AppTech Payments (APCX) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Special Note Regarding Forward-Looking Statements and Projections The report contains forward-looking statements subject to substantial risks and uncertainties, with actual results potentially differing materially due to various factors[4][6] Item 1. Financial Statements (unaudited) This section presents AppTech Corp.'s unaudited condensed financial statements, including Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows, with accompanying notes Condensed Balance Sheets as of March 31, 2021 and December 31, 2020 Total assets grew to $7.49 million by March 31, 2021, driven by capitalized software, while liabilities rose, maintaining a substantial stockholders' deficit | Metric | March 31, 2021 | December 31, 2020 | Change (Absolute) | Change (%) | | :-------------------------- | :------------- | :---------------- | :---------------- | :--------- | | Total Assets | $7,487,704 | $379,689 | $7,108,015 | 1872.0% | | Total Liabilities | $9,146,164 | $8,574,419 | $571,745 | 6.7% | | Total Stockholders' Equity (Deficit) | $(1,658,460) | $(8,194,730) | $6,536,270 | -79.8% | | Cash | $617,789 | $57,497 | $560,292 | 974.5% | | Capitalized prepaid software development and license | $6,450,921 | $0 | $6,450,921 | N/A | Condensed Statements of Operations for the three months ended March 31, 2021 and 2020 Net loss significantly increased to $(66.3) million for Q1 2021, primarily due to a large equity issuance expense, despite a 73% increase in revenues | Metric | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (Absolute) | Change (%) | | :-------------------------------------------- | :-------------------------- | :-------------------------- | :---------------- | :--------- | | Revenues | $100,663 | $58,157 | $42,506 | 73.1% | | Cost of revenues | $34,399 | $23,225 | $11,174 | 48.1% | | Gross profit | $66,264 | $34,932 | $31,332 | 89.7% | | General and administrative | $1,780,360 | $1,415,899 | $364,461 | 25.7% | | Excess fair value of equity issuance over assets received | $63,943,174 | $0 | $63,943,174 | N/A | | Research and development | $0 | $12,000 | $(12,000) | -100.0% | | Total operating expenses | $65,723,534 | $1,427,899 | $64,295,635 | 4503.6% | | Loss from operations | $(65,657,270) | $(1,392,967) | $(64,264,303) | 4613.9% | | Interest expense | $(128,823) | $(71,083) | $(57,740) | 81.2% | | Change in fair value of derivative liability | $(507,542) | $0 | $(507,542) | N/A | | Net loss | $(66,293,498) | $(1,464,050) | $(64,829,448) | 4428.1% | | Basic and diluted net loss per common share | $(0.69) | $(0.02) | $(0.67) | 3350.0% | Condensed Statements of Stockholder's Equity (Deficit) for the three months ended March 31, 2021 and 2020 Accumulated deficit grew to $(111.2) million by March 31, 2021, due to net loss, while common stock and additional paid-in capital also increased | Metric | Balance Dec 31, 2020 | Net Loss (3 Months) | Balance Mar 31, 2021 | | :------------------------------------ | :------------------- | :------------------ | :------------------- | | Common Stock Shares Outstanding | 88,511,657 | 18,401,015 | 106,912,672 | | Common Stock Amount | $88,512 | $18,401 | $106,913 | | Additional Paid-in Capital | $36,664,488 | $72,811,367 | $109,475,855 | | Accumulated Deficit | $(44,947,730) | $(66,293,498) | $(111,241,228) | | Total Stockholders' Equity (Deficit) | $(8,194,730) | $(64,829,448) | $(1,658,460) | - The increase in Additional Paid-in Capital is largely due to the issuance of common stock for services, capitalized software development, and proceeds from the sale of repurchase options[18] Condensed Statements of Cash Flows for the three months ended March 31, 2021 and 2020 Net cash increased by $560,292 in Q1 2021, as $1,905,250 from financing activities offset cash used in operating and investing activities | Cash Flow Activity | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (Absolute) | | :---------------------------------- | :-------------------------- | :-------------------------- | :---------------- | | Net cash used in operating activities | $(385,458) | $(190,888) | $(194,570) | | Net cash provided by (used in) investing activities | $(959,500) | $23,411 | $(982,911) | | Net cash provided by financing activities | $1,905,250 | $158,481 | $1,746,769 | | Changes in cash and cash equivalents | $560,292 | $(8,996) | $569,288 | | Cash and cash equivalents, end of period | $617,789 | $15,163 | $602,626 | - Non-cash investing and financing transactions related to capitalized software and licensing costs amounted to $5,491,421 for the three months ended March 31, 2021[21] Notes to the Unaudited Financial Statements This section provides detailed disclosures and explanations for the unaudited financial statements, covering organization, accounting policies, going concern, patents, liabilities, and equity NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS AppTech Corp. is a FinTech company specializing in electronic payment processing and merchant services, offering patented software for cashless payments and expanding into API-driven issuer processing - AppTech Corp. is a FinTech company providing electronic payment processing technologies and merchant services, including patented and proprietary software for cashless/contactless payments[22] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines significant accounting policies, including revenue recognition, fair value measurements, software development, derivative liabilities, and stock-based compensation - The company adopted ASC 606 for revenue recognition effective January 1, 2019, with an immaterial cumulative effect[31] - Revenue is generated from merchant processing solutions for credit cards and electronic payments, with the company acting as an agent, recorded as services are performed, typically when the bank processes payments[32] - Derivative liabilities are recognized for convertible notes with variable conversion provisions and warrants with variable anti-dilution provisions, revalued at each reporting period[52] - Stock-based compensation for employees, directors, and consultants is recognized as an expense based on estimated fair values, typically the closing price of common stock on the grant date, over the service period[53] NOTE 3 – GOING CONCERN Substantial doubt about the company's ability to continue as a going concern exists due to significant net loss, cash usage, and accumulated deficit, despite plans for additional fundraising - Substantial doubt about going concern due to: * Net loss: $(66,293,498) for Q1 2021 * Cash used in operating activities: $(385,458) for Q1 2021 * Working capital deficit: $(6,863,913) as of March 31, 2021 * Accumulated deficit: $(111,241,228) as of March 31, 2021[56] - Management plans to raise additional funds through public or private debt/equity offerings to fund operations and reduce the working capital deficit[57] - The company received $1,972,750 from seven sales of a repurchase option during 2021, and an additional $145,500 through May 13, 2021[57] - The COVID-19 pandemic continues to adversely impact processing volumes and could affect the company's ability to raise capital[58] NOTE 4 – PATENTS AppTech acquired key patents for advanced messaging and mobile payments from GlobalTel Media, Inc. in 2017, with associated costs expensed as R&D due to uncertain future cash flow - AppTech acquired key patents for advanced messaging and mobile payments from GlobalTel Media, Inc. in 2017[60] - The acquisition involved a payment of $1,600,000, assumption of liabilities, and a revenue share of 25% of net proceeds from patent revenue up to $26,600,000[60] - Costs associated with patents are expensed as research and development due to the inability to reasonably estimate future cash flow[60] NOTE 5 – ACCRUED LIABILITIES Total accrued liabilities reached $2,725,192 by March 31, 2021, with many accrued interest amounts in technical default due to past-maturity notes | Accrued Liability | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | Accrued interest – related parties | $1,056,130 | $1,039,977 | | Accrued interest – third parties | $1,456,253 | $1,395,133 | | Accrued residuals | $78,694 | $62,174 | | Accrued merchant equity | $74,773 | $91,023 | | Other | $59,342 | $44,027 | | Total accrued liabilities | $2,725,192 | $2,632,334 | - Many accrued interest amounts are in technical default due to notes being past their maturity date[65] - The company has an obligation to issue approximately 776,000 shares of common stock under its Merchant Equity Program, which ended December 31, 2015[67] NOTE 6 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE This note details various loans and convertible notes payable, many of which are in default, with some featuring variable conversion provisions or embedded derivative liabilities - Loans payable from related parties totaled $1,900 as of March 31, 2021, down from $34,400 at December 31, 2020, and are due on demand, unsecured, and non-interest bearing[70] - Subordinated notes payable of $350,000 (issued in 2016) are in default, with accrued interest of $162,295 as of March 31, 2021[71] - A $300,000 convertible note issued in 2020 bears 12% interest and has variable conversion provisions, leading to bifurcation and liability classification of the embedded conversion feature and warrants as derivative liabilities[72][74] - Several older convertible notes (2017, 2015, 2014, 2008/2009) and notes payable (2016, 2009/2010, 2008, 2007) are currently in default, with significant accrued interest[76][78][79][80][81][82][83][84][86][87][88] - Subsequent to March 31, 2021, convertible note holders converted $1,207,600 in principal and interest into 4,559,229 shares[148] NOTE 7–DERIVATIVE LIABILITIES Total derivative liability significantly increased to $1,105,490 by March 31, 2021, driven by a $507,542 change in fair value, estimated using a Monte Carlo pricing model | Derivative Liability Type | March 31, 2021 | December 31, 2020 | Change (Absolute) | | :------------------------ | :------------- | :---------------- | :---------------- | | Convertible note payable | $642,180 | $378,134 | $264,046 | | Warrants | $463,310 | $219,814 | $243,496 | | Total Derivative Liabilities | $1,105,490 | $597,948 | $507,542 | - The fair value of derivative liabilities is estimated using a Monte Carlo pricing model, with key assumptions including market value of common stock, expected volatility, expected term, and risk-free interest rate[92][94] NOTE 8–RIGHT OF USE ASSET The company recognized a right-of-use asset and liability for a five-year facility lease commencing February 2020, with Q1 2021 rent expense of $15,295 - The company has a five-year operating lease for its facility, commencing February 8, 2020[95] - Rent expense for Q1 2021 was $15,295, a decrease from $21,914 in Q1 2020[95] NOTE 9 - COMMITMENTS AND CONTIGENCIES This note details legal proceedings, including settled shareholder and patent lawsuits, and ongoing strategic partnerships with Maxim Group, Silver Alert Services, and NEC Payments - The company settled a lawsuit with former shareholders for $240,000, with a modified repayment schedule in 2021[97][195] - A patent acquisition lawsuit was conditionally settled for $150,000, fully paid by December 30, 2020[101] - The company is involved in a lawsuit regarding a non-binding MOU from 2016, which management believes is without merit[102][196] - Engaged Maxim Group LLC as lead underwriter for a follow-on offering of approximately $15 million in securities, with a 7% underwriting discount and 1% expense allowance[104] - Strategic partnership with Silver Alert Services, LLC (Lifelight Systems) for telehealth and personal emergency response systems, involving a promissory note up to $1.0 million and options to purchase 3,500,000 shares (amended to 2,500,000 shares at $0.25 and 1,000,000 shares at $0.01); the company will assess vesting probability at each reporting period[105][108][109] - Amended and restated strategic partnership with Silver Alert Services, LLC provides for a 70% ownership in Silver Alert, LLC upon certain revenue goals being achieved, altering revenue sharing[110] - Strategic partnership with NEC Payments B.S.C. (NECP) for digital banking and payment technology solutions, granting AppTech a license and conditional exclusivity in the US, involving an engagement fee of $100,000, initial fees of $707,500, and the issuance of 18,011,515 shares of common stock to NECP valued at $67,543,182[111][112][115][116] - The issuance of common stock to NECP was recorded as a $5,000,000 asset (capitalized prepaid software development and licensing) and $62,543,182 as an expense (excess fair value of equity issuance over assets received)[116] - The company entered into an amended independent contractor services agreement with Innovations Realized, LLC (IR) for strategic operating plan development, involving payments and options to purchase 400,000 shares at $0.01 and 2,500,000 shares at $0.25[120][121] - The company transitioned all relevant independent contractors to paid full-time employees in April 2021 to mitigate risks of misclassification[122] NOTE 10 – STOCKHOLDERS' DEFICIT As of March 31, 2021, 106,912,672 common shares were outstanding, following significant Q1 2021 issuances for services, partnerships, and judgment purchases, alongside stock option grants - As of March 31, 2021, 106,912,672 shares of common stock were outstanding, an increase from 88,511,657 at December 31, 2020[125] - During Q1 2021, the company issued: * 247,000 common shares for business development and professional services ($315,990) * 87,500 common shares to board of directors ($49,174) * 5,000 common shares to a merchant for contract extension ($16,250) * 200,000 common shares to purchase a judgment ($1,000,000) * 18,011,515 common shares for a strategic partnership ($67,543,182)[126][127][128][198][199] - Stock options outstanding as of March 31, 2021, totaled 6,707,000 shares with a weighted average exercise price of $0.21[135] - The AppTech Equity Incentive Plan authorized 5,000,000 shares, with 3,244,500 available for issuance as of March 31, 2021[136] - The company generated $1,972,750 in proceeds from the sale of common stock repurchase options during Q1 2021[139][140][141][142][143][198] NOTE 11 – SUBSEQUENT EVENTS Subsequent to Q1 2021, the company generated additional proceeds from repurchase options, established new executive agreements, converted convertible notes, and reduced debt with a significant shareholder - Additional proceeds from common stock repurchase options: $117,500 on April 7, 2021, and $28,000 on April 8, 2021[144][146] - New employment and stock option agreements were established with named executive officers[147] - Convertible note holders converted $1,207,600 in principal and interest into 4,559,229 shares on April 29, 2021[148] - A debt reduction and confirmation agreement on May 2, 2021, reduced outstanding accrued interest by $275,000 with a significant shareholder[148] - 24,199 shares of common stock were issued to a merchant under the merchant equity program on May 10, 2021[148] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, covering business overview, COVID-19 impact, Q1 2021 performance, liquidity, capital resources, and critical accounting policies Business Overview AppTech aims to simplify digital financial services through innovative payment processing, reconciliation, and digital banking, leveraging patented software for cashless payments and expanding into telehealth - AppTech is a FinTech company focused on simplifying digital financial services through payment processing, reconciliation, and digital banking, complementing its core merchant services[151] - The company offers patented, exclusively licensed, and proprietary software for frictionless digital and mobile payment acceptance, including alternative payment methods (APMs)[151] - AppTech is expanding into multi-use case, multi-channel, API-driven, account-based issuer processing for card, digital tokens, and payment transfer transactions[151] - A key to success is the continued development of enterprise-grade, patent-protected software for SMS text payments via mobile devices, which will benefit unbanked and underbanked individuals[157] - The company is expanding into telehealth and remote patient monitoring, aiming to integrate payment acceptance technologies and provide financial/administrative services for substantial revenue share from Medicare billing[160] Effects of the COVID-19 Pandemic The COVID-19 pandemic has adversely impacted processing volume, liquidity, and financial condition, with ongoing uncertainty regarding future economic downturns and capital raising efforts - COVID-19 has adversely affected processing volume, liquidity, and financial condition, with potential for further impact from economic downturns and merchant closures[162][180] - Revenue began to return to normal after initial significant concessions and increased online purchasing, but the continuing effects are still uncertain[58] Financial Operations Overview This section defines AppTech's statements of operations components, including revenues from financial processing, cost of revenue, operating expenses, and other expenses like interest and derivative liability changes - Revenue is generated from financial processing services to businesses[165] - Cost of revenue includes processing costs and residual payments to business development partners[166] - General and administrative expenses include professional services, rent, and utilities[166] - Research and development costs include acquiring patents, unproven technologies, contractor fees, and SMS short code texting platform development[166] Results of Operations: The Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020 Q1 2021 saw a 73% revenue increase and 89.7% gross profit growth, but a 4503.6% surge in operating expenses led to a $(66.3) million net loss, primarily due to equity issuance expense | Metric | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (Absolute) | Change (%) | | :-------------------------------------------- | :-------------------------- | :-------------------------- | :---------------- | :--------- | | Revenue | $100,663 | $58,157 | $42,506 | 73.1% | | Cost of Revenue | $34,399 | $23,225 | $11,174 | 48.1% | | Gross Profit | $66,264 | $34,932 | $31,332 | 89.7% | | General and Administrative Expenses | $1,780,360 | $1,415,899 | $364,461 | 25.7% | | Excess Fair Value of Equity Issuance Over Assets Received | $63,943,174 | $0 | $63,943,174 | N/A | | Research and Development Expenses | $0 | $12,000 | $(12,000) | -100.0% | | Interest Expense, net | $(128,823) | $(71,083) | $(57,740) | 81.2% | | Change in Fair Value of Derivative Liability | $(507,542) | $0 | $(507,542) | N/A | | Net Loss | $(66,293,498) | $(1,464,050) | $(64,829,448) | 4428.1% | - Revenue increase was driven by higher processing volume and lower processing fees[171] - The significant increase in operating expenses was primarily due to two major equity issuances for services, recorded as "Excess fair value of equity issuance over assets received"[174] - Interest expense increased due to a new convertible note agreement, and the change in fair value of derivative liability also increased significantly due to the same[176][177] Liquidity and Capital Resources AppTech's cash position is insufficient for daily operations, requiring $3,000,000 to sustain business for the next 12 months, with COVID-19 posing ongoing capital raising risks - Current cash position is insufficient for daily operations, with only 90 days of planned operations support[178] - Management believes $3,000,000 is needed to remain in business for the next 12 months[178] - The COVID-19 pandemic continues to pose risks to revenue and capital raising efforts[180] Cash Flows Q1 2021 saw increased cash usage in operating and investing activities, offset by a $1,746,769 increase in financing cash flows, primarily from repurchase option sales | Cash Flow Activity | 3 Months Ended Mar 31, 2021 | 3 Months Ended Mar 31, 2020 | Change (Absolute) | | :---------------------------------- | :-------------------------- | :-------------------------- | :---------------- | | Net cash used in operating activities | $(385,458) | $(190,888) | $(194,570) | | Net cash provided by (used in) investing activities | $(959,500) | $23,411 | $(982,911) | | Net cash provided by financing activities | $1,905,250 | $158,481 | $1,746,769 | - Increase in cash used in operating activities was due to higher residual payouts and professional fees[183] - Increase in cash used in investing activities was due to a significant investment in a capitalized asset[184] - Increase in cash provided by financing activities was primarily from the sale of repurchase options[185] Critical Accounting Policies The company's financial statements rely on estimates and judgments for revenue recognition, intangible assets, derivative instruments, and equity compensation, with no significant changes reported as of September 30, 2020 - Critical accounting policies involve estimates and judgments in areas such as revenue recognition, goodwill and intangible assets, derivative financial instruments, and equity-based compensation[186] - No significant changes to critical accounting estimates were reported as of September 30, 2020, other than those described in Note 2[188] Recent Accounting Pronouncements No significant changes to recently issued accounting pronouncements were reported as of March 31, 2021, beyond those detailed in Note 2 - No significant changes to recently issued accounting pronouncements as of March 31, 2021, beyond those in Note 2[189] Off-Balance Sheet Arrangements AppTech has no off-balance sheet arrangements with unconsolidated entities or financial partnerships, thus avoiding associated financing, liquidity, market, or credit risks - The company has no off-balance sheet arrangements with unconsolidated entities or financial partnerships[190] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable for smaller reporting companies - Not applicable for smaller reporting companies[191] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting during Q1 2021, acknowledging inherent system limitations - Disclosure controls and procedures were deemed effective as of September 30, 2020[191] - No material changes in internal control over financial reporting occurred during Q1 2021[192] - Control systems have inherent limitations and provide reasonable, not absolute, assurance[193] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in legal proceedings, including a settled lawsuit with former shareholders and an ongoing breach of contract lawsuit from 2020, which management believes is without merit - Lawsuit with former shareholders settled for $240,000, with a modified repayment schedule in January 2021, on which the company is current[195] - Lawsuit filed in July 2020 alleging breach of contract and misrepresentation related to a non-binding MOU from 2016; management believes the allegations have no merit and the statute of limitations has expired[196] Item 1A. Risk Factors This item is not applicable for smaller reporting companies - Not applicable for smaller reporting companies[197] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2021, AppTech conducted several unregistered sales of equity securities, generating $1,972,750 from repurchase options and issuing millions of common shares for services, judgments, and strategic partnerships - Net proceeds of $1,972,750 were generated from assigning rights to stock repurchase option agreements[198] - Common stock issuances during Q1 2021 included: * 247,000 shares for business development/professional services ($315,990) * 87,500 shares to Board of Directors ($49,174) * 200,000 shares to purchase a judgment ($1,000,000) * 5,000 shares to a merchant ($16,250) * 18,011,515 shares for a strategic partnership ($67,543,182)[198][199] - Options to purchase 400,000 shares ($1,399,992) and 2,500,000 shares ($8,749,701) were issued[199] - All issuances were exempt from registration under Section 4(a)(2) of the Securities Act of 1933[199] Item 3. Defaults Upon Senior Securities Most of AppTech's subordinated notes payable, convertible notes payable, and notes payable are currently in default, with a few specific exceptions - Most subordinated notes payable, convertible notes payable, and notes payable are currently in default[200] - Exceptions to default include convertible note payable to EMA Financial, LLC ($300,000), note payable to S.B.A. EDL ($68,300), and convertible notes payable related parties ($170,000 and $372,000)[200] Item 4. Mine Safety Disclosures This item is not applicable - Not applicable[201] Item 5. Other Information No other information is reported under this item - None[201] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including corporate governance documents, asset purchase agreements, and strategic partnership agreements - The exhibit index lists various corporate governance documents, asset purchase agreements, and strategic partnership agreements, including those with NEC Payments B.S.C. and Silver Alert Services LLC[202][203][204][205] Signatures Signatures The report was signed by the Chief Executive Officer and Chief Financial Officer on May 17, 2021, certifying its submission to the SEC - The report was signed by the CEO and CFO on May 17, 2021[208]