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 No.) |
(
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
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 | o | Accelerated filer | o | |
| x | 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. o
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes o No
As of August 14, 2024, the registrant had shares of common stock issued and outstanding.
AppTech Payments Corp.
Form 10-Q
Table of Contents
| Page | ||
| Part I | ||
| Special Note Regarding Forward-Looking Statements and Projections | 3 | |
| Item 1. | Consolidated Financial Statements (unaudited) | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 29 |
| Item 4. | Controls and Procedures | 29 |
| Part II | ||
| Item 1. | Legal Proceedings | 30 |
| Item 1A. | Risk Factors | 31 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 31 |
| Item 3. | Defaults Upon Senior Securities | 31 |
| Item 4. | Mine Safety Disclosures | 31 |
| Item 5. | Other Information | 31 |
| Item 6. | Exhibits | 32 |
| Signatures | 35 |
| 2 |
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:
| · | delays and uncertainty associated with the boarding of clients onto our platform; | |
| · | substantial investment and costs associated with new potential revenue streams and their corresponding contractual obligations; | |
| · | a slowdown or reduction in our sales due to a reduction in end user demand, unanticipated competition, regulatory issues, or other unexpected circumstances; | |
| · | uncertainty regarding adverse macroeconomic conditions, including inflation, a recession, changes to fiscal and monetary policy, tighter credit, higher interest rates, consumer confidence and spending, and high unemployment; | |
| · | dependence on third-parties needed to facilitate our automated clearing house (“ACH”) and merchant service capabilities; | |
| · | delay in or failure to obtain regulatory approval for any future products in additional countries, and; | |
| · | current and future laws and regulations. |
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.
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
APPTECH PAYMENTS CORP.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO UNAUDITED FINANCIAL STATEMENTS
(The financial statements have been condensed for presentation purposes)
| 4 |
APPTECH PAYMENTS CORP.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2024 AND DECEMBER 31, 2023
(UNAUDITED)
(in thousands, except shares and per share data)
| June 30, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Note receivable | ||||||||
| Right of use asset | ||||||||
| Security deposit | ||||||||
| Intangible assets, net of accumulated amortization | ||||||||
| Goodwill | ||||||||
| Capitalized software development, net of accumulated amortization | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related party | ||||||||
| Accrued liabilities | ||||||||
| Notes payable, net of discount of $10 and $0, respectively | ||||||||
| Deferred revenue | ||||||||
| Right of use liability | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Right of use liability, net of current portion | ||||||||
| Notes payable, net of current portion | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies (Note 7) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock: shares authorized at June 30, 2024 and December 31, 2023, respectively; Series A preferred stock: $ par value; shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively. | ||||||||
| Common stock, $ par value; shares authorized; and issued and outstanding at June 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| 5 |
APPTECH PAYMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 and 2023
(UNAUDITED)
(in thousands, except shares and per share data)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative, including stock based compensation of $ and $ for the three months ended June 30, 2024 and 2023, respectively, $ and $ for the six months ended June 30, 2024 and 2023, respectively | ||||||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| Research and development, including stock based compensation of $ and $ for the three months ended June 30, 2024 and 2023, respectively, $ and $ for the six months ended June 30, 2024 and 2023, respectively | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Interest expense (income) | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of derivative liability | ||||||||||||||||
| Other income (expenses) | ( | ) | ||||||||||||||
| Total other expenses | ( | ) | ( | ) | ||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Deemed dividend related to warrant resets | ( | ) | ||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 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 consolidated financial statements.
| 6 |
APPTECH PAYMENTS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 and 2023
(UNAUDITED)
(in thousands, except shares and per share data)
| Series A Preferred | Common Stock | Additional Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||
| Repricing of warrants | – | – | ( | ) | ||||||||||||||||||||||||
| Net proceeds from sale of offering shares | – | |||||||||||||||||||||||||||
| Balance March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||
| Balance June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Series A Preferred | Common Stock | Additional Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||
| Net proceeds from sale of common shares | – | |||||||||||||||||||||||||||
| Balance March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock based compensation | – | |||||||||||||||||||||||||||
| Shares issued with Note Payable | – | |||||||||||||||||||||||||||
| Balance June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
| 7 |
APPTECH PAYMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2024 and 2023
(UNAUDITED)
(in thousands, except shares and per share data)
| June 30, 2024 | June 30, 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | ||||||||
| Cancellation of stock repurchase liabilities | ( | ) | ||||||
| Impairment of intangible assets | ||||||||
| Gain on settlement of convertible note, warrants, and derivative liabilities | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Amortization of intangible assets and software | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Right of use asset and liability, net | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net cash used in investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from note payable | ||||||||
| Payments on loans payable - related parties | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Repayment of convertible notes payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Changes in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of year | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Issuance of stock for prepaid services | $ | $ | ||||||
| Common stock issued with Note Payable | ||||||||
| Cancellation of stock repurchase liabilities | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
| 8 |
APPTECH PAYMENTS CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
AppTech Payments Corp. (“AppTech” or the “Company), a Delaware corporation, is a Fintech Company headquartered in Carlsbad, California. AppTech utilizes innovative payment processing and digital banking technologies to complement its core merchant services capabilities. The Company’s patented and proprietary software will provide progressive and adaptable products that are available through a suite of synergistic offerings directly to merchants, banking institutions, and business enterprises.
AppTech has a highly secure digital payments platform that we acquired and are further developing digital banking products to power commerce experiences for clients and their customers. Based upon industry standards for payment and banking protocols, we will offer standalone products and fully integrated solutions that deliver innovative, unparalleled payments, banking, and financial services experiences. Our processing technologies can be taken off-the-shelf or tapped into via our RESTful APIs to build fully branded and customizable experiences while supporting tokenized, multi-channel, and multi-method transactions.
AppTech stock trades under the symbol “APCX” and its warrants trade under the symbol “APCXW,” on the Nasdaq Capital Market (“NASDAQ”).
In June 2023, the Company entered into licensing agreements with InstaCash and PayToMe.co. As part of the arrangement with these parties, the Company negotiated a 7.5% preferred share equity interest. As of the date of this filing, the shares have not been issued to AppTech. InstaCash’s CEO also provides investor relation services to the Company. The shares have not been issued as of the date of this filing. Additionally, PayToMe.co is a related party to AppTech. Senior members of the Company sit on PayToMe.co’s board of directors and AppTech’s Chief Financial Officer (“CFO”) is married to its founder and Chief Executive Officer (“CEO”).
In August 2023, the Company entered into a sales agreement under which it may sell shares of its common stock having an aggregate offering price of up to $18.0 million through “at-the-market” (ATM) offerings, pursuant to its shelf registration statement on Form S-3 on file with the SEC. As of this filing, and due to the baby shelf calculation, the Company cannot currently raise capital under the ATM.
On October 13, 2023, Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Alliance Partners,
LLC, a Nevada-based software development company doing business as FinZeo, and Chris Leyva (the “Seller”). Under this agreement,
the Company acquired 100% of the Seller’s membership interest in Alliance Partners. The primary purpose of this acquisition was
to gain control of FinZeo’s intellectual property, key personnel, and software platform, which are integral to boarding the Company’s
potential customers. The total consideration for the transaction was $
Subsequent to the closing of the transaction, the payment terms were amended various times with the last amendment executed on June 20, 2024. For details regarding the payment schedule and the equity considerations provided to the Seller, refer to Footnote 8. Stockholders’ Equity - Equity Issued related to Acquisition section.
The remaining outstanding payable as of June 30,
2024 is $
| 9 |
Management’s Plan to Address Going Concern Considerations
The Company has experienced recurring operating losses, primarily due to limited revenues. The Company’s current financial conditions and recurring losses raise substantial doubt about its ability to continue as a going concern.
Management is actively pursuing additional funding options and is confident that it will begin generating revenue during the following twelve months from the issuance date of these financial statements, although no assurances can be made.
Management intends to maintain adequate working capital and adhere to prudent financial forecasting.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated 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 June 30, 2024 and June 30, 2023. 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 with U.S. GAAP have been omitted pursuant to the rules and regulations of the SEC.
The accompanying consolidated 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, 2023, filed with the SEC on April 1, 2024. The interim results for the six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the year ended December 31, 2024 or for any future interim periods.
Basis of Consolidation
The consolidated unaudited financial statements include the accounts of AppTech Payments Corp., and wholly owned subsidiaries of which the Company is the primary beneficiary. All significant inter-company accounts and transactions are eliminated in consolidation.
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.
The Company makes critical estimates and assumptions in valuing: stock-based awards, intangible assets and the related goodwill impairment test. Actual results could differ from those estimates.
| 10 |
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. Specifically, the Company reclassified ‘Accounts Payable - Related Party’ from ‘Accounts Payable’ within the consolidated balance sheet. As a result, ‘Accounts Payable - Related Party’ is presented separately as of June 30, 2024 and December 31, 2023.
Concentration of Credit Risk
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000 per institution that pays Federal Deposit Insurance Corporation insurance premiums. The Company has never experienced any losses related to these balances.
The accounts receivable from merchant services
are paid by the financial institutions on a monthly basis. As of June 30, 2024,
For the six months ended June 30, 2024,
Revenue Recognition
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, codified as Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.
The Company provides merchant processing solutions for credit cards and electronic payments. In all cases, the Company acts as an agent between the merchant, which generates the credit card and electronic payments, and the bank, which processes such payments.
The Company’s revenue is generated on services priced as a percentage of transaction value or a specified fee transaction, depending on the card or transaction type. Revenue is recorded as services are performed, which is typically when the bank processes the merchant’s credit card and electronic payments. Consideration paid to channel partners is recorded as a reduction in revenues.
Licensing Revenue
The Company is actively pursuing strategic partnership agreements that licenses our portfolio of patents in return for a fee. The licensing fee is deferred and recognized evenly on a monthly basis over the term of the service period or contract.
Intangible Assets and Intellectual Property
Intellectual Property
The Company amortizes intellectual property based on the estimated period over which the economic benefits of the intangible assets are expected to be consumed. Typically, the Company amortizes its intellectual property, including patents and other identifiable intangible assets, on a straight-line basis. The amortization periods generally range from three years to fifteen years, depending on the nature of the asset and its expected useful life.
| 11 |
Capitalized Software Development Costs
The Company capitalizes certain costs related to the development of its digital payment and banking platform, including employee compensation and consulting fees for third-party developers, only when it is probable that the development will result in new or additional functionality. Costs incurred during the preliminary project planning phase and post-implementation phase are expensed as incurred. The identifiable intangible assets, such as acquired technology, intellectual property, and non-competes, are recorded at their acquisition-date fair value using a combination of the income and cost approaches. The capitalized software development costs are amortized on a straight-line basis over the estimated useful life of the asset.
Goodwill
The Company accounts for goodwill in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
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 our technology platform, contract and other outside services. Total R&D costs for the six months ended June 30, 2024 and 2023 were approximately $1.3 million and $2.0 million, respectively.
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, and convertible preferred stock.
The number of common stock equivalents not included in diluted income per share was and for the six months ended June 30, 2024 and 2023, respectively. The weighted average number of common stock equivalents is not included in diluted income (loss) per share, because the effects are anti-dilutive.
June 30, 2024 | June 30, 2023 | |||||||
| Series A preferred stock | ||||||||
| Warrants | ||||||||
| Options | ||||||||
| Total | ||||||||
| 12 |
Stock Based Compensation
The Company recognizes as compensation expense all share-based payment awards made to employees, directors, and consultants, including grants of stock, stock options, and warrants, based on their estimated fair values. For stock awards, fair value is determined based on the closing price of the Company’s common stock on the grant date and is recognized over the service period required for the employees, directors, and consultants to earn the awards. For stock options and warrants, fair value is estimated using an appropriate valuation model at the grant date, considering the terms and conditions under which the awards were granted. The expense is similarly recognized over the period during which the service conditions are expected to be met. Additionally, the Company has several grant agreements that include options awarded based on contingent performance. For these performance-based option grants, the Company records the fair market value of the options at the time the performance criteria are fully met.
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.
NOTE 3 – INTANGIBLE ASSETS
Intellectual Property
The Company has two patent portfolios, which include:
Mobile Payment Technology This portfolio consists of four mobile technology patents that range from System & Method for Delivering Web Content to a Mobile Device, Computer to Mobile Two-Way Chat System & Method, and Mobile to Mobile payment.
Geolocation Technology This portfolio consists of 13 patents that are focused on the delivery, purchase, or request of any products or services within specific geolocation and time parameters, provided by a consumer’s mobile phone anywhere in the United States. This portfolio houses the patent that protects all advertising on a mobile phone, including in a store’s mobile application. We amortize the patents on a straight-line basis from three years to 15 years, which approximates the way the economic benefits of the intangible asset will be consumed.
As of June 30, 2024 and December 31,
2023, the gross value of patents is $
On October 26, 2023, the Company acquired FinZeo,
a Nevada based LLC. The gross value of acquired intangible assets is $
| 13 |
Intellectual Property as of June 30, 2024 and December 31, 2023 are as follows:
| Intellectual Property | June 30, 2024 | December 31, 2023 | ||||||
| Beginning Balance | $ | $ | ||||||
| Acquisition of intangible assets | ||||||||
| Amortization expenses | ( | ) | ( | ) | ||||
| Ending Balance | $ | $ | ||||||
Capitalized Software Development Costs
The Company capitalizes certain costs related to the development of its digital payment and banking platform.
As of June 30, 2024, the gross value of
capitalized software development cost is approximately $
| Capitalized Software Development Cost | June 30, 2024 | December 31, 2023 | ||||||
| Beginning Balance | $ | $ | ||||||
| Impairment | ( | ) | ||||||
| Amortization expenses | ( | ) | ( | ) | ||||
| Ending Balance | $ | $ | ||||||
See Note 7 - Commitments and Contingencies for discussions of Infinios Financial Services (formerly NEC Payments B.S.C.) and the write-off of capitalized software development costs.
Goodwill
On October 26, 2023, the Company completed the
acquisition of Alliance Partners, LLC, a Nevada limited liability company. The difference between the fair value of the purchase price
and the net assets acquired (including the assembled workforce) is recorded as goodwill. As of June 30, 2024, the Company recorded
goodwill of approximately $
See Note 1 - Purchase of Alliance Partners, LLC.
NOTE 4 – ACCRUED LIABILITIES
Accrued liabilities as of June 30, 2024 and December 31, 2023 are as follows:
June 30, 2024 | December 31, 2023 | |||||||
| Accrued payroll | $ | $ | ||||||
| Anti-dilution provision | ||||||||
| Payables due to related party | ||||||||
| Other | ||||||||
| Total accrued liabilities | $ | $ | ||||||
| 14 |
Related parties noted below are either members of management, board of directors, significant shareholders, or individuals that have significant influence over the Company.
Anti-dilution provision
In connection with the shares to be issued as part of the HotHand acquisition, and anti-dilution provision with Infiinios, the Company accrued an additional shares of its common stock at $1.81 per share for a total of $. The shares have not been issued to Infinios as of June 30, 2024.
See Note 7 - Commitment and Contingencies.
Payables due to related party
The remaining
outstanding payable as of June 30, 2024, is $
NOTE 5 – NOTES PAYABLE
The following is a summary of notes payable outstanding as of June 30, 2024 and December 31, 2023.
Notes Payable
In 2020,
the Company entered into a 30-year unsecured note payable with the U.S. Small Business Administration office for $
On June 10, 2024, the Company entered into a
60-day unsecured note agreement with Black Ice Advisors, LLC, a third-party lender, for proceeds of $
The note agreement includes a default provision where the Company’s failure to pay the total amount of $224,000 by the due date will result in an additional 140% of the outstanding principal and interest, payable in free-trading AppTech Common Stock valued at the average bid price from the past 7 trading days, or a late fee of $500 per day, at the Company’s discretion. Refer to Note 9 - Subsequent Events for the Status of the Note Payable.
As of June 30, 2024, the balance of all note payable outstanding was $
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NOTE 6 – RIGHT OF USE ASSET
Lease Agreement
In January 2020, the Company entered into a lease agreement commencing February 8, 2020 for its current Carlsbad, California 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.
In October 2023, the Company entered into a lease
agreement commencing October 1, 2023 for its Austin, Texas office, which expires in March 2025. The term of the lease is for
The rent expense was $
NOTE 7 – COMMITMENTS AND CONTINGENCIES
NCR Lawsuit
On November 30, 2022, AppTech filed a complaint against NCR Payment Solutions, LLC in the United States District Court for the Southern District of California.
In March 2024, the Company and NCR reached a Settlement and Release Agreement. Both parties expressly denied any liability and no further actions are required by either party.
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.
During 2021 and 2022, the Company paid Infinios
$
On May 4, 2023, unsatisfied with Infinios’ performance of its contractual obligations, the Company notified Infinios of its intent to terminate its relationship and commenced a good-faith negotiation with Infinios regarding the termination terms.
In June 2023, Infinios turned off all its services,
and the Company wrote off the $
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On or about October 5, 2023, Infinios filed a demand for arbitration and a Statement of Claim before the International Centre for Dispute Resolution (the “Arbitration Claim”). In the Arbitration Claim, Infinios asserts claims for breach of contract, quantum meruit, and account stated. Infinios alleges damages of $598,525, and asserts a demand for the grant and registration of shares.
On November 13, 2023, the Company filed an Answer to the Arbitration Claim, along with Counterclaims for breach of contract, fraudulent inducement, unjust enrichment, breach of fiduciary duty, and breach of the covenant of good faith and fair dealing.
At a Preliminary Hearing held on February 22, 2024, hearing dates of August 12 and 13, 2024, August 19 and 20, 2024, and October 21 and 22, 2024 were scheduled. While the Company will continue to pursue consensual means of resolving this dispute, it intends to vigorously defend the claims in the Arbitration Claim, and prosecute the causes of action in its Counterclaims. Refer to Note 9 – Subsequent Events for the Status of the Litigation.
Terminated Employees
Following unsuccessful negotiations regarding severance payments, three former employees filed a lawsuit against the Company in May 2024 concerning their severance claims. After reviewing the case details, including the lawsuit, the Company has assessed that it is less likely than not that a severance obligation will be incurred. Given this assessment, the Company has determined that no accrual for severance payments is necessary as of June 30, 2024.
NOTE 8 – STOCKHOLDERS’ EQUITY
Series A Preferred Stock
The Company is authorized to issue
shares of preferred stock with a par value of $
per share. As of June 30, 2024 and December 31, 2023. There were fourteen ()
shares of Series A preferred stock issued and outstanding. The holders of Series A preferred stock are entitled to one vote per
share on an “as converted” basis on all matters submitted to a vote of stockholders and are not entitled to cumulate
their votes in the election of directors. The holders of Series A preferred stock are entitled to any dividends that may be declared
by the Board of Directors out of funds legally available, therefore on a pro rata basis according to their holdings of shares of
Series A preferred stock, on an as converted basis. In the event of liquidation or dissolution of the Company, holders of Series A
preferred stock are entitled to share ratably in all assets remaining after payment of liabilities and have no liquidation
preferences.
Common Stock
The Company is authorized to issue shares of $ par value as of June 30, 2024 and December 31, 2023. There were and , respectively, shares of common stock outstanding as of June 30, 2024 and December 31, 2023. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders and are not entitled to cumulate their votes in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the board of directors out of funds legally available, therefore subject to the prior rights of holders of any outstanding shares of preferred stock and any contractual restrictions against the payment of dividends on common stock. In the event of liquidation or dissolution of the Company, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive or other subscription rights and no right to convert their common stock into any other securities.
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Public Offerings
In February 2023, the Company announced the closing
of its previously announced $5.0 million registered direct offering (the “Registered Direct Offering”) with a single
institutional investor to sell shares of its common stock (the “Shares”) and warrants to purchase up to
shares (the “Warrants”) in a concurrent private placement (the “Private Placement”). The combined purchase price
for one Share and one Warrant was $3.00. Each of the Warrants has an exercise price of $4.64 per share of common stock and are exercisable
on and after August 1, 2023. The Warrants expire five years from the date on which they become exercisable. The aggregate gross proceeds
from the Registered Direct Offering and the concurrent Private Placement were approximately $
In August 2023, the Company entered into a
sales agreement under which it may sell shares of its common stock having an aggregate offering price of up to $18.0 million through
“at-the-market” offerings (ATM), pursuant to its shelf registration statement on Form S-3 on file with the SEC. In
total, as of the end of June 30, 2024, the Company sold
shares of common stock, for which we received net proceeds of $
In October 2023, the Company entered into a Securities
Purchase Agreement (the “Securities Purchase Agreement”) with a certain accredited and institutional investor (the “Purchaser”)
pursuant to which the Company has agreed to issue and sell to Purchaser an aggregate of: (i) shares (the “Shares”)
of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and (ii) warrants (the “Purchase
Warrants”) to purchase up to shares of Common Stock, exercisable at $2.74 per share (the “Offering”). The
offering price per Share and associated Purchase Warrants is $2.10. The October Warrants will expire five years from the date on which
they become exercisable. On October 26, 2023, the Company closed the Offering and raised $
On March 26, 2024, AppTech Payments Corp. entered into an underwriting agreement with EF Hutton LLC, as representative of the several underwriters, relating to the public offering of shares of common stock, par value $0.001 per share, at a purchase price per share to the public of $1.00. Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 45-day option to purchase up to an additional shares of Common Stock at the Offering Price, less any underwriting discounts and commissions.
As of June 30, 2024, approximately $
Stock Issued for Services
During the six months ended June 30, 2024, the Company granted 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 $
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Stock Issued with Note Payable
During the six months ended June 30,
2024, the Company issued shares
of common stock in connection with a note payable. The 2024 issuance was valued at $
Equity Issued related to Acquisition
On October 26, 2023, the Company completed the acquisition of FinZeo. The Seller received cash and stock as part of the purchase price. See Note 1 - Purchase of Alliance Partners, LLC.
As of June 30,
2024, the payment terms under the Purchase Agreement with Alliance Partners, LLC, were amended
as follows:
In consideration for modifying the payment schedule, Chris Leyva received a total of shares of AppTech Payments Corp. and options to purchase shares of the Company’s stock.
Stock Options
The Company grants stock options as part of employee compensation and recognizes these options’ expense over the vesting period. If an employee does not meet certain conditions such as sales targets or leaves the Company before the options vest, these options are forfeited as they occur.
On December 7, 2021, the board authorized the Company’s Equity Incentive Plan 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. This plan is essential for attracting, retaining, and motivating these key personnel, which is critical to our long-term success. In May 2023, shareholders approved an additional 700,000 shares for the Company’s Equity Incentive Plan, bringing the total authorized shares to . In May 2024, shareholders approved an additional shares under a newly adopted 2024 Equity Incentive Plan (the “2024 Plan”), which replaced the previous plan in its entirety. As a result, a total of shares of common stock were authorized under the 2024 Plan, with shares available for issuance as of June 30, 2024.
In June
2024, the Company canceled
On March
20, 2024, the Company extended the expiration term of vested and outstanding stock options to 10 years from the original grant
date for current employees and consultants. The fair value was calculated both on the modification date and prior to the modification.
During the six months ended June 30, 2024, the Company recorded the option modification expense of $
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During the six months ended June 30, 2024, the Company granted options to purchase of common stock. These grants included:
| 1. | options to a consultant, with vesting contingent upon reaching specified sales milestones. The fair value of these options, which are non-plan with a one-year life, will be recognized as an expense when vesting appears probable. These options have an exercise price of $ per share and a fair value of $ per share on the issuance date. The Company did not record any stock based compensation expense during the six months ended June 30, 2024 as these were not determined to be probable of vesting. | |
| 2. | On April 4, 2024, the Company granted options to current employees and consultants with an exercise price of $, a ten-year expiration term, and a fair value on the grant date of $. The Company recognized $thousand related to this grant. The options were fully vested upon on the grant date. | |
| 3. | During the six months ended June 30, 2024, the Company granted options to the board of directors and consultants. These options have a ten-year expiration period, with exercise prices ranging from $to $per share. The fair value of these options, as determined on the grant date, ranged from $to $per share. |
The following table summarizes option activity:
| Number of shares | Weighted Average exercise price | Weighted Average remaining years | ||||||||||
| Outstanding December 31, 2023 | $ | |||||||||||
| Issued | ||||||||||||
| Exercised | ||||||||||||
| Cancelled | ( | ) | ||||||||||
| Outstanding as of June 30, 2024 | $ | |||||||||||
| Outstanding as of June 30, 2024, vested | $ | |||||||||||
The unvested options includes a total of million options contingent upon reaching specified sales milestones. The remaining expense to be recognized, exclusive of the contingent performance-based options, is $ thousand as of June 30, 2024. This amount is expected to be recognized by the end of July 2024.
During the six months ended June 30, 2024, the Company recorded $ thousand in option expenses, which includes the modification expense of $ thousand and the company-wide grant of shares valued at $ thousand.
The options vest in equal monthly installments ranging from instantly to 12 months. For the six months ended June 30, 2024, the fair value of the options were valued using a Black-Scholes option pricing model with the following range of assumptions:
| Market value of common stock on issuance date | ||||
| Exercise price | ||||
| Expected volatility | % - % | |||
| Expected term (in years) | ||||
| Risk-free interest rate | % - % | |||
| Expected dividend yields |
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Warrants
As of June 30, 2024, the Company has
| Number of shares | Weighted Average exercise price | Weighted Average remaining years | ||||||||||
| Outstanding December 31, 2023 | $ | |||||||||||
| Cancelled | ||||||||||||
| Issued | ||||||||||||
| Outstanding as of June 30, 2024 | $ | |||||||||||
See Note 1 for information on warrants issued during the Offering.
NOTE 9 – SUBSEQUENT EVENTS
Private Placement Offering
On July 10, 2024, the Company closed a private placement offering (the “Private Placement Offering”) consisting of a 6% convertible debenture (the “Debenture”) with a principal amount of $1,100,000 and a warrant (the “Warrant”) to purchase up to 750,000 shares of the Company’s common stock. The Debenture was sold to the investor (the “Purchaser”) for $1,000,000, reflecting an original issue discount of 10%, pursuant to a Securities Purchase Agreement executed on the same date. The Warrant, which expires five years from its date of issuance, is exercisable at any time by the holder for up to 750,000 shares of common stock at an exercise price of $1.16 (the “Exercise Price”), subject to adjustments similar to those applicable to the Conversion Price.
Net proceeds from the Private Placement Offering were $910,000, after accounting for a $20,000 non-accountable fee withheld pursuant to the Purchase Agreement and $70,000 paid to a registered broker-dealer, for the Company’s benefit. The offering includes dilutive issuance protection and prohibits variable rate transactions until the Debenture is fully paid. In connection with the Private Placement Offering, the Company also issued an aggregate of 100,000 shares of restricted common stock (the “Commitment Shares”) on the closing date, with 50,000 shares issued to the Purchaser and 50,000 shares issued to the Purchaser’s designee.
The Debenture matures twelve months from its date of issuance and bears interest at a rate of 6% per annum, payable on the maturity date. The Debenture is convertible, at the option of the holder, into such number of shares of common stock of the Company equal to the principal amount of the Debenture plus all accrued and unpaid interest, at a conversion price of $1.07 (the “Conversion Price”), subject to adjustment for stock splits, stock dividends, recapitalizations, and similar events. Additionally, the Conversion Price may be reduced at the option of the holder if the Company issues or grants any option to purchase common stock or other convertible securities at an effective price lower than the then-current Conversion Price.
The Debenture includes a redemption feature allowing the Company to prepay the Debenture at 110% of the principal amount and 110% of accrued interest. Additionally, if the Company raises $1.5 million or more in aggregate funds from public offerings or private placements (excluding insider investments), 50% of the proceeds from such fundraising activities must be used for the repayment of the Debenture, unless otherwise waived by the Purchaser. Default provisions are also included, providing for specific penalties and remedies in the event of non-compliance with the terms of the Debenture.
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Stock and Option Grants
On July 3, 2024, the Company granted 785,000 options under the equity plan and approximately 1.2 million options outside of the plan to employees and consultants. These options, which expire ten years from the grant date, have an exercise price of $0.97 per share and a fair value of $0.87 per share on the issuance date. The vesting of these options is contingent upon reaching specified company milestones. The fair value of these options will be recognized as an expense when the vesting becomes probable.
On July 29, 2024, the Company entered into a consulting agreement with a third-party marketing firm. In connection with this agreement, the Company executed an Equity Grant Agreement on July 31, 2024, under which the grantee was granted 150,000 shares of the Company’s common stock at a grant price of $0.893 per share. The shares were fully vested on the grant date.
Status of the Note Payable
On June 10, 2024, the Company entered into a 60-day unsecured note agreement with a third party, for $200,000. The note matured on August 10, 2024. Refer to Note 5. - Notes Payable
As of August 14, 2024, the note and accrued interest have not been repaid, and the note is accruing $500 per day in late fees.
Infinios Financial Services Case Update
The Company had previously entered into a strategic partnership with Infinios Financial Services BSC (formerly NEC Payments B.S.C.) on October 1, 2020. This partnership was governed by a series of agreements, later amended and restated on February 11, 2021. The relationship faced challenges, leading to a termination notice issued by the Company in May 2023. Subsequently, Infinios filed a demand for arbitration, and the Company responded with counterclaims.
On August 8, 2024, the Company entered into a Settlement Agreement and Mutual Release with Infinios Solutions (Bahrain) W.L.L. The terms of this Settlement Agreement are confidential. The terms of the settlement do not currently result in any additional amounts payable outside what has already been accrued. Following the fulfillment of its terms, both parties will jointly file for the dismissal and termination of the arbitration, expected to be completed before the end of September 2024.
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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 together with the audited consolidated financial statements and related notes included elsewhere in this report. Certain statements contained in this report, including 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, are “forward-looking” statements. 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
The financial services industry is going through a period of intensive growth driven by the advancement of technology and the rapid rise of contactless transactions due to societal changes, in part, as a response to COVID-19. End-users expect ease of use and an enhanced user experience in all their daily financial interactions. In this rapidly evolving digital marketplace, businesses have broad and frequently changing requirements to meet consumer expectations and operational efficiencies to maintain their competitive edge.
To flourish in this environment, businesses need to adopt new technologies to engage, communicate and process payments and manage payouts with their customers from a supplier that widely supports innovation and adaptation as the industry evolves. We believe our technologies will greatly increase the adoption of omni-channel payments and digital banking solutions in sectors that must quickly adapt and migrate to new, secure digital Fintech technologies. By embracing advancements 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.
AppTech’s all-in-one Fintech platform, FinZeo™, delivers best-in-class financial technologies and capabilities through an ever-evolving modular cloud/edge-based architecture. The FinZeo platform houses a large array of financial products and services that can be implemented off-the-shelf or customized via modern APIs. Within its FinZeo platform, AppTech offers Payments-as-a-Service (“PaaS”), Banking-as-a-Service (“BaaS”), and the Commerse™ Portal.
FinZeo provides PaaS via integrated solutions for frictionless digital and mobile payment acceptance. These solutions provide advanced payment processing solutions by catering to the unique needs of each merchant. FinZeo’s PaaS solutions include ACH (automatic clearing house), credit & debit cards, eCheck, mobile processing, electronic billing, and text-to-pay. PaaS will also solve for multi-use case, multi-channel, API-driven, account-based issuer processing for card, digital tokens, and payment transfer transactions.
AppTech is positioned to further accelerate digital transformation through BaaS, layered with financial management tools that empower financial institutions to provide businesses, professionals, and individuals with the ability to better manage their finances anywhere, anytime at a fraction of the cost of traditional banking and financial services. BaaS fosters an ecosystem of immersive and scalable digital financial management services, including FinZeo’s groundbreaking automated underwriting portal. By digitizing the underwriting process, Automated Underwriting expedites business onboarding with its intuitive digital application and e-signature capabilities. This portal offers customizable pricing, risk models, and access to multiple processors, ensuring tailored solutions for diverse needs.
The Commerse Portal empowers Independent Sales Organizations (ISOs) and Independent Software Vendors (ISVs) to seamlessly integrate their businesses, facilitating swift technology adoption. By leveraging the Commerse portal, ISOs/ISVs can streamline operations and foster growth, meeting the economic demands of their merchants. Through personalized portals, ISOs/ISVs have the flexibility to select and integrate FinZeo payments and banking services, thereby enhancing their offerings to clients.
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FinZeo has a flexible architecture and can be fully white labeled to allow for rich, personalized payment and banking experiences. This cloud-based platform packages together elements of AppTech’s intellectual property, BaaS, PaaS and Commerse™ Portal to create a one-hub connection point of multi tenant portals giving the merchant, ISO/ISV, and each customer a well-defined user experience.
AppTech was reincorporated in Delaware on December 23, 2021. During this time, the business name was changed to AppTech Payments Corp. AppTech’s executive offices are located at 5876 Owens Avenue, Suite 100, Carlsbad, California 92008. The Company’s phone number is (760) 707-5959. The Company’s website address is www.apptechcorp.com. AppTech does not incorporate the information on or accessible through our website into this report. The Company has included our website address in this report solely as an inactive textual reference.
Recent Developments
On May 9, 2024, AppTech Payments Corp. received a deficiency notification from Nasdaq due to the Company’s common stock trading below the minimum bid price of $1.00 for thirty consecutive business days, as required by Nasdaq. While the notice does not currently affect the Company’s listing, AppTech Payments Corp. has until November 5, 2024, to regain compliance.
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 and six months ended June 30, 2024 and 2023, respectively.
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Revenue
Revenue was approximately $76 thousand and $134 thousand for the three months ended June 30, 2024 and 2023, representing a decrease of 43%. The decrease was principally driven by lower merchant processing revenue.
Revenue was approximately $181 thousand and $223 thousand for the six months ended June 30, 2024 and 2023, representing a decrease of 19%. The decrease was principally driven by lower merchant processing revenue.
Cost of Revenue
Cost of revenue was approximately $14 thousand and $62 thousand for the three months ended June 30, 2024 and 2023, respectively., representing a decrease of 77%, driven primarily by an decrease in residual payouts.
Cost of revenue was approximately $25 thousand and $115 thousand for the six months ended June 30, 2024 and 2023, representing a decrease of 78%, driven primarily by an decrease in residual payouts.
General and Administrative Expenses
General and administrative expenses were approximately $2.3 million and $2.8 million for the three months ended June 30, 2024 and 2023, respectively, representing a decrease of 18%. The decrease was primarily driven by lower stock based compensation.
General and administrative expenses were approximately $4.8 million and $4.9 million for the six months ended June 30, 2024 and 2023, respectively, representing a decrease of 2%. The decrease was primarily driven by lower stock based compensation.
Research and Development Expenses
Research and development expenses were approximately $0.6 million and $0.5 million for the three months ended June 30, 2024 and 2023, respectively. The increase was primarily driven by higher stock based compensation.
Research and development expenses were approximately $1.3 million and $2.0 million for the six months ended June 30, 2024 and 2023, respectively. The decrease was primarily due to lower stock based compensation of $0.5 million, lower payroll and benefit of $0.9 million, and offset by higher outsourced development consultants of $0.6 million.
Impairment of Intangible Assets
Impairment of intangible assets were approximately $0 and $6.1 million for the three and six months ended June 30, 2024 and 2023. On May 4, 2023, the Company notified Infinios of its intent to terminate its relationship. Infinios turned off all its services in June 2023 and the Company wrote-off the $6.1 million capitalized asset as it was deemed to be impaired. See Note 3 Intangible Assets - Capitalized Development Cost and Prepaid Licenses, and Note 7 - Commitments and Contingencies.
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Interest Expense, net
Interest expense, net was approximately $32 thousand for the three months ended June 30, 2024, compared to interest income, net at $3 thousand for the three months ended June 30, 2023. The increase of interest expense was primarily due to the Company’s interest on a new loan in June 2024.
Interest expenses, net was approximately $35 thousand and $43 thousand for the six months ended June 30, 2024 and 2023, respectively. The decrease was primarily due to the Company’s repayment of forbearance loan and interest in February 2023, offset by the Company’s interest on the new loan in June 2024.
Change in Fair Value of Derivative Liability
Change in fair value of derivative liability was approximately $0 and $0 for the three months ended June 30, 2024 and 2023.
Change in fair value of derivative liability was approximately $0 and $27 thousand for the six months ended June 30, 2024 and 2023, respectively. The decrease was primarily due to the Company’s settlement of derivative liabilities in April 2023.
Other income (expenses)
Other income was approximately $1 thousand and $287 thousand for the three months ended June 30, 2024 and 2023. The Company’s repaid its derivative liabilities in April 2023.
Other income was approximately $1 thousand and $715 thousand for the six months ended June 30, 2024 and 2023. The decrease was primarily driven by $430 thousand gain from cancellation of stock repurchase liabilities during the three months ended March 31, 2023, and, the Company’s repayment of derivative liabilities in April 2023.
Liquidity and Capital Resources
As of June 30, 2024, we had cash and cash equivalents of approximately $16 thousand, working capital of negative $4.3 million, and stockholders’ equity of approximately $1.7 million.
During the six months ended June 30, 2024, we met our immediate cash requirements through existing cash balances, public offerings, “at-the-market” offerings (ATM), and debt financing.
Additionally, we used equity and equity-linked instruments to pay for services and compensation.
See Note 8 – Stockholders’ Equity.
Management’s Plan to Address Going Concern Considerations
The Company has experienced recurring operating losses, primarily due to limited revenues. The Company’s current financial conditions and recurring losses raise substantial doubt about its ability to continue as a going concern.
Management is actively pursuing additional funding options and is confident that it will begin generating revenue during the following twelve months from the issuance date of these financial statements, although no assurances can be made.
Management undertook cost cutting measures to lower its expenses and it intends to maintain adequate working capital and adhere to prudent financial forecasting.
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Cash Flows
The following table presents a summary of cash flows from operating, investing and financing activities for the following comparative periods (in thousands).
Six Months Ended June 30, 2024 and 2023
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash used in operating activities | $ | (3,901 | ) | $ | (5,416 | ) | ||
| Net cash provided by (used in) investing activities | $ | – | $ | – | ||||
| Net cash provided by financing activities | $ | 2,636 | $ | 2,703 | ||||
Cash Flow from Operating Activities
Net cash used in operating activities during the six months ended June 30, 2024, was approximately $3.9 million, which is comprised of (i) our net loss of $6.0 million, adjusted for non-cash expenses totaling $1.8 million (which includes adjustments for equity-based compensation, depreciation and amortization), and (ii) changes in operating assets and liabilities of approximately $308 thousand.
Net cash used in operating activities during the six months ended June 30, 2023 was approximately $5.4 million, which is comprised of (i) our net loss of $12.2 million, adjusted for non-cash expenses totaling $7.7 million (which includes adjustments for equity-based compensation, depreciation and amortization), and (ii) increased by changes in operating assets and liabilities of approximately $0.9 million.
Cash Flow from Investing Activities
There was no cash used for investing activities during the six months ended June 30, 2024 and 2023.
Cash Flow from Financing Activities
During the six months ended June 30, 2024, net cash provided by financing activities was approximately $2.6 million. This amount primarily consists of $1.8 million in net proceeds from the issuance of common shares in our public offering, $0.7 million from the At-The-Market (ATM) offering, and a $0.2 million loan in June 2024.
Net cash provided by financing activities during the six months ended June 30, 2023 was approximately $2.7 million, which principally consists of net proceeds of $4.5 million through the issuance of common shares and warrants in our public offering, offset by repayments of the Loan forbearance Agreements in full.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Significant estimates include those related to the valuation of goodwill impairment and intangible assets, and equity-based compensation. These estimates are based on historical experience and assumptions believed to be reasonable under current conditions. It’s important to note that actual results could differ from these estimates.
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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 June 30, 2024, there have been no significant changes to our critical accounting estimates nor to our recently issued accounting pronouncements, except as described in Note 2 to our consolidated financial statements.
Equity-Based Compensation: We estimate the fair value of stock options granted using the Black-Scholes option pricing model, which requires input of subjective assumptions. The model inputs include expected stock price volatility, expected term, risk-free interest rate, and dividend yield. The assumptions about future stock price volatility and the option’s expected term involve significant judgments based on historical data and future expectations. The reported equity-based compensation expense is sensitive to changes in the volatility assumption. An increase in expected volatility could materially impact the amount of compensation expense recognized.
Goodwill: Arises when the consideration transferred in a business combination exceeds the fair value of the net identifiable assets acquired. It represents future economic benefits arising from assets that are not individually identified and separately recognized.
Intangible Assets: Identifiable intangible assets, distinguishable either by separability from the acquired entity or through contractual or other legal rights, are valued and reported independently from goodwill. These assets include, but are not limited to, trademarks, customer relationships, proprietary technology, and patents. The fair value of these intangible assets is determined at the time of acquisition and is subject to subsequent impairment tests.
The fair value of identifiable intangible assets is estimated using income, market, or cost approach methods. The income approach, often applied through the discounted cash flow (DCF) method, involves projecting future cash flows attributable to the asset and discounting them to present value using a discount rate that reflects the risk associated with those cash flows. The estimation of fair value is inherently uncertain due to the assumptions and judgments involved in projecting future cash flows, determining appropriate discount rates, and estimating the useful life of each asset.
Over the reporting period, changes in market conditions, technological advancements, or strategic shifts in the business may necessitate revisions to the assumptions used in the valuation of identifiable intangible assets. Management closely monitors these factors and will adjust the valuation of intangible assets as appropriate, reflecting the impact of any such changes in our financial statements.
Contingent Consideration: Any contingent consideration, such as earn-outs, is measured at fair value at the acquisition date and can be adjusted in subsequent periods if the fair value changes.
Goodwill Impairment
Goodwill Impairment Testing: The process requires an annual test for impairment of goodwill, and more frequent testing if certain indicators suggest that the goodwill might be impaired. This assessment involves comparing the carrying amount of a reporting unit, including goodwill, to its fair value. Key estimates in determining fair value include: a) Cash Flow Projections: Utilizing the DCF method, management estimates future cash flows based on current performance, business plans, and expected market growth, introducing judgment due to forecasting uncertainties. b) Discount Rate: The discount rate, reflecting the WACC and adjusted for unit-specific risks, is crucial for present value calculations, with changes significantly affecting fair value estimations; c) Long-term Growth Rates: Assumptions on sustainable growth rates impact the terminal value in the DCF model, thus influencing the overall fair value of the reporting unit.
Impairment Loss Calculation: The impairment loss, representing the excess of the carrying amount of goodwill over its implied fair value, is highly sensitive to the estimates and assumptions used in the fair value calculation. Small changes in cash flow projections, discount rates, or long-term growth rates can result in significant adjustments to the impairment loss recognized in the income statement. Given the dynamic nature of business conditions, technological advancements, and market competition, estimates used in goodwill impairment testing may change from one period to another. Management is tasked with regularly reviewing and updating these estimates to reflect the latest available information and market conditions.
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Once an impairment loss is recognized, it is not reversible in subsequent periods. This finality places additional importance on the accuracy and reasonableness of the underlying estimates and assumptions.
Impairment of Long-Lived Assets
Our company evaluates long-lived assets, including capitalized software, for impairment when there are indicators that the carrying amount may not be recoverable. This process involves comparing the carrying amount to the expected future undiscounted cash flows from the asset. If the carrying amount exceeds the expected cash flows, an impairment charge is recognized to reduce the asset’s carrying amount to its fair value.
Indicators of impairment include significant underperformance against projections, market or economic downturns, and technological obsolescence. The fair value is determined using market data or discounted cash flow models. An impairment loss is recorded as an expense immediately.
Recent Accounting Pronouncements
As of June 30, 2024, there have been no significant changes to our recently issued accounting pronouncements, except as described in Note 2 to our consolidated 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 Form 10-Q, we are not required to provide the information required by this item.
Item 4. Controls 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 not effective as of June 30, 2024.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during the six months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - Other Information
Item 1. Legal Proceedings
NCR Lawsuit
On November 30, 2022, AppTech filed a complaint against NCR Payment Solutions, LLC in the United States District Court for the Southern District of California.
In March 2024, the Company and NCR reached a Settlement and Release Agreement. Both parties expressly denied any liability and no further actions are required by either party.
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.
In the years of 2021 and 2022, the Company paid Infinios $1.8 million and issued to an Infinios’ affiliate about 1,895,948 shares of common stock of the Company.
On May 4, 2023, unsatisfied with Infinios’ performance of its contractual obligations, the Company notified Infinios of its intent to terminate its relationship and commenced a good-faith negotiation with Infinios regarding the termination terms.
In June 2023, Infinios turned off all its services, and the Company wrote off the $6.1 million net capitalized asset as it was deemed to be impaired.
On or about October 5, 2023, Infinios filed a demand for arbitration and a Statement of Claim before the International Centre for Dispute Resolution, (the “Arbitration Claim”). In the Arbitration Claim, Infinios asserts claims for breach of contract, quantum meruit, and account stated. Infinios alleges damages of $598,525, and asserts a demand for the grant and registration of shares.
On November 13, 2023, the Company filed an Answer to the Arbitration Claim, along with Counterclaims for breach of contract, fraudulent inducement, unjust enrichment, breach of fiduciary duty, and breach of the covenant of good faith and fair dealing.
At a Preliminary Hearing held on February 22, 2024, hearing dates of August 12 and 13, 2024, August 19 and 20, 2024, and October 21 and 22, 2024 were scheduled.
While the Company will continue to pursue consensual means of resolving this dispute, it intends to vigorously defend the claims in the Arbitration Claim, and prosecute the causes of action in its Counterclaims. Refer to Note 9 – Subsequent Events for the Status of the Litigation.
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Former Employees
Following unsuccessful negotiations regarding severance payments, three former employees filed a lawsuit against the Company in May 2024 concerning their severance claims. After reviewing the case details, including the lawsuit, the Company has assessed that it is less likely than not that a severance obligation will be incurred. Given this assessment, the Company has determined that no accrual for severance payments is necessary as of June 30, 2024.
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 quarter ended June 30, 2024, we have issued unregistered securities to the persons described below. We believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) of the Securities Act thereof as a transaction not involving a public offering. The recipients both had access, through their relationship with us, to information about us.
As previously disclosed, the Company completed its acquisition of Alliance Partners on October 26, 2023. On October 31, 2023, the Company issued 1,000,000 shares of common stock valued at $2.44 per share to an entity owned by the Seller in exchange for the cancellation of long-term debt of FinZeo. On May 2, 2024, the Board approved the cancellation and reissuance of these shares to accommodate an internal request by the Seller, with no impact on equity or the value of the asset.
During the quarter ended June 30, 2024, the Company granted 160,000 shares of common stock to several consultants in connection with business development and professional services, valued at $175 thousand.
On June 10, 2024, the Company entered into a 60-day unsecured note agreement with Black Ice Advisors, LLC, a third-party lender, for proceeds of $200 thousand. The note bears interest of $24 thousand, due along with the principal amount, within 60 days of receipt of funds, resulting in a total payable amount of $224 thousand. Additionally, the Company issued 30,000 shares of Rule 144 restricted common stock to the lender on June 17, 2024. The maturity date of the note is August 10, 2024.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
a. During the quarter ended June 30, 2024, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.
b. During the quarter ended June 30, 2024, there were no material changes to the procedures by which members may recommend nominees to our board of directors.
c. During the quarter ended June 30, 2024,
no director or officer
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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: August 14, 2024 | By: | /s/ Luke D’Angelo |
| Name: | Luke D’Angelo | |
| Title: | Chief Executive Officer | |
| Date: August 14, 2024 | By: | /s/ Meilin Yu |
| Name: | Meilin Yu | |
| Title: | Chief Financial Officer and Treasurer | |
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