NOTE
2 – MANAGEMENT PLANS
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The
Company has incurred significant losses and experienced negative cash flow from operations since inception. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Since
inception, the Company has focused on developing and implementing its business plan. The Company believes that
its existing cash resources will not be sufficient to sustain operations during the next twelve months.
The
Company currently needs to generate revenue in order to sustain its operations. In the event that the Company cannot
generate sufficient revenue to sustain its operations, the Company will need to reduce expenses or obtain financing through the
sale of debt and/or equity securities. The issuance of additional equity would result in dilution to existing shareholders. If
the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable
to the Company, the Company would be unable to execute upon the business plan or pay costs and expenses as they are incurred,
which would have a material, adverse effect on the business, financial condition and results of operations.
The
Company’s current monetization model is to derive revenues from levels of subscription revenue paid monthly, service fees,
transaction fees and in some cases revenue sharing with banking and distribution partners. As these bases of revenues grow,
the Company expects to generate additional revenue to support operations.
As
of August 14, 2019, the Company has a cash position of approximately
$108,000
.
Based upon the current cash position and the Company’s planned expense run rate, management believes the Company has funds
currently to finance its operations through
September
2019.
NOTE
3 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES - RELATED PARTIES
As
of June 30, 2019 and December 31, 2018, the Company owed the Chief Executive Officer a total of $353,880 and $210,032, consisting
of $353,345 and $207,845 in unpaid salary and expenses of $535 and $2,187.
As
of June 30, 2019 and December 31, 2018, the Company owed the Chief Financial Officer $118,392 and $84,296 consisting of $118,392
and $84,256 in unpaid salary and expenses of $0 and $40.
The
Company owed a company owned by a more than 5% beneficial owner $145,820 and $113,920 as of June 30, 2019 and December 31, 2018,
consisting of consulting fees.
Additionally
as of June 30, 2019 and December 31, 2018, the Company owed the son of a more than 5% beneficial owner $29,500 and $20,000, pursuant
to a consulting agreement.
NOTE
4 – LOANS PAYABLE
During
the six months ended June 30, 2019 and 2018, the Company received $0 and $71,260 with no formal repayment terms and 10% interest.
The Company received loans in the amount of $0 and $59,915 with no formal repayment terms and no interest, during the six months
ended June 30, 2019 and 2018. The Company repaid $4,000 and $59,475 of these loans during the six months ended June 30,
2019 and 2018. The balance of the loans payable as of June 30, 2019 and December 31, 2018 was $85,600 and $89,600. Interest
accrued on the loans was $12,187 and $9,253 as of June 30, 2019 and December 31, 2018. Interest expense related to
these loans payable was $706 and $2,934 for the three and six months ended June 30, 2019 and $676 for the three and six months
ended June 30, 2018.
NOTE
5 – DEFERRED REVENUE
The
Company received $200,000 in May 2018 as a down payment to develop software for the automotive industry. This will be a business
to business and a business to consumer application intended to remove friction in the industry and provide an improved and trusted
consumer experience.
NOTE
6 – 10% SECURED CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS
On
March 6, 2015, the Company, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), issued $2,000,000
aggregate principal amount of its 10% Secured Convertible Promissory Notes due March 5, 2016 (the “Notes”) to certain
stockholders.
On May 11, 2015, the Company issued an additional $940,000 of Notes
to stockholders. The maturity dates of the Notes have been extended most recently from September 6, 2018 to September
6, 2019, with the consent of the Note holders.
The
Notes are convertible by the holders, at any time, into shares of the Company’s Series B Preferred Stock at a conversion
price of $90.00 per share, subject to adjustment for stock splits, stock dividends and similar transactions with respect to the
Series B Preferred Stock only. Each share of Series B Preferred Stock is currently convertible into 100 shares of the
Company’s common stock at a current conversion price of $0.90 per share, subject to anti-dilution adjustment as described
in the Certificate of Designation of the Series B Preferred Stock. In addition, pursuant to the terms of a Security
Agreement entered into on May 11, 2015 by and among the Company, the Note holders and a collateral agent acting on behalf of the
Note holders (the “Security Agreement”), the Notes are secured by a lien against substantially all of the Company’s
business assets. Pursuant to the Purchase Agreement, the Company also granted piggyback registration rights to the
holders of the Series B Preferred Stock upon a conversion of the Notes.
During
the six months ended June 30, 2019, $350,000 of the Notes were exchanged for $350,000 of the 4% Secured Convertible Notes (See
Note 8).
On
March 6, 2018, the Company issued 2 year warrants to purchase 692,020 shares of the Company’s common stock to the Note
holders at an exercise price of $0.90, as consideration for the Note holders extending the maturity date of the Notes payable
to September 6, 2018.
The warrants were valued at $128,803, fair value,
using the Black-Scholes option pricing model to calculate the grant-date fair value of the warrants. The warrant value
of $128,803 was expensed immediately as interest expense.
The assumptions related to the use of the
Black-Scholes option pricing model for warrants and options, during the three months ended March 31, 2018 are as follows: no
dividend yield, expected volatility of 203.5% to 205.6%, risk free interest rate of 1.96% to 2.28% and expected term of 2.0
years.
The
Notes are recorded as a current liability as of June 30, 2019 and December 31, 2018 in the amount of $2,813,157 and
$3,163,157. Interest accrued on the Notes was $1,426,924 and $1,283,660 as of June 30, 2019 and December 31,
2018. Interest expense other than the warrant related interest expense in the paragraph above, related to these
Notes payable was $70,329 and $143,264 for the three and six months ended June 30, 2019 and $88,507 and $177,013 and for the
three and six months ended June 30, 2018.
NOTE
7 – NOTES PAYABLE - STOCKHOLDERS
On
December 14, 2017, the Company issued a promissory note in the amount of $100,000, which is non-interest bearing along with warrants
to purchase 160,000 shares of the Company’s common stock, with an exercise price of $0.90, expiring in two years. The
note also includes a provision that the promissory note holder will receive additional warrants to purchase 25,000 shares of the
Company’s common stock for each week that the payment of the principal is past due. During the three months ended
March 31, 2019 and 2018, the promissory note holder received additional warrants to purchase 175,000 shares and 325,000 shares
of the Company’s common stock with an exercise price of $0.90, expiring in two years. The warrants were valued at
$21,305 and $62,934, fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the options,
with the following assumptions: no dividend yield, expected volatility of 183.3% to 236.2%, risk free interest rate of 1.9% to
2.6% and expected option term of 2 years. The warrant value of $0 and $21,305 was expensed as interest expense during the
three and six months ended June 30, 2019 and $74,827 and $137,761 during the three and six months ended June 30, 2018.
On
February 15, 2019, the Company reached an agreement with the promissory note holder whereby the warrants would no longer be
issued on a weekly basis and that the accrued interest of 10% in addition to the warrants would be waived retrospectively in
full. The reversal was recorded as a reduction in interest expense.
On
June 17, 2019, the Company issued a 90 day promissory note in the amount of $200,000, bearing interest at 10% along with
options to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.90 for term of 2 years,
vesting immediately. Additionally, the note holder will receive up to $200,000 from a 50/50 revenue split relative to a
Norway joint venture. The options were valued at $9,075, fair value, using the Black-Scholes option pricing model to
calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of
176.1%, risk free interest rate of 1.86% and expected option life of 2 years. The relative fair value of
the option was $8,757 and was recorded as a discount to the note payable in accordance with FASB ASC
835-30-25,
Recognition,
and is being accreted over the term of the note payable for financial statement
purposes.
On
June 17, 2019, the Company issued a 90 day promissory note in the amount of $50,000, bearing interest at 10% along with
options to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.90 for term of 2 years,
vesting immediately. Additionally, the note holder will receive up to $50,000 from a 50/50 revenue split relative to a Norway
joint venture (Note 16). The options were valued at $9,075, fair value, using the Black-Scholes option pricing model to
calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of
176.1%, risk free interest rate of 1.86% and expected option life of 2 years. The relative fair value of
the option was $7,681 and was recorded as a
discount to the note payable in accordance with FASB ASC
835-30-25,
Recognition,
and is being accreted over the term of the note payable for financial statement
purposes.
The
Company also repaid $7,000 of the promissory notes during the six months ended June 30, 2019.
The
notes payable are recorded as a current liability as of June 30, 2019 and December 31, 2018 in the amount of $362,937 and $134,000
net of discount of $14,063 and $0. Interest accrued on the notes, as of June 30, 2019 and December 31, 2018 was
$3,391 and $1,084. Interest expense including accretion of discount, but exclusive of the fair value of warrants above
related to these notes payable was $3,937 and $4,681 for the three and six months ended June 30, 2019 and $0 for the three and
six months ended June 30, 2018.
NOTE
8 – 4% SECURED CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS
On
August 26, 2016, the Company, pursuant to a Securities Purchase Agreement, issued $600,000 aggregate principal amount of its 4.0%
Secured Convertible Promissory Notes due June 30, 2019 (the “New Secured Notes”) to certain accredited investors (“investors”).
The Company issued additional New Secured Notes during 2016, 2017, 2018 and 2019.
The
New Secured Notes are convertible by the holders, at any time, into shares of the Company’s newly authorized Series C Cumulative
Convertible Preferred Stock (“Series C Preferred Stock”) at a conversion price of $90.00 per share, subject to adjustment
for stock splits, stock dividends and similar transactions with respect to the Series C Preferred Stock only. Each share
of Series C Preferred Stock is currently convertible into 100 shares of the Company’s common stock at a current conversion
price of $0.90 per share, subject to full ratchet anti-dilution adjustment for one year and weighted average anti-dilution adjustment
thereafter, as described in the Certificate of Designation of the Series C Preferred Stock. Upon a liquidation
event, the Company shall first pay to the holders of the Series C Preferred Stock, on a pari passu basis with the holders of the
Company’s outstanding Series A Preferred Stock and Series B Preferred Stock, an amount per share equal to 700% of the conversion
price (i.e., $630.00 per share of Series C Preferred Stock), plus all accrued and unpaid dividends on each share of Series C Preferred
Stock (the “Series C Preference Amount”). The Series C Preference Amount shall be paid prior and in preference
to payment of any amounts to the Common Stock. After the payment of all preferential amounts required to be paid to the
holders of shares of Series C Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and any additional senior preferred
stock, the Series C Preferred Stock participates in further distributions subject to an aggregate cap of seven and one-half times
(7.5x) the original issue price thereof, plus all accrued and unpaid dividends.
The
maturity dates of the New Secured Notes were extended by the investors to October 31, 2020.
During
the six months ended June 30, 2019, the Company issued $900,000 aggregate principal amount of its New Secured Notes to certain
accredited investors. The aggregate consideration consisted of $550,000 cash and the exchange of $350,000 outstanding principal
amount of 10% Secured Convertible Notes (See Note 6).
The
New Secured Notes are recorded as a long-term liability in the amount of $7,387,250 as of June 30, 2019 and a current
liability in the amount of $6,487,250 as of December 31, 2018. Interest accrued on the New Secured Notes was
$539,129 and $394,967 as of June 30, 2019 and December 31, 2018. Interest expense, including accretion of
discounts, related to these notes payable was $74,912 and $144,161 for the three and six months ended June 30, 2019 and
$49,442 and $99,426 for the three and six months ended June 30, 2018.
NOTE
9 – INCOME TAXES
Income
tax expense was $0 for the three and six months ended June 30, 2019 and 2018.
As
of January 1, 2019, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest
or penalties during 2019 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the
three and six months ended June 30, 2019, and there was no accrual for uncertain tax positions as of June 30, 2019. Tax years
from 2015 through 2018 remain subject to examination by major tax jurisdictions.
There
is no income tax benefit for the losses for the three and six months ended June 30, 2019 and 2018, since management has determined
that the realization of the net tax deferred asset is not assured and has created a valuation allowance for the entire amount
of such benefits.
NOTE
10 – CONVERTIBLE PREFERRED STOCK
Rego
Payment Architectures, Inc. Series A Preferred Stock
The
Series A Preferred Stock has a preference in liquidation equal to two times the Original Issue Price to be paid out of assets
available for distribution prior to holders of common stock and thereafter participates with the holders of common stock in any
remaining proceeds subject to an aggregate cap of 2.5 times the Original Issue Price. The Series A Preferred Stockholders may
cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred Stock
can be converted. The Series A Preferred Stock also contains customary approval rights with respect to certain matters. The
Series A Preferred Stock accrues dividends at the rate of 8% per annum or $8.00 per Series A Preferred Share.
The
conversion price of Series A Preferred Stock is currently $0.90 per share. The Series A Preferred Stock is subject to mandatory
conversion if certain registration or related requirements are satisfied and the average closing price of the Rego’s common
stock exceeds 2.5 times the conversion price over a period of twenty consecutive days.
The
conversion feature of the Series A Preferred Stock issued in January 2014 is an embedded derivative, which is classified as a
liability in accordance with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at
a fair market value of $1,648,825 at January 27, 2014, and $0 at June 30, 2019 and December 31, 2018. This was classified as an
embedded derivative liability and a discount to Series A Preferred Stock. Since the Series A Preferred Stock can be
converted at any time, the full amount of the discount was accreted and reflected as a deemed distribution.
The
conversion feature of the Series A Preferred Stock issued in April 2014 is an embedded derivative, which is classified as a liability
in accordance with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market
value of $3,489,000 at April 30, 2014, and $0 at June 30, 2019 and December 31, 2018. This was classified as an embedded derivative
liability and a discount to Series A Preferred Stock. Since the Series A Preferred Stock can be converted at any time,
the full amount of the discount was accreted and reflected as a deemed distribution.
Rego
Payment Architectures, Inc. Series B Preferred Stock
The
Series B Preferred Stock is pari passu with the Series A Preferred Stock and has a preference in liquidation equal to two times
the Original Issue Price to be paid out of assets available for distribution prior to holders of common stock and thereafter participates
with the holders of common stock in any remaining proceeds subject to an aggregate cap of 2.5 times the Original Issue Price.
The Series B Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock into which
the shares of Series B Preferred Stock can be converted. The Series B Preferred Stock also contains customary approval
rights with respect to certain matters. The Series B Preferred Stock accrues dividends at the rate of 8% per annum
or $7.20 per Series B Preferred Share.
The
conversion price of the Series B Preferred Stock is currently $0.90 per share. The Series B Preferred Stock is subject to mandatory
conversion if certain registration or related requirements are satisfied and the average closing price of the Company’s
common stock exceeds 2.5 times the conversion price over a period of twenty consecutive trading days.
The
conversion feature of the Series B Preferred Stock is an embedded derivative, which is classified as a liability in accordance
with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market value of
$375,841 at October 30, 2014, and $0 at June 30, 2019 and December 31, 2018. This was classified as an embedded derivative liability
and a discount to Series B Preferred Stock. Since the Series B Preferred Stock can be converted at any time, the full
amount of the discount was accreted and reflected as a deemed distribution.
The
Warrants associated with the Series B Preferred Stock were also classified as equity, in accordance with FASB ASC 480-10-25. Therefore
it is not necessary to bifurcate these Warrants from the Series B Preferred Stock.
Rego
Payment Architectures, Inc. Series C Preferred Stock
In
August 2016, Rego authorized 150,000 shares of the Rego’s Series C Cumulative Convertible Preferred Stock (“Series
C”). As of March 31, 2019, none of the Series C shares are issued or outstanding. After the date of issuance
of Series C, dividends at the rate of $7.20 per share will begin accruing and will be cumulative. The Series C Preferred Stock
is pari passu with the Series A Preferred Stock and Series B Preferred Stock and has a preference in liquidation equal to seven
times the Original Issue Price to be paid out of assets available for distribution prior to holders of common stock and thereafter
participates with the holders of common stock in any remaining proceeds subject to an aggregate cap of 7.5 times the Original
Issue Price. The Series C Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock
into which the shares of Series C Preferred Stock can be converted. The Series C Preferred Stock also contains customary
approval rights with respect to certain matters. There are no outstanding Series C Preferred Shares, therefore the current
per annum dividend per share is $0.
As
of June 30, 2019, the value of the cumulative 8% dividends for all Rego preferred stock was $5,551,228. Such dividends
will be paid when and if declared payable by Rego’s board of directors or upon the occurrence of certain liquidation events. In
accordance with FASB ASC 260-10-45-11, the Company has recorded these accrued dividends as a current liability.
ZS
Series A Preferred Stock
In
November 2018, ZS pursuant to a Securities Purchase Agreement (the “ZS Series A Purchase Agreement”), issued in a
private placement to an accredited investor, 83,334 units at an original issue price of $3 per unit (the “ZS Original Series
A Issue Price”), which includes one share of ZS’ Series A Cumulative Convertible Preferred Stock (the “ZS Series
A Preferred Stock”) and one warrant to purchase one share of ZS’ common stock with an exercise price of $3.00 per
share expiring in three years (the “Series A Warrants”). ZS raised $250,000 with respect to this transaction. Dividends
on the ZS Series A Preferred Stock accrue at a rate of 8% per annum and are cumulative. The ZS Series A Preferred Stock
has a preference in liquidation equal to two times the ZS Original Series A Issue Price to be paid out of assets available for
distribution prior to holders of ZS common stock and thereafter participates with the holders of ZS common stock in any remaining
proceeds subject to an aggregate cap of 2.5 times the ZS Original Series A Issue Price. The ZS Series A Preferred Stockholders
may cast the number of votes equal to the number of whole shares of ZS common stock into which the shares of ZS Series A Preferred
Stock can be converted.
In
accordance with FASB ASC 480 and 815, the ZS Series A Preferred Stock has been classified as permanent equity and was valued based
on the relative fair value, $139,959, assumed to be the total proceeds less the fair value of the warrants of $110,041, at November
6, 2018, the date of issuance. The value of the warrants were reflected as a discount to the ZS Series A Preferred Stock. Because
the ZS Series A Preferred Stock can be converted at any time, the full amount of the discount relative to the warrants has been
fully accreted and reflected as a deemed distribution.
The
conversion feature of the ZS Series A Preferred Stock is an embedded derivative, which is classified as equity in accordance with
FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market value of $193,377
at the date of issuance. However in accordance with FASB ASC 470, the value of the beneficial conversion feature is limited to
the value of the ZS Series A Preferred Stock of $139,959 at the date of issuance. This was classified as an embedded derivative
and a discount to the ZS Series A Preferred Stock. Since the ZS Series A Preferred Stock can be converted at any time,
the full amount of the discount was accreted and reflected as a deemed distribution.
The
warrants associated with the ZS Series A Preferred Stock were also classified as equity, in accordance with FASB ASC 480-10-25. Therefore
it is not necessary to bifurcate the warrants from the ZS Series A Preferred Stock.
As
of June 30, 2019, the value of the cumulative 8% dividends for ZS preferred stock was $13,333. Such dividends will
be paid when and if declared payable by the ZS’ board of directors or upon the occurrence of certain liquidation events. In
accordance with FASB ASC 260-10-45-11, the Company has recorded these accrued dividends as a current liability.
NOTE 11
– STOCKHOLDERS’ EQUITY
Extension
and Revaluation of Options
In
April 2019, the Board of Directors of the Company approved amendments extending the term of outstanding options to purchase in
the aggregate 150,000 shares of common stock of the Company at an exercise price $0.90 per share. These options were
scheduled to expire in June 2019 and were each extended for an additional two year period from the applicable current expiration
date. The Company used the Black-Scholes option pricing model to calculate the fair value at $21,975, with the following
assumptions for the extended options: no dividend yield, expected volatility of 179.2%, risk free interest rate of 2.3%, and expected
option life of two years. The incremental increase in fair value of this term extension was $21,964, which was expensed during
the period.
Issuance
of Restricted Shares
A
restricted stock award (“RSA”) is an award of common shares that is subject to certain restrictions during a specified
period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates
prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of
nonvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions
thereon and are considered to be currently issued and outstanding. The Company’s restricted stock awards generally vest
over a period of one year. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market
value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes,
the fair market value of the restricted stock is determined based on the closing price of the Company’s common stock on
the grant date.
During
the three and six months ended June 30, 2019, the Company expensed $0 and during the three and six months ended June 30, 2018,
the Company expensed $9,375 and $18,750 relative to restricted stock awards.
The
Company entered into an financial advisory agreement whereby generally the Company will pay the financial advisor a success fee
equal to 6% of the Capital committed in a capital transaction.
NOTE
12 – STOCK OPTIONS AND WARRANTS
During
2008, the Board of Directors (“Board”) of the Company adopted the 2008 Equity Incentive Plan (“2008 Plan”)
that was approved by the stockholders. Under the 2008 Plan, the Company was authorized to grant options to purchase
up to 25,000,000 shares of common stock to any officer, other employee or director of, or any consultant or other independent
contractor who provides services to the Company. The 2008 Plan was intended to permit stock options granted to
employees under the 2008 Plan to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as
amended (“Incentive Stock Options”). All options granted under the 2008 Plan, which are not intended to
qualify as Incentive Stock Options are deemed to be non-qualified options (“Non-Statutory Stock Options”). As
of June 30, 2019, options to purchase 9,261,667 shares of common stock have been issued and are unexercised, and 0 shares are
available for grants under the 2008 Plan. The 2008 Plan expired on March 3, 2019.
During
2013, the Board adopted the 2013 Equity Incentive Plan (“2013 Plan”), which was approved by stockholders at the
2013 annual meeting of stockholders. Under the 2013 Plan, the Company is authorized to grant awards of stock
options, restricted stock, restricted stock units and other stock-based awards of up to an aggregate of 5,000,000 shares of
common stock to any officer, employee, director or consultant. The 2013 Plan is intended to permit stock options
granted to employees under the 2013 Plan to qualify as Incentive Stock Options. All options granted under the 2013
Plan, which are not intended to qualify as Incentive Stock Options are deemed to be Non-Statutory Stock
Options. As of June 30, 2019, under the 2013 Plan grants of restricted stock and options to purchase 4,450,000
shares of common stock have been issued and 3,050,000 are outstanding or unexercised, and 550,000 shares of common stock
remain available for grants under the 2013 Plan.
The
2013 Plan is administered by the Board or its compensation committee, which determines the persons to whom awards will be granted,
the number of awards to be granted, and the specific terms of each grant, including the vesting thereof, subject to the terms
of the 2013 Plan.
In
connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value
of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10%
of the outstanding stock of the Company).
Prior
to January 1, 2014, volatility in all instances presented is the Company’s estimate of volatility that is based on the volatility
of other public companies that are in closely related industries to the Company. Beginning January 1, 2014, volatility
in all instances presented is the Company’s estimate of volatility that is based on the historical volatility of the Company’s
stock.
On
January 9, 2019, REGO issued options to purchase an aggregate of 500,000 shares of REGO’s common stock to
four employees and a consultant. The options have an exercise price of $0.90, vest immediately and have a term of 5 years,
with a fair value of $72,576 in total, which was expensed immediately.
On
January 21, 2019, REGO issued options to purchase 50,000 shares of REGO’s common stock to a consultant.
The options have an exercise price of $0.90, vest immediately and have a term of 2 years, with a fair value of $7,562, which was
expensed immediately.
On
February 1, 2019, REGO issued options to purchase 25,000 shares of REGO’s common stock to a consultant.
The options have an exercise price of $0.90, vest immediately and have a term of 2 years, with a fair value of $3,593 in total.
These options were issued to satisfy a ZS obligation in the amount of $15,000 and resulted in forgiveness of debt of $11,607.
The
following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted by REGO
during the six months ended June 30, 2019:
|
|
|
2019
|
|
|
|
|
|
|
|
Risk Free
Interest Rate
|
|
|
2.4%
|
|
|
Expected Volatility
|
|
|
171.4%
|
|
|
Expected Life (in years)
|
|
|
3.9
|
|
|
Dividend Yield
|
|
|
0%
|
|
|
Weighted average estimated fair value of options
during the period
|
|
|
$ 0.13
|
|
The
following table summarizes the activities for REGO’s stock options for the six months ended June 30, 2019:
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
|
Intrinsic
|
|
|
|
|
|
Number of
|
|
|
|
Average
|
|
|
Term
|
|
|
|
Value
|
|
|
|
|
|
Shares
|
|
|
|
Exercise Price
|
|
|
in years)
|
|
|
|
(in 000's) (1)
|
|
|
Balance December 31, 2018
|
|
|
12,925,000
|
|
|
$
|
0.66
|
|
|
|
3.3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
775,000
|
|
|
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Expired/cancelled
|
|
|
(1,188,333
|
)
|
|
|
0.65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019
|
|
|
12,511,667
|
|
|
$
|
0.69
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
9,511,667
|
|
|
$
|
0.60
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
12,511,667
|
|
|
$
|
0.69
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
(1)
|
The aggregate
intrinsic value is calculated as the difference between the exercise price of the underlying
options and the closing stock price of $0.15 for REGO’s common stock on June
30, 2019.
|
For
the three and six months ended June 30, 2019, Rego expensed $59,636 and $254,351 and for the three and six months ended June 30,
2018, Rego expensed $946,666 and $1,080,422 with respect to options.
In
accordance with FASB ASC 505-50,
Equity – Equity-Based Payments to Non-Employees
, share based compensation with
performance conditions should be revalued based on the modification accounting methodology described in FASB ASC 718-20,
Compensation—Stock
Compensation—Awards Classified as Equity
. Upon the adoption, on June 30, 2018, of FASB ASU No. 2018-07, the Company
has revalued certain stock options with consultants and determined that there was an aggregate increase in fair value of $4,208.
Also upon the adoption of FASB ASU No. 2018-07, nonemployee share-based payment awards within the scope of Topic 718 are measured
at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the
service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
As
of June 30, 2019, there was $104,032 of unrecognized compensation cost related to outstanding stock options. This amount is expected
to be recognized over a weighted-average period of 0.5 years. To the extent the actual forfeiture rate is different from what
we have estimated, stock-based compensation related to these awards will be different from the Company’s expectations. The
difference between the stock options exercisable at June 30, 2019 and the stock options exercisable and expected to vest relates
to management’s estimate of options expected to vest in the future.
The
following table summarizes the activities for REGO’s unvested stock options for the six months ended June 30, 2019:
|
|
|
|
Unvested Options
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
Number of
|
|
|
|
Date Fair
|
|
|
|
|
|
Shares
|
|
|
|
Value
|
|
|
Balance December 31, 2018
|
|
|
3,625,000
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
775,000
|
|
|
|
0.13
|
|
|
Expired/cancelled
|
|
|
(616,667
|
)
|
|
|
0.25
|
|
|
Vested
|
|
|
(783,333
|
)
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019
|
|
|
3,000,000
|
|
|
$
|
0.16
|
|
The
following table summarizes the activities for REGO’s warrants for the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in 000's) (1)
|
|
|
Balance at December 31, 2018
|
|
|
3,052,020
|
|
|
$
|
0.90
|
|
|
|
1.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
175,000
|
|
|
|
0.90
|
|
|
|
2.0
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
|
3,227,020
|
|
|
$
|
0.90
|
|
|
|
0.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
3,227,020
|
|
|
$
|
0.90
|
|
|
|
0.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
3,227,020
|
|
|
$
|
0.90
|
|
|
|
0.8
|
|
|
$
|
-
|
|
|
(1)
|
The
aggregate intrinsic value is calculated as the difference between the exercise price
of the underlying warrants and the closing stock price of $0.15 for Rego’s common
stock on June 30, 2019.
|
All
warrants were vested on the date of grant.
The
following table summarizes the activities for ZS’s stock options for the six months ended June 30, 2019:
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Contractual
|
|
|
|
Intrinsic
|
|
|
|
|
|
Number of
|
|
|
|
Average
|
|
|
|
Term
|
|
|
|
Value
|
|
|
|
|
|
Shares
|
|
|
|
Exercise Price
|
|
|
|
in years)
|
|
|
|
(in 000's) (1)
|
|
|
Balance December 31, 2018
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
4.6
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
|
(1)
|
The aggregate
intrinsic value is calculated as the difference between the exercise price of the underlying
options and the value of $4.00 for ZS’s common stock on June 30, 2019.
|
For
the three and six months ended June 30, 2019, ZS expensed $0 and $28,051 with respect to options and for the three and six months
months ended June 30, 2018, ZS expensed $0 with respect to options.
The
following table summarizes the activities for ZS’s warrants for the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in 000's) (1)
|
|
|
Balance December 31, 2018
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
2.9
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
2.4
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
2.4
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
2.4
|
|
|
$
|
83
|
|
|
|
(1)
|
The aggregate
intrinsic value is calculated as the difference between the exercise price of the underlying
warrants and the value of $4.00 for ZS’s common stock on June 30, 2019.
|
For
the three and six months ended June 30, 2019 and 2018, ZS expensed $0 with respect to warrants.
The
following table summarizes the activities for ZBS’s stock options for the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in 000's) (1)
|
|
|
Balance December 31, 2018
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.2
|
|
|
$
|
-
|
|
|
|
(1)
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the
value of $0.01 for ZBS’s common stock on June 30, 2019.
|
For
the three and six months ended June 30, 2019 and 2018, ZBS expensed $0 with respect to options.
The
following table summarizes the activities for ZCS’s stock options for the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in 000's) (1)
|
|
|
Balance December 31, 2018
|
|
|
2,200,000
|
|
|
$
|
5.00
|
|
|
|
4.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019
|
|
|
2,200,000
|
|
|
$
|
5.00
|
|
|
|
4.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
2,200,000
|
|
|
$
|
5.00
|
|
|
|
4.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,200,000
|
|
|
$
|
5.00
|
|
|
|
4.3
|
|
|
$
|
-
|
|
|
|
(1)
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the value
of $0.01 for ZCS’s common stock on June 30, 2019.
|
For
the three and six months ended June 30, 2019 and 2018, ZCS expensed $0 with respect to options.
The
following table summarizes the activities for ZPS’s stock options for the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in 000's) (1)
|
|
|
Balance December 31, 2018
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
1.2
|
|
|
$
|
-
|
|
|
|
(1)
|
The aggregate
intrinsic value is calculated as the difference between the exercise price of the underlying
options and the value of $0.01 for ZPS’s common stock on June 30, 2019.
|
For
the three and six months ended June 30, 2019, ZPS expensed $0 with respect to options.
NOTE
13 – NONCONTROLLING INTERESTS
Losses
incurred by the noncontrolling interests for the three and six months ended June 30, 2019 were $724 and $6,481 and for the three
and six months ended June 30, 2018 were $5,026 and $11,459.
N
OTE
14 – OPERATING LEASES
For
the three and six months ended June 30, 2019, total rent expense under leases amounted to $6,352 and $13,682. For the three
and six months ended June 2018, total rent expense under leases amounted to $16,705 and $21,672. The Company has elected
not to recognize right-of-use assets and lease liabilities arising from short-term leases. The Company has no long-term lease
obligations as of June 30, 2019.
NOTE
15 – RELATED PARTY TRANSACTIONS
The
Company has a consulting agreement with a company owned by a more than 5% beneficial owner, at a cost of $15,000 per month.
For the three and six months ended June 30, 2019 and 2018, the Company expensed $45,000 and $90,000 relative to the consulting
company.
The
Company has a consulting agreement with the son of the principal of a company owned by a more than 5% beneficial owner, at a cost
of $5,000 per month. For the three and six months ended June 30, 2019 and 2018, the Company expensed $15,000 and $30,000
relative to this consultant.
During
the three and six months ended June 30, 2019, the Company received revenue from a technology company for the outsourcing of the
Company’s engineers for development. In addition, the Company paid this technology company $45,000 as a deposit for technical
assistance with the Platform when it becomes necessary. The deposit has been fully refunded as of June 30, 2019.
NOTE
16 – SUBSEQUENT EVENTS
The
Company entered into a consulting agreement with a consultant whereby the Company is obligated as follows:
|
|
1.
|
To
pay $2,000 upon execution of the agreement.
|
|
|
2.
|
Up
o
n
t
he
Effecti
v
e
D
a
t
e,
July 1, 2019, C
om
pany
s
hall
pr
ov
i
de
C
onsultant
an o
p
tion
to purchase 200,000 shares of Company's common stock at an exercise price of USD $0
.
90
per share. The term of such option shall commence on the Date of Grant and shall expire
three years from the Date of Grant.
The
fair value of the options was valued using the Black-Scholes option pricing model to
calculate the grant-date fair value of the warrants, with the following assumptions:
no dividend yield, expected volatility of 171.9%, risk free interest rate of 1.8% and
expected option life approximating three years. The Company will recognize $22,897
as consulting expense over one year, which is the expected term of the consulting agreement.
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3.
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Upon
the Company and a Norwegian bank entering into Definitive Agreements establishing a
Joint Venture, Company shall provide Consultant an option to purchase an additional 200,000
shares of Company's common stock at an exercise price of USD $0.90 per share
.
The term
of such option shall commence on the Date of Grant and shall expire three years from
the Date of Grant.
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4.
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Upon
the Joint Venture commercially launching the Payment Platform in Norway, Company shall
provide Consultant with an option to purchase an additional 200,000 shares of Company's
common stock at an exercise price of USD $0.90 per share. The term of such option shall
commence on the Date of Grant and shall expire three years from the Date of Grant.
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5.
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In
addition to the aforesaid options, during the Term of the Agreement, Company shall pay
to Consultant an amount equal to 2% of all profit distributions received by Company from
the Joint Venture. By way of illustration, assuming that during the Term, the Company receives
an exclusive license fee of USD $10 million from the Joint Venture, Consultant shall
receive a payment of USD $200,000 from Company.
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ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Rego
Payment Architectures, Inc. (the “Company,” “we”, or “us”) was incorporated in Delaware on
February 11, 2008 under the name Chimera International Group, Inc. On April 4, 2008, we amended our certificate of
incorporation and changed our name to Moggle, Inc. On August 22, 2011, we filed a Certificate of Ownership with
the Secretary of State of Delaware, pursuant to which the Company’s newly-formed wholly-owned subsidiary, Virtual Piggy
Incorporated was merged into and with the Company (the “Merger”). In connection with the Merger and in accordance
with Section 253 of the Delaware General Corporation Law, the name of the Company was changed from “Moggle, Inc.”
to “Virtual Piggy, Inc.” On February 28, 2017, we amended our certificate of incorporation and changed our name
to Rego Payment Architectures, Inc. Our principal offices are located at 18327 Gridley Road, Suite K Cerritos, CA 90703 and
our telephone number is (561) 220-0408.
As
of the date of this report, we have not generated significant revenues. Our initial business plan was to develop an
online game platform to allow game companies to create, monetize and distribute massive multiplayer online games (MMOG). The Company
technology was the monetization component of this overall platform (our “Platform”). During 2010, we analyzed the
market potential for an expanded Company solution and decided to concentrate our efforts on the delivery of a full-featured Company
solution that was not restricted to online gaming. The expanded Company solution is designed to provide a complete online solution
for families and parents to teach their children about financial management and spending on gaming, retail, music and entertainment.
In late 2013, we rebranded our Company product under the name “Oink®”. In March 2016, we discontinued our
prior Oink product offering.
Our
CEO’s focus is monetizing the Platform in the FinTech industry and crypto currencies, through technology licensing and similar
partnerships. We are focused on building and improving the existing Platform and App that will act as the foundation
for the strategic alignment with the Financial Technology (“FinTech”) industry. The FinTech industry is
composed primarily of startup companies that use software to provide financial services more efficiently and less costly than
traditional financial service companies. With our Children’s Online Privacy Protection Act (“COPPA”) compliant
technology as an added feature, we believe we will have better market success.
Strategic
Outlook
We
believe that the virtual goods market and the FinTech industry will continue to grow over the long term. Within the
market and industry, we intend to provide services to allow transactions with children in compliance with COPPA and similar international
privacy laws. We believe that this particular opportunity is relatively untapped and intend to be a leading provider
of online transactions for children.
Sustained
spending on technology, our ability to raise additional financing, the continued growth of the FinTech industry, and compliance
with regulatory and reporting requirements are all external conditions that may affect our ability to execute our business plan. In
addition, the FinTech industry is intensely competitive, and most participants have longer operating histories, significantly
greater financial, technical, marketing, customer service and other resources, and greater name recognition. In addition,
certain potential customers, particularly large organizations, may view our small size and limited financial resources as a negative
even if they prefer our offering to those of our competitors.
Our
primary strategic objectives over the next 12-18 months are to increase our user base and the engagement level of that base. We
plan to achieve that by implementing our partner-first go to market model in which established payments market leaders and vertical
market participants can incorporate and integrate our platform into co-branded payments solutions targeting youth and family. Management
believes this approach will enable the Company to reduce expenses while broadening its reach.
Within
this model, the Company is incorporating licensing fees. This should enable the Company to begin creating shareholder
value above and beyond consumer transaction fees. As our service grows, we intend to hire additional information technology staff
to maintain our product offerings and develop new products to increase our market share.
We
believe that our near-term success will depend particularly on our ability to develop customer awareness and confidence in our
service. Since we have extremely limited capital resources, we will need to closely manage our expenses and conserve
our cash by continually monitoring any increase in expenses and reducing or eliminating unnecessary expenditures. Our prospects
must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development,
particularly given that we operate in new and rapidly evolving markets, that we have limited financial resources, and face an
uncertain economic environment. We may not be successful in addressing such risks and difficulties.
Results
of Operations
Comparison
of the Three Months Ended June 30, 2019 and 2018
The
following discussion analyzes our results of operations for the three months ended June 30, 2019 and 2018. The following information
should be considered together with our condensed financial statements for such period and the accompanying notes thereto.
Net
Revenue
We
have not generated significant revenue since our inception. For the three months ended June 30, 2019 and 2018 we generated
revenues of $15,226 and $0.
In 2019, we outsourced some of our engineers to assist
a technology company and were able to generate revenue to support our operations.
Net
Loss
For
the three months ended June 30, 2019 and 2018, we had a net loss of $729,570 and $1,969,219.
Sales
and Marketing
Sales
and marketing expenses for the three months ended June 30, 2019 were $(1,839) as compared to $5,163 for the three months ended
June 30, 2018, a decrease of $7,002. The Company redirected marketing funds during the three months ended June 30, 2019 as
the focus has been on raising funds to be able to complete the Platform.
Product
Development
Product
development expenses were $27,839 and $314,679 for the three months ended June 30, 2019 and 2018, a decrease of $286,840. The
Company is in the process of raising funds to complete the development of the Platform and only funding necessary projects.
General
and Administrative Expenses
General
and administrative expenses decreased $867,757 to $568,168 for the three months ended June 30, 2019 from $1,435,925 for the three
months ended June 30, 2018. The decrease resulted primarily from option expenses decreases in 2019 relative to employees
and consultants, which is a difference of approximately $643,000. Additionally, consultant fees decreased in 2019, by approximately
$136,000 due to stock issued for settlement expenses in 2018.
Interest
Expense
During
the three months ended June 30, 2019, the Company incurred interest expense of $150,629 as compared to $213,452 for the three
months ended June 30, 2018, a decrease of $62,823. The decrease in interest expense relates to the exchange by some investors
of 10% secured convertible notes for the 4.0% secured convertible notes in 2018, which is now reducing interest expense in 2019.
Comparison
of the Six Months Ended June 30, 2019 and 2018
The
following discussion analyzes our results of operations for the six months ended June 30, 2019 and 2018. The following information
should be considered together with our condensed financial statements for such period and the accompanying notes thereto.
Net
Revenue
We
have not generated significant revenue since our inception. For the six months ended June 30, 2019 and 2018 we generated
revenues of $34,485 and $0.
In 2019, we outsourced some of our engineers to assist
a technology company and were able to generate revenue to support our operations.
Net
Loss
For
the six months ended June 30, 2019 and 2018, we had a net loss of $1,641,425 and $3,054,086.
Sales
and Marketing
Sales
and marketing expenses for the six months ended June 30, 2019 were $28,465 as compared to $13,363 for the six months
ended June 30, 2018, an increase of $15,102. The Company issued options to a marketing firm and a marketing consultant
for the preparation of various presentation materials, during the six months ended June 30, 2019. The options were valued at
$22,077. The Company also made an effort to minimize spending on sales and marketing in 2019.
Product
Development
Product
development expenses were $241,396 and $489,180 for the six months ended June 30, 2019 and 2018, a decrease of $247,784. The
Company is in the process of raising funds to complete the development of the Platform and only funding necessary projects.
General
and Administrative Expenses
General
and administrative expenses decreased $918,161 to $1,089,703 for the six months ended June 30, 2019 from $2,007,864 for the six
months ended June 30, 2018. The decrease resulted primarily from option expense decreases in 2019 relative to employees and
consultants, which is a difference of approximately $671,000. Additionally, consultant fees decreased in 2019, by approximately
$167,000 due to stock issued in settlement of expenses in 2018.
Interest
Expense
During
the six months ended June 30, 2019, the Company incurred interest expense of $316,346 as compared to $543,679 for the six months
ended June 30, 2018, a decrease of $227,333. The decrease in interest expense relates to the exchange by some investors of 10%
secured convertible notes for the 4.0% secured convertible notes in 2018, which is now reducing interest expense in 2019.
Liquidity
and Capital Resources
As
of August 14, 2019, we had cash on hand of approximately
$108,000
.
Net
cash used in operating activities increased $30,526 to $676,464 for the six months ended June 30, 2019 as compared to
$645,938 for the six months ended June 30, 2018. The increase resulted primarily from reductions in options
and stock issued in 2019 compared to 2018 and accounts payable differences.
Net
cash provided by financing activities increased to $789,000 for the six months ended June 30, 2019 from
$639,950
for
the six months ended June 30, 2018, an increase of $149,050. Cash provided by financing activities during the six months
ended June 30, 2019, consisted of convertible notes payable and notes payable to provide capital to continue operations.
As
we have not realized significant revenues since our inception, we have financed our operations through offerings of debt and equity
securities. We do not currently maintain a line of credit or term loan with any commercial bank or other financial
institution.
Since
our inception, we have focused on developing and implementing our business plan. We believe that our existing cash
resources will not be sufficient to sustain our operations during the next twelve months.
We currently need
to generate sufficient revenues to support our cost structure to enable us to pay ongoing costs and expenses as they
are incurred, finance the development of our platform, and execute the business plan. If we cannot generate sufficient
revenue to fund our business plan, we intend to seek to raise such financing through the sale of debt and/or equity
securities. The issuance of additional equity would result in dilution to existing shareholders. The issuance
of convertible debt may also result in dilution to existing stockholders. If we are unable to obtain additional funds when
they are needed or if such funds cannot be obtained on terms acceptable to us, we will be unable to execute upon the business
plan or pay costs and expenses as they are incurred, which would have a material, adverse effect on our business, financial condition
and results of operations.
Even
if we are successful in generating sufficient revenue or in raising sufficient capital in order to complete the Platform,
our ability to continue in business as a viable going concern can only be achieved when our revenues reach a level that sustains
our business operations. The launch of the Platform is expected in the first quarter of 2020, however, we do not project
that significant revenue will be developed until later in 2020. There can be no assurance that we will raise sufficient proceeds,
or any proceeds, for us to implement fully our proposed business plan. Moreover there can be no assurance that even
if the Platform is fully developed and successfully launched, that we will generate revenues sufficient to fund our operations. In
either such situation, we may not be able to continue our operations and our business might fail.
Based
upon the current cash position and the Company’s planned expense run rate, management believes the Company will not be able
to finance its operations beyond September 2019.
The
foregoing forward-looking information was prepared by us in good faith based upon assumptions that we believe to be reasonable.
No assurance can be given, however, regarding the attainability of the projections or the reliability of the assumptions on which
they are based. The projections are subject to the uncertainties inherent in any attempt to predict the results of our operations,
especially where new products and services are involved. Certain of the assumptions used will inevitably not materialize and unanticipated
events will occur. Actual results of operations are, therefore, likely to vary from the projections and such variations may be
material and adverse to us. Accordingly, no assurance can be given that such results will be achieved. Moreover due to changes
in technology, new product announcements, competitive pressures, system design and/or other specifications we may be required
to change the current plans.
Off-Balance
Sheet Arrangements
As
of June 30, 2019, we do not have any off-balance sheet arrangements.
Critical
Accounting Policies
Our
financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during
their preparation. A complete summary of these policies is included in Note 1 of the Notes to Financial Statements included in
the Company’s Form 10-K for the year ended December 31, 2018. We have identified below the accounting policies that are
of particular importance in the presentation of our financial position, results of operations and cash flows and which require
the application of significant judgment by management.
Stock-based
Compensation
We
have adopted the fair value recognition provisions Financial Accounting Standards Board Accounting Standards Codification (“FASB
ASC”) 718. In addition, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 “
Share-Based
Payment
” (“SAB 107”) in March, 2005, which provides supplemental FASB ASC 718 application guidance
based on the views of the SEC. Under FASB ASC 718, compensation cost recognized includes compensation cost for all share-based
payments granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions
of FASB ASC 718.
We
have used the Black-Scholes option-pricing model to estimate the option fair values. The option-pricing model requires
a number of assumptions, of which the most significant are, expected stock price volatility, the expected pre-vesting forfeiture
rate and the expected option term (the amount of time from the grant date until the options are exercised or expire).
All
issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by the
Company are accounted for based on the fair value of the equity instruments issued. Non-employee equity based payments
that do not vest immediately upon grant are recorded as an expense over the vesting period.
Revenue
Recognition
In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition
(Codified in FASB ASC 606), we will recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists
or acceptance occurs, (ii) a retailer, distributor or wholesaler receives the goods, (iii) the price is fixed or determinable,
and (iv) collectability of the sales revenues is reasonably assured. Subject to these criteria, we have generally recognized revenue
from our prior Oink product at the time of the sale of the associated goods.
Recently
Issued Accounting Pronouncements
Recently
issued accounting pronouncements are discussed in Note 1 of the Notes to Financial Statements contained elsewhere in this report.