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.
The Covid-19 pandemic caused a significant economic slowdown that adversely affected the demand for services. While the Company expects this matter to negatively impact its results of operations, cash flow and financial position, the future financial impact cannot be reasonably estimated at this time.
As of November 15, 2021, the Company has a cash position of approximately $1.2 million. 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 2022.
NOTE 3 – IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 2021, REGO entered into a Purchase of Business Agreement (“Agreement”) with Chore Check, LLC pursuant to which it purchased the assets of Chore Check, LLC, consisting primarily of a software application, valued at $111,817, fair value. The consideration for the acquisition consisted of the issuance of an option to purchase 100,000 shares of the Company’s common stock, with an exercise price of $0.90, vesting immediately and with a term of three years.
Long-lived assets are tested for impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value is less than the carrying value. Long-lived assets are considered impaired if the carrying value exceeds its fair value. We determined that the carrying value of the asset acquired from Chore Check, LLC exceeded its fair value and have recorded an impairment loss in the amount of $111,817 as of March 31, 2021, which is included in general and administrative expenses.
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES - RELATED PARTIES
As of September 30, 2021 and December 31, 2020, the Company owed the Chief Executive Officer, who is also a more than 5% beneficial owner, a total of $127,877 and $184,507, consisting of $127,877 and $78,462 in unpaid salary and consulting fees to a company owned by the Chief Executive Officer of $0 and $106,045.
Additionally, as of September 30, 2021 and December 31, 2020, the Company owed the son of a more than 5% beneficial owner, Chief Executive Officer, President and Board member, $10,349 and $21,549, pursuant to a consulting agreement.
As of September 30, 2021 and December 31, 2020, the Company owed the Chief Financial Officer $31,373 and $83,648 in unpaid salary.
NOTE 5 – 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 recorded the loans as a current liability in the amount of $81,500. The Company recorded 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.
On January 28, 2021, the Company received notification from the lender that its Paycheck Protection Program loan had been forgiven in full by the Small Business Administration in the amount of $79,500, and that no further payments were required. Therefore, the Company recorded derecognition of the liability in accordance with FASB ASC 405-20, Liabilities-Extinguishment of Liabilities, when the loan was, in part or wholly, forgiven and the Company was legally released. The Paycheck Protection Program loan was recognized as forgiveness of debt.
Additionally, the Economic Injury Disaster Loan of $2,000 ($1,000 per employee) does not require repayment and was also recognized as forgiveness of debt.
NOTE 6 – LOANS PAYABLE
Loans payable as of September 30, 2021 and December 31, 2020 were $42,600. Interest accrued on the loans at 0% and 10% was $3,550 and $2,790 as of September 30, 2021 and December 31, 2020. Interest expense related to these loans payable was $256 and $760 for the three and nine months ended September 30, 2021 and $1,465 and $4,366 for the three and nine months ended September 30, 2020.
NOTE 7 – DEFERRED REVENUE
The Company received $200,000 in May 2018 as a down payment to develop software for the automotive industry.
During the nine months ended September 30, 2021, the Company exchanged $200,000 of deferred revenue for a 10% Secured Convertible Note Payable in the amount of $200,000 (Note 8).
NOTE 8 – 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 to October 31, 2022, 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, 2021, the Company exchanged $200,000 of deferred revenue for a 10% Secured Convertible Note Payable in the amount of $200,000 (Note 7).
The Notes are recorded as a long-term liability as of September 30, 2021 and a current liability as of December 31, 2020 in the amount of $3,316,357 and 3,116,357. Interest accrued on the Notes was $2,096,693 and $1,855,368 as of September 30, 2021 and December 31, 2020. Interest expense related to these Notes payable was $82,909 and $241,325 for the three and nine months ended September 30, 2021 and $70,329 and $210,987 for three and nine months ended September 30, 2020.
NOTE 9 – NOTES PAYABLE – STOCKHOLDERS
During the nine months ended September 30, 2021 and 2020, the Company issued $100,000 and $0 aggregate principal amount of its notes payable - stockholders with no formal repayment terms and 10% interest. This loan also included an option to purchase 100,000 shares of the Company’s common stock with an exercise price of $1.20 and a term of two years. The option was valued at $74,518 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the option, with the following assumptions: no dividend yield, expected volatility of 124.3%, risk free interest rate of 0.11% and expected life of 2 years. The relative fair value of the option of $42,699 was recorded as a discount to the loan payable in accordance with FASB ASC 835-30-25, Recognition, and was accreted over the term of the note payable for financial statement purposes. The note payable was repaid in full, plus interest, on March 2, 2021 and the full amount of the discount was accreted to interest expense.
During the nine months ended September 30, 2021, the Company repaid $50,000 principal of one of the loans outstanding and then later exchanged the remaining $450,000 principal of that loan for a 4% Secured Convertible Note in the amount of $517,000, which included accrued interest of $67,000 (Note 10). The holder of this Note was given an option to purchase a total of 88,889 shares of the Company’s Series B Preferred Stock, which requires all cash purchases of Series B Preferred Stock at $90.00 per share, as detailed below, to be made to the Company by the due dates in order to prevent the termination of the option as follows:
1.
$200,000 on or before July 20, 2021, unless the option has previously terminated.
2.
$250,000 on or before August 23, 2021, unless the option has previously terminated.
3.
$300,000 on or before October 4, 2021, unless the option has previously terminated.
4.
$350,000 on or before November 5, 2021, unless the option has previously terminated.
5.
$400,000 on or before December 6, 2021, unless the option has previously terminated.
6.
$500,000 on or before January 3, 2022, unless the option has previously terminated.
7.
In order to prevent the termination of the option, unless it has previously terminated, the Holder of the option must purchase $500,000 of the Company’s Series B Preferred Stock (5,556 shares) on or before February 7, 2022 and continuing on the first Monday of every subsequent month, until a total of $8 million of the Company’s Series B Preferred Stock has been purchased.
8.
In addition to the other termination clauses, the option will terminate and be of no further force or effect ten days after the occurrence of any of the following events, however nothing will prevent the holder from purchasing up to $8 million in the aggregate of the Company’s Series B Preferred Stock during the ten day period:
a.
Execution by the Company of an engagement letter with a “major bracket” investment banking firm.
b.
Upon the Company entering into a definitive agreement with respect to a specified Norway white label transaction.
c.
Upon the MazoolaPaySM technology becoming integrated and operational on any one of the following websites:
i.
Demandware
ii.
Magento
iii.
WooCommerce
iv.
Shopify
v.
BigCommerce
vi.
Wix
vii.
Squarespace
viii.
Square Online
d.
Upon the Company entering into a definitive agreement to white label the MazoolaPaySM technology with a banking institution with assets in excess of $1.5 billion, excluding Origin Bank.
The option to purchase $8 million of the Company’s Series B Preferred Stock with an exercise price of $90.00, a term of 1.5 months and fully vested was valued at $0, fair value. The option was valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the option, with the following assumptions: no dividend yield, expected volatility of 0%, risk free interest rate of 0.04% and expected life of 1.5 months.
The options to purchase Series B Preferred Stock on July 20, 2021 and August 23, 2021, were exercised by the holder of the note payable and the Company issued 5,000 shares of Series B Preferred Stock (Note 12).
On September 30, 2021, the Company extended the deadline date for the exercise of the option expiring on October 4, 2021 to November 1, 2021 related to the $517,000 note payable (Note 9) and revalued the option accordingly. The option to purchase $8 million of the Company’s Series B Preferred Stock with an exercise price of $90.00, a term of 1.5 months and fully vested was revalued at $0, fair value. The option was valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the option, with the following assumptions: no dividend yield, expected volatility of 0%, risk free interest rate of 0.07% and expected life of 1.5 months.
These notes payable are recorded as a current liability as of September 30, 2021 and December 31, 2020 in the amount of $595,000 and $1,095,000. Interest accrued on the notes, as of September 30, 2021 and December 31, 2020 was $174,781 and $115,917. Interest expense including accretion of discount was $20,844 and $204,411 for the three and nine months ended September 30, 2021 and $21,727 and $104,740 for the three and nine months ended September 30, 2020.
NOTE 10 – 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, 2022.
During the nine months ended September 30, 2021, the Company issued $4,770,000 aggregate principal amount of its New Secured Notes to certain investors.
In addition, during the nine months ended September 30, 2021, the Company exchanged the remaining $450,000 principal of a Note Payable and accrued interest of $67,000 for a for 4% Secured Convertible Note in the amount of $517,000 (Note 9).
The New Secured Notes are recorded as a long-term liability in the amount of $14,781,250 as of September 30, 2021 and a current liability in the amount of $9,494,250 as of December 31, 2020. Interest accrued on the New Secured Notes was $1,404,707 and $1,019,180 as of September 30, 2021 and December 31, 2020. Interest expense related to these notes payable was $148,036 and $385,527 for the three and nine months ended September 30, 2021 and $88,405 and $237,711 for the three and nine months ended September 30, 2020.
NOTE 11 – INCOME TAXES
Income tax expense was $0 for the three and nine months ended September 30, 2021 and 2020.
As of January 1, 2021, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2021 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three and nine months ended September 30, 2021, and there was no accrual for uncertain tax positions as of September 30, 2021. Tax years from 2017 through 2020 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, 2021 and 2020, 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 12 – 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 $20,470,000, 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.
On January 1, 2021, upon adoption of FASB ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, the Company reclassified the embedded derivative value of the beneficial conversion feature of the Series A Preferred Stock issued in January 2014 valued at $3,481,050 as of December 31, 2020, to retained earnings. The Company also reclassified the embedded derivative value of the beneficial conversion feature of the Series A Preferred Stock issued in April 2014 valued at $5,349,800 as of December 31, 2020, to accumulated deficit.
During the nine months ended September 30, 2021, certain holders of the Series A Preferred Stock converted 5,500 shares of the Series A Preferred Stock into 611,111 shares of the Company’s common stock. The Company reversed the cumulative accrued dividends associated with the shares upon conversion in the amount of $342,167.
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 $6,058,080, 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.
On January 1, 2021, upon adoption of FASB ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, the Company reclassified the embedded derivative liability relative to the beneficial conversion feature of the Series B Preferred Stock issued in October 2014 valued at $2,156,728 as of December 31, 2020, to accumulated deficit.
During the third quarter of 2021, the Company sold 5,278 shares of the Company’s Series B Preferred Stock in private placements to accredited investors and received proceeds of $475,020, of which $450,000 was from the exercise of options issued with notes payable – stockholders (Note 9).
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”). On August 23, 2021, Rego filed with the Delaware Secretary of State an Amendment to Certificate of Designation of Preferences, Rights and Limitations of Series C Cumulative Convertible Preferred Stock, pursuant to which the amount of authorized Series C Preferred Stock was increased from 150,000 shares to 300,000 shares. As of September 30, 2021, 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, 2021, the value of the cumulative 8% dividends for all Rego preferred stock was $7,598,918. 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.
As of September 30, 2021, the value of the cumulative 8% dividends for ZS preferred stock was $58,333. 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 13 – 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.
Option Amendments and Adjustments
On June 3, 2021, the Board of Directors approved amendments extending the term of certain outstanding options to purchase in the aggregate 600,000 shares of common stock of the Company at exercise prices of $0.90 per share. These options were scheduled to expire at various dates during 2021 and were each extended to June 15, 2022. The increase in fair value of this term extension was $258,622 which was expensed during the nine months ended September 30, 2021. The Company used the Black-Scholes option pricing model to calculate the increase in fair value, with the following assumptions for the extended options: no dividend yield, expected volatility of 116.9%, risk free interest rate of 0.04%, and expected option life of 1.03 years.
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 months ended March 31, 2021, the Company issued 150,000 shares of the Company’s common stock with a value of $0.90 at the time of issuance, with a fair value of $135,000, to a vendor in settlement of $135,000 of accounts payable.
During the three months ended March 31, 2021, the Company issued a Board Member and the Chief Financial Officer 400,000 shares of the Company’s common stock each, with an aggregate fair value of $920,000 upon the launch of the MazoolaSM app. The Chief Executive Officer, who is also a Board Member, received 500,000 shares of the Company’s common stock, with an aggregate fair value of $575,000.
During the three months ended March 31, 2021, the Company issued the Chief Executive Officer, who is also a Board Member, 500,000 shares of the Company’s common stock with an aggregate fair value of $435,000, upon the Company raising $2,000,000.
During the three months ended March 31, 2021, an employee exercised an option to purchase 80,000 shares of the Company’s common stock at $0.25 per share or $20,000.
During the three months ended June 30, 2021, the Company issued the Chief Executive Officer, who is also a Board Member, 600,000 shares of the Company’s common stock with an aggregate fair value of $621,000, upon the Company raising funds above the previous $2 million requirement.
During the three months ended June 30, 2021, an employee exercised an option to purchase 37,500 shares of the Company’s common stock at $0.25 per share on a cashless basis. This netted the employee 28,125 shares of the Company’s common stock.
NOTE 14 – 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, 2021, under the 2008 Plan, options to purchase 1,250,000 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, 2021, under the 2013 Plan, grants of restricted stock and options to purchase 4,700,000 shares of common stock have been issued and are unexercised, and 300,000 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.
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, 2021:
|
Risk Free Interest Rate
|
|
0.3
|
%
|
|
Expected Volatility
|
|
138.7
|
%
|
|
Expected Life (in years)
|
|
3.1
|
|
|
Dividend Yield
|
|
0
|
%
|
|
Weighted average estimated fair value of options during the period
|
$
|
0.75
|
|
During the nine months ended September 30, 2021, the Company issued options to purchase 3,147,500 shares of the Company’s common stock to various consultants and employees. The options were valued at $2,333,411 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the options. The fair value of options was expensed immediately. The Company also issued an option to purchase 100,000 shares of the Company’s common stock to Chore Check, LLC with a fair value of $111,817. The $111,817 was capitalized as fixed assets and subsequently deemed to be impaired in full and expensed (Note 3).
The following table summarizes the activities for REGO’s stock options for the nine months ended September 30, 2021:
|
|
|
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, 2020
|
|
|
10,012,500
|
|
|
$
|
0.50
|
|
|
|
2.5
|
|
|
$
|
8,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,247,500
|
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(117,500
|
)
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,350,000
|
)
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021
|
|
|
11,792,500
|
|
|
$
|
0.59
|
|
|
|
2.2
|
|
|
$
|
4,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
|
|
11,792,500
|
|
|
$
|
0.59
|
|
|
|
2.2
|
|
|
$
|
4,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 and expected to vest thereafter
|
|
|
11,792,500
|
|
|
$
|
0.59
|
|
|
|
2.2
|
|
|
$
|
4,804
|
|
|
(1)
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the closing stock price of $0.99 for Rego’s common stock on September 30, 2021.
|
Rego expensed $13,320 and $2,592,036 for the three months and nine months ended September 30, 2021 and $667,670 and $719,117 for the three and nine months ended September 30, 2020 with respect to options.
As of September 30, 2021, there was $0 of unrecognized compensation cost related to outstanding stock options. The difference, if any, between the stock options exercisable at September 30, 2021 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 warrants for the nine months ended September 30, 2021:
|
|
|
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, 2020
|
|
|
3,375,000
|
|
|
$
|
0.90
|
|
|
|
1.1
|
|
|
$
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(175,000
|
)
|
|
|
0.90
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021
|
|
|
3,200,000
|
|
|
$
|
0.90
|
|
|
|
0.4
|
|
|
$
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
|
|
3,200,000
|
|
|
$
|
0.90
|
|
|
|
0.4
|
|
|
$
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 and expected to vest thereafter
|
|
|
3,200,000
|
|
|
$
|
0.90
|
|
|
|
0.4
|
|
|
$
|
286
|
|
|
(1)
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.99 for Rego’s common stock on September 30, 2021.
|
Rego expensed $0 for the three and nine months ended September 30, 2021 and $59,563 and $184,048 for the three and nine months ended September 30, 2020 with respect to warrants.
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, 2021:
|
|
|
ZS 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, 2020
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
2.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
2.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 and expected to vest thereafter
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
2.2
|
|
|
$
|
-
|
|
|
(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, 2021.
|
For the three and nine months ended September 30, 2021 and 2020, ZS expensed $0 with respect to options.
The following table summarizes the activities for ZS’s warrants for the nine months ended September 30, 2021:
|
|
|
ZS Warrants Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Term
|
|
|
|
Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
(in years)
|
|
|
|
(in 000's) (1)
|
|
|
Balance, December 31, 2020
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
0.9
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
0.1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
0.1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 and expected to vest thereafter
|
|
|
83,334
|
|
|
$
|
3.00
|
|
|
|
0.1
|
|
|
$
|
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, 2021.
|
For the three and nine months ended September 30, 2021 and 2020, ZS expensed $0 with respect to warrants.
The following table summarizes the activities for ZCS’s stock options for the nine months ended September 30, 2021:
|
|
|
ZCS 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, 2020
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
2.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
2.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 and expected to vest thereafter
|
|
|
1,600,000
|
|
|
$
|
5.00
|
|
|
|
2.2
|
|
|
$
|
-
|
|
|
(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, 2021.
|
For the three and nine months ended September 30, 2021 and 2020, ZCS expensed $0 with respect to options.
NOTE 15 – NONCONTROLLING INTERESTS
Losses incurred by the noncontrolling interests for the three and nine months ended September 30, 2021 were $0 and $101 and for the three and nine months ended September 30, 2020 were $313 and $1,039.
NOTE 16 – OPERATING LEASES
For the three and nine months ended September 30, 2021, total rent expense under leases amounted to $805 and $3,087 and for the three and nine months ended September 30, 2020, total rent expense under leases amounted to $1,130 and $13,116. 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, 2021.
NOTE 17 – SUBSEQUENT EVENTS
On October 29, 2021, the Company extended the deadline date for the exercise of the option expiring on November 1, 2021 to November 23, 2021 related to the $517,000 note payable (Note 9) and revalued the option accordingly. The option to purchase $8 million of the Company’s Series B Preferred Stock with an exercise price of $90.00, a term of 0.1 months and fully vested was revalued at $0, fair value. The option was valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the option, with the following assumptions: no dividend yield, expected volatility of 0%, risk free interest rate of 0.05% and expected life of 0.1 months.
On November 5, 2021, the Company sold 556 shares of the Company’s Series B Preferred Stock in a private placement to an accredited investor and received proceeds of $50,000.
On November 8, 2021, two Series A Preferred shareholders elected to convert a total of 750 shares of the Company’s Series A Preferred stock into 83,333 shares of the Company’s common stock.
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 current focus is
monetizing the MazoolaSM Digital Wallet Platform in the Financial Technology (“FinTech”) industry through
white label, licensing and partnership agreements. We have successfully launched the MazoolaSM App and are
focused on improving and monetizing the existing Platform and App that will act as the foundation for the strategic alignment with the
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:
|
|
1.
|
The ability to define data control settings from parent
to child.
|
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.
|
|
2.
|
The ability to (mis)attribute the child’s transaction
and personal identification.
|
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 through 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.
|
|
3.
|
The ability to disseminate transactional data on minors
while remaining COPPA and GDPR compliant.
|
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.
We have launched our MazoolaSM app.
We plan to develop additional enhancements to the app and develop a web based platform, which is expected to be completed in the fourth
quarter of 2021.
In addition to expanding the existing payment
solution to a growing US and global customer base, management believes there is robust demand for:
|
1)
|
A digital ecosystem for children embedded within a marketplace
of service offerings, delivered via in-house technology and through third party integrations (“super app”). The inherent fenced
design and systems architecture of the MazoolaTM digital wallet aligns well with the overall purpose and approach of a “super app”—
to offer a wide array of services within a controlled environment on mobile operating systems, such as iOS and Android.
|
|
2)
|
Expanded in-application service modules such as investments,
charitable giving, and financial literacy, as well as, the inclusion of new marketplaces, health centers, and logistic/inventory management
systems.
|
|
3)
|
Predictive analytic products and services based on REGO’s
anonymized data collection techniques.
|
|
4)
|
A two-sided platform of the REGO offering, MazoolaPay,
which is currently in later stage development. This provides a way for retailers to offer families a compliant payment offering when engaging
in e-commerce transactions.
|
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, 2021 and 2020
The following discussion
analyzes our results of operations for the three months ended September 30, 2021 and 2020. 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, 2021 and 2020 we generated revenues of $1,068 and
$0.
Net
Loss
For the three months
ended September 30, 2021 and 2020, we had a net loss of $1,308,769 and $1,427,513.
Transaction
Expense
Transaction expense for
the three months ended September 30, 2021 was $38,389 compared to $0 for the three months ended September 30, 2020. These are transactional
charges primarily for the operation of the MazoolaSM app, and the Chore Check app.
Sales
and Marketing
Sales and marketing expenses
for the three months ended September 30, 2021 were $178,404 compared to $22,784 for the three months ended September 30, 2020, an increase
of $155,620. This resulted from hiring consultants to develop and execute a marketing plan.
Product
Development
Product development expenses
were $631,977 and $474,151 for the three months ended September 30, 2021 and 2020, an increase of $157,826. The Company continued
the process to complete the development of the MazoolaSM app prior to its launch and then began developing further enhancements
to the app to increase its marketability.
General
and Administrative Expenses
General and administrative
expenses decreased $719,684 to $208,497 for the three months ended September 30, 2021 from $928,181 for the three months ended September
30, 2020. This resulted from the Company issuing shares of common stock and options to Board members and officers, in the amount
of approximately $710,000, during the three months ended September 30, 2020 versus $0 for the three months ended September 30, 2021.
Forgiveness of Debt
Forgiveness of debt decreased $422,419 to $0 for the three months ended
September 30, 2021. This resulted from forgiveness of debt for three months ended September 30, 2020 related to accrued payroll.
Interest
Expense
During the three months
ended September 30, 2021, the Company incurred interest expense of $252,621, compared to $192,216 for the three months ended September
30, 2020, an increase of $60,405. The increase in interest expense relates to additional debt outstanding.
Change in Fair Value of
Embedded Derivative Liability
The change in fair value of embedded derivative
liability decreased to $0 for the three months ended September 30, 2021 from $232,600 for the three months ended September 30, 2020 as
a result of the Company adopting FASB ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in
an Entity’s Own Equity. The Company adopted the modified retrospective transition method of this pronouncement on January 1,
2021 and as a result reclassified $10,987,578 between debt and accumulated deficit.
Comparison of the
Nine Months Ended September 30, 2021 and 2020
The following discussion
analyzes our results of operations for the nine months ended September 30, 2021 and 2020. 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, 2021 and 2020 we generated revenues of $2,341 and
$0.
Net
Loss
For the nine months ended
September 30, 2021 and 2020, we had a net loss of $9,226,135 and $2,697,006.
Transaction
Expense
Transaction expense for
the nine months ended September 30, 2021 was $114,448 compared to $0 for the nine months ended September 30, 2020. These are transactional
charges primarily for the operation of the MazoolaSM app, and the Chore Check app.
Sales
and Marketing
Sales and marketing expenses
for the nine months ended September 30, 2021 were $802,017 compared to $41,123 for the nine months ended September 30, 2020, an increase
of $760,894. This resulted from the issuance of options to consultants involved with the marketing of the MazoolaSM app
and monthly consulting fees.
Product
Development
Product development expenses
were $2,279,893 and $667,604 for the nine months ended September 30, 2021 and 2020, an increase of $1,612,289. The Company continued
the process to complete the development of the MazoolaSM app prior to its launch and then began developing further enhancements
to the app to increase its marketability.
General
and Administrative Expenses
General and administrative
expenses increased $3,693,750 to $5,299,285 for the nine months ended September 30, 2021 from $1,605,535 for the nine months ended September
30, 2020. This resulted from the Company issuing shares of common stock and options to Board members, officers and consultants, an
increase of approximately $3,523,000 for the nine months ended September 30, 2021 compared to September 30, 2020. Additionally, impairment
of the Chore Check, LLC assets of $112,000 contributed to the increase for the nine months ended September 30, 2021 compared to September
30, 2020.
Forgiveness
of Debt
During the nine months
ended September 30, 2021, the Company had $95,425 of debt forgiven compared to $422,419 for the nine months ended September 30, 2020.
On January 28, 2021, the Company received notification that the Paycheck Protection Plan loan was forgiven in full by the Small Business
Administration and therefore $79,500 was recognized as forgiveness of debt during the nine months ended September 30, 2021.
Additionally, the Economic
Injury Disaster Loan of $2,000 ($1,000 per employee) does not require repayment and was also recognized as forgiveness of debt.
The Company also had
$13,925 of vendor debt forgiven during the nine months ended September 30, 2021 and for the three months ended September 30, 2020 recognized
$422,419 of forgiveness of debt related to accrued payroll.
Interest
Expense
During the nine months
ended September 30, 2021, the Company incurred interest expense of $828,568, compared to $572,563 for the nine months ended September
30, 2020, an increase of $256,005. The increase in interest expense relates to additional debt outstanding.
Change
in Fair Value of Embedded Derivative Liability
The change in fair value of embedded derivative liability decreased
to $0 for the nine months ended September 30, 2021 from $232,600 for the nine months ended September 30, 2020 as a result of the Company
adopting FASB ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own
Equity. The Company adopted the modified retrospective transition method of this pronouncement on January 1, 2021 and as a result
reclassified $10,987,578 between debt and accumulated deficit.
Liquidity and Capital Resources
As of November 15,
2021 we had cash on hand of approximately $1.2 million.
Net cash used in operating
activities increased $2,368,394 to $3,727,342 for the nine months ended September 30, 2021 as compared to $1,358,948 for the nine months
ended September 30, 2020. The increase resulted primarily from the increased development costs to launch the MazoolaSM app
and continued enhancements to increase its marketability. Additionally, the Company issued common stock and options with total fair value
of $5,143,035 rather than having to expend cash.
Net cash used in investing activities increased
$41,196 for the three months ended September 30, 2021 from the three months ended September 30, 2020 as a result of patent expenses related
to current patents.
Net cash provided by
financing activities increased to $5,215,020 for the nine months ended September 30, 2021 from $1,941,500 for the nine months ended September
30, 2020. Cash provided by financing activities during the nine months ended September 30, 2021, consisted of proceeds from
convertible notes payable and the sale of Series B Preferred Stock 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 enhancements to 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 this Form 10-Q.
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. We do
not project that significant revenue will be developed at the earliest until the first quarter of 2022. 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 2022.
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, 2021,
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, 2020. 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 FASB
ASC 606, Revenue from Contracts with Customers, the Company recognizes revenue when it satisfies performance obligations,
by transferring promised goods or services to customers, in an amount that reflects the consideration to which the Company expects to
be entitled in exchange for fulfilling those performance obligations.
Recently Issued Accounting
Pronouncements
Recently issued accounting
pronouncements are discussed in Note 1 of the Notes to Financial Statements contained elsewhere in this report.