NOTES
TO THE UNAUDITED 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
is developing an embedded, highly secure digital payments and banking platform that powers 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.
In
2013, AppTech merged with Transcendent One, Inc., whereby Transcendent One, Inc. and its management took controlling ownership of the
Company. During this time, AppTech operated as a merchant services provider, continuing the business conducted by Transcendent One, Inc.
In
2017, the Company acquired assets from GlobalTel Media, Inc. The assets included patented, enterprise-grade software for advanced text
messaging. In addition to the software, four patents in text technology, and additional intellectual property for mobile payments.
In
2020, AppTech entered into a strategic partnership with Infinios (formerly “NEC Payments”), to extend its product offering
to include flexible, scalable, and secure payment acceptance and issuer payment processing that supports the digitization of business
and consumer financial services and the migration of cash and other legacy payment types to contactless card and real time payment transactions.
In
2021, the Company announced its intent to launch an innovative and patented mobile text payment solution in addition to a suite of digital
banking and payment acceptance products designed in the Business-to-Business (“B2B”) and Business-to-Consumer (“B2C”)
payment and software space.
On
December 23, 2021, AppTech re-domiciled to Delaware and changed its name from “AppTech Corp.” to “AppTech Payments
Corp.” AppTech stock trades under the symbol “APCX” and its warrants trade under the symbol “APCXW,” on
the Nasdaq Capital Market ("NASDAQ").
The
Company successfully completed its capital raise and uplisting onto NASDAQ (herein referred to as its “Offering”) on
January 7, 2022. As part of the Offering, the Company executed a 9.5
to 1 reverse split of its common stock. In addition, the Offering sold
3,614,458 units of our common stock (a unit consisting of one share of common stock and a warrant to purchase one share of
common stock) at $4.15 per
unit. In addition, 542,168 warrants were granted by EF Hutton and the Offering warrants of 3,614,458, all having a five-year 5
expiration and an exercise price of $5.19. The Offering provided net proceeds of approximately $13.4 million. All shares and share
prices within this 10-Q have been adjusted to reflect the stock split.
In
April 2022, the Company acquired HotHand Inc. (“HotHand”), a patent-holding company. These patents are focused on the delivery,
purchase, or request of any products or services within specific geolocation and time parameters, provided by a consumer’s cell
phone anywhere in the United States.
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 September 30, 2022 and September 30, 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 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, 2021, filed
with the SEC on March 31, 2022. The interim results for the three and nine months ended September 30, 2022 are not necessarily indicative
of the results to be expected for the year ended December 31, 2022 or for any future interim periods.
Basis
of Consolidation
The
consolidated financial statements include the accounts of AppTech Payments Corp., its wholly owned subsidiary 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. 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 $250 thousand
per institution that pays Federal Deposit Insurance Corporation (“FDIC”) 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. The Company currently uses seven
financial institutions to service their merchants for which represented 100% of accounts receivable
as of September 30, 2022. The loss of one of these financial institutions would not have a significant impact on the Company’s
operations as there are additional financial institutions available to the Company. For the nine months ended September 30, 2021,
one merchant (customer) represented approximately 40% of the total revenues. The loss of
this customer would not have significant impact on the Company’s operations.
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 September 30, 2022 and December 31,
2021 on recurring basis (in thousands):
Schedule of derivative liabilities | |
| | | |
| | | |
| | | |
| | |
| |
September
30, 2022 | |
|
| |
Level
1 | |
Level
2 | |
Level
3 | |
Total
Carrying Value |
Derivative liabilities | |
$ | — | | |
$ | — | | |
$ | 418 | | |
$ | 418 | |
| |
December
31, 2021 | |
|
| |
Level
1 | |
Level
2 | |
Level
3 | |
Total
Carrying Value |
Derivative liabilities | |
$ | — | | |
$ | — | | |
$ | 599 | | |
$ | 599 | |
See
Note 6 for discussion of valuation and roll forward related to derivative liabilities.
Intangible
Assets and Patents
Our
intangible assets only consist of patents. We amortize the patents on a straight-line basis over 15 years, which approximates the way
the economic benefits of the intangible asset will be consumed.
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 nine months ended September 30, 2022 and
2021 approximately $5.5 million and $0, respectively.
Per
Share Information
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 5,999,940
and 1,315,598 for the nine months ended September 30,
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.
Schedule of anti dilutive stock | |
| | | |
| | |
| |
September
30, 2022 | |
September
30, 2021 |
| |
| |
|
Series A preferred stock | |
| 1,149 | | |
| 1,149 | |
Convertible debt | |
| 174,060 | | |
| 172,549 | |
Warrants | |
| 4,275,464 | | |
| 21,053 | |
Options | |
| 1,039,868 | | |
| 765,526 | |
Restricted stock units | |
| 509,399 | | |
| 355,321 | |
Total | |
| 5,999,940 | | |
| 1,315,598 | |
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.
NOTE
3 – INTANGIBLE ASSETS
Software
Development Cost
The
Company capitalizes certain costs related to the development of its elite digital banking platform. Costs incurred during the development
phase are capitalized only when we believe it is probable the development will result in new or additional functionality. The types of
costs capitalized during the development phase include employee compensation and consulting fees for third party developers working on
these projects. Costs related to the preliminary project planning phase and post implementation phase are expensed as incurred. The elite
digital banking platform is amortized on a straight line basis over the estimated useful life of the asset. The Company has capitalized
approximately $5.2 million of software development costs as of September 30, 2022 and will amortize over five years beginning October
1, 2022. The Company capitalized $1.8 million during the nine months ended September 30, 2022 which included costs that were initially
recorded as research and development expenses of $0.4 million and $0.5 million during the three month periods ended March 31, 2022 and
June 30, 2022, respectively. The error was not material enough to require restatement and those periods will be revised prospectively.
Management
evaluated the materiality of capitalizing and revising the research and development expenses in the first and second quarter 10-Qs from
a qualitative and quantitative perspective in accordance with the requirements of the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 99, Materiality (SAB 99) and determined the impact to the financial statements to be immaterial.
Patents
In
April 2022, the Company fully executed a Definitive Agreement to acquire HotHand Inc. (“HotHand”), a patent-holding company.
HotHand did not have any operations, so the transaction was an asset acquisition of its portfolio of thirteen patents including USPTO
7,693,752; USPTO 8,554,632; USPTO 8,799,102; USPTO 9,436,956; USPTO 10,102,556; USPTO 10,127,592; USPTO 10,600,094; USPTO 10,621,639;
USPTO 10,846,726; USPTO 10,846,727; USPTO 10,909,593; USPTO 11,107,140; USPTO 11,345,715. These patents are focused on the delivery,
purchase, or request of any products or services within specific geolocation and time parameters, provided by a consumer’s cell
phone anywhere in the United States. Additionally, HotHand’s family of patents includes a patent that protects advertising on a
store’s mobile application when the cell phone is in the store and the ads shown are being triggered by geolocation tagging.
AppTech
is currently integrating the HotHand Intellectual Property (“IP”) into an elite digital platform. In addition to offering
an embedded, highly secure, and patent-backed product, AppTech will offer licensing agreements for its IP.
HotHand
was acquired for 225,000 shares of common stock and was allocated to the patents as an intangible asset based on the fair market value
of the common stock on the date of acquisition (April 18, 2022). The Company expects to amortize the asset over fifteen years. Further,
the purchase agreement outlines revenue milestones that may trigger four payments of $500 thousand payables to HotHand's former
owners.
See
Note 8 for more information on capitalized prepaid software development and license.
NOTE
4 – ACCRUED LIABILITIES
Accrued
liabilities as of September 30, 2022 and December 31, 2021 consist of the following (in thousands):
Schedule of Accrued Liabilities | |
| | | |
| | |
| |
September
30, 2022 | |
December
31, 2021 |
| |
| |
|
Accrued interest – third
parties | |
$ | 1,215 | | |
$ | 1,420 | |
Accrued payroll | |
| 386 | | |
| 294 | |
Accrued residuals | |
| 33 | | |
| 98 | |
Anti-dilution provision | |
| 72 | | |
| 1,290 | |
Other | |
| 21 | | |
| 34 | |
Total accrued liabilities | |
$ | 1,727 | | |
$ | 3,136 | |
Accrued
Interest
Notes
payable and convertible notes payable incur interest at rates between 10% and 24%, 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 73,848 shares of its common stock at $17.46 per share for a total value of $1.3 million as of December 31, 2021.
Further, in connection with the capital raise discussed in Note 1, the Company issued an additional 378,109 shares of its common stock
at $2.20 per share for a value of $832 thousand or a total value of $2.1 million. The 451,957 total shares were issued in May
2022.
Further,
in connection with the shares to be issued as part of the HotHand acquisition, and to be in compliance
with its anti-dilution provision with Infiinios, the Company accrued an additional 39,706 shares of its common stock at $1.81 per share
for a total of $72 thousand. The shares have not been issued to Infinios as of November 10, 2022.
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 September 30, 2022.
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. Upon maturity of the convertible note, interest rate will be increased to 24%. 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 $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 September 30, 2022 and December 31,
2021, the convertible note payable balance was $280 thousand and $280 thousand, and has accrued interest of $102 thousand and $39 thousand,
respectively.
As
of September 30, 2022, the convertible note payable discount is $1 thousand.
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. On March 30, 2022, the Company entered into forbearance agreements
in exchange for not enforcing the terms of the original agreements. In November 2022, the parties agreed to extend the terms of the forbearance
agreements for an additional six months. As of September 30, 2022 and December 31, 2021, the balance of the convertible notes
was $400 thousand and $400 thousand, respectively. As of September 30, 2022 and December 31, 2021, the accrued interest related
to the convertible notes was $278 thousand and $268 thousand, respectively.
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 September 30, 2022 and December 31, 2021 the balance of the note payable was $67 thousand and $68 thousand, and accrued
interest was $6 thousand and $4 thousand, respectively.
A
significant shareholder funded the Company’s operations through notes payable primarily in 2009 and 2010. On May 2, 2021, the Company
entered into a debt reduction and confirmation agreement with the significant shareholder that is no longer a related party. The Company
entered into a forbearance agreement in exchange for not enforcing the terms of the agreement. In November 2022, the parties agreed to
extend the terms of the forbearance agreement for an additional six months. As of September 30, 2022, and December 31, 2021,
the balance of the notes payable was $597 thousand and $597 thousand respectively, and the the accrued interest related to the notes
was $133 thousand and $383 thousand, respectively.
The
Company entered into several notes payable with third parties. The Company entered into forbearance agreements in exchange for not enforcing
the terms of the agreement. In November 2022, the parties agreed to extend the terms of the forbearance agreement for an additional six
months. As of September 30, 2022 and December 31, 2021, the balance of the notes payable was $525 thousand and $525 thousand,
respectively, and the accrued interest related to the notes payable was $606 thousand and $606 thousand, respectively.
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, the fair values of the variable conversion option and warrants were recorded as derivative
liabilities on the issuance date and revalued for the nine months ended September 30, 2022 and December 31, 2021.
Based
on the convertible notes described in Note 5, the derivative liability day one loss is $390
thousand and the change in fair value for the nine months ended September 30, 2022 and December 31, 2021 is $181 thousand and
$26 thousand, respectively. The fair value of applicable derivative liabilities on notes, warrants and change in fair value of derivative
liability are as follows for the nine months ended September 30, 2022 (in thousands).
Schedule of fair value of derivative liabilities | |
| | | |
| | | |
| | |
| |
Derivative
Liability Convertible Notes | |
Derivative
Liability Warrants | |
Total |
Balance as of December 31, 2021 | |
$ | 274 | | |
$ | 325 | | |
$ | 599 | |
Change in fair value | |
| (45 | ) | |
| (136 | ) | |
| (181 | ) |
Balance as of September 30, 2022 | |
$ | 229 | | |
$ | 189 | | |
$ | 418 | |
As
of September 30, 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 | |
$ | 0.69 | |
Expected volatility | |
| 79.3 | % |
Expected term (in years) | |
| 0.25 | |
Risk-free interest rate | |
| 3.65 | % |
As
of September 30, 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 | |
$ | 0.69 | |
Expected volatility | |
| 93.9 | % |
Expected term (in years) | |
| 3.13 | |
Risk-free interest rate | |
| 3.72 | % |
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 September 30,
2022, including the total amount of related imputed interest (in thousands):
Years
ending December 31:
| Schedule of Future Minimum Rental Payments for Operating Leases | | |
| | |
| 2022 | | |
$ | 21 | |
| 2023 | | |
| 88 | |
| 2024 | | |
| 90 | |
| 2025 | | |
| 7 | |
| Operating
Lease Total | | |
| 206 | |
| Less:
Imputed interest | | |
| (27 | ) |
| Total | | |
$ | 179 | |
The
rent expense was $64 thousand and $46 thousand
for the nine months ended September 30, 2022 and 2021, respectively.
In
September 2022, the Company opened a new office in Austin’s emerging tech hub to expand operations and foster growth. The one year
lease is $11 thousand.
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. On January 24,
2021, the parties entered a stipulation modifying the repayment schedule of the settlement which altered the timing of payments over
the three-year repayment period. The final payment was made in March 2022. The litigants are now paid in full and no further action is
warranted by the Company.
Other
Resolved Lawsuit
In
July 2020, Flowpay Corporation, a Delaware corporation ("Flowpay"), and R. Wayne Steiger, the President of Flowpay, 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. The claims included breach of contract, intentional misrepresentation,
negligent misrepresentation, and unjust enrichment. Management believes the non-binding MOU terminated after no definite agreement was
executed between the parties, and negotiations ceased December 20, 2016. On May 19, 2022, AppTech entered into a Settlement and Release
Agreement (the “Settlement Agreement”) with Flowpay and Mr. Steiger. Under the terms of the Settlement Agreement, Flowpay
and Mr. Steiger dismissed with prejudice all claims against the Company, its Chief Executive Officer, a Director and a third party individual.
Convertible
Note and Warrant Lawsuit
On
July 14, 2021, EMA Financial LLC, a Delaware limited liability company (“EMAF”), filed a complaint in the United States District
Court for the Southern District of New York against the Company. In its complaint, EMAF alleged that AppTech breached the terms of a
convertible note and a related warrant agreement purchased by EMAF pursuant to a securities purchase agreement between the parties.
On
September 3, 2021, EMAF filed a motion for summary judgement arguing that it should be granted a total of $1.95 million in damages.
AppTech filed a motion to dismiss EMAF’s complaint in its entirety. On September 13, 2022, the court denied AppTech’s motion
to dismiss, and granted EMAF’s motion for summary judgement in part and denied in part. In particular, the court granted EMA’s
motion for summary judgment for its claim of breach of contract but denied its request for damages of $1.95 million. On October
27, 2022, EMAF filed a briefing arguing that it should be granted either a total of $1.26 million or a total of $1.95 million in damages,
plus its attorney fees and additional interest after October 27, 2022. AppTech and EMAF are scheduled to file supplemental briefings
regarding the damages in November 2022. No final ruling has been made by the court. AppTech and its Counsel still believe EMAF’s
claims are meritless. The Company intends to defend against this lawsuit vigorously and counter if necessary.
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 21,052 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 3,614,458 units of our common stock (a unit consisting 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 $2.8 million and capitalized licensing of $1.0 million. The estimated amortization is a 5-year life based on the term
of the licensing agreement. The amortization is set to begin once the platform begins processing transactions (in thousand).
As
of September 30, 2022, the following fees were paid (in thousands):
Schedule of fees paid to NECP platform | |
| | |
Engagement Fee (prepaid licensing
cost) | |
$ | 100 | |
License subscription fee (prepaid licensing
cost) | |
| 750 | |
Annual maintenance subscription fee (prepaid
licensing cost) | |
| 113 | |
Implementation fee (capitalized software cost) | |
| 325 | |
Infrastructure implementation fee (capitalized
software cost) | |
| 65 | |
Training fee (50% due
at Funding Date) | |
| 50 | |
Total | |
$ | 1,403 | |
The
annual maintenance subscription fee of $113 thousand will be due annually beginning in the month of the platform launch. In addition,
the infrastructure support fee of $72 thousand will be due annually with monthly payments beginning in February 2022 and ending in 2026.
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.
On
May 31st, 2022, the Company entered into a six months agreement with another investor relations firm. The firm received 100,000 shares
of AppTech's common stock valued at the closing price on May 31st, 2022, in return for providing marketing and investor relation services.
NOTE
9 – STOCKHOLDERS’ DEFICIT
Common
Stock
During
the nine months ended September 30, 2022 and 2021, the Company issued 345,742 and 488,053, respectively, shares of common stock
to several consultants in connection with business development and professional services. The Company valued the common stock issuances
at $566 thousand and $2.5 million, respectively, based upon the closing market price of the Company’s common stock on the date
in which the performance was complete or issued based upon the vesting schedule and the closing market price of the Company’s common
stock on the date of the agreement. The amounts were expensed to general and administrative expenses on the accompanying statements of
operations.
During
the nine months ended September 30, 2022 and 2021, the Company granted 133,912
and 36,842
shares of common stock to the board of directors
valued at $194
thousand and $197
thousand, respectively. The shares vest quarterly
over the period of approximately one year.
During
the nine months ended September 30, 2022, the Company has
reserved the 225,000
shares of common stock to HotHand.
See
Note 8 – Significant Contracts for additional common stock issuance.
Stock
Options
During
the nine months ended September 30, 2022:
| a) | options
to purchase 363,685 shares of common stock at a weighted average price of $2.73 were granted
as compensation to employees. The options vest in equal monthly installments ranging from
instantly to 24 months. The options were valued at $992 thousand using a Black-Scholes options
pricing model. |
| b) | options
to purchase 63,157 shares of common stock at a weighted average price of $7.29 were granted
as compensation for various services including engineering, accounting, and sales. The options
were valued at $460 thousand using a Black-Scholes options pricing model. |
The
fair value of the options for the nine months ended September 30, 2022 is estimated using a Black-Scholes option pricing model with
the following range of assumptions:
Market
value of common stock on issuance date |
$0.64
- $12.45 |
Exercise
price |
$0.64
- $12.04 |
Expected
volatility |
415%
- 442% |
Expected
term (in years) |
0.0
- 5.0 |
Risk-free
interest rate |
0.11 % |
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 |
1,055,184 |
|
$ 6.62 |
|
|
Issued |
426,842 |
|
$ 3.76 |
|
|
Exercised |
(42,105) |
|
$ 0.10 |
|
|
Cancelled |
(400,053) |
|
$ 2.52 |
|
|
Outstanding
as of September 30, 2022 |
1,039,868 |
|
$ 7.29 |
|
2.01 |
Outstanding
as of September 30, 2022, vested |
858,682 |
|
$ 7.67 |
|
1.99 |
The
remaining expense outstanding through September 30, 2022 is $2.1 million which is expected
to be expensed over the next 2 years in general and administrative expense.
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 1,052,632 shares of common stock were authorized under the Equity Incentive Plan, for which as of September 30, 2022
a total of 294,232 are available for issuance.
The
Company extended its stock repurchase agreement with the Chief Financial Officer. Terms of the updated agreement state that the Company
has until January 31, 2023 to buyback 263,158 shares of its common stock for $500 thousand.
In
July 2022, the Company amended its option agreements with all employees, consultants and board of directors. The shareholders will vote
to ratify the amendment as part of the annual shareholder meeting tentatively scheduled to take place in April 2023.
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 their date of issuance.
In
total, the Company has 4,275,464 warrants outstanding. 3,614,458 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.
For
forbearance agreements disclosure, see Note 5.