The following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, our audited annual financial statements and the
related notes thereto, each of which appear elsewhere in this Annual Report.
This discussion contains certain forward-looking statements that involve risks
and uncertainties, as described under the heading "About Forward-Looking
Statements" in this Annual Report. Actual results could differ materially from
those projected in the forward-looking statements. For additional information
regarding these risks and uncertainties. The Management Discussion and Analysis
of Financial Condition and Results of Operations below is based upon only the
financial performance of Innovate Payment Solutions.
Overview and Financial Condition
We are a provider of digital payment solutions and services to businesses and
consumers. We are focused on operating and developing "e-wallets" that enable
consumers to deposit cash, convert it into a digital form, and remit the funds
to Mexico and other countries quickly and securely. Our first e-wallet,
the Beyond Wallet, is focused on the business market and is currently
operational. Our flagship e-wallet, IPSIPay, is focused on the consumer market
and was fully launched in July 2022 after a soft launch in December 2021.
Our platform (which can be used both business-to-business and
business-to-consumer) facilitates the transfer of funds in digital form to other
countries, initially Mexico but also, India and the Philippines, primarily from
hand-held devices as well as on desktop or laptop computers.
During the third quarter of 2022, we completed the key integration of our
IPSIPay mobile application and back-end payment processing infrastructure
through our commercial partners. Additionally, in July 2022 we entered into an
endorsement agreement with Mexican-American actor and television personality,
Mario Lopez, which we believe will be a significant part of our commercial
launch efforts in our target markets as described below.
In October 2022, we announced that since the commencement of our new IPSIPay
marketing campaign featuring Mr. Lopez in August 2022, we achieved 10,000
downloads of IPSIPay, and of the 10,000 downloads, 1,200 have been converted to
active users with wallets, meaning the users have initiated at least one
transaction via IPSIPay. As of December 31, 2022, we had achieved 31,004
downloads of IPSIPay, and of the 31,004 downloads, 2,686 have been converted to
active users with wallets.
Our launch plan for IPSIPay and Beyond Wallet is to target lower income, migrant
communities in California (notably in the agriculture industry), and expanding
to other states with large migrant populations such as Texas and Florida. We not
only believe the addressable market for our products and services is large and
growing, but that servicing this market is socially responsible. We believe our
digital payment facilitation platform and related apps will empower and enable
the unbanked and under-served and payment providers who service these users,
acting as a bridge to provide access to comprehensive and easy to use payment
solutions. Given the large size of our addressable market, our ability to
capture even a very small share of the market represents a significant revenue
opportunity for our company.
Previously, we intended to invest in physical kiosks which required the user
presence at digital payment kiosk locations, and we still intend to use our
existing kiosks in certain target markets within Southern California.
25
Known Trends, Demands, Commitments, Events or Uncertainties Impacting Our
Business
Launch and Scaling of E-Wallets
Having achieved full commercial integration and launch of the IPSIPay app during
the third quarter of 2022, the key for our business for the foreseeable future
is to scale the number of IPSIPay and, to a lesser extent, Beyond Wallet
downloads achieved and revenue generated from transactions process by customers
via IPSIPay and Beyond Wallet. Presently, our ability to generate meaningful
revenue from customer use of IPSIPay or Beyond Wallet is limited, given the
relatively recent commencement of launch activities, the relatively limited app
downloads and active users achieved to date and our launch promotional
activities. While we see great potential for our product offerings in our
initial target markets as described above, both the near- and long-term
viability of our business is dependent in large part on our ability to scale our
IPSIPay and Beyond Wallet business and add complimentary offerings (such as our
telemedicine collaboration with MeMD (also known as Walmart Health Virtual
Care), which we announced in October 2022), all with the goal of increasing app
downloads and active users who would generate transaction processing and other
fees for our company.
We generated nominal IPSIPay-related revenue during the fourth quarter of 2022,
with the goal of increasing revenues during 2023. In the current environment, it
has proven to take longer to win a customer's trust and resulting fee generating
usage of our apps. This is especially true when it relates to the unbanked
and underserved sending money abroad. We initiated an aggressive digital
marketing campaign, late in the third quarter. With the help of National
Positions and Mario Lopez we were able to finish the year with 35,000 downloads
and 5,000 active users. We have seen sequential growth every month and coupled
with organic growth, we recently achieved 50,000 downloads. Since the launch of
our marketing program, we also have seen steady growth of the issuance of debit
Visa cards via IPSIPay. While we have not seen any significant revenue from
these endeavors, we believe the brand we are building and the impressions we
have recorded should help us grow the awareness and use of our apps during
2023. Our ability to reach sufficient scale of our business and generate
sufficient revenue is, however, unproven and speculative at this time, so we
remain faced with all of the risks associated with launching and seeking to
scale a new business. If we are unable to grow our IPSIPay and Beyond Wallet
business, our business could be severely harmed or could fail.
COVID-19
The novel coronavirus ("COVID-19") pandemic has resulted in government
authorities and businesses throughout the world implementing numerous measures
intended to contain and limit the spread of COVID-19, including travel
restrictions, border closures, quarantines, shelter-in-place and lock-down
orders, mask and social distancing requirements, and business limitations and
shutdowns. The spread of COVID-19 and increased variants has caused, and may
continue to cause us to make significant modifications to our business
practices, including enabling most of our workforce to work from home,
establishing strict health and safety protocols for our offices, restricting
physical participation in meetings, events, and conferences, and imposing
restrictions on employee travel. We will continue to actively monitor the
situation and may take further actions that alter our business practices as may
be required by federal, state, or local authorities or that we determine are in
the best interests of our employees, customers, or business partners.
The rapidly changing global market and economic conditions as a result of the
COVID-19 pandemic have impacted, and are expected to continue to impact, our
operations and business. For example, COVID-19 related issues has caused a delay
in our ability to launch our products and services. The broader implications of
the COVID-19 pandemic and related global economic unpredictability on our
business, financial condition, and results of operations remain uncertain.
Russia's Invasion of Ukraine
In February 2022, Russia invaded Ukraine, with Belarus complicit in the
invasion. As of the date of this report, the conflict between these two
countries is ongoing. We do not have any direct or indirect exposure to Ukraine,
Belarus or Russia, through our operations, employee base or any investments in
any of these countries. In addition, our securities are not traded on any stock
exchanges in these three countries. We do not believe that the sanction levied
against Russia or Belarus or individuals and entities associated with these two
countries will have a material impact on our operations or business, if any.
Further, we do not believe that we have any direct or indirect reliance on goods
sourced from Russia, Ukraine or Belarus or countries that are supportive of
Russia.
We have commercially launched our e-wallet platforms which provide online money
transfer and payment services to our customers which may expose us to
cybersecurity risks. We employ the latest encryption techniques and firewall
practices and constantly monitor the usage of our software, however, this may
not be sufficient to prevent the heightened risk of cybersecurity attacks
emanating from Russia, Ukraine, Belarus, or any other country.
The impact of the invasion by Russia of Ukraine has increased volatility in
stock trading prices and commodities throughout the world. To date, we have not
seen a material impact on our operations; however, a prolonged conflict may
impact on consumer spending, in general, which could have an adverse impact on
the payment services industry as a whole and our business.
26
Inflation
Macro-economic conditions could affect consumer spending adversely and
consequently our future operations when we fully launch our e-wallet products
commercially. The U.S. has entered a period of significant inflation, and this
may impact consumer's desire to adopt our products and services and may increase
our costs overall. However, as of the date of this report, we do not expect
there to be any material impact on our liquidity as forecast in our business
plan due to recent inflationary concerns in the U.S.
Foreign Exchange Risks
We intend to operate in several foreign countries, including Mexico. Changes and
fluctuations in the foreign exchange rate between the US Dollar and other
foreign currencies, including the Mexican Peso, may in future have an effect our
results of operations.
Recent Developments
December 2022 Note Amendment Transaction
On February 16, 2021, we entered into separate Securities Purchase Agreements
(the "SPAs"), with each of Cavalry Fund I LP ("Cavalry") and Mercer Street
Global Opportunity Fund, LLC ("Mercer"), pursuant to which we received $500,500
and $500,500 from Cavalry and Mercer, respectively, in exchange for the issuance
of: (i) Original Issue Discount 12.5% Convertible Notes (the "Notes" and each a
"Note") in the principal amount of $572,000 to each of Cavalry and Mercer; and
(ii) five-year warrants (the "Original Warrants") issued to each of Cavalry and
Mercer to purchase 2,486,957 shares of the Company's common stock (the "Common
Stock") at an exercise price of $0.24 per share.
We have twice extended our indebtedness to each Cavalry and Mercer. On February
3, 2022, we agreed to extend the maturity date of the Notes to August 16, 2022.
Additionally, on August 30, 2022 we entered agreements for an additional
maturity date extension to November 16, 2022. In consideration for the second
extension, we agreed to (i) increase the principal amount outstanding and due to
Cavalry and Mercer under their respective Notes by twenty percent (20%) and (ii)
issue to each of Cavalry and Mercer a new five-year warrant (each, an "Extension
Warrant") to purchase an additional 3,000,000 shares of common stock at an
exercise price of $0.15 per share. The Extension Warrant contains the same terms
and provisions in all material respects as the Original Warrants, except for
difference in exercise price.
On December 30, 2022, we again extended the maturity dates of each of the Notes
to December 30, 2023. Each of Cavalry and Mercer entered into Note Amendment
Letter Agreement with the Company (the "Note Amendment") pursuant to which the
parties agreed to the following:
(1) The conversion price of the Notes was reduced from $0.15 to $0.0115 per
share (such reduced conversion price being the current conversion price of
the Notes give the passage of the November 16, 2022 maturity date of the
Notes). As a result of this change in conversion price, under the existing
terms of the Notes, the 3,000,000 shares of common stock underlying the
Extension Warrants was increased to 39,130,435 shares;
(2) The Original Warrants issued on February 16, 2021 were irrevocably
exchanged for 12-month non-convertible promissory notes in the amount of
$482,000 (the "Exchange Notes"). This exchange caused the cancellation of
the Original Warrants for all purposes. The Exchange Notes have a maturity
date of December 30, 2023 and carry an interest rate of ten percent (10%).
We shall have the right, but not the obligation, in lieu of a cash payment
upon maturity of the Exchange Notes, to issue 51,901,711 shares of common
stock, as adjusted for any stock splits, dividends or other similar
corporate events, in full satisfaction of its obligations under each of
the Exchange Notes (or any pro rata portion of such number of shares in
partial satisfaction of such obligations). We are under no legal
obligation to reserve such number of shares for future issuance;
(3) Each of Cavalry and Mercer agreed (i) not to convert all or any portion of
the Notes until after March 30, 2023 and (ii) waive any events of default
under the Notes and the SPAs;
(4) Certain other warrants held by Cavalry and Mercer which contain a mandatory
exercise provision allowing us to force exercise of such warrants if the
price of the common stock is $0.06 per share or above were amended effective
December 30, 2022 to reduce such forced exercise price to $0.04 per share;
and
(5) We are obligated to register the shares of common stock underlying the Notes
and the shares underlying all warrants held by Cavalry and Mercer for resale
with the Securities and Exchange Commission and we have filed the
registration statement to satisfy such registration obligation.
The parties also acknowledged that the principal and accrued interest under the
Notes as of December 28, 2022 is equal to an aggregate of $2,264,784, or
$1,132,392 for each of Cavalry and Mercer. In addition, as a result of the
reduction in the conversion price of the Notes, certain other warrants held by
third parties will have the exercise price of such warrants reduced to $0.0115
per share. All of the shares of our common stock underlying the Notes as amended
and all warrants held by Cavalry and Mercer as adjusted are registered for
resale pursuant to a registration statement.
27
Results of Operations for the years Ended December 31, 2022 and
December 31, 2021
Net revenue
We recorded minimal revenues of $847 during the year ended December 31, 2022 and
we did not have revenues during the year ended December 31, 2021. Our goal is to
increase revenue as our product becomes more widely used and we are exploring
different market segments to increase our revenue from our e-wallets. We have
utilized financial promotional strategies to encourage downloads and use of
IPSIPay, which has reduced our ability to generate revenues in the near term
while such strategies are in effect.
Cost of goods sold
Cost of goods sold was $5,052 for the year ended December 31, 2022 and consists
primarily of bank and merchant related fees and chargebacks. We had no cost of
goods sold, as we did not have revenues during the year ended December 31, 2021.
General and administrative expenses
General and administrative expenses were $5,540,879 and $10,284,815 for the
years ended December 31, 2022 and 2021, respectively, a decrease of $4,743,936
or 46.1%. The decrease is primarily due to the following;
(i) Salaries and wages of $2,323,361 and $7,066,725 for the years ended December
31, 2022 and 2021, respectively, a decrease of $4,743,364 or 67.1%. The
decrease is due to the value of warrants issued to our CEO of $4,327,899 in
the prior year. These warrants were subsequently cancelled and replaced with
stock options; the reduction in severance expenses of $302,000, a severance
expense was raised for several employees in the prior year who are currently
disputing their severance; the decrease in stock option compensation expense
of $57,342; and a reduction in salary expense of $79,267 due to the reduction
in payroll head count during the current year.
(ii) Consulting fees of $339,500 and $1,340,134 for the years ended December
31, 2022 and 2021, respectively, a decrease of $1,000,634 or 74.7%. The
decrease is due to 8,000,000 restricted shares issued to various advisory
board members valued at $776,000 in the prior year and 3,650,000 shares
issued to various consultants and advisory board members valued at
$443,050 during the prior year. The remaining increase of $218,416 is due
to consulting fees paid to various consultants to improve our marketing
and selling efforts.
(iii) Directors' fees of $105,000 and $722,114 for the years ended December
31, 2022 and 2021, respectively, a decrease of $617,114 or 85.5%,
Directors fees in the prior year included shares issued to directors
valued at $539,000, and the value of options granted to directors of
$91,614.
(iv) Selling and marketing costs of $622,639 and $117,185 for the years ended
December 31, 2022 and 2021, respectively, an increase of $505,454 or 431.3%.
The increase is due to the Mario Lopez endorsement fees of $446,702 and a
general increase in other marketing expenditure of $58,752 to launch our
payment platform.
(v) Professional fees of $1,117,066 and $405,552 for the years ended December 31,
2022 and 2021, respectively, an increase of $711,514 or 175.4%. The increase
is primarily due to an increase in fees paid to Frictionless of $526,033 for
compliance, consulting and customer support and various other functions
during the current period; and an increase in social media expense of
$148,415 in order to promote the completed IPSI pay platform.
(vi) Legal fees of $470,316 and $243,541 for the years ended December 31, 2022
and 2021, respectively, increased by $226,775 or 93.1%, primarily due to two
legal cases, one with a previous employee and the other with a consultant
who was to provide services to the Group. These cases are ongoing and are
being defended.
(vii) Insurance expense of $224,056 and $85,936 for the years ended December 31,
2022 and 2021, respectively, an increase of $138,120 or 160.7%, primarily
due to increases in both health care costs and D&O insurance taken out
during the current year.
(vi) The balance of the difference is made up of several individually
insignificant expenses.
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Depreciation
Depreciation was $132,394 and $17,935 for the years ended December 31, 2022 and
2021, respectively, an increase of $114,459. The increase is primarily due to
the September 2022 commencement of amortization of the platform which is now
commercially operational.
Investment impairment charge
Investment impairment charge was $1 and $0 for the years ended December 31, 2022
and 2021, respectively, the amount is immaterial.
Loss on debt conversion
Loss on debt conversion was $0 and $5,498,820 for the years ended December 31,
2022 and 2021, respectively, a decrease of $5,498,820. The loss on debt
conversion during the prior year represents a loss realized on the conversion of
convertible notes, into equity at fixed conversion prices which ranged from
$0.035 to $0.045 per share, when the stock price ranged from $0.05 per share to
$0.238 per share, resulting in a significant loss. A total of $2,259,221 was
converted from convertible debt to equity during the year ended December 31,
2021.
Loss on convertible notes
loss on convertible notes was $4,602,709 and $0 for the years ended December 31,
2022 and 2021, respectively, an increase of $4,602,709 or 100.0%. The increase
is due to the repayment of one convertible note and the modification of the
maturity date of two convertible notes during the first, third fourth quarters,
respectively, resulting in the triggering of a full rachet provision on certain
warrants, the reduction in the conversion price of the convertible notes and the
exchange of certain warrants for promissory notes, discussed fully in note 9 to
the financial statements.
Forgiveness of federal relief loan
Forgiveness of federal relief loan was $0 and $60,292 for the years ended
December 31, 2022 and 2021, respectively. During the prior period the company
applied and was granted on the PPP loan advanced by the federal government
during the 2020 year.
Interest expense
Interest expense was $199,788 and $228,240 for the years ended December 31, 2022
and 2021, respectively, a decrease of $28,452 or 12.5%. The decrease is
primarily due to a reduction in the value of convertible debt outstanding, which
has been offset by increases in the principal balance outstanding during the
current period due to the capitalization of interest and penalties incurred for
extending the maturity dates of the debt.
Amortization of debt discount
Amortization of debt discount was $263,200 and $3,653,652 for the years ended
December 31, 2022 and 2021, respectively, a decrease of $3,390,452 or 92.8%. The
decrease is primarily due to the accelerated amortization of debt discount
related to notes converted to equity during the first quarter of the prior year.
Derivative liability movements
Derivative liability movements were $411,752 and $5,128,255 for the years ended
December 31, 2022 and 2021, respectively. The derivative liability arose due to
the issuance of convertible securities with variable conversion prices and no
floor conversion price. The credit during the current year represents the
mark-to-market of the derivative liability outstanding as of December 31, 2022,
primarily as a result of a decrease in the share price over the prior year.
29
Net loss
We incurred a net loss of $10,331,424 and $14,494,915 for the years ended
December 31, 2022 and 2021 respectively, a decrease of $4,163,491 or 28.7%. The
decrease is due to the decrease in general and administrative expenses, the
decrease in the loss realized on the conversion of convertible debt, the
decrease in the amortization of debt discount, offset by the increase in loss on
convertible notes and the movement in derivative liabilities, discussed in
detail above.
Liquidity and Capital Resources
To date, our primary sources of cash have been funds raised primarily from the
sale of our debt and equity securities.
We incurred an accumulated deficit of $52,399,858 through December 31, 2022 and
incurred negative cash flow from operations of $3,061,953 for the year ended
December 31, 2022. Our focus on operating and developing e-wallets that enable
consumers to deposit cash, convert it into a digital form and remit the funds to
Mexico and other countries quickly and securely, has required us to spend
substantial amounts in connection with implementing our business strategy,
including marketing our services to our target market.
To meet our financing needs, in 2021, we raised net convertible debt and warrant
funding of $2,048,000 (gross proceeds from convertible notes of $2,569,000 less
repayment of convertible notes of $521,000), received proceeds from warrant
exercises of $3,009,349 and additional gross proceeds $4,550,000 from a private
placement of equity securities. Subsequent to the 2022 year end, during February
2023, we raised an additional $535,000 in gross proceeds from convertible debt
and warrant funding. As of the date of this Report, we do not believe that we
have sufficient funding to implement our business strategy and anticipate that
we will need to raise substantial additional funds in order to implement our
plans.
At December 31, 2022, we had cash of $374,765 and working capital deficit of
$6,071,437, including a derivative liability of $2,550,642. After eliminating
the derivative liability our working capital deficit is $3,520,795.
We utilized cash of $3,061,953 and $2,608,118 in operations for the year ended
December 31, 2022 and 2021, respectively. Overall cash utilized in operations
increased by $453,835.
We invested $819,782 and $625,000 for the years ended December 31, 2022 and
2021, respectively, in the acquisition of a license and services for our wallet
products in the furtherance of our business objectives. In the prior year, we
also invested $500,000 in the common stock of Frictionless which has been
contracted to develop our payment platform for the Mexican and other markets.
Cash utilized in financing activities was $1,137,410 for the year ended December
31, 2022 was primarily due to the repayment of convertible debt during February
2022. Cash provided by financing activities for the year ended December 31, 2021
was primarily comprised of gross proceeds of $4,550,000 from the private
placement on March 17, 2021, $3,009,349 from warrants exercised and a net
$2,048,000 from convertible debt issued, net of convertible debt repayments of
$521,000. We utilized $501,100 for share issue expenses.
At December 31, 2022, we had outstanding convertible notes in the amount of
$2,266,602 and notes outstanding of $964,268. The convertible notes were issued
on February 16, 2021 and the maturity date has subsequently been extended three
times to August 16, 2022, November 16, 2022 and December 30, 2023. The August
16, 2022 and November 16, 2022 maturity date extensions resulted in additional
penalties been incurred on the notes. The December 2022 Note Amendment
Transection resulted in the exchange of certain warrants into notes with an
aggregate principal balance of $964,000, the reduction in the conversion price
of the convertible notes to $0.0115 per share from $0.15 per share and the
triggering of the full rachet provision on certain warrants resulting in the
issuance of an additional 72,260,870 warrants at a revised exercise price of
$0.0115 per share, in addition the exercise price of certain warrants was reset
to $0.0115 per share from $0.05 per share. See note 9 to the financial
statements for a full description of the December 2022 Debt Amendment
Transaction.
30
Capital Expenditures
Our capital expenditure is dependent on our cash resources, currently we are not
forecasting any additional capital expenditure for the 2023 fiscal year.
Critical Accounting Policies
Preparation of our consolidated financial statements in accordance with U.S.
generally accepted accounting principles ("GAAP") requires us to make estimates
and assumptions that affect the reported amounts of certain assets, liabilities,
revenues and expenses, as well as related disclosure of contingent assets and
liabilities. Significant accounting policies are fundamental to understanding
our financial condition and results as they require the use of estimates and
assumptions which affect the financial statements and accompanying notes. See
Note 2 - Summary of Significant Accounting Policies of the Notes to the
Consolidated Financial Statements included in Part II, Item 8 of this Form 10- K
for further information.
Recently Issued Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies of the Notes to the
Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K
for information regarding recently issued accounting standards.
Contractual Obligations
We have contractual obligations in the form of notes and convertible notes which
are described in the financial statements included as part of this Report.
Inflation
The effect of inflation on the Company's operating results was not significant.
Interest rate sensitivity
We are not subject to interest rate sensitivity; our only debt consists of fixed
rate convertible debt.
Cybersecurity
We believe we employ industry standard cybersecurity protocols and tools, which
are constantly evolving, to protect our apps and software. While we are not
aware of any cybersecurity breaches or similar issues relating to our company,
there is a risk that our efforts will be insufficient to defend against all
cybersecurity threats.
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INNOVATIVE PAYMENT SOLUTIONS, INC. 