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 November 14, 2019, the
Company has a cash position of approximately $27,000. 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 December 2019.
NOTE 3 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES - RELATED PARTIES
As of September 30, 2019 and December 31, 2018, the Company
owed the Chief Executive Officer a total of $454,842 and $210,032, consisting of $454,307 and $207,845 in unpaid salary and expenses
of $535 and $2,187.
As of September 30, 2019 and December 31, 2018, the Company
owed the Chief Financial Officer $150,161 and $84,296 consisting of $150,161 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 $164,720 and $113,920 as of September 30, 2019 and December 31, 2018, consisting of consulting fees.
Additionally as of September 30, 2019 and December 31,
2018, the Company owed the son of a more than 5% beneficial owner $38,500 and $20,000, pursuant to a consulting agreement.
NOTE 4 – LOANS PAYABLE
During the nine months ended September 30, 2019 and
2018, the Company received loans in the amount of $0 and $71,260 with no formal repayment terms and 10% interest. The Company
also received loans in the amount of $0 and $59,915 with no formal repayment terms and no interest, during the nine
months ended September 30, 2019 and 2018. The Company repaid $4,000 and $59,475 of these loans during the nine
months ended September 30, 2019 and 2018. The balance of the loans payable as of September 30, 2019 and December 31,
2018 was $85,600 and $89,600. Interest accrued on the loans was $13,653 and $9,253 as of September 30, 2019 and December 31,
2018. Interest expense related to these loans payable was $1,465 and $4,400 for the three and nine months ended
September 30, 2019 and $1,845 and $2,521 for the three and nine months ended September 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, 2019 to September 6, 2020, 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 nine months ended September 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 September
30, 2019 and December 31, 2018 in the amount of $2,813,157 and $3,163,157. Interest accrued on the Notes was $1,497,253
and $1,283,660 as of September 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 $213,593 for the three and nine months ended September
30, 2019 and $81,471 and $253,484 for the three and nine months ended September 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 nine months ended September 30, 2019 and $47,832
and $187,337 during the three and nine months ended September 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. The Company has received verbal acknowledgement
that the promissory note will be extended until such time as the Company has the ability to repay it.
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 has received verbal
acknowledgement that the promissory note will be extended until such time as the Company has the ability to repay it.
On July 19, 2019, the Company issued a 60 day promissory
note in the amount of $100,000, 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
$40,000 from a 50/50 revenue split relative to a Norway joint venture (Note 16). The options were valued at $8,312, 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 170.8%, risk free interest rate of 1.80% and expected option life of 2 years. The
relative fair value of the option was $7,674 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 has received verbal
acknowledgement that the promissory note will be extended until such time as the Company has the ability to repay it.
The Company also repaid $7,000 of the promissory notes
during the nine months ended September 30, 2019.
The notes payable are recorded as a current liability
as of September 30, 2019 and December 31, 2018 in the amount of $477,000 and $134,000. Interest accrued on the notes,
as of September 30, 2019 and December 31, 2018 was $12,401 and $1,084. Interest expense including accretion of
discount, but exclusive of the fair value of warrants above related to these notes payable was $31,491 and $35,428 for the three
and nine months ended September 30, 2019 and $103 for the three and nine months ended September 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 nine months ended September 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 September 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 $613,001 and $394,967 as of September 30, 2019 and December 31, 2018. Interest
expense, including accretion of discounts, related to these notes payable was $73,873 and $218,034 for the three and nine months
ended September 30, 2019 and $86,967 and $188,143 for the three and nine months ended September 30, 2018.
NOTE 9 – INCOME TAXES
Income tax expense was $0 for the three and nine months
ended September 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 nine months ended September 30, 2019, and there was
no accrual for uncertain tax positions as of September 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 nine months
ended September 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 trading 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 September 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 September 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 September 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 Preferred Stock”). As of March 31, 2019,
none of the Series C Preferred Stock was issued or outstanding. After the date of issuance of Series C Preferred Stock, 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 September 30, 2019, the value of the cumulative
8% dividends for all Rego preferred stock was $5,818,008. 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 September 30, 2019, the value of the cumulative
8% dividends for ZS preferred stock was $18,333. 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 nine months ended September 30,
2019, the Company expensed $0 relative to restricted stock awards. During the three and nine months ended September 30, 2018, the
Company expensed $9,375 and $28,125 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 September 30, 2019, options to purchase 8,558,333 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 September 30, 2019, under the 2013 Plan grants of restricted stock and options to purchase 4,250,000
shares of common stock have been issued, 3,350,000 are outstanding or unexercised, and 750,000 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 common 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.
On July 1, 2019, REGO issued options to purchase 200,000
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 3 years, with a fair value of $22,897, which will be expensed over one year, which is the expected term of the consulting
agreement.
On September 3, 2019, REGO issued options to purchase
200,000 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 $23,668, which is being expensed over four months, which is the expected term
of the consulting agreement.
On September 3, 2019, REGO issued options to purchase
50,000 shares of REGO’s common stock to two consultants. The options have an exercise price of $0.90, vest immediately
and have a term of 2 years, with a fair value of $5,917, which was expensed immediately.
On September 27, 2019, REGO issued options to purchase
100,000 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 3 years, with a fair value of $15,028, which is being expensed over four months, which is the expected term
of the consulting agreement.
The following table presents the weighted-average assumptions
used to estimate the fair values of the stock options granted by REGO during the nine months ended September 30, 2019:
|
|
|
2019
|
|
|
|
|
|
Risk Free Interest Rate
|
|
2.0%
|
|
Expected Volatility
|
|
171.2%
|
|
Expected Life (in years)
|
|
3.3
|
|
Dividend Yield
|
|
0%
|
|
Weighted average estimated fair value of options
during the period
|
|
$ 0.12
|
The following table summarizes the activities for REGO’s stock options
for the nine months ended September 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
|
|
|
1,425,000
|
|
|
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Expired/cancelled
|
|
|
(2,091,666
|
)
|
|
|
0.75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2019
|
|
|
12,258,334
|
|
|
$
|
0.67
|
|
|
|
2.6
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
10,491,662
|
|
|
$
|
0.61
|
|
|
|
2.7
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
12,258,334
|
|
|
$
|
0.67
|
|
|
|
2.6
|
|
|
$
|
4
|
|
|
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and
the closing stock price of $0.20 for REGO’s common stock on September 30, 2019.
|
For the three and nine months ended September 30, 2019,
Rego expensed $76,743 and $331,094 and for the three and nine months ended September 30, 2018, Rego expensed $210,465 and $1,290,887
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 September 30, 2019, there was $86,501 of unrecognized
compensation cost related to outstanding stock options. This amount is expected to be recognized over a weighted-average period
of 0.2 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation
related to these awards will be different from the Company’s expectations. The difference between the stock options
exercisable at September 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 nine months ended September 30, 2019:
|
|
|
Unvested Options
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance December 31, 2018
|
|
|
3,625,000
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,425,000
|
|
|
|
0.12
|
|
|
Expired/cancelled
|
|
|
(683,334
|
)
|
|
|
0.39
|
|
|
Vested
|
|
|
(2,600,000
|
)
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2019
|
|
|
1,766,666
|
|
|
|
0.14
|
|
The following table summarizes the activities for REGO’s
warrants for the nine months ended September 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
|
|
|
|
-
|
|
|
Expired
|
|
|
(400,000
|
)
|
|
|
0.90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
2,827,020
|
|
|
$
|
0.90
|
|
|
|
0.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
2,827,020
|
|
|
$
|
0.90
|
|
|
|
0.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,827,020
|
|
|
$
|
0.90
|
|
|
|
0.7
|
|
|
$
|
-
|
|
|
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the
closing stock price of $0.20 for Rego’s common stock on September 30, 2019.
|
All warrants were vested on the date of grant.
The following table summarizes the activities for ZS’s stock options
for the nine months ended September 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 September 30, 2019
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
3.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
3.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
3.8
|
|
|
$
|
-
|
|
|
|
(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 September 30, 2019.
|
For the three and nine months ended September 30, 2019,
ZS expensed $0 and $28,051 with respect to options and for the three and nine months months ended September 30, 2018, ZS expensed
$21,938 with respect to options.
The following table summarizes the activities for ZS’s
warrants for the nine months ended September 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 September 30, 2019
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
2.1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
2.1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable atSeptember 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
2.1
|
|
|
$
|
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 September 30, 2019.
|
For the three and nine months ended September 30, 2019
and 2018, ZS expensed $0 with respect to warrants.
The following table summarizes the activities for ZBS’s
stock options for the nine months ended September 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 September 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.9
|
|
|
$
|
-
|
|
|
|
(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 September 30, 2019.
|
For the three and nine months ended September 30, 2019
and 2018, ZBS expensed $0 with respect to options.
The following table summarizes the activities for ZCS’s
stock options for the nine months ended September 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 September 30, 2019
|
|
|
2,200,000
|
|
|
$
|
5.00
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
2,200,000
|
|
|
$
|
5.00
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,200,000
|
|
|
$
|
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 $0.01 for ZCS’s common stock on September 30, 2019.
|
For the three and nine months ended September 30, 2019
and 2018, ZCS expensed $0 with respect to options.
The following table summarizes the activities for ZPS’s
stock options for the nine months ended September 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 September 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.9
|
|
|
$
|
-
|
|
|
|
(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 September 30, 2019.
|
For the three and nine months ended September 30, 2019,
ZPS expensed $0 with respect to options.
NOTE 13 – NONCONTROLLING INTERESTS
Through September 30, 2018, Zoom Solutions, Inc. and
ZPS, LLC received $243,250 for convertible notes payable. The notes were non-interest bearing. As of September
30, 2018, ZS has converted all of the $243,250 of the convertible notes into 23,929 shares of ZS common stock in accordance with
the individual convertible note agreements.
In addition, ZS, ZBS, ZCS and ZPS issued options to purchase 100,000 shares
of each of the companies to a consultant, which were valued at a total $21,938 (See Note 12).
Losses incurred by the noncontrolling interests for the
three and nine months ended September 30, 2019 were $461 and $6,942 and for the three and nine months ended September 30, 2018
were $14,622 and $26,081.
NOTE 14 – OPERATING LEASES
For the three and nine months ended September 30, 2019,
total rent expense under leases amounted to $6,364 and $20,046. For the three and nine months ended September 2018, total
rent expense under leases amounted to $19,215 and $40,887. 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 September 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 nine months ended September 30,
2019 and 2018, the Company expensed $45,000 and $135,000 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 nine
months ended September 30, 2019 and 2018, the Company expensed $15,000 and $45,000 relative to this consultant.
During the nine months ended September 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
On September 30, 2019, the Company pursuant to a
Securities Purchase Agreement issued a $20,000 principal amount 4% Secured Convertible Promissory Note due October 31, 2020
to an accredited investor, for which the funds were not received until October 2, 2019.
On October 2, 2019, REGO issued options to purchase 250,000
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 $27,919, which is being expensed over three months, which is the expected term of the consulting
agreement.
On October 4, 2019, REGO issued options to purchase 200,000
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 $21,475, which is being expensed over one year, which is the expected term of the consulting
agreement.
On October 10, 2019, REGO issued options to purchase
in the aggregate 300,000 shares of REGO’s common stock to two consultants. The options have an exercise price of $0.90,
vest immediately and have a term of 2 years, with a fair value of $27,898, which is being expensed over four months, which is the
expected term of the consulting agreement.
On October 24, 2019, the Chief Executive
Officer’s employment agreement expired and was not renewed by the Company. The Chief Executive Officer is serving on an
at-will basis without compensation.
On November 4, 2019, the Company
issued a 90 day promissory note in the amount of $225,000, bearing interest at 20% along with a warrant to purchase 750,000
shares of the Company’s common stock at an exercise price of $0.90 for term of 2 years, vesting
immediately. Additionally, upon maturity of the note, the holder will receive $250,000, plus the 10% interest. The warrants
were valued at $68,452, 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 153.6%, risk free interest rate of 1.60% and expected option life of 2 years. The relative fair value of the warrant is $53,738 and will be 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 November 4, 2019, the Company
issued $25,000 principal amount of its New Secured Notes to an accredited investor.
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 325 Sentry Parkway, Suite 200, Blue Bell, PA 19422 and our telephone number is (267) 465-7530.
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 current
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, our ability to successfully implement technology
partnerships or joint ventures, 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. We are pursuing both domestic and international opportunities for the use of our payment platform.
These opportunities have customer bases of their own that they could bring to our platform, thus minimizing the marketing
costs for the Company, that would normally need to be incurred. 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 September 30, 2019 and 2018
The following
discussion analyzes our results of operations for the three months ended September 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 September 30, 2019 and 2018 we generated revenues of $0.
Net Loss
For the three
months ended September 30, 2019 and 2018, we had a net loss of $742,179 and $1,013,619.
Sales and
Marketing
Sales and marketing
expenses for the three months ended September 30, 2019 were $9,371 as compared to $1,414 for the three months ended September 30,
2018, an increase of $7,957. The Company redirected marketing funds during the three months ended September 30, 2019 to necessary
rebranding of the product and presentation materials.
Product
Development
Product development
expenses were $33,806 and $217,170 for the three months ended September 30, 2019 and 2018, a decrease of $183,364. 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 $62,725 to $522,589 for the three months ended September 30, 2019 from $585,314 for the three months ended
September 30, 2018. The decrease is primarily attributable to a decrease in option expense as a result of a decrease in option
grants to employees and consultants during the three months ended September 30, 2019. In addition, rent expense decreased due
to the Arkansas lease being terminated in March 2019. In the aggregate, both expenses decreased $124,000 during the three months
ended September 30, 2019 as compared to the same period in 2018. The decrease was offset against an increase in professional and
consulting fees approximating $59,000. The increase in professional fees was due to legal services necessitated by new agreements
and the increase in consulting fees related to replacement of certain employees with consultants.
Interest Expense
During the three months ended September
30, 2019, the Company incurred interest expense of $176,413 as compared to $209,721 for the three months ended September 30, 2018,
a decrease of $33,308. 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 reduced interest expense in 2019.
Comparison
of the Nine Months Ended September 30, 2019 and 2018
The
following discussion analyzes our results of operations for the nine months ended September 30, 2019 and 2018. The following
information should be considered together with our condensed consolidated financial statements for such period and the
accompanying notes thereto.
Net Revenue
We have not generated
significant revenue since our inception. For the nine months ended September 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 nine months
ended September 30, 2019 and 2018, we had a net loss of $2,383,604 and $4,067,705.
Sales and
Marketing
Sales and marketing
expenses for the nine months ended September 30, 2019 were $37,836 as compared to $14,777 for the nine months ended September 30,
2018, an increase of $23,059. The Company issued options to a marketing firm and a marketing consultant for the preparation
of various presentation materials and to rebrand the Company’s product, during the nine months ended September 30, 2019.
The options were valued at $22,077.
Product
Development
Product development
expenses were $275,202 and $706,350 for the nine months ended September 30, 2019 and 2018, a decrease of $431,148. 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 $980,886 to $1,612,292 for the nine months ended September 30, 2019 from $2,593,178 for the nine months ended
September 30, 2018. The decrease resulted primarily from option expense decreases in 2019 relative to employees and consultants,
which is a difference of approximately $768,000. Additionally, consulting fees decreased in 2019, by approximately $158,000 due
to stock issued in settlement of expenses in 2018. The Company also reduced payroll expenses during the third quarter of 2019.
Interest Expense
During the nine months ended September
30, 2019, the Company incurred interest expense of $492,759 as compared to $753,400 for the nine months ended September 30, 2018,
a decrease of $260,641. 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 reduced interest expense in 2019.
Liquidity and Capital Resources
As of November
14, 2019, we had cash on hand of approximately $27,000.
Net
cash used in operating activities decreased $155,071 to $877,144 for the nine months ended September 30, 2019 as compared
to $1,032,215 for the nine months ended September 30, 2018. The decrease resulted primarily from the smaller net
loss partially offset by reduced option and stock expenses in 2019 compared to 2018.
Net cash used
in investing activities decreased to $0 from $2,069 for the nine months ended September 30, 2019.
Net cash provided
by financing activities decreased to $889,000 for the nine months ended September 30, 2019 from $1,030,714 for
the nine months ended September 30, 2018, an decrease of $141,714. Cash provided by financing activities during the
nine months ended September 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. See Note 2, to our
consolidated financial statements included in December 31, 2018 Form 10-K.
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 December 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 September
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.
