOCKHOLDERS’ DEFICIT
Common Stock
During the three months ended March 31, 2022
and 2021, the Company issued and , respectively, shares of common stock to several consultants in connection with business
development and professional services. The Company valued the common stock issuances at $
During the three months ended March 31, 2022
and 2021, the Company granted and shares of common stock to the board of directors valued at $
See Note 8 – Significant Contracts for additional common stock issuance.
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Stock Options
During the year ended December 31, 2021:
| a) | options to purchase shares of common stock at a weighted average price of $ were granted
as compensation to employees. The options vest in equal monthly installments over 6 and 12 months. The options were valued at $ |
| b) | options to purchase shares of common stock at a weighted average price of $ were granted as
compensation for various services including accounting, sales, and marketing. The options were valued at $ |
The fair value of the options for the year ended December 31, 2021 is estimated using a Black-Scholes option pricing model with the following range of assumptions:
| Schedule of Black Scholes option pricing | ||||
| Market value of common stock on issuance date | $ | |||
| Expected price | $ | |||
| Expected volatility | % - % | |||
| Expected term (in years) | - | |||
| Risk-free interest rate | % | |||
| Expected dividend yields |
During the three months ended March 31, 2022:
| a) | options to purchase shares of common stock at a weighted average price of $ were granted as
compensation to employees. The options vest in equal monthly installments ranging from instantly to 24 months months. The options were
valued at $ |
| b) | options to purchase shares of common stock at a weighted average price of $ were granted as
compensation for various services including engineering, accounting, and sales. The options were valued at $ |
The fair value of the options for the three months ended March 31, 2022 is estimated using a Black-Scholes option pricing model with the following range of assumptions:
| Market value of common stock on issuance date | $ | |||
| Expected price | $ | |||
| Expected volatility | % - % | |||
| Expected term (in years) | 0.0 - | |||
| Risk-free interest rate | % | |||
| Expected dividend yields |
The following table summarizes option activity:
| Schedule of option activity | ||||||||||||
| Number of shares | Weighted Average exercise price | Weighted Average remaining years | ||||||||||
| Outstanding December 31, 2021 | $ | |||||||||||
| Issued | $ | |||||||||||
| Exercised | $ | |||||||||||
| Cancelled | ( | ) | $ | |||||||||
| Outstanding as of March 31, 2022 | $ | |||||||||||
| Outstanding as of March 31, 2022, vested | $ | |||||||||||
The remaining expense outstanding through March 31, 2022 is $ million which is expected to be expensed over the next months in general and administrative expense.
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See Note 8 – Significant Contracts for additional stock options granted.
On December 7, 2021, the board authorized the Company’s Equity Incentive Plan in order to facilitate the grant of equity incentives to employees (including our named executive officers), directors, independent contractors, merchants, referral partners, channel partners and employees of our company to enable our company to attract, retain and motivate employees, directors, merchants, referral partners and channel partners, which is essential to our long-term success. A total of shares of common stock were authorized under the Equity Incentive Plan, for which as of March 31, 2022 a total of are available for issuance.
Warrants
In 2020, the Company entered into a security purchase agreement with an investor pursuant to which the Company agreed to sell the investor a $300 thousand convertible note bearing interest at 12% per annum. The Company also sold warrants to the investors to purchase up to an aggregate of 21,052 shares of common stock, with an exercise term of five (5) years, at a per share price of $14.25 which may be exercised by cashless exercise. The number of warrants adjusted in the period ending March 31, 2022 due to a reset event on January 7, 2022 changed the exercise price from $9.50 to $2.52 and increased the number of warrants from 31,578 to 119,095. The warrants were deemed a derivative liability and recorded as a debt discount at its date of issuance.
In total, the Company has 4,275,464 warrants outstanding. 3,614,201 were related to the Offering, 542,168 were granted on January 7 and the reset event added an additional 119,095. See Note 1 for information on warrants issued during the Offering and note 6 for additional information on the derivative liability.
NOTE 10 – SUBSEQUENT EVENTS
Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855 and has determined that no material subsequent events exist other than those disclosed below.
The Company fully executed a Definitive Agreement to acquire Hothand Inc. (“Hothand”), a patent-holding company which owns the intellectual property rights to a wide array mobile credit/debit transaction and mobile search, location, offer and payment fields in April 2022. The purchase price was a combination of cash and stock, but should be finalized in the second quarter of 2022. The Company is still determining the impact of this transaction on the financial statements.
The Company extended its stock repurchase agreement with the Chief Financial Officer. Terms of the updated agreement state that the Company has until October 21, 2022 to buyback 263,158 shares of its common stock for $500 thousand.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements, such as statements regarding the anticipated development and expansion of our business, our intent, belief or current expectations, primarily with respect to the future operating performance of our company and the products and services we expect to offer and other statements contained herein regarding matters that are not historical facts. Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also forward-looking statements which involve risks, uncertainties, and assumptions. Because forward-looking statements are inherently subject to risks and uncertainties, our actual results may differ materially from the results discussed in the forward-looking statements.
Business Overview
Through our scalable cloud-based platform architecture and infrastructure coupled with our commerce experiences development and delivery model, we intend to simplify and streamline digital financial services for corporations, small and midsized enterprises (“SMEs”) and consumers. We will accomplish this through innovative omnichannel payment and digital banking technologies that complement our core merchant services capabilities. We believe there is opportunity to generate significant revenue for the Company the near future by providing innovative commerce solutions and experiences that resonate with clients, their customers, and the market as a whole. Further, our soon to be launched modular platform will equip forward-thinking financial institutions, technology companies, and SMEs with operational efficiencies, such as automated financial controls and reconciliation in addition to manual administration.
Our Company’s merchant services solutions provide financial processing for businesses to accept cashless and/or contactless payments, such as credit cards, ACH, wireless payments, and more. Our patented, exclusively licensed, and proprietary merchant services software will offer, new integrated solutions for frictionless digital and mobile payment acceptance including acceptance of alternative payment methods (“APMs”). We are extending and enhancing these capabilities with software that solves for multi-use case, multi-channel, API-driven, account-based issuer processing for card, digital tokens, and payment transfer transactions. Our scalable business model allows for expansive white-labeling, SaaS, and embedded solutions that will drive the digital transformation of financial services and generate diverse revenue streams for our company.
The financial services industry is going through a period of intensive change driven by the advancement of technology, the adaptation to societal changes resulting from COVID-19, and the rapid rise of contactless transactions. End-users expect ease of use and an enhanced user experience in all their daily financial interactions. In this rapidly evolving digital marketplace, our prospective clients, such as merchants and independent software vendors (“ISVs”), have broad and frequently changing requirements to meet consumer expectations and operational efficiencies to maintain their competitive edge.
Providing basic payment acceptance and “lowest price” models is no longer the winning formula to support the market. These entities recognize that staying competitive in the digital age requires a partner with a platform and services capable of delivering flexibility and growth while streamlining operations to continually deliver increased revenue and profitability opportunities. Our pricing is extremely competitive, but we believe the value we create for financial institutions, technology companies, and SMEs through our technology, deployment model, services and consultative approach will create true differentiation from our competitors.
Our global financial services platform architecture and infrastructure is designed to be flexible and configurable to meet current and future market needs. This will empower our clients to take advantage of future platform development and new innovative digital financial solutions by leveraging off-the-shelf experiences and consuming our APIs. Additionally, by taking a holistic view of all aspects of our clients’ business, including risk, volume, user experience, integration capabilities and technical needs, we will create optimal and extensible financial technology solutions at a rapid pace.
Through exclusive licensing and partnership agreements to complement our patented technology capabilities, we believe we will become leaders in the embedded payment and digital banking sectors by supporting digital, tokenized, multi-channel, embedded API-driven transactions. We intend to accelerate this position through the integration of our merchant services and a secure text payment solution with extensive digital account-based and multi-channel issuer payment processing capabilities. We believe that this will enable us to provide our clients an end-to-end payment acceptance and digital banking solution powering straight-through processing and embedded payment opportunities in the B2B space. We expect to support clients through the development of custom and off-the-shelf experiences by delivering these solutions through public APIs and Webhooks.
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A key to the company’s success and market penetration is the continued development of enterprise-grade, patent-protected software for SMS text payments via a mobile device. Our patented technology manages text messaging for processing payments, notification, response, authentication, marketing, advertising, information queries and reports. Once an account is established through a multi-currency digital wallet, neither internet connectivity nor a specific application is required to process payments between merchants and end-users. These features will be particularly beneficial for unbanked and under-banked individuals in developing or emerging markets where access to the internet on a mobile device and modern banking institutions may not be readily available. In addition, our software platform will extend merchants’ marketplace capabilities by creating new avenues and channels to request and receive frictionless, digital payments and engaging end-users by utilizing a familiar, convenient, and widely adopted technology.
We believe our technologies will greatly increase the adoption of mobile payments and alternate banking solutions in sectors that must quickly adapt and migrate towards new technologies that facilitate convenient and safe contactless payments. To survive and succeed in this environment, businesses need to adopt new technologies to engage, communicate and process payments with their customers from a supplier that widely supports innovation and adaptation as the industry evolves. By embracing technological advancement in the payment and banking industries, we are well-positioned to meet the growing needs of existing and prospective clients and intend for our current and future products to be at the forefront of solving these accelerated market needs.
We were founded in 1998 and changed our name to AppTech Corp. in 2009. In 2013, we merged with Transcendent One, Inc., whereby Transcendent One, Inc. and its management took controlling ownership of the Company. From this point forward, we have operated as a merchant services provider, continuing the business conducted by Transcendent One, Inc. In 2017, we acquired certain assets from GlobalTel Media, Inc., which included patented, enterprise-grade software for advanced text messaging. In addition to the software and associated databases, the acquisition included four patents and additional intellectual property for mobile payments. On December 23, 2021, we changed our name to AppTech Payments Corp and re-domiciled to Delaware. We are headquartered in Carlsbad, CA. and uplisted to NASDAQ in January 2022. Our stock trades under the symbol “APCX” and our warrants under the symbol “APCXW”.
Financial Operations Overview
The following discussion sets forth certain components of our statements of operations as well as factors that impact those items (in thousands, except per share data).
Revenues
Our Revenues. We derive our revenue by providing financial processing services to businesses.
Expenses
Cost of Revenue. Cost of revenue includes costs directly attributable to processing and other services the company provides. These also include related costs such as residual payments to our business development partners, which are based on a percentage of the net revenue generated from client referrals.
General and Administrative. General and administrative expenses include professional services, rent and utilities, and other operating costs.
Research and Development. Research and development costs include costs of acquiring patents and other unproven technologies, contractor fees and other costs associated with the development of the SMS short code texting platform, contract and outside services.
Interest Expense, net. Our interest expense consists of interest on our outstanding indebtedness and amortization of debt issuance costs.
Results of Operations
This section includes a summary of our historical results of operations, followed by detailed comparisons of our results for the three months ended March 31, 2022 and 2021, respectively.
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Revenue
Revenue was approximately $104 thousand for the three months ended March 31, 2022, compared to $101 thousand for the three months ended March 31, 2021, representing an increase of 3%. The increase was principally driven by an increase in processing volume and a decrease in processing fees charged to the Company.
Cost of Revenue
Cost of revenue was approximately $51 thousand for the three months ended March 31, 2022, compared to $34 thousand for the three months ended March 31, 2021, representing an increase of 50%. The increase was driven primarily by increased residual payouts from more processing revenue.
General and Administrative Expenses
General and administrative expenses were approximately $2.8 million for the three months ended March 31, 2022, compared to $1.8 million for the three months ended March 31, 2021, representing an increase of 56%. The increase was primarily driven by an increase in both payroll and bonuses which is consistent with the ramped up headcount growth needed to launch the platform.
Research and Development Expenses
Research and development expenses were approximately $2.1 million for the three months ended March 31, 2022, compared to $1 for the three months ended March 31, 2021. The increase was primarily due to the onboarding of engineers and developers, and the hardware and software needed to complete the platform. Only the salaries of the product development team were capitalized in January 2022.
Excess Fair Value of Equity Issuance Over Assets Received
Excess fair value of equity issuance over assets received expenses was $832 thousand for the three months ended March 31, 2022, compared to $63.9 million for the three months ended March 31, 2021. The excess fair value over assets was a one-time event that was due to the timing of the share issuance to Infinios. The shares were issued on a day that the fair value of our common stock closed at $3.75 per share. Approximately, 18 million shares were issued, so the difference between the value of the newly issued shares and the value of the services performed was expensed as excess fair value of equity issuance over assets received. See Note 4 for additional information related to the Anti-dilution provision.
Interest Expense, net
Interest expenses, net was approximately $55 thousand for the three months ended March 31, 2022, compared to $129 thousand for the three months ended March 31, 2021, representing an decrease of 57%. The decrease was due to the Company entering into forbearance agreements with outstanding debt holders in return for the interest being capped. In addition, the Company converted certain debt into equity, so the interest expense was written off.
Change in Fair Value of Derivative Liability
Change in fair value of derivative liability was approximately $136 thousand for the three months ended March 31, 2022, compared to $508 thousand for the three months ended March 31, 2021. The decrease was primarily due to standard market volatility coupled with the resetting terms of the derivative.
Liquidity and Capital Resources
As noted earlier, the Company successfully completed its Offering on January 7, 2022. For further discussion, see Note 1.
As of March 31, 2022, we had cash and cash equivalents of approximately $10.3 million, working capital of approximately $6.2 million, and stockholders’ equity of approximately $10.7 million.
During the three months ended March 31, 2022, we met our immediate cash requirements through existing cash balances. Additionally, we used equity and equity-linked instruments to pay for services and compensation.
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Net cash used in or provided by, operating, investing and financing activities were as follows (in thousands):
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (2,878 | ) | $ | (385 | ) | ||
| Net cash provided by (used in) investing activities | (185 | ) | (960 | ) | ||||
| Net cash provided by financing activities | 13,345 | 1,905 | ||||||
Operating Activities
Net cash used in operating activities during the three months ended March 31, 2022 was approximately $2.9 million, which is comprised of (i) our net loss of $5.5 million, adjusted for non-cash expenses totaling $3.4 million (which includes adjustments for equity-based compensation, depreciation and amortization), and (ii) changes in operating assets and liabilities using approximately $0.8 million.
Net cash used in operating activities during the three months ended March 31, 2021 was approximately $0.4 million, which is comprised of (i) our net loss of $66.3 million, adjusted for non-cash expenses totaling $65.9 million (which includes adjustments for equity-based compensation, depreciation and amortization), and (ii) changes in operating assets and liabilities using approximately $15 thousand.
Investing Activities
Net cash used by investing activities during the three months ended March 31, 2022 was approximately $185 thousand and was primarily due to the internal capitalized software costs.
Net cash used by investing activities during the three months ended March 31, 2021 was approximately $960 thousand and was primarily due to the purchase of capitalized software costs.
Financing Activities
Net cash provided by financing activities during the three months ended March 31, 2022 was approximately $13.3 million, which principally consists of net proceeds of $13.4 million through the issuance of common shares and warrants in our public offering.
Net cash provided by financing activities during the three months ended March 31, 2021 was approximately $1.9 million, which principally consists of net proceeds of $1.9 million through the sale of repurchase options.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition, goodwill and intangible assets, derivative financial instruments, and equity-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that we consider the most critical to understanding our financial condition and results of operations. The accounting policies we believe to be most critical to understanding our financial condition and results of operations are discussed below. As of March 31, 2022, there have been no significant changes to our critical accounting estimates, except as described in Note 2 to our financial statements.
Software Development Costs
The Company capitalizes software development costs in developing internal use software when capitalizing requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred. Equity and options granted are capitalized as part of the software development costs.
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Recent Accounting Pronouncements
As of March 31, 2022, there have been no significant changes to our recently issued accounting pronouncements, except as described in Note 2 to our financial statements.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established to facilitate off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Because we are allowed to comply with the disclosure obligations applicable to a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, with respect to this Annual Report on Form 10-K, we are not required to provide the information required by this Item.
Item 4. Control and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during the three-month period ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On December 19, 2019, the Company entered into a settlement and release agreement with two shareholders. The total obligation was for $240 thousand and the final payment was made in March 2022. The litigants are now paid in full and no further action is warranted by the Company.
In July of 2020, an owner and corporation having a non-binding Memorandum of Understanding (“MOU”) filed a lawsuit against AppTech Payments Corp. (formally “AppTech Corp.”) in the County of San Diego, State of California. Plaintiffs amended the Complaint on March 11, 2021. The claims include breach of contract, intentional misrepresentation, negligent misrepresentation, and unjust enrichment. Service of process occurred on January 8, 2021. Management believes the non-binding MOU terminated after no Definite Agreement was executed between the parties, and negotiations ceased December 20, 2016. We filed an answer to the Amended Complaint on April 27, 2021 and began discovery. Management does not believe Plaintiffs’ claims for damages have merit or are supported by Plaintiffs’ evidence. We filed a Summary Judgment requesting an Order from the Court to narrow the issues in the Amended Complaint. This matter is scheduled for trial on July 8, 2022. We currently own a judgment dated February 17, 2017, against the owner and corporation in the amount of $517 thousand plus interest. The judgment was assigned to AppTech Payments Corp. and Management plans to use the judgment to assist in the possible settlement and dismissal of this case prior to trial.
On July 14, 2021, EMA Financial LLC, a Delaware limited liability company (“EMAF”), filed a complaint in the Southern District of New York against the Company. In its complaint, EMAF alleged that the Company breached the terms of a convertible note and a related warrant agreement purchased by EMAF pursuant to a securities purchase agreement between the parties. EMAF sought specific performance, payment of damages to be determined but not in excess of $2.75 million, reimbursement of costs and expenses, including reasonable legal fees, and non-interference. On September 2, 2021, EMAF filed a motion for summary judgment. On September 9, 2021, AppTech filed a motion to dismiss on the grounds the agreements were void as a result of the illegal activity by the plaintiff. On October 15, 2021, the parties filed memorandums in opposition to the respective motion. On October 25, 2021, the parties filed memorandums of law in further support of their respective motions. We believe the EMAF’s claims are meritless and intend to vigorously defend against this lawsuit. The parties have engaged in settlement discussions with an expected range of potential liability between $400 thousand and $550 thousand, which includes principal and accrued interest of the convertible notes payable.
Item 1A. Risk Factors.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended March 31, 2022:
| a) | 233,816 shares of common stock were issued to several consultants in connection with business development and professional services rendered valued at $466 thousand. |
| b) | 76,664 shares of common stock were issued to members of the Board of Directors valued at $103 thousand, which vest quarterly over the period of approximately one year. |
Item 3. Defaults Upon Senior Securities.
Only the EMA Financial, LLC payable is in default since it is currently involved in litigation.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
EXHIBIT INDEX
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AppTech Payments Corp. | ||
| Date: May 10, 2022 | By: | /s/ Luke D’Angelo |
| Luke D’Angelo | ||
| Chief Executive Officer, Chairman and Director | ||
| Date: May 10, 2022 | By: | /s/ Gary Wachs |
| Gary Wachs | ||
| Chief Financial Officer, Treasurer and Director | ||
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