Table of Contents
UNITED STATES
SECURITIES AND EXCHANGECOMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
For the quarterly period endedMarch 31, 2020
or
For the transition period from____________________ to ________________________
Commissionfile number: 0001070050
AppTechCorp.
(Exactname of registrant as specified in itscharter)
5876 Owens Ave. Suite 100
Carlsbad, California 92008
(Addressof Principal Executive Offices & Zip Code)
(760) 707-5959
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicateby check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ☐ No ☒
Indicate bycheck 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). Yes ☒ No ☐
Indicateby check mark whether the registrant is a largeaccelerated filer, an accelerated filer,a non-accelerated filer, a smallerreporting company, or emerging growthcompany. See the definitions of “large accelerated filer,” ” acceleratedfiler” “smaller reporting company,” and“emerging growth company” in Rule12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of May 14,2020, the latest practicable date, the registrant had 86,538,325 shares of common stock (par value 0.001)
AppTech Corp.
Form 10-Q
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Various statementsin this Quarterly on Form 10-Q of AppTech Corp. (we, our, AppTech or the Company)are “forward-looking statements” within the meaningof the Private Securities Litigation Reform Actof 1995. Forward-looking statements involve substantialrisks and uncertainties. All statements, other thanstatements of historical facts, included in this report regarding ourstrategy, future operations, future financial position, future revenues, projected costs, prospects, plans andobjectives 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 suchas “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 notoccur and actual results could differmaterially from those projected in our forward-looking statements. Meaningful factors that could cause actualresults to differ include:
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All written and oral forward-looking statements attributable to usor any person acting on our behalf are expressly qualifiedin their entirety by the cautionary statements contained or referredto in this section. We caution investors notto rely too heavily on the forward-looking statements we makeor that are made on our behalf. We undertake no obligation and specifically declineany obligation, to update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. Please see, however, any furtherdisclosures we make on related subjects in any annual, quarterly or current reportsthat we mayfile with the Securities and Exchange Commission (SEC).
We encourage you to read the discussion and analysis of ourfinancial condition and our consolidated financial statements containedin this Annual Report on Form 10-Q.There can be no assurance that we willin fact achieve the actual resultsor developments we anticipate or, evenif we do substantially realize them,that they will have the expected consequences to, or effects on, us. Therefore, wecan give no assurances thatwe will achieve the outcomes stated in those forward-looking statements and estimates.
Unless thecontext otherwise requires, throughoutthis Quarterly Report on Form 10-Q, the words “AppTech” “we,” “us,” the “registrant” or the “Company”refer to AppTech Corp.
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PART I – FINANCIAL INFORMATION
Item1. Financial Statements
APPTECHCORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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APPTECH CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMARCH 31, 2020 and DECEMBER 31, 2019 (UNAUDITED)
See accompanying notes to the consolidated financial statements.
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APPTECH CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019(UNAUDITED)
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APPTECH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICITFOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019(UNAUDITED)
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APPTECH CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019(UNAUDITED)
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATIONAND DESCRIPTION OF BUSINESS
AppTech Corp. (“AppTech”or the “Company”) is a Wyoming Corporation incorporated onJuly 2, 1998.
AppTech Corp. is a FinTech companyproviding electronic payment processing technologies and merchant services. This includes credit card processing, Automated Clearing House (“ACH”) processing, gift and loyalty cards and e-commerce.The Company expanded its core services to include global Short Messaging Service (“SMS”) patented text messaging and secure mobile payments based on Multi-factor authentication technologies. The patentedtwo-way text chat platform enables secureSMS services including mobile payments, notifications,authentication, marketing, information queries and reporting. Other services include digital marketing, lead generation, mobileapp development, and intellectual property rights development.
NOTE 2 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES
Basisof Presentation
The Company’sconsolidated financial statements havebeen prepared in accordance with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”). Also see Note 3.
Principlesof Consolidation
The Company’saccounts include financials of the Company and its wholly owned subsidiaries, TranscendentOne, Inc. and TransTech One, LLC. Allsignificant inter-company transactions have been eliminated inconsolidation. The operations of Transcendent One, Inc. and TransTech One, LLC are insignificant and the Company dissolved the subsidiaries on October 8,2019.
Use of Estimates
The preparation of theconsolidated financial statements in conformitywith generally accepted accounting principlesrequires management to make estimatesand assumptions that affect the reportedamounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts ofrevenues and expenses duringthe reporting period. Significant estimates include the estimated liabilities related to various vendors in which communications haveceased, contingent liabilities, and realization of tax deferred tax assets. Actualresults could differ from thoseestimates.
Concentration of CreditRisk
Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limitsof $250,000 per institution that pays Federal Deposit Insurance Corporation (“FDIC”) insurance premiums. The Company has never experienced any losses related to these balances.
The accountsreceivable from merchant services are paid bythe financial institutions on a monthly basis.The Company currently uses three financial institutions to service their merchants for which represented 100% of accountsreceivable as of March 31, 2020 and 2019. The lossof one of these financial institutions would not have a significant impact on the Company’s operations as thereare additional financial institutions available to the Company. For the three months ended March 31, 2020 and2019, the one merchant (customer) represented approximately 43% and 40% of thetotal revenues, respectively. The lossof this customer would have significantimpact on theCompany’s operations.
Cashand Cash Equivalents
The Company classifies itshighly liquid investments with maturitiesof three months or less at the date of purchaseas cash equivalents. Managementdetermines the appropriate classification of its investments at the timeof purchase and reevaluates the designations of each investment as ofthe balance sheet date for each reporting period. The Company classifies its investments aseither short-term or long-term based on each instrument’s underlying contractual maturity date. Investmentswith maturities of less than 12 monthsare classified as short-term and those with maturities greater than 12 months are classifiedas long-term. The cost of investments sold is based upon thespecific identification method.
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Accounts Receivable and Allowance for Doubtful Accounts
Accountsreceivable is recorded net of an allowance for doubtful accounts, if needed. The Company considersany changes to the financial condition of its financial institutions used and any other external market factors that could impact the collectability of its receivables in thedetermination of its allowance for doubtful accounts. The Company does not expectto have write-offs or adjustments to accounts receivable which could have a material adverse effect on its consolidated financial position, results of operations or cash flows as the portion whichis deemed uncollectible is already taken into account when the revenue is recognized.
RevenueRecognition
The Financial Accounting Standards Board (“FASB”) issued AccountingStandards Update (“ASU”) No. 2014-09, codifiedas Accounting Standards Codification (“ASC) 606 Revenue from Contracts withCustomers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted ASC606 effective January 1, 2019 using modified retrospective basis and the cumulative effect was immaterial to the consolidated financial statements.
The Company provides merchantprocessing solutions for credit cardsand electronic payments. In all cases, theCompany 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 percentageof transaction value or a specified fee transaction,depending on the card or transactiontype. Revenue is recorded as services are performed whichis typically when the bank processes the merchant’scredit card and electronic payments.
The Company provides various Cloud services to business clients. Revenues generated from the services asagreed upon in a Cloud Service Agreement.The revenue is recorded as the services are performed and billed in advance ona monthly basis. Revenues from these services represent less than 5% of the Company’stotal revenues.
Consideration paid to customers, such as amounts earned under our customer equity incentive program,are recorded as a reduction to revenues.
Fair Value of Financial Instruments
ASC 820, Fair ValueMeasurements and Disclosures defines fair valueas the price that would be received tosell an asset or paid to transfera liability in an orderly transaction between market participants at the measurementdate. ASC 820 also establishes a fair valuehierarchy that requires an entity to maximize the use of observable inputs and minimize the useof unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels as follows:
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, vendor deposits, accounts payable, accrued expenses, etc. The carrying value of these assets and liabilities isrepresentative of their fair market value, due to the shortmaturity of these instruments.
Researchand Development
In accordancewith ASC 730, Research and Development(“R&D”) costs are expensed when incurred. R&Dcosts include costs of acquiring patents and other unproven technologies, contractor fees and other costs associated withthe development of the SMS short codetexting platform, contract and other outside services. Total R&D costs for the three months ended March 31, 2020 and2019 were $12,000 and $6,820,respectively.
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Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance andrepairs are charged to operations as incurred. Depreciation of property and equipment iscomputed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful life of five (5) years. Upon saleor retirement of equipment, therelated cost and accumulated depreciation are removedfrom the accounts and any gain or loss is reflected in the consolidated statementsof operations.
Impairment of Long-LivedAssets
Long-livedassets are reviewed for impairment when there isevidence that events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparingthe carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generatedby the asset or asset group. If the carryingamount of an asset or asset group exceeds its estimated future cash flows, animpairment charge is recognized for theamount by which the carryingamount of the asset or asset group exceeds the estimated fair value of the asset or asset group. Long-lived assets to bedisposed of by sale are reported at the lower of their carrying amounts or their estimated fair values less costs to sell and are notdepreciated. As of March 31, 2020 and December31, 2019, there were no asset impairments.
Lease Commitment
The Company determines ifan arrangement is a lease at inception.This determination generally depends on whether the arrangement conveys to theCompany the right to control the useof an explicitly or implicitly identified fixed asset fora period of time in exchange for consideration. Control of an underlyingasset is conveyed to the Company ifthe Company obtains the rights to direct theuse of and to obtain substantiallyall of the economic benefits from using theunderlying asset. The Company has lease agreements which include lease and non-leasecomponents, which the Company has elected to account for as a single lease component for all classes of underlying assets. Lease expense for variable lease components are recognized when the obligation is probable.
Operating lease rightof use (“ROU”) assets and lease liabilities are recognized at commencementdate based on the present value of lease payments over the lease term. Operating lease payments are recognized as lease expense on a straight-line basis over the lease term.The Company primarily leases buildings (real estate) which are classified as operating leases. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit inthe lease or, if that rate cannot be readily determined, its incremental borrowing rate. As an implicit interest rate is not readily determinable in the Company’s leases,the incremental borrowing rate is usedbased on the information available at commencement date in determining the presentvalue of lease payments.
The lease term forall of the Company’s leases includesthe non-cancellable period of the lease plusany additional periods covered by either a Company option to extend(or not to terminate) the lease thatthe Company is reasonably certain to exercise, or an option to extend(or not to terminate) the lease controlled by the lessor. Options for lease renewals have been excluded from the lease term (and lease liability) for the majority of the Company’s leases as thereasonably certain threshold is not met.
Lease payments included in the measurement of thelease liability are comprised of fixed payments,variable payments that depend on indexor rate, and amounts probable to be payable underthe exercise of the Company option to purchase the underlyingasset if reasonably certain.
Variable lease payments not dependent on a rate or index associated withthe Company’s leases are recognizedwhen the event, activity, or circumstancein the lease agreementon which those payments are assessedas probable. Variable lease paymentsare presented as operating expenses in the Company’s statement of operations in the same line as expensearising from fixed lease payments.As of March 31, 2020, management determined that there were no variable lease costs.
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Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuationallowance to the extent managementconcludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change intax rates is recognized in the consolidated statement of operations in the period that includes the enactment date.
The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, thecalculation of the Company’s tax liabilities involvesdealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position forrecognition by determining if the weight of available evidence indicates thatit is more likely than not that the positionwill be sustained on audit, includingresolution of related appeals or litigationprocesses, if any. The second step is to measure the tax benefit as the largestamount that is more than 50% likely of being realized upon settlement. While theCompany believes it has appropriate support for the positions taken on its taxreturns, the Company regularly assesses thepotential outcomes of examinations bytax authorities in determining the adequacy ofits provision for income taxes. The Company continually assesses the likelihoodand amount of potential adjustments andadjusts the income tax provision, incometaxes payable and deferred taxes in the period in which the facts that give rise to a revision become known. As of March 31, 2020 and2019, the Company does not believe anyprovisions are required in connectionwith uncertain tax positions as there are none.
Per ShareInformation
Basic net income (loss) per common share is computedby dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stockand potentially outstanding shares of common stock during the period.
As of March 31, 2020 and2019, the Company had potential dilutivesecurities related to options, warrants, Series A preferred stock and convertible notes payable. These dilutivesecurities were not included within thecalculation of dilutive net loss per common share as the effects would havebeen anti-dilutive.
Convertible Debt
Convertible debt is accountedfor under the guidelines establishedby ASC 470-20Conversion and Other Options. ASC 470-20 governsthe calculation of an embedded beneficialconversion, which is treated as an additional discount to the instruments where derivative accountingdoes not apply. The amountof the value of additional stock and otherconsideration in addition to the beneficial conversion feature may reduce the carrying valueof the instrument to zero, but no further. The discounts are accreted over the term of the debt usingthe straight line method due to the shortterms of the notes.
The Company accounts for modifications of its embedded beneficial conversions, in accordance withASC 470-50 Modifications and Extinguishments. ASC 470-50 requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense or the associated debt instrumentwhen the modification does not resultin a debt extinguishment.
Stock BasedCompensation
The Company recognizes as compensation expense all share-based payment awards madeto employees, directors, andconsultants including grants of stock options and warrants, based on estimated fair values. Fair value is generally determinedbased on the closing price of the Company’s common stockon the date of grant and is recognizedover the service period. The Company has severalconsulting agreements that have sharebased payment awards based on performance.These agreements typically require theCompany to issue common stock to the consultants on a monthly basis. The Company recordsthe fair market value of the common stock issuableat each month end when the performance is complete based upon theclosing market price of the Company’s common stock. The Company has enteredinto board of directors agreements that have share based paymentawards based on service. These agreements require the Company to issue common stockto the directors, earned on amonthly basis, over the oneyear term of the agreement. The Company records the fair market value of the commonstock issuable at the end of the month when the director is appointed to theboard based upon the closing marketprice of the Company’s common stock
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New Accounting Pronouncements
The FASB issues ASUs to amend the authoritative literature in ASC.There have been a number of ASUs to datethat amend the original text of ASC.The Company believes those issued to dateeither (i) provide supplemental guidance,(ii) are technical corrections, (iii) are notapplicable to the Company or (iv) arenot expected to have a significant impact on the Company.
NOTE 3 – GOINGCONCERN
As reflectedin the accompanying consolidated financial statements, duringthe three months ended March 31, 2020 and2019, the Company incurred a net loss of $1,464,050 and $238,241and used cash of $190,888 and $190,661 in operating activities. In addition, the Company hada working capital deficit of $7,409,180and an accumulated deficit of $42,224,463 at March 31, 2020. These factors raise substantial doubt regarding the Company’s ability to continue asa going concern. We have evaluated the conditions or events that raise substantialdoubt about the Company’s ability as a going concern within one year of issuance of the consolidated financial statements.
While the Company is continuing operations and generating revenues, the Company’s cash position is not significant enough to support the Company’s daily operations. To fundoperations and reduce the working capital deficit,we intend to raise additional fundsthrough public or private debt and/or equity offerings.During 2020, the Company raised $205,781froma sale of a repurchase option to fundoperations. Management believes thatthe actions presently being taken to further implement its businessplan and generate revenues provide the opportunity forthe Company to continue as a going concern, however, such are notguaranteed. While the Company believes inthe viability of its strategy to generate revenuesand in its ability to raise additional funds, there canbe no assurances to that effect, nor can there be assurance that such fundswill be at acceptable terms. As of thedate of these consolidated financial statements, the Company has not finalized a commitment for additional capital. The ability of theCompany to continue as a going concernis dependent upon our ability to further implementits business plan and generate revenues andcash flows. The consolidated financialstatements do not include any adjustments that mightbe necessary if the Company isunable to continue as a going concern.
Risksand uncertainties
On January 30, 2020, theWorld Health Organization declared the coronavirus outbreak a “PublicHealth Emergency of International Concern” and on March 10, 2020, declaredit to be a pandemic. Actions taken aroundthe world to help mitigate thespread of the coronavirus include restrictions on travel, and quarantines in certain areas,and forced closures for certain typesof public places and businesses. The coronavirus and actions taken to mitigate it have had and are expected to continue to havean adverse impact on the economies and financialmarkets of many countries, including the geographicalarea in which the Company operates. Sincewe derive our revenues from processing of purchases from our merchant services clients,a downturn in economic activity, such asassociated with the current coronaviruspandemic, could reduce the volumeof purchases we process, and thus our revenues. In addition, such a downturn could cause our merchant customers to cease operations permanently decreasing our paymentprocessing unless new customers are found. We may also faceadditional difficulty in raising capital during aneconomic downturn. The effects of thepotential impact cannot be estimated at thistime.
Additionally,it is reasonably possible that the estimates made in the financial statements have been, or will be materially and adversely impacted in the nearterm as a result of these conditions.
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NOTE 4 – PATENTS
Patents
On June 22, 2017, AppTech executed an Amendment to Asset Purchase Agreement with GlobalTel Media, Inc. In connection with the asset purchase agreement, 5,000,000 sharesof common stock were issued to GlobalTel Media, Inc. The Company valued the common stock issuance at $1,000,000 based on theclosing market price of the Company’s common stock on the date in which the performance wascomplete. This amendment revived the originalasset purchase agreement dated December 4, 2013 to purchase the assets of GlobalTel Media, Inc. (AppTech andGlobalTel agree that the asset purchase agreement dated September 30, 2015 is nulland void), which include, but is not limited to, all intellectual property, UnitedStates Patent Trademark Office (“USPTO”) issued patents, enterprise-grade, patent protected software and intellectual property for advanced messaging incorporating secure payments, databases, documentation, copyrights, trademarks, registrations,and all current development workin process of USPTO application approval; more specifically but not limited to USPTO 8,073,895 & 8,572,166 “System and Method for Delivering Web Content to a Mobile Device”, USPTO 8,315,184 “Computerto Mobile Two-Way Chat System and Method”, and USPTO 8,369,828 “Mobile-to-Mobile PaymentSystem and Method”. GlobalTel’s technology focuses on SMS text-based applications, social media and mobile payment. The USPTO assigned the patents to AppTech on July 25, 2017. AppTech, as part of the various agreements, agreed to pay $1,600,000 whichincluded an assumption of certain liabilities, including costs incurredto continue development of the patents, as well as guaranteed paymentof 25% of the net proceeds on revenuecreated by the patents up to $26,600,000. As of March 31, 2020 and December 31, 2019, amountsincluded in accounts payable related to theassumption of liabilities in connection with the patents were $380,000 and $415,000, respectively. The Company has expensed the cost of the patents as research and development costs as the future estimated cash flow expected cannot be reasonably estimated.
NOTE 5 – ACCRUED LIABILITIES
Accruedliabilities as of March 31, 2020 and December 31, 2019 consist of the following:
AccruedInterest
Notes payable and convertible notespayable incur interest at rates between 10% and 15%, per annum.The accrued interest in most cases is currently in technical default due to the notesbeing past their maturity date.
AccruedResiduals
The Company pays commissionsto independent agents which refer merchant accounts. The amountspayable to these independent agents is based upon a percentage of the amounts processed on a monthly basis by thesemerchant accounts.
AccruedMerchant Equity Liability
The Companyprovided all merchants the opportunity to earn shares of the Company’s commonstock through their Merchant Equity Program (the “Program”). Under the Program,the merchant earned 1% of their total Visa/MasterCard volumeprocessed during the first year of their contract.For example, if a merchantprocesses $1.0 million in credit cardcharges, the merchant will receive 10,000 sharesof the Company’s common stock. The merchant must process with the Company fora period of three years for the shares to vest. All merchants became fully vested whenthe Company ended the program effectiveDecember 31, 2015.
For merchantsin which the shares of common stock are not known as they are within the one-year period, the Company estimates on a quarterly basis as to the estimated amount of shares based upon theexpected amount to be processed by themerchant on an annual basis. At theend of the first year, when the number of shares issuable is known,the Company makes an adjustmentto the value of the shares, if needed.
The Company accounts forthe value of the shares underthe program as a sales incentive and thus the amountsin connection with the Program are recorded as a reduction to revenues. As of March 31, 2020, the Company has an obligation to issue approximately 776,000 sharesof the Company’s common stock issuableunder the Program. During the year ended December31, 2019, the Company issued 37,193 sharesof common stock relieving $14,877 in liability under the program.
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NOTE 6 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
The Company funds operations through cash flows generated from operations and the issuance of loans and notes payable. The following isa summary of loans and notes payable outstanding as of March 31, 2020 and 2019. Relatedparties noted below are either members of management, board of directors, significant shareholders or individuals in which have significant influence over the Company.
Loans Payable – Related Parties
Duringthe three months ended March 31, 2020 and 2019, the Company obtained (paid) $(28,050) and $69,500 loans payable from related parties, net. Asof March 31, 2020 and December 31, 2019, the balance of the loans payable was $65,351 and $93,401, respectively. The loans payable are due on demand, unsecured and non-interest bearing as there are no formal agreements executed.
Subordinated Notes Payable
In 2016, theCompany issued $350,000 in subordinated notes payable to third parties. The subordinated notes payable were due in 30 to 180 days and incurred interestat 10% per annum. As of March 31, 2020 and December31, 2019, accrued interest related to the subordinated notes was $127,295 and $118,545, respectively.The Company is currently in default of the subordinated note agreements.
Convertible Notes Payable
In 2017, theCompany received $222,000 in convertible notes payable from related parties. The convertible notes payable are unsecured, were due in180 days, incur interest at 10% per annum and are convertibleat $0.10 per share. As of March 31, 2020and December 31, 2019, accrued interestrelated to the convertible notes was $59,538and $53,988, respectively. On thedate of the agreement, Management calculated the beneficial conversion featurein connection with the convertible notespayable and recorded a discount of $222,000. The Company amortized the discount overthe term of the convertible notes payable of 180 days.The Company is currently in default on the convertible notes payable.
In 2015, theCompany issued $50,000 in convertible notespayable. The convertible notes payableare unsecured, were due in nine months, incurinterest at 10% per annum and are convertibleat $1.00 per share. As ofMarch 31, 2020 and December 31, 2019,the accrued interest related to the convertible notes was $22,084 and $20,833,respectively. The Company is currently indefault on theconvertible note payable.
In 2014, the Company issued $400,000 in convertible notes payable. The convertible notes payable are unsecured, due in periods ranging up to one year, incurringinterest between 10% to 12% per annum and are convertible at prices ranging from $0.33 to $1.00 per share. In addition, the Company issued 400,000 sharesof common stock in connection with the convertible notes payable. The Company had the obligation to repurchase the 400,000 shares of common stock at $1.00 per share within one year of the note issuance date. As of March 31, 2020 and December 31, 2019,the Company held the obligation to repurchase the shares for $400,000. As of March 31, 2020 and December 31, 2019, the accrued interest related to the convertible notes was $196,333 and$186,083, respectively. The Company iscurrently in default of the note agreements.
In 2008 and2009, the Company issued $320,000 inconvertible notes payable, of which $150,000was from related parties. The convertiblenotes payable are currently due on demand, incur interestat 15% per annum, and convertible at $0.60 per share. As of March 31, 2020and December 31, 2019, accrued interestrelated to the convertible notes was$528,013 and $516,013 of which $249,000and $243,375, respectively, was due to related parties. The Company is currentlyin default of the notes payable agreements.
Notes Payable
In 2016, theCompany issued $143,000 in notes payable to third parties. The notes payable were due in ninety days or less. During2019, the Company paid $36,000 in notespayable. The Company is currently in default of the note agreements.
In 2007 and2008, the Company entered into notespayable with a related party for$46,000 in proceeds. The notes payablewere due on demand and incurred interest at 12% per annum. These were combinedinto a single note agreement in2014. As of March 31, 2020 and December 31, 2019, thebalance on the note payable was $88,136 and accrued interest related to the note payable was $51,907 and$49,243, respectively. The Company iscurrently in default ofthe note payable agreement.
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In 2007, the Company entered into note payable with a third party for $128,000 in proceeds. Under theterms of the agreement the holder received a flat interest amountof $37,496. The Company is currently in defaultof the note payable agreement and the entire amount of $37,496 has been included within accrued interest. Since the note payable did not incur interest, the Company imputed interest at $3,200 and $3,200, respectively, which represented an interest rate of 10% per annum during the three months ended March 31, 2020 and 2019.
In 2008, theCompany entered into a note payable witha third party for $10,000 in total proceeds. The notepayable is currently in default and has a flat interest amount due of$21,000. As of March 31, 2020 and December31, 2019, the Company was in defaultof the note agreement and the entire amount of $21,000 hasbeen included within accrued interest. Since the notes payable do not incur interest, the Company imputed interest at $250 and $250, respectively, which represented an interest rate of 10% per annum during the three monthsended March 31, 2020 and 2019.
In 2008, the Company entered into notes payable with a thirdparty for $26,000 in total proceeds.The notes payable have a flat interestamount due of $80,000. During 2015, the Company received another $50,000 from the third party.During 2017, the Company entered into an agreement whereby they wouldrepay the principal and accrued interest inthe amount of $145,000 by April 4, 2018and issue the holders 800,000 shares of common stock. The Company recorded the fair market value of the common stock issued at $336,000 based on thedate of issuance as interest expense. Otherthan the issuance of shares of common stock,the Company did not perform under theagreement. The Company is currently in default of the note agreement.
In 2007, the Company entered into note payable with a third party for$221,800 in proceeds. The note payable is currently in default and incurs interest at 10% per annum. OnSeptember 30, 2013, the holder received an arbitration settlementfor the principal and accruedinterest. As of March 31, 2020 and December 31, 2019, theCompany was in default of the arbitration settlement. As of March 31, 2020 and December 31, 2019, accrued interest related to the note payable was$439,931 and $429,861, respectively.
In 2007, theCompany entered into note payable witha significant shareholder for $58,600 in proceeds. The notepayable is currently due on demand andincurs interest at 10% per annum. As of March 31, 2020 and December 31, 2019, accrued interest related to the note payable was$71,978 and $70,513, respectively. The Company is currently in default of the noteagreement.
Two significant shareholders funded the Company’s operationsthrough notes payable in primarily 2009 and2010 and continue to support operations on a limited basis. The notes payable incur interest at 10% per annumand were due on December 31, 2016. The Company is currently in default of the note agreements. As of March 31, 2020 and December 31, 2019, theaggregate balance of the notes payable was$620,355 and accrued interest was $591,114 and$575,480, respectively.
NOTE 7 – RIGHT OF USE ASSET
Lease Agreement
In January 2020, the Company enteredinto a lease agreement commencing February 8, 2020 forits current facility which expires in 2025.The term of the lease is for five years.The Company also entered into a six monthoption to purchase its current facilityunder terms and conditions of the lease. At inception of thelease, the Company recorded a right ofuse asset and liability. The Companyused an effectiveborrowing rate of 12% within the calculation. Thefollowing are the expected lease paymentsas of March 31, 2020, including the total amount of imputed interest related:
Years ended December31, :
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NOTE 8 - COMMITMENTS AND CONTIGENCIES
Litigation
Shareholder Lawsuit
In March 2016, a significant shareholder (“Plaintiff”) of the Company filed a lawsuitagainst the Company in the state of Californiaalleging breach of contract, fraud and negligentmisrepresentation based on supposed oral promises in 2013 to give Plaintiff’s company shares in exchange for stocks in another company and a 2014 consulting agreement. The Company strongly disputed all claims made in the lawsuit. OnApril 20, 2017, theCompany filed an answer thatdenied each and every purported allegation and cause of action and furtherdenied that they caused any damage orloss. The Company reached an agreement resultingin a voluntary dismissal of the civil caseon July 5, 2017. The Plaintiff was not able to fulfill the proper documentation within the allotted 180 daysand the 3,450,000 shares of AppTech Corp stock wereproperly cancelled in 2019.
FormerShareholders Lawsuits
In April2014, a shareholder of AppTech fileda lawsuit against the Company in theState of Washington claiming breach of contractrelated to the sale / transfer of unregisteredshares at the time of AppTech acquisition.On August 13, 2014, the Company notified the transfer agent and placed a ’Stop Order’ on theshares. The shareholder claims that the2.5 million shares received are unrestrictedand should be reflected as such.On August 19, 2014, the Company fileda motion to dismiss the lawsuit. Thelawsuit was dismissed on October 31, 2014.
In November2017, two shareholders of AppTech, onewho previously filedthe 2014 lawsuit in the State of Washington, filed another lawsuit against the Company in theState of California, claiming the same accusations as thepreviously filed lawsuit which was dismissed. The lawsuit has been transferred to the United States DistrictCourt for the Southern District of California.The Company filed the defendants answer, affirmative defenses andcounter claims. Management believes that the Plaintiff misrepresented and misled AppTech during the merger. The court has encouraged the parties to settle. Even though theCompany believes the lawsuit is without merit and will vigorously defend, the Company has made several offers to settle. On December 19, 2019, theCompany entered into a settlement and releaseagreement. The Company has recorded the liability asof December 31, 2019 for the total obligation of $240,000 to be paid out over three years beginningFebruary 15, 2020. The 2019 impact is recorded in other expenses. A stipulation for dismissal of action hasbeen filed with the courts. As of May 14, 2020, we are current on thepayment schedule.
Former Landlord Lawsuit
In September 2018, thelandlord for our former office space lease fileda limited civil lawsuit against the Companyin the State of California.The Company reached an agreement thatresulted in a stipulation for judgment on October 28, 2018. The stipulatedjudgment was for $42,432 including attorneyfees and court costs plus interest forwhich the Company recorded as a liability asof December 31, 2018. The stipulated judgment was paid in full on August 16, 2019.
Patent Acquisition Lawsuit
In September 2018, a complaint was filed in San Diego superior court for a breach of contractarising from a written agreement for the purchase of a judgment to whichAppTech was not a party. The purchase of the judgment was part of the transaction to acquire the patents. AppTech substantially performed under the agreement but the second agreement to extend the final payment was executed under duress. OnOctober 26, 2018, the Company filed an answer that denied each andevery purported allegation and cause of action and further denied that they causedany damage or loss. On December3, 2019, the Company entered into a conditionalsettlement providing the terms of the conditional settlement have been completed byOctober 1, 2020. The conditional settlement amount of $150,000 is paid in monthlyinstallments of $15,000. The settlement installments paid for the three months ended March 31, 2020 was $35,000. $5,000 was paid towardsthe March 31, 2020 installment and the April 30, 2020 installment was not paid. We are currentlyin default of the agreement and are in discussions with the plaintiffs to cure the default prior to May 22, 2020.
Significant Contract
In January 2019, theCompany entered into an agreementwith a broker dealer to provide capital raising activities. Under the terms of the agreement the broker dealer is to make a minimum of $90,000 in advisory fees. In addition, there are various otherprovisions within the agreement which include a 10% placement fee, warrants to purchase common stock, a 4% transaction fee, etc.
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Employee versusContractor Classification
The Company compensates various individuals as consultants. Annually, these consultants are issuedForm 1099s for amounts paid to them.In addition, these consultants do not have arrangementsin which specify compensation payable to them. The Company riskspotential tax and legal actions if theseconsultants are deemed to be employeesby governmental agencies.
NOTE 9 – STOCKHOLDERS’ DEFICIT
SeriesA Preferred Stock
The Company isauthorized to issue 100,000 shares of $0.001 par value Series A preferred stock (“Series A”). There were fourteen (14) sharesof Series A preferred stock outstanding as of March 31, 2020 and December 31, 2019. The holders of Series A preferred stockare entitled to one vote per shareon an “as converted” basis on all matterssubmitted to a vote of stockholders andare not entitled to cumulate their votesin the election of directors. The holders of Series A preferred stock are entitledto any dividends that may be declared by the Board of Directors outof funds legally available, therefore on a prorata basis according to their holdings of shares ofSeries A preferred stock, on an as convertedbasis. In the event of liquidation or dissolution of the Company, holders of Series A preferred stock are entitledto share ratably in all assets remaining after payment of liabilities and have no liquidation preferences. Holders of SeriesA preferred stock have a right to converteach share of Series A into 780 sharescommon stock.
Common Stock
The Company is authorized toissue 1,000,000,000 shares of $0.001par value common stock. There were86,503,325 and 84,153,825, respectively,shares of common stock outstanding as of March 31, 2020 and December 31, 2019.The holders of common stock are entitledto one vote per share on all matters submitted to a vote of stockholders andare not entitled to cumulate their votes in the election of directors. The holders of common stock are entitledto any dividends that may be declared by the board of directors outof funds legally available, therefore subject to the prior rightsof holders of any outstanding shares of preferred stock and any contractual restrictions against the payment of dividendson common stock. In theevent of liquidation or dissolution of the Company,holders of common stock are entitled to share ratably in all assets remaining afterpayment of liabilities and the liquidationpreferences 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 intoany other securities.
Duringthe three months ended March 31, 2020 and2019, the Company issued 2,349,500 and12,000, respectively, shares of common stock to several consultants in connection with business development and professional services. The Company valued the common stock issuances at $1,209,185 and $7,208, respectively, based upon the closing marketprice of the Company’s common stock onthe date in which the performance wascomplete. The amounts were expensed to general and administrative expenses on the accompanying consolidated statements ofoperations.
Common Stock Repurchase Option
On January 23, 2020, theCompany entered into a common stock repurchaseoption agreement to purchase or assign 300,000 sharesof common stock from a third party at $0.05 per share. The Company assigned its rights to the repurchase option agreementto a third party in exchange for compensation. The common stock repurchaseoptions were exercised on January 26, 2020 for which the Company received $98,750 in proceeds which was recorded as additionalpaid-in capital.
On February 26, 2020, the Company entered into a common stock repurchaseoption agreement to purchase or assign266,115 shares of common stockfrom a third party at $0.05 per share.The Company assigned its rights to the repurchase option agreement to a third party in exchange forcompensation. The common stock repurchase option wasexercised on February 27, 2020 for which the Company received$25,281 in proceeds which was recorded as additionalpaid-in capital.
On March 18, 2020, theCompany entered into a common stock repurchase option agreement to purchaseor assign 250,000 shares of common stockfrom a third party at $0.05 per share.The Company assigned its rightsto the repurchase option agreement to a third party in exchange for compensation. The common stock repurchase option was exercised on March 19, 2020 for which the Company received $62,500 in proceeds which wasrecorded as additional paid-in capital.
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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 otherthan those disclosed below.
On April24, 2020, the Company entered into a common stock repurchase option agreement to purchaseor assign 55,000 shares of common stockfrom a third party at $0.05 per share.The Company assigned its rights to the repurchaseoption agreement to a third party inexchange for compensation. The common stockrepurchase option was exercised on April27, 2020 for which the Company received$19,250 in proceeds which was recorded as additional paid-incapital.
See note8 for additional subsequent events.
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Item2. Management’s Discussion and Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction withour consolidated 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 alsoforward-looking statements which involve risks, uncertainties, and assumptions. Becauseforward-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
We are a financialtechnology company utilizing innovative payment processing technologies to complementour core merchant services capabilities.Our patented and proprietary software for merchant services, text marketing and lead generation are licensableor available through a suite of synergisticofferings directly to our clients. We are developing an enterprise-grade text payment system using thesimplicity and familiarity of text messaging with multi-factor authentication to ensure security.
Our company’s merchant services provide financial processing for businesses to accept traditional means ofcashless payments, such as credit cards, ACH, wireless payments, and more. Through partnerships andproprietary software, we offer our merchants advanced capabilities such asonline payment gateways and paymentsplitting to protect, enhance and expand theirbusiness. Further, in part throughour intellectual property and patents, we offerintegrated, advanced solutions for mobilepayment processing, payment facilitation, digital marketing, software development, mobile app development, website development and website hosting.
We are expanding our merchant processing services to include enterprise-grade, patent protected software and intellectual property for secure short message system, or SMS, payments and advanced text messaging for lead generation. Our patent protected software and technology managestext messaging for notification, response, authentication, marketing, advertising, information queries and reports. Oursoftware platforms will incorporate advanced intellectualproperty to transact mobile payments via securetext messaging based on secure multi-factorauthentication, or MFA, technology, thereby extending merchants’ marketplace andavenues to receive payments.
We believe that our technology will greatly increase the adoption of mobile payment through ease of use including text-based securityprotocols. To succeed, businesses mayneed to adopt text messaging to engage withtheir customers. We believe thatour patent protected text platform willallow businesses to communicate regularly with their customers, suppliers andpartners knowing that their texts are being read and welcomed.
We seek to grow our business by pursuing the following strategies:
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We are an OTCPink Open Market traded corporation headquarteredin Carlsbad, CA. Our stock trades underthe symbol “APCX.” We were foundedin 1998 as Health Express USA, Inc. Our business went through name changes in 2005(CSI Business, Inc.), 2006 (Natural NutritionInc.) and 2009 (AppTech Corp.) In 2013,we merged with Transcendent One, Inc., whereby Transcendent One, Inc. and its managementtook controlling ownership of the Company.From this point forward, wehave operated as a merchant services provider, continuing the business conducted byTranscendent One, Inc. In 2017, we acquired certain assets from GlobalTel Media, Inc., or GTM, which included patented, enterprise-grade software for advanced text messaging. In addition to the software and associated databases,the acquisition included four patents andadditional intellectual property for mobile payments and advanced MFA securityprotocols.
Effects of the COVID-19 Pandemic
The unprecedented and adverse effects of COVID-19, andits unpredictable duration, in the regions wherewe have merchants, employees andconsumers have had a material adverseeffect on our processing volume and thus on our net revenues and may in the future have a material adverse effect on our liquidity and financial condition.
Financial Operations Overview
The followingdiscussion sets forth certain componentsof our statements of operations as wellas factors that impact those items.
Revenues
Our Revenues.We devise 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-month periods ended March 31, 2020 and 2019, respectively. We have derived this data from our consolidated financial statements included elsewhere in this registration statement.
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The Three Months Ended March 31, 2020
Compared to the Three Months Ended March 31, 2019
The followingtable presents our historical results of operations for the periods indicated:
Revenue
Revenueincreased to $58,157 from $56,800, or 2%, for the three monthsended March 31, 2020 from the three monthsended March 31, 2019. This increase was principally driven by various insignificant factors.
Cost of Revenue
Costof revenue increased to $23,225 from$22,537, or 3%, for the three monthsended March 31, 2020 from the three months ended March 31, 2019.This increase was driven primarily byvarious insignificant factors.
Generaland Administrative Expenses
Generaland administrative expenses increased to $1,415,899 from $189,645, for the three months ended March 31, 2020 from the three months ended March 31,2019, primarily driven by stock-basedcompensation due to several significant consultingagreements for marketing and professional related services.
Research and Development Expenses
Research and development expenses increased to $12,000 from $6,820, or 76%, for the months ended March 31, 2020 from the three months ended March 31, 2019. This increase wasprimarily due to various insignificant factors.
Interest Expense,net
Interest expense, net decreased to $71,083 from $76,039, or 7%, for the three months ended March 31, 2020 from the three months ended March 31, 2019. This decrease was primarily driven bythe elimination of one-time interest charges for theamortization of the debt discount onnew related party notes payable and refinancing charges on other notespayable.
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Liquidity and Capital Resources
While the company iscontinuing operations and generating revenues, thecompany’s cash position is not significant enough to support the company’s daily operations. To the extent that additional funds are necessary to financeoperations and meet our long-term liquidityneeds as we continue to execute our strategy, weanticipate that they can be obtained through additional indebtedness,equity or debt issuances or both. Usingcurrently available capital resources, management believes wecan conduct planned operations for 21 days. Further, management believes we needto raise $1.35M to remain in business for the next 12 months.
Sincewe derive our revenues principally from processing of purchases from our merchant servicesclients, a downturn in economic activity, such as that associated with the current coronavirus pandemic could reduce the volume of purchaseswe process, and thus our revenues. In addition, such a downturn could cause our merchantcustomers to cease operations permanently decreasing our payment processing unless new customers were found. We may also faceadditional difficulty in raising capital during aneconomic downturn.
Cash Flows
The followingtable presents a summary of cash flows from operating, investing and financing activities for the following comparative periods.
Cash Flow from Operating Activities
Net cash used in operating activities increased by $227 for the three months ended March 31, 2020 from the three monthsended March 31, 2019. This increase was principally driven by various insignificant factors.
Cash Flow from Investing Activities
Net cashprovided by investing activities increased by$23,411 for the three months ended March 31, 2020 fromthe months ended March 31, 2019. Thisincrease was principally driven bya refund of a deposit and a prepaymentof rent expense.
Cash Flow from Financing Activities
Net cashprovided by financing activities decreasedby $67,519 for the three months ended March 31, 2020 from the months ended March 31, 2019. This decrease wasprincipally driven by decreased proceeds from the sale of common stock and proceeds fromloans payable related parties.
Critical Accounting Policies
Ourdiscussion and analysis of our financialcondition 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 ofassets, liabilities, revenues and expenses. Onan ongoing basis, weevaluate our estimates including those related to revenue recognition, goodwill and intangibleassets, derivative financial instruments, and equity-based compensation.We base our estimates on historical experienceand on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differfrom these estimates under differentassumptions or conditions.
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Critical accounting policies are thosethat we consider the most critical to understanding our financial condition and resultsof operations. The accountingpolicies we believe to be mostcritical to understanding our financial condition and resultsof operations are discussed below. Asof March 31, 2020, there have been no significant changes to our critical accounting estimates, except as described in Note 2 to our consolidated financial statements.
Recent Accounting Pronouncements
As of March 31, 2020,there have been no significant changesto 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 facilitateoff-balance sheet arrangements (as thatterm 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 thatcould arise if we had engaged in thosetypes of relationships. We enter intoguarantees in the ordinary course of business related to theguarantee of our own performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for smaller reporting companies.
Item 4. Control and Procedures.
Evaluation of DisclosureControls and Procedures
Under the supervision and with the participation ofour management, including the Chief Executive Officer and the Chief Financial Officer, weevaluated the effectiveness of the designand operation of our “disclosure controls and procedures” (asdefined in Rule 13a-15(e) under the Exchange Act) as of the endof the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of March 31, 2020.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internalcontrol over financial reporting duringthe three-month period ended March 31, 2020 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.
Limitationson 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 objectivesof the control system are met. Further,the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherentlimitations in all control systems, noevaluation of controls can provide absolute assurancethat all control issues and instances offraud, if any, have been detected. Becauseof the inherent limitations in any controlsystem, misstatements due to error or fraud may occur and not be detected.
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PART II – OTHERINFORMATION
Item 1. Legal Proceedings
In September 2018, a complaint was filed in San Diego Superior Court for a breach of contract arising from a subsequent agreement regarding the purchase of a judgment for the matter of Svenston Buelow and Amanda Eliot v. GlobalTel Media. The purchaseof the judgment was part of the transaction in which we acquired our IP portfolio from GlobalTel Media. We substantially performed under the original agreement, but the plaintiffs alleged we breached the subsequent agreement which was executed to extend the final payment. On October 26, 2018, we filedan answer that denied each andevery purported allegation and cause of action, further denied that they caused any damageor loss and asserted the affirmative defense of duress. We recorded as a liability as of December 31, 2019 and 2018 in the amount of $135,000 and $175,000, respectively. On December 3, 2019, the parties entered into a conditionalsettlement agreement whereby we agreed to pay $150,000 on a payment schedule ending October 1, 2020. Should the repayment enter default without being cured, the court shall order an entry of judgment in favor of the Plaintiffsin the amount of $175,000 less any amounts paid under the settlement, plus pre-judgment and post-judgment interest, court costs and reasonable attorney fees. As of May14, 2020, we are currently in default of the agreement and are in discussions with the plaintiffs to cure the default by May 22, 2020.
In September 2018, thelandlord for our former office space lease fileda limited civil lawsuit against us in the State of California. We reached an agreement that resulted in a stipulationfor judgment on October 28, 2018. Thestipulated judgment was for $42,432 includingattorney fees and court costs plus interest for which we recorded as a liabilityas of September 30, 2019 and December31, 2018. The stipulated judgment waspaid in full on August 16, 2019.
In November2017, two shareholders of AppTech, onewho previously filed a 2014 lawsuitin the State ofWashington, filed another lawsuit against us in the State of California, claiming the sameaccusations as the previously filed lawsuit which was dismissed. The lawsuit has been transferredto the United States District Court for the Southern District of California. We filed an answer, affirmative defenses and counter claims. Management believes that the Plaintiff misrepresented and mislead us during the merger between ourselves and Transcendent One, Inc. The court has encouraged the parties to settle. Even though theCompany believes the lawsuit is without meritand will vigorously defend, the Company has made several offers to settle. On December 19, 2019, theCompany entered into a settlement and releaseagreement. The Company has recorded theliability as of December 31, 2019 forthe total obligation of $240,000 to be paid out over three years beginning February 15, 2020. A stipulation for dismissal of action has been filed with the courts. As of May 14, 2020,we are currenton the payment schedule.
In March 2016, a significantshareholder (“Plaintiff”) of ours filed a lawsuit against us in the state of California alleging breach of contract, fraudand negligent misrepresentation based on supposedoral promises in 2013 to givePlaintiff’s company shares in exchange for stockin another company and a 2014 consulting agreement. We stronglydisputed all claims made in the lawsuit.On April 20, 2017, wefiled an answerthat denied each and every purported allegation and cause of actionand further denied that they caused anydamage or loss. We reachedan agreement resulting in a voluntary dismissal ofthe civil case on July 5, 2017. The Plaintiff was not able to fulfill the proper documentation withinthe allotted 180 days and the 3,450,000 sharesof our common stock were properly cancelled in 2019.
Item 1A. Risk Factors.
As a smallerreporting company, as defined in Rule12b-2 of the Exchange Act,we are not required to provide the informationrequired by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During2020 year-to-date, we assignedour rights to stock repurchase optionagreements to third parties resultingin net proceeds of $205,781.
Duringthe three months ended March 31, 2020, 2,349,500 sharesof common stock were issued to severalconsultants in connection with business development and professional services rendered valued at $1,209,185. Duringthe three months ended March 31, 2020, we assignedour rights to stock repurchaseoption agreements to third parties resulting in netproceeds of $186,531. During the three monthsended March 31, 2020, no shares ofcommon stock were issued to the managementor members of theBoard of Directors.
All Issuances were exempt from registration requirements of Section 5 of the Securities Act of 1933 as they did not involve a public offering under Section 4(a)2(2) and were issued as restricted securities as defined inRule 144 of the Act.
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Item 3. Defaults Upon Senior Securities.
All subordinated notes payable, convertiblenotes payable and notes payable are currently in default.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
EXHIBIT INDEX
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Signatures
Pursuant to the requirements of the Securities and ExchangeAct of 1934, the registrant has dulycaused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
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