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.
In March 2020,
the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout
the United States. On March 19, 2020, the Governor of Pennsylvania declared a health emergency and issued an order to close all
nonessential businesses until further notice. The Company has temporarily curtailed its business operations and has required employees
to work from home. While the Company expects this matter to negatively impact its results of operations, cash flow and financial
position, the related financial impact cannot be reasonably estimated at this time.
As of November
16, 2020, the Company has a cash position of approximately $825,000.
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 January 2021.
NOTE 3 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES - RELATED
PARTIES
As of September 30, 2020 and December 31,
2019, the Company owed the Chief Executive Officer, who is also a more than 5% beneficial owner, a total of $162,853 and $158,220,
consisting of $32,308 and $0 in unpaid salary and a company owned by the Chief Executive Officer consulting fees of $130,545 and
$158,220.
Additionally as of September 30, 2020 and
December 31, 2019, the Company owed the son of a more than 5% beneficial owner, Chief Executive Officer, President and Board member,
$22,550 and $32,000, pursuant to a consulting agreement.
As of September 30, 2020 and December 31,
2019, the Company owed the Chief Financial Officer $129,173 and $118,596 in unpaid salary.
NOTE 4 – PAYCHECK PROTECTION PROGRAM LOAN PAYABLE
During April 2020, the
Company received $2,000 from the Emergency Injury Disaster Loan program and $79,500 from the Paycheck Protection Program. The Company
has spent all of the proceeds under these programs for payroll related expenses.
In
accordance with FASB ASC 470, Debt, the Company has recorded the loans as a current liability in the amount of $81,500.
The Company will record derecognition of the liability in accordance with FASB ASC 405-20, Liabilities-Extinguishment of
Liabilities, when either (1) the loan is, in part or wholly, forgiven and the Company has been legally released or (2) the
Company pays off the loan.
NOTE 5 – LOANS PAYABLE
During the nine months ended September
30, 2020 and 2019, the Company did not receive any loans with no formal repayment terms and 10% interest. The Company also did
not receive any loans with no formal repayment terms and no interest, during the nine months ended September 30, 2020 and 2019.
The balance of such loans payable as of September 30, 2020 and December 31, 2019 was $85,600. Interest accrued on the loans was
$19,484 and $15,118 as of September 30, 2020 and December 31, 2019. Interest expense related to these loans payable
was $1,465 and $4,366 for the three and nine months ended September 30, 2020 and $1,465 and $4,400 for the three and nine months
ended September 30, 2019.
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 October 31, 2021, 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.
The Notes are recorded as a current liability
as of September 30, 2020 and December 31, 2019 in the amount of $2,813,157. Interest accrued on the Notes was $1,778,569
and $1,567,582 as of September 30, 2020 and December 31, 2019. Interest expense other than the warrant related interest
expense related to these Notes payable was $70,329 and $210,987 for the three and nine months ended September 30, 2020 and $81,471
and $253,484 for the three and nine months ended September 30, 2019.
NOTE 7 – NOTES PAYABLE - STOCKHOLDERS
During the nine months ended
September 30, 2020 and 2019, the Company issued $15,000 and $0 aggregate principal amount of its notes payable - stockholders
with no formal repayment terms and 10% interest. These notes in the principal amount of $15,000 were repaid in full by June
30, 2020 and the Company issued an option to purchase 25,000 shares of the Company’s common stock with an exercise
price of $0.90 and a term of 3 years, with a fair value of $4,470 as interest expense. These notes payable are recorded as a
current liability as of September 30, 2020 and December 31, 2019 in the amount of $1,095,000 and
$1,161,969. Interest accrued on the notes, as of September 30, 2020 and December 31, 2019 was $94,190 and
$29,481. Interest expense including accretion of discount was $21,727 and $104,740 for the three and nine months
ended September 30, 2020 and $31,491 and $35,428 for the three and nine months ended September 30, 2019.
On September 30, 2020, one of the note
holders exchanged his $107,000 note for a 4% Secured Convertible Note, in the principal amount of $107,000.
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, 2019 and 2020.
The New Secured Notes are convertible by
the holders, at any time, into shares of the Company’s 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, 2021.
During the nine months ended September
30, 2020, the Company issued $1,967,000 aggregate principal amount of its New Secured Notes to certain investors, of which $107,000
was an exchange of a note from a stockholder (see Note 7).
The New Secured Notes are recorded as a
current liability in the amount of $9,399,250 as of September 30, 2020 and $7,432,250 as of December 31, 2019. Interest
accrued on the New Secured Notes was $924,915 and $687,204 as of September 30, 2020 and December 31, 2019. Interest
expense related to these notes payable was $88,405 and $237,711 for the three and nine months ended September 30, 2020 and $73,873
and $218,034 for the three and nine months ended September 30, 2019.
NOTE 9 – INCOME TAXES
Income tax expense was $0 for the three
and nine months ended September 30, 2020 and 2019.
As of January 1, 2020, the Company
had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2020 related to unrecognized
tax benefits. There has been no change in unrecognized tax benefits during the three and nine months ended September 30, 2020,
and there was no accrual for uncertain tax positions as of September 30, 2020. Tax years from 2016 through 2019 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, 2020 and 2019, 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 its original issue price, or $21,570,000, 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 its 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, 2020 and December 31, 2019. 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 $232,600 at September 30, 2020 and $0 at December 31, 2019. 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 its original issue price, or $5,108,040,
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 its 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.
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, 2020 and December 31, 2019. 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 Rego’s Series C Cumulative Convertible Preferred Stock (“Series C Preferred Stock”). As of September
30, 2020, 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 its
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 its 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, 2020, the value of
the cumulative 8% dividends for all Rego preferred stock was $6,885,130 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.
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, 2020, the value of
the cumulative 8% dividends for ZS preferred stock was $38,333. 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 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Liabilities
For purposes of determining whether certain
instruments are derivatives for accounting treatment, the Company follows the accounting standard that provides guidance for determining
whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies
to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding
financial instruments that are potentially settled in an entity’s own common stock.
The Company has identified the following liabilities that are
measured at fair value on a recurring basis, summarized as follows:
|
September 30, 2020
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability related to fair value of beneficial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion feature
|
|
$
|
-
|
|
|
$
|
232,600
|
|
|
$
|
-
|
|
|
$
|
232,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
232,600
|
|
|
$
|
-
|
|
|
$
|
232,600
|
|
The following table details the approximate fair value measurements
within the fair value hierarchy of the Company’s derivative liabilities using Level 2 inputs:
|
|
|
Total
|
|
|
Balance at December 31, 2019
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
232,600
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
$
|
232,600
|
|
As of September 30, 2020, the beneficial conversion feature
of the Preferred Stock is treated as an embedded derivative liability and changes in the fair value were recognized in earnings.
The shares of Preferred Stock are convertible into shares of the Company’s common stock, which did trade in an active securities
market; therefore the embedded derivative liability was valued using the following market based inputs:
|
Closing trading price of Rego common stock
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
Rego Series A Preferred Stock Effective Conversion Price issued April 30, 2014
|
|
|
0.46
|
|
|
|
|
|
|
|
|
Intrinsic value of conversion warrant per share
|
|
$
|
0.04
|
|
NOTE 12 – STOCKHOLDERS’ EQUITY
The Company entered into a financial
advisory agreement in November 2018 whereby generally the Company will pay the financial advisor a success fee equal to 6% of the
capital committed in a capital transaction involving the sale of the Company.
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.
On August 13, 2020, in conjunction
with the execution of the Chief Executive Officer’s employment agreement, the Company issued 250,000 shares of the
Company’s common stock to the Chief Executive Officer, which vested
immediately. The fair value of the issuance of the common stock was $62,500, which was expensed
immediately.
On August 18, 2020, the Company
issued 250,000 each to a member of the Board of Directors, and to the Chief Financial Officer, which vested immediately. The aggregate
fair value of the issuance of the common stock was $125,000, which was expensed immediately.
NOTE 13 – 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, 2020, options to purchase 6,900,000 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, 2020, under the 2013 Plan grants of restricted stock and options to purchase 4,917,500
shares of common stock have been issued and are unvested and unexercised, and 82,500 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.
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, 2020:
|
Risk Free Interest Rate
|
|
|
0.3
|
%
|
|
Expected Volatility
|
|
|
164.2
|
%
|
|
Expected Life (in years)
|
|
|
4.6
|
|
|
Dividend Yield
|
|
|
0
|
%
|
|
Weighted average estimated fair value of options
during the period
|
|
$
|
0.21
|
|
The following table summarizes the activities for REGO’s
stock options for the nine months ended September 30, 2020:
|
|
|
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, 2019
|
|
|
13,185,000
|
|
|
$
|
0.69
|
|
|
|
2.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,222,500
|
|
|
|
0.34
|
|
|
|
4.5
|
|
|
|
699
|
|
|
Expired
|
|
|
(1,660,000
|
)
|
|
|
0.52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2020
|
|
|
14,747,500
|
|
|
$
|
0.63
|
|
|
|
2.4
|
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
14,747,500
|
|
|
$
|
0.63
|
|
|
|
2.4
|
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
14,747,500
|
|
|
$
|
0.63
|
|
|
|
2.4
|
|
|
$
|
1,517
|
|
|
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and
the closing stock price of $0.50 for REGO’s common stock on September 30, 2020.
|
For the three and nine months ended September
30, 2020, Rego expensed $667,670 and $719,117 and for the three and nine months ended September 30, 2019, Rego expensed $76,743
and $331,094 with respect to options.
As of September 30, 2020, there was
$0 of unrecognized compensation cost related to outstanding stock options. The difference, if any, between the stock
options exercisable at September 30, 2020 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, 2020:
|
|
|
Unvested Options
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
|
|
|
|
Number of
|
|
Date Fair
|
|
|
|
Shares
|
|
Value
|
|
Balance December 31, 2019
|
|
|
233,333
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,222,500
|
|
|
|
0.21
|
|
|
Expired/cancelled
|
|
|
(100,000
|
)
|
|
|
0.22
|
|
|
Vested
|
|
|
(3,355,833
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2020
|
|
|
-
|
|
|
|
-
|
|
During the nine months ended September
30, 2020, the Company issued warrants to purchase 1,500,000 shares of common stock commensurate with a consulting agreement. The
warrants were valued at $184,048 fair value, 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 139.0 to 140.8%, risk free interest
rate of 0.14% to 0.36% and expected life of 2 years. The fair value of the warrants was $184,048 and was expensed immediately. During
the three and nine months ended September 30, 2020, the Company expensed $59,563 and $184,048 and during the three and nine months
ended September 30, 2019, the Company expensed $0, relative to warrants.
The following table summarizes the activities for REGO’s
warrants for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Weighted-
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Number of
|
|
Average
|
|
Term
|
|
Value
|
|
|
|
Shares
|
|
Exercise Price
|
|
(in years)
|
|
(in 000's) (1)
|
|
Balance at December 31, 2019
|
|
|
4,427,020
|
|
|
$
|
0.90
|
|
|
|
1.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,500,000
|
|
|
|
0.90
|
|
|
|
1.7
|
|
|
|
-
|
|
|
Expired
|
|
|
(2,227,020
|
)
|
|
|
0.90
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
|
3,700,000
|
|
|
$
|
0.90
|
|
|
|
1.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
3,700,000
|
|
|
$
|
0.90
|
|
|
|
1.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
3,700,000
|
|
|
$
|
0.90
|
|
|
|
1.3
|
|
|
$
|
-
|
|
|
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the
closing stock price of $0.50 for Rego’s common stock on September 30, 2020.
|
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, 2020:
|
|
|
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, 2019
|
|
|
2,400,000
|
|
|
$
|
5.00
|
|
|
|
3.6
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(100,000
|
)
|
|
$
|
5.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2020
|
|
|
2,300,000
|
|
|
$
|
5.00
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
2,300,000
|
|
|
$
|
5.00
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,300,000
|
|
|
$
|
5.00
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
(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, 2020.
|
For the three and nine months ended September 30, 2020, ZS expensed
$0 with respect to options and for the three and nine months ended September 30, 2019, ZS expensed $0 and $28,051 with respect
to options.
The following table summarizes the activities
for ZS’s warrants for the nine months ended September 30, 2020:
|
|
|
Warrants 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, 2019
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
1.8
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2020
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
1.1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
1.1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
1.1
|
|
|
$
|
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, 2020.
|
For the three and nine months ended September
30, 2020 and 2019, ZS expensed $0 with respect to warrants.
The following table summarizes the activities
for ZBS’s stock options for the three and nine months ended September 30, 2020:
|
|
|
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, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(100,000
|
)
|
|
$
|
5.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(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, 2020.
|
For the three and nine months ended September
30, 2020 and 2019, ZBS expensed $0 with respect to options.
The following table summarizes the activities
for ZCS’s stock options for the three and nine months ended September 30, 2020:
|
|
|
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, 2019
|
|
|
2,200,000
|
|
|
$
|
5.00
|
|
|
|
3.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(100,000
|
)
|
|
$
|
5.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2020
|
|
|
2,100,000
|
|
|
$
|
5.00
|
|
|
|
3.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
2,100,000
|
|
|
$
|
5.00
|
|
|
|
3.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,100,000
|
|
|
$
|
5.00
|
|
|
|
3.2
|
|
|
$
|
-
|
|
|
|
(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 ZCS’s common stock on September 30, 2020.
|
For the three and nine months ended September
30, 2020 and 2019, ZCS expensed $0 with respect to options.
The following table summarizes the activities
for ZPS’s stock options for the three and nine months ended September 30, 2020:
|
|
|
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, 2019
|
|
|
100,000
|
|
|
$
|
5.00
|
|
|
|
0.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(100,000
|
)
|
|
$
|
5.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(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, 2020.
|
For the three and nine months ended September 30, 2020 and 2019,
ZPS expensed $0 with respect to options.
NOTE 14 – NONCONTROLLING INTERESTS
Losses incurred by the noncontrolling interests
for the three months and nine months ended September 30, 2020 were $313 and $1,039 and for the three and nine months ended September
30, 2019 were $461 and $6,942.
NOTE 15 – OPERATING LEASES
For the three and nine months ended September
30, 2020, total rent expense under leases amounted to $1,130 and $13,116 and for the three and nine months ended September 30,
2019, total rent expense under leases amounted to $6,364 and $20,046. 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,
2020.
NOTE 16 – RELATED PARTY TRANSACTIONS
During the three and 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 was fully refunded as of June 30, 2019. As of September 30, 2020, the technology company
is no longer a related party.
NOTE 17 –
SUBSEQUENT EVENTS
On October 20, 2020, the Company issued a consultant, an option
to purchase 500,000 shares of the Company’s common stock for every $1 million of capital raised, with an exercise price of
$0.90 and a term of 2 years.
On October 27, 2020, the Company issued a consultant an option
to purchase 50,000 shares of the Company’s common stock with an exercise price of $0.90 and a term of 2 years for assisting
in raising up to $3 million of capital. The options were valued at $18,302, fair market value and will be expensed immediately.
On October 27, 2020, the Company issued a consultant an option
to purchase 25,000 shares of the Company’s common stock with an exercise price of $0.90 and a term of 2 years for assisting
with a marketing campaign. The consultant will also receive an option to purchase an additional 20,000 shares of the Company’s
common stock with an exercise price of $0.90 and a term of 2 years, each month for eight months. The initial options issued were valued
at $9,151, fair market value and will be expensed immediately. The fair value of each additional 20,000 options issued monthly over eight months will expensed upon issuance.
Also on October 27, 2020, the Board of Directors approved
the issuance of 250,000 shares of the Company’s common stock each for a total of 750,000 shares to the Chief Executive
Officer, a Board Member and the Chief Financial Officer upon launching the Beta test and commercial launch of the digital
wallet platform. Additionally, the Board approved the issuance of 250,000 of the Company’s common stock to the Chief
Executive Officer, if he is successful in rasing an additional $2 million by December 31, 2020.
During October and November 2020, Shareholders owning an
aggregate of 23,833 common shares of the outstanding 10,023,929 common shares of ZS and notes payable have agreed to
exchange their shares of common stock of ZS for 10% Secured Convertible Notes of Rego
Payment Architectures, Inc. on a dollar for dollar exchange based on the original investment of $195,250 in ZS.
In November 2020, the
Company received $20,000 through the issuance of our 4% secured convertible notes payable-stockholders.
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 software 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 focus is monetizing
the Platform in the FinTech industry 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”) and GDPRkidsTM Trustmark compliant technology as an added feature,
we believe we may 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 goal, moving forward is to enable both
incumbent and new FinTech participants, as well as key verticals with a large base of ‘family accounts,’ to provide
their consumers with safe and empowering youth money management and financial literacy content and tools via the mobile payment
platform.
While some of the Rego Platform can be
easily duplicated/commoditized, such as the app skin, APIs to retailers, APIs to financial infrastructure and cloud storage, we
believe that defending our market position rests on three factors:
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1.
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The ability to define data control settings from parent to child.
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Our approach to this opportunity
uses a master account to dictate purchase rules to sub-accounts via a hierarchical architecture. This approach adheres to data
flow and privacy policy requirements specifically outlined for COPPA compliance. We believe other approaches based on machine learning,
or other artificial intelligence methodologies are potentially viable alternatives but are likely too costly, do not meet current
compliance timelines, and may defy the core of COPPA’s “opt-in” parameters. There is considerable room for next-generation
automation techniques to be layered on Rego’s hierarchical approach. Given its current stability and scalability metrics,
the Rego Platform strongly features these advances in its technical development roadmap without compromising any of its current
data control performance.
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2.
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The ability to (mis)attribute the child’s transaction and personal identification.
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Rego has solved this issue by
masking user data and maintaining separate identity and financial data flows. As a result, Rego can verify the age of the internet
user throught the transaction lifecycle on its Platform. Authenticating and validating the identity of the actual user on the internet
is one of the more difficult cybersecurity challenges. Current approaches are mainly not for commercial use; however, there is
investment in commercial innovation in this area. Rego’s data control features and its (mis)attribution approach are inextricably
linked and a key to its scalability and extensibility.
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3.
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The ability to disseminate transactional data on minors while remaining COPPA and GDPR compliant.
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The highest value data will be
that which shows the most nuanced detail afforded under current regulations. Without extreme data control features, such as in
the Rego Platform, any lesser data precision will be less valuable.
These three factors are all supported by Rego’s patented
technology.
Currently, we are targeting established
brands with large family-focused account bases — including banks, telecommunication companies, faith-based organizations,
media distributors, mobile device Original Equipment Manufacturers (“OEMs”), and merchants.
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, 2020 and 2019
The following
discussion analyzes our results of operations for the three months ended September 30, 2020 and 2019. 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, 2020 and 2019 we generated revenues of $0.
Net Loss
For the three
months ended September 30, 2020 and 2019, we had a net loss of $1,427,513 and $742,179.
Sales and Marketing
Sales and marketing expenses for the three
months ended September 30, 2020 were $22,784 compared to $9,371 for the three months ended September 30, 2019, an increase of $13,413. The
Company continued to spend marketing funds during the three months ended September 30, 2020 in preparation for the launch of the
Platform in order to create market visibility.
Product
Development
Product development
expenses were $474,151 and $33,806 for the three months ended September 30, 2020 and 2019, an increase of $440,345. The Company
continued the process to complete the development of the Platform and move toward the launch of the Platform, which is anticipated
in December 2020.
General and Administrative Expenses
General and administrative expenses
increased $405,592 to $928,181 for the three months ended September 30, 2020 from $522,589 for the three months ended
September 30, 2019. This resulted from the Company issuing options to Board members, officers and consultants, an
increase of approximately $348,000, an increase in expenses related to the issuance of common shares to Board members and
officers in the amount of approximately $180,000, offset by a decrease in consulting expenses of approximately $87,000.
Interest Expense
During the three months ended September
30, 2020, the Company incurred interest expense of $192,216, compared to $176,413 for the three months ended September 30, 2019,
an increase of $15,803. The increase in interest expense relates to additional debt outstanding.
Forgiveness of Debt
During the three months ended September
30, 2020, the Company had $422,419 of debt forgiven compared to $0 for the three months ended September 30, 2019, an increase of
$422,419. The increase related to a settlement of accounts payable and accrued payroll with the former Chief Executive Officer,
an employee and a consultant.
Change in Fair Value of Embedded
Derivative Liability and Preferred Stock Dividends
As described in Note 10 to the financial
statements, in April 2014, 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 $232,600 at September 30, 2020 and $0 at December
31, 2019. 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 in April 2014. The change in value for the three months ended September 30, 2020 was an increase in the liability
of $232,600.
Comparison
of the Nine Months Ended September 30, 2020 and 2019
The following
discussion analyzes our results of operations for the nine months ended September 30, 2020 and 2019. 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 nine months ended September 30, 2020 and 2019 we generated revenues of $0
and $34,485.
Net Loss
For the nine months ended September 30,
2020 and 2019, we had a net loss of $2,697,006 and $2,383,604.
Sales and
Marketing
Sales and marketing
expenses for the nine months ended September 30, 2020 were $41,123 compared to $37,836 for the nine months ended September 30,
2019, an increase of $3,287. The Company continued to spend marketing funds during the nine months ended September 30, 2020
to increase visibility of the Platform.
Product
Development
Product development
expenses were $667,604 and $275,202 for the nine months ended September 30, 2020 and 2019, an increase of $392,402. The Company
continued the process to complete the development of the Platform and move toward the launch of the Platform, which is anticipated
in December 2020.
General
and Administrative Expenses
General and administrative expenses decreased
$6,757 to $1,605,535 for the nine months ended September 30, 2020 from $1,612,292 for the nine months ended September 30, 2019. The
Company is now focusing on the development of the Platform and has implemented cost containment measures to fulfill that plan.
Interest Expense
During the nine months ended September
30, 2020, the Company incurred interest expense of $572,563, compared to $492,759 for the nine months ended September 30, 2019,
an increase of $79,804. The increase in interest expense relates to additional debt outstanding.
Forgiveness of Debt
During the nine months ended
September 30, 2020, the Company had $422,419 of debt forgiven compared to $0 for the nine months ended September 30, 2019,
an increase of $422,419. The increase related to a settlement of accounts payable and accrued payroll with the former Chief
Executive Officer, an employee and a consultant.
Change in Fair Value of Embedded
Derivative Liability and Preferred Stock Dividends
As described in Note 10 to the financial
statements, in April 2014, 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 $232,600 at September 30, 2020 and $0 at December
31, 2019. 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 in April 2014. The change in value for the three months ended September 30, 2020 was an increase in the liability
of $232,600.
Liquidity and Capital Resources
As of November
16, 2020 we had cash on hand of approximately $825,000.
Net cash used
in operating activities increased $481,804 to $1,358,948 for the nine months ended September 30, 2020 as compared to $877,144 for
the nine months ended September 30, 2019. The increase resulted primarily from the increase in net loss and the decrease
accounts payable and accrued expenses partially offset by increased option and warrant expenses and forgiveness of debt during
the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
Net cash provided
by financing activities increased to $1,941,500 for the nine months ended September 30, 2020 from $889,000 for
the nine months ended September 30, 2019. Cash provided by financing activities during the nine months ended September
30, 2020, consisted of convertible notes payable to provide capital to continue operations and a loan pursuant to the paycheck
protection program.
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 our most recent 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 fourth quarter of 2020, however, we do not project that significant revenue
will be developed until 2021. 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 January 2021.
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, 2020, 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, 2019. 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 of 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”), 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, 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.