Indicate by check mark whether
the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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. The issuance of debt securities convertible
into equity securities could also 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 likely 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 license its platform to merchants to enable them to provide COPPA compliant services for themselves
and their customers and to license its technology to joint ventures in specified verticals.
As of August 14, 2018, the Company
has a cash position of approximately $90,000. Based upon the current cash position and the Company’s planned
expense run rate, management believes the Company does not have funds currently to finance its operations through August 31, 2018.
NOTE 3 – INVESTMENT
In April 2018, Crowd Cart, Inc. issued
500,000 shares of its stock to the Company, for a 5% ownership interest in Crowd Cart, Inc. and the Company issued 500,000 shares
of its stock to Crowd Cart, Inc., at a fair value of $115,000, pursuant to a Stock Issuance and Stock Option Agreement. Crowd
Cart, Inc. has the option to receive an additional 500,000 shares of the Company’s common stock upon either:
|
|
1.
|
The formation of Zoom Mining Solutions, Inc. and the closing on a minimum 200 bitcoin mining machines
being acquired into Zoom Mining Solutions, Inc. or
|
|
|
2.
|
The contribution of $500,000 in equity capital into Zoom Payment Solutions by investors introduced
by Crowd Cart.
|
The option expired July 30, 2018.
NOTE 4 – ACCOUNTS PAYABLE
AND ACCRUED EXPENSES - RELATED PARTIES
As of June 30, 2018 and December 31,
2017, the Company owed the Chief Executive Officer a total of $103,054 and $27,998, including $102,034 and $25,690 in unpaid salary
and expenses of $1,020 and $2,308.
As of June 30, 2018 and December 31,
2017, the Company owed the Chief Financial Officer $45,765 and $9,331 including $45,765 and $9,299 in unpaid salary and expenses
of $0 and $32 .
The
Company owed the Secretary of the Company a total of $0 and $5,774 for unpaid salary as of June 30, 2018 and December 31,
2017.
The Company owed a company owned by
a more than 5% beneficial owner $70,250 and $5,000 as of June 30, 2018 and December 31, 2017.
Additionally as of June 30, 2018 and
December 31, 2017, the Company owed the son of a more than 5% beneficial owner $8,000 and $0, pursuant to a consulting agreement.
NOTE 5 – LOANS PAYABLE
During the six months ended June
30, 2018, the Company received loans in the amount of $131,175 with no formal repayment terms and 10% interest on loans after
May 22, 2018 amounting to $71,260. The Company repaid $59,475 of these loans during the six months ended June 30,
2018. The balance of the loans payable as of June 30, 2018 and December 31, 2017 was $98,700 and $27,000. Interest
accrued on the loans was $5,741 and $0 as of June 30, 2018 and December 31, 2017. Interest expense related to
these loans payable was $676 for the three and six months ended June 30, 2018 and $1,295 and $2,589 for the three and six
months ended June 30, 2017.
NOTE 6 – DEFERRED REVENUE
The Company received $200,000 in May
2018 as a down payment to develop software for the automotive industry. This will be a business to business and a business to consumer
application intended to remove friction in the industry and provide an improved and trusted consumer experience.
NOTE 7 – 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 to September 6, 2018 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 first quarter of 2018, $100,000 of the Notes were exchanged for $100,000 of the 3.5% Secured
Convertible Notes (See Note 9).
On March 6, 2018, the Company issued
2 year warrants to purchase 692,020 shares of the Company’s common stock to the 10% Secured convertible note holders at an
exercise price of $0.90, as consideration for the note holders extending the maturity date of the notes payable to September 6,
2018.
The warrants were valued at $128,803, fair value, using the Black-Scholes
option pricing model to calculate the grant-date fair value of the warrants. The warrant value of $128,803 was expensed immediately
as interest expense.
The assumptions related to the use of the Black-Scholes option pricing model for warrants and options,
during the three months ended March 31, 2018 are as follows: no dividend, yield, expected volatility of 203.5% to 205.6%, risk
free interest rate of 1.96% to 2.28% and expected term of 2.0 years.
The Notes are recorded as a current
liability as of June 30, 2018 and December 31, 2017 in the amount of $3,360,264 and $3,460,264. Interest accrued on
the Notes was $1,129,706 and $952,693 as of June 30, 2018 and December 31, 2017. Interest expense other than the warrant
related interest expense above, related to these Notes payable was $88,507 and $177,013 for the three and six months ended June
30, 2018 and $95,096 and $198,465 for the three and six months ended June 30, 2017.
NOTE 8 – NOTES PAYABLE - STOCKHOLDER
On
December 14, 2017, the Company issued a promissory note in the amount of $100,000, which is non-interest bearing and maturing
on December 21, 2017, along with warrants to purchase 160,000 shares of the Company’s common stock, with an exercise
price of $0.90, expiring in two years. The note also includes a provision that the promissory note holder will
receive additional warrants to purchase 25,000 shares of the Company’s common stock for each week that the payment of
the principal is past due. During the three and six months ended June 30, 2018, the promissory note holder
received additional warrants to purchase 325,000 shares and 650,000 shares of the Company’s common stock with an
exercise price of $0.90, expiring in two years. The warrants were valued at $137,761, 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 193.8% to 223.4%, risk free interest rate of 1.96% to 2.56% and expected option term
of 2 years. The warrant value of $137,761 was expensed as interest expense of $74,827 and $137,761 during the three and
six months ended June 20, 2018.
The notes payable are recorded as a
current liability as of June 30, 2018 and December 31, 2017 in the amount of $100,000. Interest accrued on the notes
as of June 30, 2018 and December 31, 2017 was $0. Interest expense representing the fair value of warrants related
to these notes payable was $74,827 and $137,761 for the three and six months ended June 30, 2018 and $0 for the three and six months
ended June 30, 2017.
NOTE 9 – 3.5% SECURED CONVERTIBLE
NOTES PAYABLE - STOCKHOLDERS
On August 26, 2016, the Company, pursuant
to a Securities Purchase Agreement (the “Purchase Agreement”), issued $600,000 aggregate principal amount of its 3.5%
Secured Convertible Promissory Notes due June 30, 2018 (the “New Secured Notes”) to certain accredited investors (“investors”).
The Company issued additional New Secured Notes during 2016 and 2017.
The New Secured Notes are convertible
by the holders, at any time, into shares of the Company’s newly authorized Series C Cumulative Convertible Preferred Stock
(“Series C Preferred Stock”) at a conversion price of $90.00 per share, subject to adjustment for stock splits, stock
dividends and similar transactions with respect to the Series C Preferred Stock only. Each share of Series C Preferred Stock
is currently convertible into 100 shares of the Company’s common stock at a current conversion price of $0.90 per share,
subject to full ratchet anti-dilution adjustment for one year and weighted average anti-dilution adjustment thereafter, as described
in the Certificate of Designation of the Series C Preferred Stock. Upon a liquidation event, the Company shall
first pay to the holders of the Series C Preferred Stock, on a pari passu basis with the holders of the Company’s outstanding
Series A Preferred Stock and Series B Preferred Stock, an amount per share equal to 700% of the conversion price (i.e., $630.00
per share of Series C Preferred Stock), plus all accrued and unpaid dividends on each share of Series C Preferred Stock (the “Series
C Preference Amount”). The Series C Preference Amount shall be paid prior and in preference to payment of any amounts
to the Common Stock. After the payment of all preferential amounts required to be paid to the holders of shares of Series
C Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and any additional senior preferred stock, the Series C Preferred
Stock participates in further distributions subject to an aggregate cap of seven and one-half times (7.5x) the original issue price
thereof, plus all accrued and unpaid dividends.
In March 2018, the Company issued
$350,000 aggregate principal amount of its New Secured Notes to certain accredited investors. The aggregate consideration
consisted of $250,000 cash and the exchange of $100,000 outstanding principal amount of 10% Secured Convertible Notes (See Note
7).
In June 2018, the Company issued $75,000 aggregate principal
amount of its New Secured Notes to certain accredited investors.
The New Secured Note holders as
of June 28, 2018 agreed to extend the maturity date of the notes to June 30, 2019. The Company has agreed to increase the
interest rate on the New Secured Notes from 3.5% to 4.0%.
The New Secured Notes are
recorded as a short-term liability in the amount of $5,894,200 and $5,462,779, net of discount of $0 and $6,421 as of June
30, 2018 and December 31, 2017. Interest accrued on the New Secured Notes was $241,033 and $148,299 as of June 30,
2018 and December 31, 2017. Interest expense, including accretion of discounts, related to these notes payable was
$49,442 and $99,426 for the three and six months ended June 30, 2018 and $27,221 and $49,369 for the three and six months
ended June 30, 2017.
NOTE 10 – CONVERTIBLE NOTES
PAYABLE
Through June 30,
2018, Zoom Payment Solutions, Inc. and Zoom Payment Solutions, LLC received $243,250 for convertible notes payable.
The notes are non-interest bearing. The notes were convertible within 90 days of issuance into:
|
|
(i)
|
Common stock of Oil Optimization Inc., a company traded on the Toronto Stock Exchange, at the conversion price of $0.125 per
share of common stock in Oil Optimization, Inc.; or
|
|
|
(ii)
|
Common stock of Zoom Payment Solutions, Inc. at various conversion prices per share of common stock;
|
As of June 30, 2018, the Company converted
$183,250 of the convertible notes into 8,929 shares of Zoom Solutions, Inc. common stock in accordance with the individual convertible
note agreements.
NOTE 11 – INCOME TAXES
Income tax expense was $0 for the three
and six months ended June 30, 2018 and 2017.
As of January 1, 2018, the Company
had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2017 related to unrecognized
tax benefits. There has been no change in unrecognized tax benefits during the three and six months ended June 30, 2018, and there
was no accrual for uncertain tax positions as of June 30, 2018. Tax years from 2014 through 2017 remain subject to examination
by major tax jurisdictions.
There is no income tax benefit for
the losses for the three and six months ended June 30, 2018 and 2017, 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
Series A Preferred Stock
The
Series A Preferred Stock has a preference in liquidation equal to two times the Original Issue Price to be paid out of assets available
for distribution prior to holders of common stock and thereafter participates with the holders of common stock in any remaining
proceeds subject to an aggregate cap of 2.5 times the Original Issue Price. The Series A Preferred Stockholders may cast the number
of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred Stock can be converted. The
Series A Preferred Stock also contains customary approval rights with respect to certain matters. The Series A Preferred
Stock accrues dividends at the rate of 8% per annum.
The
conversion feature of the additional Series A 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 an original fair
market value of $3,489,000 at April 30, 2014 and $0 at June 30, 2018 and December 31, 2017.
Series B Preferred Stock
The
Series B Preferred Stock is pari passu with the Series A Preferred Stock and has a preference in liquidation equal to two times
the Original Issue Price to be paid out of assets available for distribution prior to holders of common stock and thereafter participates
with the holders of common stock in any remaining proceeds subject to an aggregate cap of 2.5 times the Original Issue Price. The
Series B Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock into which the
shares of Series B Preferred Stock can be converted. The Series B Preferred Stock also contains customary approval rights
with respect to certain matters. The Series B Preferred Stock accrues dividends at the rate of 8% per annum.
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.
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.
Series C Preferred Stock
In August 2016, the Company authorized
150,000 shares of the Company’s Series C Cumulative Convertible Preferred Stock (“Series C”). As of June
30, 2018, none of the Series C shares are issued or outstanding. After the date of issuance of Series C, dividends at the
rate of $7.20 per share will begin accruing and will be cumulative. The Series C Preferred Stock is pari passu with the Series
A Preferred Stock and Series B Preferred Stock and has a preference in liquidation equal to seven times the Original Issue Price
to be paid out of assets available for distribution prior to holders of common stock and thereafter participates with the holders
of common stock in any remaining proceeds subject to an aggregate cap of 7.5 times the Original Issue Price. The Series C Preferred
Stockholders may cast the number of votes equal to the number of whole shares of common stock into which the shares of Series C
Preferred Stock can be converted. The Series C Preferred Stock also contains customary approval rights with respect
to certain matters.
As of June 30, 2018, the value of the
cumulative 8% dividends for all preferred stock was $4,487,106. Such dividends will be paid when and if declared payable
by the Company’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.
NOTE 13 – STOCKHOLDERS’
EQUITY
Issuance of Restricted Shares
A restricted stock award (“RSA”)
is an award of common shares that is subject to certain restrictions during a specified period. Restricted stock awards are independent
of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The
grantee cannot transfer the shares before the restricted shares vest. Shares of nonvested restricted stock have the same voting
rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued
and outstanding. The Company’s restricted stock awards generally vest over a period of one year. The Company expenses the
cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, straight-line
over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined
based on the closing price of the Company’s common stock on the grant date.
During the three and six months ended
June 30, 2018, the Company expensed $9,375 and $18,750 and for the three and six months ended June 30, 2017, $2,292 and $9,167
relative to restricted stock awards.
In June 2018, the Company issued 500,000
shares of common stock, fair value $169,450 as a settlement for litigation.
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 June 30, 2018, options to purchase 8,723,333 shares of common
stock have been issued and are unexercised, and 6,426,667 shares are available for grants under the 2008 Plan. The 2008 Plan expiration
date was extended for one year to March 3, 2019 by the Board.
During 2013, the Board adopted
the 2013 Equity Incentive Plan (“2013 Plan”), which was approved by stockholders at the 2013 annual meeting of
stockholders. Under the 2013 Plan, the Company is authorized to grant awards of stock options, restricted stock,
restricted stock units and other stock-based awards of up to an aggregate of 5,000,000 shares of common stock to any officer,
employee, director or consultant. The 2013 Plan is intended to permit stock options granted to employees under the
2013 Plan to qualify as Incentive Stock Options. All options granted under the 2013 Plan, which are not intended
to qualify as Incentive Stock Options are deemed to be Non-Statutory Stock Options. As of June 30, 2018, under the
2013 Plan grants of restricted stock and options to purchase 4,971,666 shares of common stock have been issued and are
outstanding or unexercised, and 28,334 shares of common stock remain available for grants under the 2013
Plan.
The 2008 Plan and 2013 Plan are 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 applicable Plan.
In connection with Incentive Stock
Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of
the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company).
Prior
to January 1, 2014, volatility in all instances presented is the Company’s estimate of volatility that is based on the volatility
of other public companies that are in closely related industries to the Company. Beginning January 1, 2014, volatility
in all instances presented is the Company’s estimate of volatility that is based on the historical volatility of the Company’s
stock.
On April 12, 2018, the Company issued
options to purchase 750,000 shares of the Company’s common stock to two Board members, the Chief Financial Officer and the
company owned by a more than 5% stockholder, for a total of three million options. The options have an exercise price of
$0.2595, vest immediately and have a term of 5 years, with a fair value of $728,345 in total, which was expensed immediately.
On June 6, 2018, the Company issued
options to purchase 200,000 shares of the Company’s common stock to a consultant. The options have an exercise price
of $0.2595, vest immediately and have a term of 5 years, with a fair value of $58,330, which was expensed immediately.
On June 11, 2018, the Company issued
options to purchase 500,000 shares of the Company’s common stock to an employee. The options have an exercise price
of $0.90, 1/3 vested immediately and the remainder will vest over 2 years. The options have a term of 5 years, with a fair value
of $138,277, which will be expensed over the vesting period.
The following table presents the weighted-average
assumptions used to estimate the fair values of the stock options granted during the six months ended June 30, 2018:
|
|
|
2018
|
|
|
|
|
|
|
|
Risk Free Interest Rate
|
|
|
2.64
|
%
|
|
Expected Volatility
|
|
|
162.7
|
%
|
|
Expected Life (in years)
|
|
|
5
|
|
|
Dividend Yield
|
|
|
0
|
%
|
Weighted average estimated fair value of options
during the period
|
|
$
|
0.25
|
|
The following table summarizes the
activities for the Company’s stock options for the six months ended June 30, 2018:
|
|
|
|
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, 2017
|
|
|
9,150,000
|
|
|
$
|
0.83
|
|
|
|
3.6
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,700,000
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(505,000
|
)
|
|
|
1.69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2018
|
|
|
12,345,000
|
|
|
$
|
0.65
|
|
|
|
3.8
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
6,270,000
|
|
|
$
|
0.44
|
|
|
|
3.4
|
|
|
$
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
12,345,000
|
|
|
$
|
0.65
|
|
|
|
3.8
|
|
|
$
|
305
|
|
|
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and
the closing stock price of $0.31 for the Company’s common stock on June 30, 2018.
|
For the three and six months ended
June 30, 2018, the Company expensed $946,666 and $1,080,422 and $93,366 and $181,733 for the three and six months ended
June 30, 2017 with respect to options.
In accordance with FASB ASC 505-50,
Equity
– Equity-Based Payments to Non-Employees
, share based compensation with performance conditions should be revalued
based on the modification accounting methodology described in FASB ASC 718-20,
Compensation—Stock Compensation—Awards
Classified as Equity
. Upon the adoption of FASB ASU No. 2018-07, the Company has revalued certain stock options with consultants
and determined that there was an aggregate increase in fair value of $4,208 for the six months ended June 30, 2018. Also upon
the adoption of FASB ASU No. 2018-07, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date
fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has
been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
As of June 30, 2018, there was $522,067
of unrecognized compensation cost related to outstanding stock options. This amount is expected to be recognized over a weighted-average
period of 1.4 years. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation
related to these awards will be different from the Company’s expectations. The difference between the stock options
exercisable at June 30, 2018 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 the Company’s unvested stock options for the six months ended June 30, 2018:
|
|
|
|
Unvested Options
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance December 31, 2017
|
|
|
|
5,811,670
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
3,700,000
|
|
|
|
0.25
|
|
|
Vested
|
|
|
|
(3,436,670
|
)
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2018
|
|
|
|
6,075,000
|
|
|
|
0.14
|
|
The following table summarizes
the activities for the Company’s warrants for the six months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in 000's) (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2017
|
|
|
1,191,700
|
|
|
$
|
0.90
|
|
|
|
1.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,342,020
|
|
|
|
0.90
|
|
|
|
1.0
|
|
|
|
-
|
|
|
Expired
|
|
|
(131,700
|
)
|
|
|
0.90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2018
|
|
|
2,402,020
|
|
|
$
|
0.90
|
|
|
|
1.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
2,402,020
|
|
|
$
|
0.90
|
|
|
|
1.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018 and expected to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vest thereafter
|
|
|
2,402,020
|
|
|
$
|
0.90
|
|
|
|
1.7
|
|
|
$
|
-
|
|
|
|
(1)
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the
closing stock price of $0.31 for the Company’s common stock on June 30, 2018.
|
All warrants were vested on the date
of grant.
N
OTE 15 – OPERATING LEASES
For the three and six months ended
June 30, 2018, total rent expense under leases amounted to $16,705 and $21,672. For the three and six months ended June
30, 2017, total rent expense under leases amounted to $43,725 and $78,675.
At June 30, 2018,
the Company was obligated for $4,633 per month through September 30, 2018 under a non-cancelable operating lease arrangements for
property.
The
Company was also obligated under an operating lease arrangement for $3,223 per month with the first six months free through April
20, 2019. The Company is expensing $1,612 per month pursuant to this lease.
NOTE 16 – RELATED PARTY TRANSACTIONS
The Company has a consulting agreement
with a company owned by a more than 5% beneficial owner, at a cost of $15,000 per month. For the three and six months ended
June 30, 2018, the Company expensed $45,000 and $90,000 and for the three and six months ended June 30, 2017, the Company expensed
$39,500 and $79,500 to the consulting company.
The Company has a consulting agreement
with the son of the principal of a company owned by a more than 5% beneficial owner, at a cost of $5,000 per month. For the
three and six months ended June 30, 2018 and 2017, the Company expensed $15,000 and $30,000 to this consultant.
NOTE 17 – SUBSEQUENT EVENTS
The
Company has issued 2 year warrants to purchase 150,000 shares of the Company’s common stock, from June 30, 2018 through the
date of this report, with an exercise price of $0.90, to a stockholder in conjunction with notes payable issued in December 2017
(See Note 8).
From April 1, 2018 through the date
of this report, the Company has received loans from stockholders in the amount of $8,000 and repaid $7,100.
On July 23, 2018, the Company issued options to purchase
in aggregate 800,000 shares of the Company’s common stock to eight employees. The options have an exercise price of $0.90,
vest 266,667 immediately and the remainder over two years. The options have a term of five years with a fair value of $199,127.
In July and August 2018, the Company issued $491,885
aggregate principal amount of its New Secured Notes to certain accredited investors. The aggregate consideration consisted of $295,943
and the exchange of $195,942 outstanding principal amount of 10% Secured Convertible Notes.
In July and August 2018, the Company
converted $60,000 of the convertible notes payable into 15,000 shares of Zoom Solutions, Inc. common stock in accordance with the
individual convertible note agreements.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Rego Payment Architectures,
Inc. (the “Company,” “we”, or “us”) was incorporated in Delaware on February 11, 2008 under
the name Chimera International Group, Inc. On April 4, 2008, we amended our certificate of incorporation and changed
our name to Moggle, Inc. On August 22, 2011, we filed a Certificate of Ownership with the Secretary of State of
Delaware, pursuant to which the Company’s newly-formed wholly-owned subsidiary, Virtual Piggy Incorporated was merged into
and with the Company (the “Merger”). In connection with the Merger and in accordance with Section 253 of the Delaware
General Corporation Law, the name of the Company was changed from “Moggle, Inc.” to “Virtual Piggy, Inc.”
On February 28, 2017, we amended our certificate of incorporation and changed our name to Rego Payment Architectures, Inc. Our
principal offices are located at 18327 Gridley Road, Suite K Cerritos, CA 90703 and our telephone number is (561) 220-0408.
As of the date of this report, we have
not generated significant revenues. Our initial business plan was to develop an online game platform to allow game companies
to create, monetize and distribute massive multiplayer online games (MMOG). The Company technology was the monetization component
of this overall platform (our “Platform”). During 2010, we analyzed the market potential for an expanded Company solution
and decided to concentrate our efforts on the delivery of a full-featured Company solution that was not restricted to online gaming.
The expanded Company solution is designed to provide a complete online solution for families and parents to teach their children
about financial management and spending on gaming, retail, music and entertainment. In late 2013, we rebranded our Company product
under the name “Oink®”. In March 2016, we discontinued our prior Oink product offering.
In April 2016, our former Chief Executive
Officer (“CEO”) resigned and we hired a new CEO who was concentrating on the FinTech industry. In September 2017,
this CEO resigned and we hired a new CEO, whose focus is monetizing the Platform in the FinTech industry and crypto currencies
through technology licensing and similar partnerships. We are focused on building and improving the existing Platform
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 COPPA compliant technology as an added feature, we believe
we will have better market success.
Strategic Outlook
We believe that the virtual
goods market and the FinTech industry will continue to grow over the long term. Within the market and industry,
we intend to provide technology and services to allow transactions with children in compliance with COPPA and similar
international privacy laws. We believe that this particular opportunity is relatively untapped and intend to be a
leading provider of online transactions for children.
Sustained spending on technology, our
ability to raise additional financing, the continued growth of the FinTech industry, and compliance with regulatory and reporting
requirements are all external conditions that may affect our ability to execute our business plan. In addition, the
FinTech industry is intensely competitive, and most participants have longer operating histories, significantly greater financial,
technical, marketing, customer service and other resources, and greater name recognition. In addition, certain potential
customers, particularly large organizations, may view our small size and limited financial resources as a negative even if they
prefer our offering to those of our competitors.
Our primary strategic
objectives over the next 12-18 months are to increase our user base and the engagement level of that base. We plan to achieve
that by implementing our partner-first go to market model in which established payments market leaders and vertical
market participants can incorporate and integrate our platform into co-branded payments solutions targeting youth and
family or other verticals. 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.
Additionally, the Company
has licensed its technology to ZS, which was formed to continue the success in the payments industry and extend
the company’s business runway through acquisition of capabilities in blockchain, token development and cloud storage.
ZS was formed to implement these specified new technologies and growth opportunities in conjunction with other business
partners, as appropriate.
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 limited
capital resources, we will need to closely manage our expenses and conserve our cash by continually monitoring any increase in
expenses and reducing or eliminating unnecessary expenditures. Our prospects must be considered in light of the risks, expenses
and difficulties encountered by companies at an early stage of development, particularly given that we operate in new and rapidly
evolving markets, that we have limited financial resources, and face an uncertain economic environment. We may not be successful
in addressing such risks and difficulties.
Results of Operations
Comparison of the Three Months Ended
June 30, 2018 and 2017
The following discussion analyzes our
results of operations for the three months ended June 30, 2018 and 2017. The following information should be considered together
with our condensed financial statements for such period and the accompanying notes thereto.
Net Revenue/Net Loss
We have not generated significant revenue
since our inception. For the three months ended June 30, 2018 and 2017 we did not generate any revenue. For the
three months ended June 30, 2018 and 2017, we had a net loss of $1,969,219 and $1,055,038.
Sales and Marketing
Sales and marketing expenses for the
three months ended June 30, 2018 were $5,163 as compared to $19,657 for the three months ended June 30, 2017, a decrease of $14,494. The
Company has continued to focus its resources on the development of the platform, during the three months ended June 30, 2018.
Product Development
Product development expenses were $314,679
and $305,215 for the three months ended June 30, 2018 and 2017, an increase of $9,464. The current platform development is
primarily labor intensive, which is being provided by employees as opposed to employee and consultant labor, therefore the Company
has incurred more payroll tax and employee benefit expenses during the three months ended June 30, 2018.
General and Administrative Expenses
General and administrative expenses
increased $831,835 to $1,435,925 for the three months ended June 30, 2018 from $604,090 for the three months ended June 30, 2017. The
increase resulted primarily from options being issued to employees and consultants valued at approximately $924,952, offset by
reductions commensurate with implemented cost containment measures.
Interest Expense
During the three months ended June
30, 2018, the Company incurred interest expense of $213,452 as compared to $126,076 for the three months ended June 30, 2017, an
increase of $87,376. The increase in interest expense relates to the issuance of additional 3.5% convertible notes and the fair
value of warrants related to notes payable to a stockholder.
Results of Operations
Comparison of the Six Months Ended
June 30, 2018 and 2017
The following discussion analyzes our
results of operations for the six months ended June 30, 2018 and 2017. The following information should be considered together
with our condensed financial statements for such period and the accompanying notes thereto.
Net Revenue/Net Loss
We have not generated significant revenue
since our inception. For the six months ended June 30, 2018 and 2017 we did not generate any revenue. For the six
months ended June 30, 2018 and 2017, we had a net loss of $3,054,086 and $2,406,028.
Sales and Marketing
Sales and marketing expenses for the
six months ended June 30, 2018 were $13,363 as compared to $226,575 for the six months ended June 30, 2017, a decrease of $213,212. The
Company has focused its resources on the development of the platform, during the six months ended June 30, 2018.
Product Development
Product development expenses were $489,180
and $751,926 for the six months ended June 30, 2018 and 2017, a decrease of $262,746. The current platform development is
primarily labor intensive, which is being provided by employees as opposed to employee and consultant labor during the six months
ended June 30, 2017.
General and Administrative Expenses
General and administrative expenses
increased $895,981 to $2,007,864 for the six months ended June 30, 2018 from $1,111,883 for the six months ended June 30, 2018. The
increase resulted primarily from options being issued to employees and consultants valued at approximately $924,952, offset by
reductions commensurate with implemented cost containment measures.
Interest Expense
During the six months ended June 30,
2018, the Company incurred interest expense of $543,679 as compared to $315,644 for the six months ended June 30, 2017, an increase
of $228,035. The increase in interest expense relates to the issuance of additional 3.5% convertible notes and the fair value of
warrants related to notes payable to a stockholder.
Liquidity and Capital Resources
As of August 14, 2018, we had
cash on hand of approximately $90,000.
Net cash used in operating activities
decreased $868,470 to $645,938 for the six months ended June 30, 2018 as compared to $1,514,408 for the six months ended June 30,
2017. The decrease resulted primarily from increases in equity issuances in lieu of cash for expenses offset by the
increase in loss from operations.
Net cash used in investing activities
decreased to $0 for the six months ended June 30, 2018 as compared to $9,389 for the six months ended June 30, 2017. There
was no need for additional investment in assets during the six months ended June 30, 2018.
Net cash provided by financing activities
decreased to $639,950 for the six months ended June 30, 2018 from
$1,518,200
for
the six months ended June 30, 2017, a decrease of $878,250. Cash provided by financing activities during the six months
ended June 30, 2018, consisted of loans payable and convertible notes payable to provide capital to continue operations.
Subsequent to June 30, 2018, the Company
raised gross proceeds of $295,943 through the issuance of convertible notes payable.
As we have not realized significant
revenues since our inception, we have financed our operations through offerings of debt and equity securities. We do
not currently maintain a line of credit or term loan with any commercial bank or other financial institution.
Since our inception, we have focused
on developing and implementing our business plan. We believe that our existing cash resources will not be sufficient
to sustain our operations during the next twelve months.
We currently need to generate sufficient revenues to
support our cost structure to enable us to pay ongoing costs and expenses as they are incurred, finance the development
of our platform, and execute the business plan. If we cannot generate sufficient revenue to fund our business
plan, we intend to seek to raise such financing through the sale of debt and/or equity securities. The issuance
of additional equity would result in dilution to existing shareholders. The issuance of convertible debt may also result in
dilution to existing stockholders. If we are unable to obtain additional funds when they are needed or if such funds cannot
be obtained on terms acceptable to us, we will be unable to execute upon the business plan or pay costs and expenses as they
are incurred, which would have a material, adverse effect on our business, financial condition and results of operations.
Even if we are successful in generating
sufficient revenue or in raising sufficient capital in order to complete the Platform, our ability to continue in business as a
viable going concern can only be achieved when our revenues reach a level that sustains our business operations. The
launch of the Platform is expected in the third quarter of 2018, however, we do not project that significant revenue will
be developed until later in 2018. 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
August, 2018.
The foregoing forward-looking information
was prepared by us in good faith based upon assumptions that we believe to be reasonable. No assurance can be given, however, regarding
the attainability of the projections or the reliability of the assumptions on which they are based. The projections are subject
to the uncertainties inherent in any attempt to predict the results of our operations, especially where new products and services
are involved. Certain of the assumptions used will inevitably not materialize and unanticipated events will occur. Actual results
of operations are, therefore, likely to vary from the projections and such variations may be material and adverse to us. Accordingly,
no assurance can be given that such results will be achieved. Moreover due to changes in technology, new product announcements,
competitive pressures, system design and/or other specifications we may be required to change the current plans.
Off-Balance Sheet Arrangements
As of June 30, 2018, 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, 2017. We have identified below the accounting policies that are of particular importance in the presentation
of our financial position, results of operations and cash flows and which require the application of significant judgment by management.
Stock-based Compensation
We have adopted the fair value recognition
provisions Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 718. In addition, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 “
Share-Based Payment
” (“SAB
107”) in March, 2005, which provides supplemental FASB ASC 718 application guidance based on the views of the SEC. Under
FASB ASC 718, compensation cost recognized includes compensation cost for all share-based payments granted beginning January 1,
2006, based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718.
We have used the Black-Scholes
option-pricing model to estimate the option fair values. The option-pricing model requires a number of assumptions, of which
the most significant are, expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term
(the amount of time from the grant date until the options are exercised or expire).
All issuances of stock options or other
equity instruments to non-employees as consideration for goods or services received by the Company are accounted for based on the
fair value of the equity instruments issued. Non-employee equity based payments that do not vest immediately upon grant
are recorded as an expense over the service period, as if the Company had paid cash for the services. At the end of
each financial reporting period, prior to the completion of the services, the fair value of the equity based payments will be re-measured
and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity based
payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value
re-measurements until the equity based payments are fully vested or the service is completed.
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.