The remaining value of the previous CEO’s RSAs included in deferred compensation in the amount of $48,125 was reclassified to additional paid in capital upon her resignation and the Company reversed expense of $10,312 relative to her departure.
During 2008, the Board of Directors (“Board”) of the Company adopted the 2008 Equity Incentive Plan (“2008 Plan”) that was approved by the shareholders. Under the Plan, the Company is 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 Plan is 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, 2016, options to purchase 9,590,000 shares of common stock have been issued and are unexercised, and 5,560,000 shares are available for grants under the 2008 Plan.
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, 2016, under the 2013 Plan grants of restricted stock and options to purchase 1,390,000 shares of common stock have been issued and are unvested or unexercised, and 3,110,000 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.
The following table summarizes the activities for the Company’s stock options for the six months ended June 30, 2016:
On December 3, 2015, the Company incorporated a newly-formed wholly-owned Subsidiary, Finity, Inc. On December 11, 2015, the Company filed a Statement of Correction with the Pennsylvania Department of State, to change the name of Finity, Inc. to Finitii, Inc. The purpose of Finitii, Inc. is to teach children financial responsibility as a not for profit organization.
Management believes that a future alternative for Virtual Piggy, Inc. will revolve around the FinTech industry with a partner-first go to market model in which established payments market leaders and vertical market participants can incorporate and integrate the Company’s platform into co-branded payments solutions targeting youth and family. Management believes this approach will enable the Company to reduce expenses while broadening its reach.
Within this affinity partner model, the company will seek to incorporate licensing fees and customization services. This would enable the Company to begin creating shareholder value above and beyond consumer transaction fees.
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.
To date we have not generated material revenues. For the first quarter of 2016, we earned revenue by charging a percentage to the merchant or gaming publisher for each transaction processed, which continued until March 2016, when the decision was made to discontinue the Oink product offering. As we proceed through 2016, we intend to seek additional revenue streams by generating licensing and customization fees from our co-branding partners.
The Company is currently adding enhancements to the platform, to enable the platform to update itself with any new regulations that are passed, in order to reduce costs associated with manually updating the platform. This will enable the Company to market the platform to other companies in need of a solution to comply with COPPA or other regulatory requirements.
Strategic Outlook
We believe that the virtual goods market and the FinTech industry will continue to grow over the long term. Within the market and industry, we intend to provide services to allow transactions with children in compliance with COPPA and similar international privacy laws. We believe that this particular opportunity is relatively untapped and will seek 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 objective over the next 12 -18 months is to increase the value of the underlying technical assets of the Company by incorporating new essential functionality that will act as a key differentiator in the financial services market. These new technology advances should augment our current portfolio of patents that would give the Company a competitive advantage. In addition, the Company is redirecting its marketing efforts to increase its user base by entering into affinity marketing agreements with companies targeting specific user communities. This would increase our potential user community while bringing in development and licensing revenue for those sectors. This approach would greatly reduce the expense associated with direct marketing efforts.
Within this affinity partner model, the Company will seek to incorporate licensing fees and customization services. This would enable the Company to begin creating shareholder value above and beyond consumer transaction fees.
As our service grows, we intend to hire additional information technology staff to maintain our product offerings and develop new products to increase our market share.
We believe that our near-term success will depend particularly on our ability to develop customer awareness and confidence in our service. Since we have 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, 2016 and 2015
The following discussion analyzes our results of operations for the three months ended June 30, 2016 and 2015. 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, 2016 and 2015, we generated sales of $12 and $5,277. For the three months ended June 30, 2016 and 2015, we had a net loss of $696,970 and $2,133,739.
Sales and Marketing
Sales and marketing expenses for the three months ended June 30, 2016 were $(1,068) as compared to $509,039 for the three months ended June 30, 2015, a decrease of $510,107. The Company closed its sales office in England in September of 2015 and reduced the sales force in 2015 that was not replenished in 2016, as the Company focuses on enhancements to the platform.
Product Development
Product development expenses were $168,566 and $505,924 for the three months ended June 30, 2016 and 2015, a decrease of $337,358. The decrease is related to cost containment initiatives, including reduction of staff, while still emphasizing enhancements to the platform, which will benefit the Company.
Integration and Customer Support
Integration and customer support expenses decreased $22,535 to $36,337 for the three months ended June 30, 2016 from $58,872 for the three months ended June 30, 2015. The decrease was a result of the Company terminating its prepaid card business, thus requiring minimal customer support in the winding down process.
General and Administrative Expenses
General and administrative expenses decreased $438,948 to $359,885 for the three months ended June 30, 2016 from $798,833 for the three months ended June 30, 2015. The decrease resulted from the reduction of staff and expenses to a level commensurate with the Company’s operations.
Strategic Consulting
Strategic consulting expenses were $0 for the three months ended June 30, 2016, a decrease of $203,500 from the three months ended June 30, 2015. The Company did not require any strategic consulting for the three months ended June 30, 2016.
Interest Expense
During the three months ended June 30, 2016, the Company incurred interest expense of $134,347 as compared to $62,998 for the three months ended June 30, 2015, an increase of $71,349. The increase in interest expense was a result of issuing short term notes in latter part of 2015 and continuing this process in the first two quarters of 2016, in order to continue its operations.
Other income
During the three months ended June 30, 2016, the Company received $1,085 for the sale of one of its domain names.
Results of Operations
Comparison of the Six Months Ended June 30, 2016 and 2015
The following discussion analyzes our results of operations for the six months ended June 30, 2016 and 2015. 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, 2016 and 2015, we generated sales of $1,037 and $9,386. For the six months ended June 30, 2016 and 2015, we had a net loss of $2,865,915 and $5,312,924.
Sales and Marketing
Sales and marketing expenses for the six months ended June 30, 2016 were $34,035 as compared to $1,398,276 for the six months ended June 30, 2015, a decrease of $1,364,241. The Company closed its sales office in England in September of 2015 and reduced the sales force in 2015 that was not replenished in 2016, as the Company focuses on enhancements to the platform.
Product Development
Product development expenses were $416,139 and $1,096,793 for the six months ended June 30, 2016 and 2015, a decrease of $680,654. The decrease is related to cost containment initiatives, including reduction of staff, while still emphasizing enhancements to the platform, which will benefit the Company.
Integration and Customer Support
Integration and customer support expenses decreased $50,135 to $70,575 for the six months ended June 30, 2016 from $120,710 for the six months ended June 30, 2015. The decrease was a result of the Company terminating its prepaid card business, thus requiring minimal customer support in the winding down process.
General and Administrative Expenses
General and administrative expenses decreased $212,972 to $2,078,113 for the six months ended June 30, 2016 from $2,291,085 for the six months ended June 30, 2015. The decrease resulted from the reduction of staff and expenses to a level commensurate with the Company’s operations. The decrease would be more substantial, however, during the first quarter of 2016, there was a revaluation of warrants in the amount of $1,305,411, compared to revaluations in the first quarter of 2015 amounting to $228,743.
Strategic Consulting
Strategic consulting expenses were $0 for the six months ended June 30, 2016, a decrease of $338,500 from the six months ended June 30, 2015. The Company did not require any strategic consulting for the six months ended June 30, 2016.
Interest Expense
During the six months ended June 30, 2016, the Company incurred interest expense of $276,578 as compared to $77,245 for the six months ended June 30, 2015, an increase of $199,333. The increase in interest expense was a result of issuing short term notes in latter part of 2015 and continuing this process in the first two quarters of 2016, in order to continue its operations.
Other income
During the six months ended June 30, 2016, the Company received $1,085 for the sale of one of its domain names.
Liquidity and Capital Resources
As of August 12, 2016, we had cash on hand of approximately $40,000.
Net cash used in operating activities decreased $3,326,069 to $780,511 for the six months ended June 30, 2016 as compared to $4,106,580 for the six months ended June 30, 2015. The decrease resulted primarily from a decline in the net loss from operations as explained previously.
Net cash used in investing activities was $0 for the six months ended June 30, 2016, compared to $35,735 for the six months ended June 30, 2015. As a result of cost containment measures, the Company did not invest in any capital expenditures.
Net cash provided by financing activities decreased by $2,172,400 to $767,600 for the six months ended June 30, 2016 from $2,940,000 for the six months ended June 30, 2015. Cash provided by financing activities during the six months ended June 30, 2016, consisted of short-term notes payable to provide capital to continue operations.
As we have not realized significant revenues since our inception, we have financed our operations through public and private 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. 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 now in the first quarter of 2017, as we have not been able to obtain financing as quickly as we had anticipated, however, we do not project that significant revenue will be developed until later in 2017. 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 platform is developed and 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.
As of August 12, 2016, the Company has a cash position of approximately $40,000. Based upon the current cash position and the Company’s planned expense run rate, management believes the Company will be able to finance its operations through August 2016.
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, 2016, 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, 2015. 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 605), 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 Oink and ParentMatch at the time of the sale of the associated product.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Note 1 of the Notes to Financial Statements contained elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
As of June 30, 2016, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2016, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
