AppTech Payments Corp.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements, such as statements regarding the anticipated development and expansion of our business, our intent, belief or current expectations, primarily with respect to the future operating performance of our company and the products and services we expect to offer and other statements contained herein regarding matters that are not historical facts. Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also forward-looking statements which involve risks, uncertainties, and assumptions. Because forward-looking statements are inherently subject to risks and uncertainties, our actual results may differ materially from the results discussed in the forward-looking statements.

Business Overview

The financial services industry is going through a period of intensive change 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 of their daily financial interactions. In this rapidly evolving digital marketplace, businesses face broad and ever-changing requirements to meet consumer expectations and achieve the operational efficiencies necessary to maintain a competitive edge.

To survive and succeed in this environment, businesses must adopt new technologies in order to engage, communicate, process payments, and manage payouts with their customers. They need a supplier who will widely support innovation and adaptation as the industry evolves. AppTech believes that its technologies will greatly increase the adoption of digital payments and banking solutions in sectors that must adapt and migrate to new, secure digital Fintech technologies. By embracing advancements in the payment and banking industries, AppTech is well-positioned to meet the growing needs of existing and prospective clients and it intends for its current and future products to be at the forefront of solving these accelerated market needs.

AppTech’s innovative Fintech platform, “Commerse™” officially launched in October 2022. The platform will deliver best-in-class financial technologies and capabilities through an ever-evolving modular cloud/edge-based architecture. The Commerse™ platform houses a large array of financial products and services that can be implemented off-the-shelf or customized via modern APIs. Within its Commerse™ platform, AppTech offers three primary products: Payments-as-a-Service (“PaaS”), Banking-as-a-Service(“BaaS”), and Commerce-as-a-Service (“CXS”).

Commerse™ provides PaaS via integrated solutions for frictionless digital and mobile payment acceptance. These solutions provide advanced payment processing solutions for credit cards, ACH, and gift/loyalty cards by catering to the unique needs of each merchant. PaaS will also solve for multi-use case, multi-channel, API-driven, account-based issuer processing for cards, 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 creates an ecosystem of immersive and scalable digital financial management services backed by Mastercard & Visa processing certifications.

Commerse™ has a flexible architecture to allow for rich, personalized payment and banking experiences. This CXS, customized product, packages together elements of AppTech’s intellectual property, BaaS, PaaS, and other related technologies to create seamless interactions throughout the customer journey.

The platform also incorporates AppTech’s core, patented text payment and geolocation-triggered ecommerce and/or advertising via cell phone capabilities delivering experiences that focus on frictionless use cases and end-user's desire for payment transaction simplicity, control, and comfort. AppTech believes that these features will be particularly beneficial to the unbanked and under-banked in developing or emerging markets—where access to the internet on a mobile device and modern banking institutions may not be readily available—specifically by extending merchants’ marketplace capabilities via new channels to request and receive frictionless, digital payments and engaging end-users by utilizing a familiar, convenient, and widely adopted technology.

AppTech’s innovative Commerse™ product delivers scalable solutions for automated and embedded, customizable business and consumer commerce experiences. These experiences propel business growth, create value and drive operational efficiencies for businesses while providing economic convenience for end users.

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 (http://www.apptechcorp.com). AppTech does not incorporate the information on or accessible through our website into this Form 10-Q. The Company has included our website address in this Form 10-Q solely as an inactive textual reference.

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, 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 nine months ended September 30, 2023 and 2022, respectively.

Revenue

Revenue was approximately $140 thousand and $115 thousand for the three months ended September 30, 2023 and 2022, representing an increase of 22%. The increase was principally driven by licensing revenue in 2023.

Revenue was approximately $363 thousand and $342 thousand for the nine months ended September 30, 2023 and 2022, representing an increase of 6%. The increase was principally driven by licensing revenue in 2023.

Cost of Revenue

Cost of revenue was approximately $44 thousand and $54 thousand for the three months ended September 30, 2023 and 2022, respectively. The decrease was principally driven by lower transaction volume and fewer merchant accounts.

Cost of revenue was approximately $159 thousand and $167 thousand for the nine months ended September 30, 2023 and 2022, representing an decrease of 5%, driven primarily by lower transaction volume and fewer merchant accounts.

General and Administrative Expenses

General and administrative expenses were approximately $2.2 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, representing an increase of 63%. The increase was primarily driven by the new company-wide option awards on July 25, 2023, resulting in additional stock based compensation of $761 thousand.

General and administrative expenses were approximately $7.1 million and $5.5 million for the nine months ended September 30, 2023 and 2022, respectively, representing an increase of 30%. The increase was primarily driven by the modification of option awards resulting in additional stock based compensation of $711 thousand, and the new company-wide option awards on July 25, 2023, resulting in additional stock based compensation of $761 thousand.

Research and Development Expenses

Research and development expenses were approximately $0.8 million and $1.5 million for the three months ended September 30, 2023 and 2022. The decrease was primarily driven by lower stock based compensation in 2023.

Research and development expenses were approximately $2.8 million and $5.5 million for the nine months ended September 30, 2023 and 2022. The decrease was primarily driven by lower stock based compensation in 2023.

Impairment of Intangible Assets

Impairment of intangible assets were approximately $0 and $6.1 million for the three and nine months ended September 30, 2023 and 2022. On May 4, 2023, the Company notified Infinios of its intent to terminate its relationship with Infinios. 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. See Note 8 - Commitments and Contingencies.

Excess Fair Value of Equity Issuance Over Assets Received

Excess fair value of equity issuance over assets received expenses was $0 thousand and $0 thousand for the three months ended September 30, 2023 and 2022.

Excess fair value of equity issuance over assets received expenses was $0 thousand and $904 thousand for the nine months ended September 30, 2023 and 2022. The excess fair value over assets occurring was due to the timing of the share issuance to Infinios. The difference between the value of the newly issued shares and the value of the services performed was expensed as excess fair value of equity issuance over assets received. See Note 4 for additional information related to the Anti-dilution provision.

Interest Expense, net

Interest expenses, net was approximately $4 thousand and $41 thousand for the three months ended September 30, 2023 and 2022. The decrease was primarily due to the Company's repayment of forbearance loan and interest in February 2023.

Interest expenses, net was approximately $48 thousand and $137 thousand for the nine months ended September 30, 2023 and 2022. The decrease was primarily due to the Company's repayment of forbearance loan and interest in February 2023.

Change in Fair Value of Derivative Liability

Change in fair value of derivative liability was approximately $0 thousand and $8 thousand for the three months ended September 30, 2023 and 2022. The decrease was primarily due to the Company's repayment of derivative liabilities in April 2023.

Change in fair value of derivative liability was approximately $27 thousand and $181 thousand for the nine months ended September 30, 2023 and 2022. The increase was primarily due to the Company's repayment of derivative liabilities in April 2023..

Liquidity and Capital Resources

The Company successfully completed its capital raise and uplisting onto NASDAQ (herein referred to its “Offering”) on January 7, 2022. As part of the Offering, the Company executed a 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 consisted 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. The Offering provided net proceeds of approximately $13.4 million.

On February 2, 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 1,666,667 shares of its common stock (the “Shares”) and warrants to purchase up to 1,666,667 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 $5.0 million before deducting placement agent fees and other estimated offering expenses. Along with the offering that was completed in February 2023, the reset price (essentially the fair value of the share sold with the Warrant) was determined by iterating the valuation of the Warrant until the stock price converged to yield a unit price of $4.15. The Company used a portion of the proceeds to fulfill its obligations and paid all of its Loan Forbearance Agreements related to the notes payable in full. See note 5 for the agreements that have been paid off.

As of September 30, 2023, we had cash and cash equivalents of approximately $0.3 million, working capital deficit of approximately $0.7 million, and stockholders’ equity of approximately $0.8 million.

Management's Plan

The Company continues to have yearly losses from its limited revenues from operations. Management believes the present cash flows will not enable it to meet its commitments for twelve months from the date of filing. The Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission that would allow the Company to raise additional capital in an amount up to $66.5 million. SEC regulations limit the amount of funds we can raise during any 12-month period pursuant to our effective shelf registration statement on Form S-3. We are currently limited by the Baby Shelf Rule as of the filing of this Quarterly Report, until such time as our public float exceeds $75 million. However, factors such as stock price, volatility, trading volume, market conditions, demand and regulatory requirements may adversely affect the Company’s ability to raise capital in an efficient manner.

Cash Flows

Net cash used in or provided by, operating, investing and financing activities were as follows (in thousands):

Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2023 was approximately $6.5 million, which is comprised of (i) our net loss of $15.1 million, adjusted for non-cash expenses totaling $9.1 million (which includes adjustments for equity-based compensation, depreciation and amortization, impairment of capitalized software), and (ii) increased by changes in operating assets and liabilities of approximately $0.5 million.

Net cash used in operating activities during the nine months ended September 30, 2022 was approximately $5.7 million, which is comprised of (i) our net loss of $11.5 million, adjusted for non-cash expenses totaling $6.8 million (which includes adjustments for equity-based compensation, depreciation and amortization), and (ii) changes in operating assets and liabilities using approximately $1.1 million.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023, was $50,000 and was primarily due to the research and development of mobile app.

Net cash used by investing activities during the nine months ended September 30, 2022 was approximately $1.7 million and was primarily due to the purchase of software.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2023 was approximately $3.4 million, which principally consists of net proceeds of $5.2 million through the issuance of common shares and warrants in our public offering, offset by repayments of the Loan forbearance Agreements in full..

Net cash provided by financing activities during the three months ended September 30, 2022 was approximately $13.4 million, which principally consists of net proceeds of $13.4 million through the sale of repurchase options.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition, goodwill and intangible assets, derivative financial instruments, and equity-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those that we consider the most critical to understanding our financial condition and results of operations. The accounting policies we believe to be most critical to understanding our financial condition and results of operations are discussed below. As of September 30, 2023, there have been no significant changes to our critical accounting estimates, except as described in Note 2 to our financial statements.

Software Development Costs

The Company capitalizes software development costs in developing internal use software when capitalizing requirements have been met. Costs prior to meeting the capitalization requirements are expensed as incurred. Equity and options granted are capitalized as part of the software development costs.

Recent Accounting Pronouncements

As of September 30, 2023, 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.

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 Quarterly Report on Form 10-Q, we are not required to provide the information required by this item.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The Company did not properly identify a triggering event under Accounting Standards Codification Topic 360 Property, Plant and Equipment and other applicable accounting guidance, which indicated that the Company’s capitalized software costs and prepaid licensing fees could be impaired. Further, the Company did not identify the contract termination and impairment as a significant disclosure item during the financial reporting process. As of September 30, 2023, the Company recognized impairment of its capitalized software costs and prepaid licensing fees approximately $6.1 million due to the termination of the Infinios contract. See Note 3 Intangible Assets - Capitalized Development Cost and Prepaid Licenses; and Note 8 Commitments and Contingencies.

Policies and procedures should be implemented to ensure that any significant events requiring disclosure are identified, accounted for, disclosed and reviewed by the management.

Other than the material weaknesses noted above, there have not been any changes in our internal control over financial reporting during the nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

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.