NOTE 2 – MANAGEMENT
PLANS
The accompanying consolidated 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 service fees, transaction fees and in some cases, revenue sharing with banking and distribution partners. As these bases
of revenues grow, the Company expects to generate additional revenue to support operations.
As of May 15, 2023, the Company has a cash position of approximately
$4.7 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 December 2023.
NOTE 3 – ACCOUNTS PAYABLE
AND ACCRUED EXPENSES - RELATED PARTIES
As of March
31, 2023 and December 31, 2022, the Company owed the Chief Executive Officer, who is also a more than 5% beneficial owner, a total of
$7,154 and $1,703 in unpaid salary.
As of March
31, 2023 and December 31, 2022, the Company owed the Chief Financial Officer a total of $3,808 and $907 in unpaid salary.
NOTE 4 – LOANS PAYABLE
Loans payable
as of March 31, 2023 and December 31, 2022 were $42,600. Interest accrued on the loans at 6% and 10% was $7,499 and $6,768 as
of March 31, 2023 and December 31, 2022. Interest expense related to these loans payable was $730 for the three months ended March 31,
2023 and 2022.
NOTE 5 – 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, 2023, with the consent of the Note holders.
The Notes
are convertible by the holders, at any time, into shares of the Company’s Series B Preferred Stock at a conversion price of $90.00 per
share, subject to adjustment for stock splits, stock dividends and similar transactions with respect to the Series B Preferred Stock only.
Each share of Series B Preferred Stock is currently convertible into 100 shares of the Company’s common stock at a current
conversion price of $0.90 per share, subject to anti-dilution adjustment as described in the Certificate of Designation of the Series
B Preferred Stock. In addition, pursuant to the terms of a Security Agreement entered into on May 11, 2015 by and among the Company, the
Note holders and a collateral agent acting on behalf of the Note holders (the “Security Agreement”), the Notes are secured
by a lien against substantially all of the Company’s business assets. Pursuant to the Purchase Agreement, the Company also granted
piggyback registration rights to the holders of the Series B Preferred Stock upon a conversion of the Notes.
The Notes
are recorded as a current liability as of March 31, 2023 and December 31, 2022 in the amount of $3,316,357. Interest accrued on the Notes
was $2,594,147 and $2,511,238 as of March 31, 2023 and December 31, 2022. Interest expense related to these Notes payable was
$82,909 for the three months ended March 31, 2023 and 2022.
NOTE 6 – NOTES PAYABLE
– STOCKHOLDERS
These notes
payable have no formal repayment terms and $370,000 of the notes bear interest at 10% per annum and the remaining $225,000 of the notes
bear interest at 20% per annum.
These notes
payable are recorded as a current liability as of March 31, 2023 and December 31, 2022 in the amount of $595,000. Interest accrued on
the notes, as of March 31, 2023 and December 31, 2022 was $298,717 and $278,326. Interest expense related to these notes was $20,391 for
the three months March 31, 2023 and 2022.
NOTE 7 – 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 2020, 2021 and 2022.
During the three months ended March 31, 2022,
the Company issued $200,000 aggregate principal amount of its New Secured Notes to a member of the Board of Directors and his son.
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 most recently to October 31, 2023.
The New
Secured Notes are recorded as a current liability in the amount of $14,981,250 as of March 31, 2023 and December 31, 2022. Interest accrued
on the New Secured Notes was $2,300,261 and $2,150,449, as of March 31, 2023 and December 31, 2022. Interest expense related
to these New Secured Notes was $149,813 and $148,492 for the three months ended March 31, 2023 and 2022.
NOTE 8 – INCOME TAXES
Income tax expense was $0 for
the three months ended March 31, 2023 and 2022.
As of January
1, 2023, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2023
related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three months ended March 31, 2023,
and there was no accrual for uncertain tax positions as of March 31, 2023. Tax years from 2019 through 2022 remain subject to examination
by major tax jurisdictions.
There is
no income tax benefit for the losses for the three months ended March 31, 2023 and 2022, 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 9 – 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 $19,670,000, 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.
During the
three months ended March 31, 2023, a Series A Preferred stockholder converted 2,000 Series A Preferred shares into 222,220 shares of common
stock.
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 $30,767,340 as of March 31, 2023, 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.
During the
three months ended March 31, 2023 and 2022, the Company sold 8,444 and 39,599 shares of the Company’s Series B Preferred Stock in
private placements to accredited investors and received proceeds of $759,999 and $3,564,000.
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 March 31, 2023, 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 March
31, 2023, the value of the cumulative 8% dividends for all Rego preferred stock was $9,393,381. 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 March
31, 2023, the value of the cumulative 8% dividends for ZS preferred stock was $88,333. 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 10 – STOCKHOLDERS’
EQUITY
On September
22, 2022 the Company engaged an investment banking firm to explore a prospective sale of the Company. The Company will pay a fee equal
to 1.5% of the transaction value upon closing. This contingency has not yet been met.
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.
NOTE 11 – 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 March 31, 2023, under the 2008 Plan, options to purchase 1,250,000 shares of common stock have
been issued and are unexercised, and no 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 March 31, 2023, under the 2013 Plan, grants of restricted stock and options to purchase 3,487,500 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.
The Company also grants stock options outside
the 2013 Plan on terms determined by the Board.
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 three
months ended March 31, 2023:
| Risk Free Interest Rate | |
| 4.2 | % |
| Expected Volatility | |
| 77.6 | % |
| Expected Life (in years) | |
| 2.0 | |
| Dividend Yield | |
| 0 | % |
| Weighted average estimated fair value of options during the period | |
$ | 0.58 | |
During the
three months ended March 31, 2023, the Company issued options to purchase 597,875 shares of the Company’s common stock to various
consultants and employees. The options were valued at $346,086 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.
During the
three months ended March 31, 2023, 80,000 options to purchase shares of the Company’s common stock were exercised at various strike
prices for aggregate proceeds of $79,600.
The following table summarizes
the activities for REGO’s stock options for the three months ended March 31, 2023:
| | |
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, 2022 | |
| 16,062,125 | | |
$ | 0.71 | | |
| 1.5 | | |
$ | 8,803 | |
| | |
| | | |
| | | |
| | | |
| | |
| Granted | |
| 597,875 | | |
| 1.31 | | |
| 1.9 | | |
| - | |
| Exercised | |
| (80,000 | ) | |
| 1.00 | | |
| - | | |
| - | |
| Expired/Cancelled | |
| (200,000 | ) | |
| 1.08 | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable at March 31, 2023 | |
| 16,380,000 | | |
$ | 0.73 | | |
| 1.3 | | |
$ | 8,156 | |
| | |
| | | |
| | | |
| | | |
| | |
Exercisable at March 31, 2023 and expected to
vest thereafter | |
| 16,380,000 | | |
$ | 0.73 | | |
| 1.3 | | |
$ | 8,156 | |
| (1) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the closing
stock price of $1.21 for Rego’s common stock on March 31, 2023. |
REGO expensed
$504,862 and $403,686 for the three months ended March 31, 2023 and 2022 with respect to stock options.
As of March
31, 2023, there was $0 of unrecognized compensation cost related to outstanding stock options. The difference, if any, between the stock
options exercisable at March 31, 2023 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 ZS’s stock options for the three months ended March 31, 2023:
| | |
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, 2022 | |
| 1,600,000 | | |
$ | 5.00 | | |
| 1.0 | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance, March 31, 2023 | |
| 1,600,000 | | |
$ | 5.00 | | |
| 0.7 | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable at March 31, 2023 | |
| 1,600,000 | | |
$ | 5.00 | | |
| 0.7 | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
Exercisable at March 31, 2023 and expected to
vest thereafter | |
| 1,600,000 | | |
$ | 5.00 | | |
| 0.7 | | |
$ | - | |
| (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 March 31, 2023. |
For the three months ended March
31, 2023 and 2022, ZS expensed $0 with respect to options.
NOTE 12 – NONCONTROLLING
INTERESTS
Losses incurred
by the noncontrolling interests for the three months ended March 31, 2023 and 2022 were $0 and $101.
NOTE 13 – OPERATING
LEASES
For the
three months ended March 31, 2023 and 2022, total rent expense under leases amounted to $1,231 and $800. 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 March 31, 2023.
NOTE 14 – RELATED PARTY
TRANSACTIONS
On March 8, 2023 the following performance
bonuses were earned pursuant to the securing of a commercial distribution agreement with a financial institution software provider: 1)
Shares of Common Stock: Chairman: 150,000 shares; Chief Executive Officer: 400,000 shares; Chief Technology Officer: 200,000 shares; and
Chief Financial Officer: 50,000 shares. The Company accrued compensation expense of $1,040,000, the fair value of the common stock to
be issued, for the three months ended March 31, 2023. 2) Cash Compensation: Chief Executive Officer: $20,000; and Chief Technology Officer:
$20,000.
On March 13, 2023 the following performance
bonuses were earned pursuant to the securing of a $20 million Business Line of Credit: 1) Shares of Common Stock: Chairman: 750,000 shares;
Chief Executive Officer: 500,000 shares; and Chief Technology Officer: 150,000 shares. The Company accrued compensation expense of $1,890,000,
the fair value of the common stock to be issued, for the three months ended March 31, 2023. 2) Cash Compensation: Chairman: $50,000; and
Chief Executive Officer: $50,000.
NOTE 15 – COMMON STOCK
TO BE ISSUED
On September 22, 2022 the Company engaged
an investment banker for advisory services to explore a prospective sale of the Company. The successful engagement of this investment
banker resulted in an incentive award of 2,850,000 shares of common stock due to certain executives and board of director members. The
Company accrued compensation expense of $2,705,000, the fair value of the common stock to be issued, for the year ended December 31, 2022.
During the three months ended March 31, 2023, the Company recognized the shares as issued on January 1, 2023 and reclassed the amount
from common stock to be issued to additional paid in capital.
On October 5, 2022 the Company secured additional
investment in its Series B Preferred Stock to satisfy completion of the $20MM Preferred B Raise – Successful Corporate Action Award.
This resulted in an incentive award of 2,150,000 shares of common stock due to certain executives and board of director members. The Company
accrued compensation expense of $2,645,000, the fair value of the common stock to be issued, for the year ended December 31, 2022. During
the three months ended March 31, 2023, the Company recognized the shares as issued on January 1, 2023 and reclassed the amount from common
stock to be issued to additional paid in capital.
NOTE 16 - INVESTOR PRIVATE LINE OF CREDIT
On March 13, 2023, the Company entered into
an Investor Private Line of Credit agreement (the “LOC Agreement”) with an existing shareholder of the Company (the “Lender”).
Pursuant to this agreement, the Lender may extend unsecured loans to the Company in the amount of up to twenty million dollars ($20,000,000)
which may be drawn upon by the Company for a period of one year in order to provide additional capital to facilitate the Company’s
operations. Drawings may be made by the Company as long as there has not been any material change in the operations of the Company. Loans
under the LOC Agreement bear interest at the rate of 7% per annum. Drawings under the LOC Agreement must be repaid in full: (i) upon the
execution and completion of a sale, merger or other transaction of the Company whereby the Company transfers its ownership and/or its
assets to a third party within thirty (30) days of the completion of the transaction (a “Change of Control”) or (ii) if a
Change of Control does not occur within one year from the date of the LOC Agreement, the Company will repay any amounts outstanding within
sixty (60) days. As of March 31, 2023 the outstanding balance on this LOC is $0.
NOTE 17 – SUBSEQUENT
EVENTS
On April 19, 2023 the following cash bonuses were earned pursuant to
the securing of an agreement with a banking FinTech provider: Chairman: $20,000; Chief Executive Officer: $60,000; and Chief Technology
Officer: $20,000. Pursuant to this item, shares of common stock were also earned as follows: Chairman: 100,000 shares; Chief Executive
Officer: 450,000 shares; Chief Technology Officer: 100,000 shares; and Chief Financial Officer: 25,000 shares. The distribution of the
shares will not occur until the date the Company is sold. The Company accrued compensation expense of $816,750, the fair value of the
common stock to be issued, in April 2023.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
REGO Payment Architectures, Inc. is a provider of consumer software
that delivers a mobile payment platform—MazoolaR - a family focused mobile banking solution. Headquartered in Blue Bell, Pennsylvania,
the Company maintains a portfolio of trade secrets and four US patent awards. REGO offers an all-digital financial payments platform to
enable minors, particularly under 13 years old, to transact, complete chores and learn in a secure online environment guided by parental
permission, oversight, and control, while remaining COPPA and GDPR compliant.
COPPA applies not only to websites and mobile apps. It can apply to
a growing list of connected devices that is included in the Internet of Things. Some of these include toys and products that could collect
personal information, such as voice recordings or geolocation information. Non-compliance with COPPA has meant substantial fines for many
violators.
Management believes that by building on its COPPA compliance advantage,
the future of REGO Payment Architectures, Inc. will be based on the foundational architecture of its software platform (the “Platform”)
that will allow its use across multiple financial markets where secure controlled payments are needed. The Company intends to license
in each alternative field of use the ability for its partners, distributors and/or value-added resellers to private label each of the
alternative markets. These partners will deploy, customize and support each implementation under their own label, but with acknowledgement
of the Company’s proprietary intellectual assets as the base technology. Management believes this approach will enable the Company
to reduce marketing expenses while broadening its reach.
Further, California passed the California Consumer Privacy Act of 2018
(“CCPA”) on June 28, 2018. CCPA gives consumers (defined as natural citizens who are California residents) four rights relative
to their personal information as follows:
| ● | the right to know, through a general privacy policy and with more specifics
available upon request, what personal information a business has collected about them, where it was sourced from, what it is being used
for, whether it is being disclosed or sold, and to whom it is being disclosed or sold; |
| ● | the right to “opt out” of allowing a business to sell their personal
information to third parties (or, for consumers who are under 16 years old, the right not to have their personal information sold absent
their, or their parent’s, opt-in); |
| ● | the right to have a business delete their personal information, with some
exceptions; and |
| ● | the right to receive equal service and pricing from a business, even if they
exercise their privacy rights under the CCPA. |
With respect to the evolving CCPA, the Company has designed its Platform
and app to be in compliance.
Additionally, the European Parliament and Council agreed upon the General
Data Protection Regulation (“GDPR”) in April 2016, to replace the Data Protection Directive 95/46/EC. This is the primary
law regulating how companies protect European Union (“EU”) citizens’ personal data. GDPR became effective on May 25,
2018. Companies that fail to achieve GDPR compliance are subject to severe fines and penalties.
GDPR requirements apply to each member state of the European Union,
aiming to create more consistent protection of consumer and personal data across EU nations. Some of the key privacy and data protection
requirements of the GDPR include:
| ● | Requiring the consent of subjects for data processing |
| ● | Anonymizing collected data to protect privacy |
| ● | Providing data breach notifications |
| ● | Safely handling the transfer of data across borders |
| ● | Requiring certain companies to appoint a data protection officer to oversee
GDPR compliance |
In short, the handling of EU citizens’ data is mandated by GDPR
using a baseline set of standards for companies that are designed to better safeguard the processing and movement of personal data. The
Company has designed its Platform and app to be in compliance with GDPR, and has received the GDPRkidsTM Trustmark from PRIVO.
Revenues generated from the Platform will come from multiple sources
depending on the level of service and facilities requested. There will be levels of subscription revenue paid monthly, service fees, transaction
fees and in some cases, revenue sharing and licensing with banking and distribution partners.
Our goal, moving forward, is to enable both incumbent and new financial
technology (“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 remains 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.
REGO addresses hard industry problems such as:
| ● | COPPA compliant technology with a key component being its ability to verify
the age of an internet user |
| ● | A master and sub-account architecture with the ability to administer user-specific
controls |
| ● | An advanced rules engine to provide strict automated compliance of the parental
rules for each child |
| ● | Near real-time buying behavior database on minors - anonymized geolocation,
age range and purchases |
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 are seeking partners that will leverage our Platform to:
Buy vs. Build: Partners can license or revenue share for their
specific market or field of use a safe, compliant system, instead of building one on their own.
Safety & Security: Partners can safely engage a younger
consumer segment and their families with a new family friendly peer-to-peer-payment approach. Vendors will be explicitly protected from
non-compliant transactions and the underlying technology protects the privacy of the user.
Youth Financial Literacy: Partners can expand their brand story
around empowerment and education of youth financial literacy while engaging their ‘future customers’ with Gen Z, a digital
native population of post-millennial youth.
The REGO MazoolaSM app and associated digital wallet technology is
designed to enable our partners to engage families with Gen Z and Gen Alpha youths through a money management, transactional and financial
literacy platform that enables young people to make smart decisions about the things they value in life — including their money,
their time, their ideas and their connections. The MazoolaSM app enables a new way for individual users to own and monetize their purchasing
behavior that is currently unavailable to them.
In addition, we are analyzing specific components of our technology
for individual monetization as well as exploring opportunities in the Business to Business (“B2B”) realm.
Other markets for potential licensed applications are:
| ● | Government social services payments where control over how benefits allowances
are used is required. This is particularly necessary in some European countries where social benefits are not being used as intended by
the government or where benefits are subject to fraud. |
| ● | Closed network consumer to business (C2B) and business to business (B2B).
An example is school lunch programs where the consumer can make direct mobile payments to the provider’s point of sale (POS) terminal
without the need to traverse the traditional merchant payment system. This reduces the cost per transaction for the vendor and provides
instant non-repudiated settlement. Many school lunch programs are now provided by large catering companies. This is particularly valuable
as credit card fees, transaction fees and service fees can exceed 3% in overhead costs per transaction dependent on the negotiated rate.
Removing this overhead can have significant positive financial impact on profitably. It also allows the closed network to own its own
behavioral use data thus obviating the need to pay a third party for the same data. |
| ● | Integration of our certified COPPA-compliant white label Family Wallet Banking-as-a-Platform
into digital banking platforms. This will make the Company’s family wallet available to financial institutions which will allow
end-user customers of subscribing financial institutions to utilize the Company’s family wallet. |
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 March
31, 2023 and 2022
The following discussion analyzes our results of operations for the
three months ended March 31, 2023 and 2022. 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 March 31, 2023 and 2022, we generated revenues of $0 and $1,397.
Net Loss
For the three months
ended March 31, 2023 and 2022, we had a net loss of $5,408,901 and $2,279,147.
Transaction Expense
Transaction expense for
the three months ended March 31, 2023 was $56,284 compared to $62,531 for the three months ended March 31, 2022. These are transactional
charges primarily for the operation of the Mazoola® app, and the Chore Check app.
Sales and Marketing
Sales and marketing expenses
for the three months ended March 31, 2023 were $353,980 compared to $636,608 for the three months ended March 31, 2022, a decrease of
$282,628. The decrease was due to the discontinuation of the direct-to-consumer initiative, which will ultimately be replaced by
an initiative directed toward white label agreements, banks, credit unions and channel providers.
Product Development
Product development expenses
were $686,748 and $435,366 for the three months ended March 31, 2023 and 2022, an increase of $251,382. The Company added an enhancement
of fractional transaction capability to the Mazoola® app to increase its marketability.
General and Administrative
Expenses
General and administrative
expenses increased $3,164,491 to $4,058,045 for the three months ended March 31, 2023 from $893,554 for the three months ended March 31,
2022. This resulted from the Company issuing shares of common stock and options to Board members, officers and consultants, an increase
of approximately $3,200,000, during the three months ended March 31, 2023, which did not occur during the three months ended March 31,
2022. This was offset by a $50,000 decrease in legal fees and a $30,000 decrease in consultant fees for the three months ended March 31,
2023 compared to the three months ended March 31, 2022.
Interest Expense
During the three months
ended March 31, 2023, the Company incurred interest expense of $253,844 compared to $252,523 for the three months ended March 31, 2022,
an increase of $1,321. The increase in interest expense relates to increased levels of outstanding debt.
Liquidity and Capital Resources
As of May 15, 2023
we had cash on hand of approximately $4.7 million.
Net cash used in operating
activities decreased $24,852 to $1,625,878 for the three months ended March 31, 2023 as compared to $1,650,730 for the three months ended
March 31, 2022. The decrease resulted primarily from the reduction in marketing costs upon completion of the Mazoola® app.
Costs associated with common shares to be issued were offset by the reduction in non-cash based compensation.
Net cash used in investing activities decreased
$101,446 to $0 for the three months ended March 31, 2023 as compared to $101,446 for the three months ended March 31, 2022 as a result
of reduction in patent expenses.
Net cash provided by
financing activities decreased to $839,599 for the three months ended March 31, 2023 from $3,764,000 for the three months ended March
31, 2022. Proceeds from the sale of Series B Preferred Stock as well as proceeds from the sale of Convertible Notes Payable decreased
as compared to the prior year period.
As we have not realized
significant revenues since our inception, we have financed our operations through offerings of debt and equity securities. On
March 13, 2023, the Company entered into a $20 million Investor Private Line of Credit agreement with an existing shareholder of the Company.
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 commercialize 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 second quarter of 2024. 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 commercialized, that we will generate revenues sufficient
to fund our operations. In either such situation, we may not be able to continue our operations and our business might fail.
Based upon the current
cash position and the Company’s planned expense run rate, management believes the Company will not be able to finance its operations
beyond December 2023.
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 March 31, 2023,
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, 2022. 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.