News Column

NOTE 2 - MANAGEMENT PLANS

August 7, 2014

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 during the development stage. 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 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 derive a percentage of all revenues generated by online merchants using the Oink service. Merchants are billed at the end of each month for all transactions that have been processed by the Company on their behalf in the prior month. As the merchant base and consumer base grows, and as the trend to higher online spending levels continues, the Company expects to generate additional revenue to support operations. If sufficient revenues are not generated to sustain operations or additional funding cannot be obtained in the short term, the Company will need to reduce monthly expenditures to a level that will enable the Company to continue until such funds can be obtained. For the six months ended June 30, 2014, and for the year ended December 31, 2013, the Company raised $13.4 million and $7.3 million respectively, net of stock issuance costs, through private placements of its equity securities and from exercises of stock options and warrants.



NOTE 3 - PATENTS AND TRADEMARKS

The Company continues to apply for patents and purchased the Oink trademark in November 2013. Accordingly, costs associated with the registration of the patents have been capitalized and are amortized on a straight-line basis over the estimated lives of the patents (20 years). The trademark is also being amortized on a straight-line basis over its estimated useful life of 20 years. At June 30, 2014 and December 31, 2013, capitalized patent and trademark costs were $705,717 and $739,657. Amortization expense for patents and trademarks were $7,311 and $6,530 for the three months ended June 30, 2014 and 2013 and were $17,440 and $11,899 for the six months ended June 30, 2014, and 2013.



During the three months ended June 30, 2014, the Company abandoned its application for three of its patents and five of its trademarks. Accordingly, the Company recorded a charge to general and administrative expenses for $114,522 relating to costs previously capitalized with respect to these applications.

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NOTE 4 - NOTES PAYABLE

On December 27, 2013, the Company entered into two identical agreements with two stockholders that each include a note payable in the amount of $500,000 and two-year warrants to purchase 37,500 shares of the Company's common stock at $0.01 and two-year warrants to purchase 50,000 shares of the Company's common stock at $1.00 per share. The notes bore interest at 10% per annum and were payable upon the earlier of: a. 5 days after the sale of the Company's securities in one transaction or series of related transactions, which sale results in gross proceeds to the Company of at least $3 million; b. Upon (i) the sale or other disposition of all or substantially all of the Company's assets or (ii) the acquisition of the Company by another entity by means of any transaction or series of related transactions to which the Company is a party other than a transaction or series of transactions in which the holders of the voting securities of the Company outstanding immediately prior to such transaction continue to retain, as a result of shares in the Company held by such holders prior to such transaction, at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such transaction or series of transactions; c. February 28, 2014. The warrants were valued at $92,470, fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 22.2%, risk free interest rate of .4% and expected option life of 2 years. The warrant values were treated as a discount to the value of the note payable in accordance with FASB ASC 835-30-25, Recognition and were accreted over the term of the note payable for financial statement purposes. These notes were repaid in full in January 2014 and therefore the remaining unamortized discount was fully accreted.



During the six months ended June 30, 2014 and 2013, $86,087 and $0 of interest was accreted on the notes payable.

NOTE 5 - INCOME TAXES

Income tax expense was $0 for the three and six months ended June 30, 2014 and 2013.

As of December 31, 2013, the Company had net operating loss carry forwards approximating $39.7 million.

As of January 1, 2014, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2014 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three and six months ended June 30, 2014, and there was no accrual for uncertain tax positions as of June 30, 2014. Tax years from 2010 through 2013 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, 2014 and 2013, 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. 14



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Table of Contents Virtual Piggy, Inc. Notes to the Financial Statements NOTE 6 - LITIGATION The Company entered into a settlement agreement with an investor in 2012, whereby the Company agreed to pay the investor a settlement of $450,000 and the investor agreed to cease trading in the Company's stock and to return warrants issued to the investor. The Company's insurance carrier agreed to reimburse the Company with respect to this litigation. Both the settlement payment and the insurance company settlement were completed in 2013. On April 10, 2014, the Company was named in a law suit in superior court for the State of California filed by a former employee alleging wrongful termination and seeking monetary damages and legal fees. The Company intends to vigorously dispute the claims made by the former employee, while pursuing reasonable efforts to achieve a resolution of this matter. At this time it is not possible for us to provide any opinion as to any ultimate outcome or any definitive estimate of the amount of loss, if any, although we do not believe that any outcome will be material to the Company's financial condition.



NOTE 7 - CONVERTIBLE PREFERRED STOCK

In January 2014, the Company, pursuant to a Securities Purchase Agreement (the "Purchase Agreement"), issued in a private placement to certain accredited investors, 50,450 shares of the Company's Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") at an original issue price of $100 per share (the "Original Issue Price") and warrants to purchase 5,045,000 shares of the Company's common stock (the "Warrants"), for an aggregate purchase price of $5,045,000. Pursuant to the Purchase Agreement, the Company also granted piggyback registration rights to the holders of the Preferred Stock and Warrants. The Purchase Agreement provides that the holders of the Preferred Stock shall be entitled to nominate two directors of the Company. Dividends accrue at a rate of 8% and are cumulative. The Company had incurred and capitalized approximately $141,000 of costs associated with this offering, which were charged to additional paid in capital when the transaction was consummated.



In accordance with FASB ASC 480 and 815, the Preferred Stock has been classified as permanent equity and was valued at $3,396,175, net of the beneficial conversion feature of $1,648,825, at January 27, 2014.

The conversion feature of the Preferred Stock is an embedded derivative, which is classified as a liability in accordance with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market value of $1,648,825 at January 27, 2014, and $3,834,000 at March 31, 2014 and $1,765,750 at June 30, 2014. This was classified as an embedded derivative liability and a discount to Preferred Stock. Since the Preferred Stock can be converted at any time, the full amount of the discount was accreted and reflected as a deemed distribution.



Because the Preferred Stock can be converted at any time, the embedded derivative is classified as a current liability at June 30, 2014.

The Warrants associated with the Preferred Stock were also classified as equity, in accordance with FASB ASC 480-10-25. Therefore it is not necessary to bifurcate the Warrants from the Preferred Stock.

The 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 Preferred Stockholders may cast the number of votes equal to the number of whole shares of common stock into which the shares of Preferred Stock can be converted. The Preferred Stock also contains customary approval rights with respect to certain matters. The conversion price of the Preferred Stock is currently $1.00 per share. The 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. 15



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NOTE 7 - CONVERTIBLE PREFERRED STOCK (CONTINUED)

On April 30, 2014, the Company sold, in a private placement to certain accredited investors, an additional 58,150 shares of Preferred Stock and Warrants to purchase 5,815,000 shares of the Company's common stock for an aggregate purchase price of $5,815,000. In accordance with FASB ASC 480 and 815, the additional Preferred Stock has been classified as permanent equity and was valued at $2,674,900, net of the beneficial conversion feature of $3,140,100, at April 30, 2014. The Company had incurred and capitalized approximately $6,000 of costs associated with this offering, which were charged to additional paid in capital when the transaction was consummated. The conversion feature of the additional Preferred Stock is an embedded derivative, which is classified as a liability in accordance with FASB ASC 815 and was valued in accordance with FASB ASC 470 as a beneficial conversion feature at a fair market value of $3,489,000 at April 30, 2014 and $3,372,700 at June 30, 2014. This was classified as an embedded derivative liability and a discount to Preferred Stock. Since the Preferred Stock can be converted at any time, the full amount of the discount was accreted and reflected as a deemed distribution. As of June 30, 2014, the value of the cumulative 8% dividends was $250,412. 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, and accordingly have not been recorded in the Company's financial statements.



NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Derivative Liabilities

For purposes of determining whether certain instruments are derivatives for accounting treatment, the Company follows the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity's own stock. The standard applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity's own common stock.



The Company has identified the following liabilities that are measured at fair value on a recurring basis, summarized as follows:

June 30, 2014 Level 1 Level 2 Level 3 Total Derivative liability related to fair value of beneficial conversion feature $ - $ 5,138,450 $ - $ 5,138,450 Total $ - $ 5,138,450 $ - $ 5,138,450



The following table details the approximate fair value measurements within the fair value hierarchy of the Company's derivative liabilities using Level 2 inputs:

Total Balance at January 27, 2014$ 1,648,825 Preferred Stock issued on April 30, 2014 3,489,000 Change in fair value of derivative liabilities 625 Balance at June 30, 2014$ 5,138,450 As of June 30, 2014, the beneficial conversion feature of the Preferred Stock is treated as an embedded derivative liability and changes in the fair value were recognized in earnings. The shares of Preferred Stock are convertible into shares of the Company's common stock, which did trade in an active securities market; therefore the embedded derivative liability was valued using the following market based inputs: Closing Trading Price of Common Stock $ 1.04



Series A Preferred Stock Effective Conversion Price (.57) Intrinsic value of conversion option per share $ .47

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NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The Company has no assets that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2014 and December 31, 2013.



NOTE 9 - STOCKHOLDERS' EQUITY

Private Placements of Securities During the first quarter of 2013, the Company entered into a private placement for shares of the Company's common stock. The shares were sold at a purchase price of $.75 per share. Through June 30, 2013, 1,133,334 shares were sold resulting in proceeds of $850,000. Issuance costs related to this private placement were $60,783. On April 15, 2013, the Company issued 26,521 restricted shares of the Company's common stock to five members of the Board of Directors that were valued at $49,071. In conjunction with this the five members of the Board also received in aggregate options to purchase 1,050,000 shares of the Company's common stock. These options were valued at $519,080, fair value. The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 29.0%, risk free interest rate of .69% and expected option life of five years. The options expire five years from the date of issuance. Options granted are being expensed over the three year vesting term. On May 28, 2013, the Company entered into a Securities Purchase Agreement with accredited investors, pursuant to which we issued and sold in a private placement an aggregate of 2,572,553 units at a purchase price of $1.80 per unit (the "Offering"), with each unit being comprised of one (1) share of the Company's common stock and a warrant to purchase one-half (0.5) of a share of common stock at an exercise price of $3.00 per share for a period of three years. On May 29, 2013, we issued and sold an additional 300,000 units pursuant to the Offering. The Company retained a placement agent in connection with the Offering. The Company paid the placement agent aggregate placement agent fees in the amount of $151,408 plus $155,118 as an expense allowance. In addition, the placement agent received three year warrants to purchase an aggregate of 287,255 shares of the Company's common stock at an exercise price of $1.80 per share. Net proceeds of the Offering to the Company, after the expense allowance and other expenses, were approximately $4,836,157.



In 2013, options and warrants to purchase 5,821,852 shares of the Company's common stock were exercised at an average price of $0.28 per share for net proceeds to the Company of $1,617,593.

In 2014, options and warrants to purchase 378,571 shares of the Company's common stock were exercised at an average price of $0.57 per share for net proceeds to the Company of $214,286. Exchange of Warrants and Deemed Dividend Effective February 7, 2014, when the market price of our common stock was $1.18 per share, we completed an exchange offering with certain investors in our 2011 to 2012 Private Placements to exercise their current warrants at $0.50 per share and receive a new warrant which would be convertible into the same number of common shares as the original warrant. The new warrant has an exercise price of $1.00. The Company has recognized a deemed dividend of $717,594 in the Statement of Operations for the three and six months ended June 30, 2014, attributable to the incremental fair value resulting from the modification of these warrants. The fair value of the new warrants was valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 143.2%, risk free interest rate of 0.30% and expected option life approximating two years. The warrants expire two years from the date of issuance. Pursuant to the offering, the Company received aggregate cash consideration of $2,521,143 from exercised warrants to purchase 5,042,287 shares of Company common stock. Extension of Warrants In June 2014, the Company extended by one year the term of 514,286 warrants with an exercise price of $0.75 which were to expire in June 2014. The fair value of the extended warrants was valued using the Black-Scholes option pricing model to calculate the grant-date fair value of the options, with the following assumptions: no dividend yield, expected volatility of 99.6%, risk free interest rate of 0.11% and expected option life approximating one year. The Company recognized compensation expense of $108,000 which was charged to general and administrative expenses. In February 2014, the Company extended warrants previously granted to two of its executive officers, which included 1,142,588 warrants exercisable at $0.04 per share and 100,000 warrants exercisable at $.75 per share for an additional two years. The increase in fair value of this term extension was $28,663 which was expensed during the period. The Company used the Black-Scholes option pricing model to calculate the increase in fair value, with the following assumptions: no dividend yield, expected volatility of 89.3% to 89.5%, risk free interest rate of 0.33%, and expected warrant life of 2 years. Issuance of Restricted Shares In April, 2014, the Company issued 300,000 shares of restricted stock in connection with a consulting agreement. Such shares will vest monthly over a six month period. The shares were valued at the closing stock price on the date of issuance which was $1.27, valuing the shares at $381,000 which will be expensed over a six month period. For the three and six months ended June 30, 2014, the Company recorded expense of $190,500. The remaining $190,500 was recorded in prepaid expense as of June 30, 2014. 17



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NOTE 10 - 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 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, 2014, options to purchase 14,691,664 shares of common stock have been issued and are unexercised, and 458,336 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, 2014, under the 2013 Plan options to purchase 3,279,166 shares of common stock have been issued and are unexercised, and 1,495,834 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 history. 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, 2014: Risk-free interest rate 1.52% Expected volatility 99% Expected life (in years) 5.2 Dividend yield 0% Weighted-average estimated fair value of options granted during the period $.79 18



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NOTE 10 - STOCK OPTIONS AND WARRANTS (CONTINUED)

The following table summarizes the activities for our stock options for the six months ended June 30, 2014: Options Outstanding Weighted- Average Remaining Aggregate Weighted- Contractual Intrinsic Number of Average Term Value Shares Exercise Price (in years) (in 000's) (1) (unaudited) Balance as of December 31, 2013 18,817,499 $ .90 Granted 1,565,000 $ 1.15 Exercised (100,000 ) $ .75 Forfeited/canceled (813,336 ) $ 1.48 Expired (1,085,000 ) $ 1.48 Balance as of June 30, 2014 18,384,163 $ .86 2.6 $ 6,067 Exercisable as of June 30, 2014 12,151,229 $ .71 1.9 $ 5,404 Exercisable as of June 30, 2014 and expected to vest thereafter 17,884,163 $ .85 2.6 $ 6,007



(1) The aggregate intrinsic value is calculated as the difference

between the exercise price of the underlying awards and the closing stock price of $1.04 for our common stock on June 30, 2014.



During the six months ended June 30, 2014, the fair value of stock options granted during the period was $923,805. The fair value of stock options is expensed over the vesting term in accordance with the terms of the related stock option agreements.

For the three and six months ended June 30, 2014, the Company expensed $272,792 and $552,115, and for the three and six months ended June 30, 2013, the Company expensed $277,072 and $468,566 relative to the fair value of stock options granted, respectively. As of June 30, 2014, there was $1,813,246 of unrecognized compensation cost related to outstanding employee and consultant stock options. This amount is expected to be recognized over a weighted-average period of 2.0 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 our expectations. The difference between the stock options exercisable at June 30, 2014 and the stock options exercisable and expected to vest relates to stock options with milestones tied to vesting. 19



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NOTE 10 - STOCK OPTIONS AND WARRANTS (CONTINUED)

The following table presents the weighted-average assumptions used to estimate the fair values of the warrants granted during the six months ended June 30, 2014: Risk-free interest rate 0.37% Expected volatility 96% Expected life (in years) 2.0 Dividend yield 0% Weighted-average estimated fair value of options granted during the period $.56 The following table summarizes the activities for our warrants for the six months ended June 30, 2014: Warrants Outstanding Weighted- Average Remaining Aggregate Weighted- Contractual Intrinsic Number of Average Term Value Shares Exercise Price (in years) (in 000's) (1) (unaudited) Balance as of December 31, 2013 13,887,181 $ .81 Granted 15,902,287 $ 1.00 Exercised (5,320,858 ) $ .50 Forfeited/canceled $ Expired $ Balance as of June 30, 2014 24,468,610 $ 1.00 1.6 $ 4,064 Exercisable as of June 30, 2014 24,468,610 $ 1.00 1.6 $ 4,064 Exercisable as of June 30, 2014 and expected to vest thereafter 24,468,610 $ 1.00 1.6 $ 4,064



(1) The aggregate intrinsic value is calculated as the difference between

the exercise price of the underlying awards and the closing stock price of $1.04 for our common stock on June 30, 2014.



NOTE 11 - OPERATING LEASES

Rent expense was $172,028 and $71,233 for the three months ended June 30, 2014 and 2013 and was $310,872 and $126,871 for the six months ended June 30, 2014 and 2013. At June 30, 2014, the Company was obligated under various non-cancelable operating lease arrangements for property as follows: 2014 $ 211,973 2015 305,197 2016 205,197 $ 722,367 20



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NOTE 12 - RELATED PARTY TRANSACTIONS

During the six months ended June 30, 2013, a consultant owning more than 5% of the Company was paid for consulting and travel expenses to provide strategic advice to the Company. On January 1, 2013, the Company entered into an agreement with this consultant, whereby the Company would pay the consultant $12,500 per month beginning January 1, 2013 for a term of one year. In June 2013, this contract was terminated. Consulting fees paid for the three and six months ended June 30, 2013 were $105,000 and 130,000, respectively. Reimbursable business expenses of $2,411 and $5,357 were paid for the three and six months ended June 30, 2014 and $0 and $23,566 for the three and six months ended June 30, 2013, respectively. No consulting fees were paid after June 30, 2013. 21



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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS.

Cautionary Statements Regarding Forward-Looking Statements

This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included or incorporated by reference in this quarterly report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expects," "intends," "plans," "projects," "estimates," "anticipates," or "believes" or the negative thereof or any variation thereon or similar terminology or expressions. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to: our ability to raise additional capital, the absence of any operating history or revenue, our ability to attract and retain qualified personnel, our dependence on third party developers who we cannot control, our ability to develop and introduce a new service to the market in a timely manner, market acceptance of our services, our limited experience in a relatively new industry, the ability to successfully develop licensing programs and generate business, rapid technological change in relevant markets, unexpected network interruptions or security breaches, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments, intense competition with larger companies, general economic conditions, as well as other factors set forth under the caption "Risk Factors" in this and prior quarterly reports on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.



Overview

Virtual Piggy, Inc. ("the Company") was incorporated in the state of Delaware on February 11, 2008. Oink from Virtual Piggy is a family wallet and shopping application that provides a safe and secure payment solution for the family. Oink is designed to provide efficiency and security for online and mobile payments, and is expanding to handle in store payments. Oink is in operational use in the US, Canada, UK and soon to be other parts of Europe. Oink functions as a digital wallet allowing payments to be made by all family members while providing the ability for parents to allocate and monitor funds and spending. Key benefits to the consumer of the Oink service include payment security, the payment consent and the transparency provided.



The Oink product enables online businesses to interact and transact with the "Under 18" market in a manner consistent with the Children's Online Privacy Protection Act ("COPPA") and other similar international children's privacy laws. Oink was launched in the US in 2012 and was launched in the European market in 2013.

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We secure agreements with a variety of businesses including merchants, gaming publishers, e-commerce platforms, payment aggregators, and payment processors to provide Oinks services. To date we have over a million users of our system and we expect to see major growth in both the user base and the engagement level in the second half of 2014, as we go live with some major digital goods providers and we release our new offers functionality that will drive affiliate marketing revenue for the Company. We have affiliate agreements with over 200 merchants in the US market. In the first half of 2014, we embarked on a program to build our channel partners and to date have secured over 20 channel partner arrangements in the US and Europe. We currently earn revenue by charging a percentage to the merchant or gaming publisher for each transaction processed. In addition, in the second quarter ended June 30, 2014, we received our first affiliate marketing revenues - a channel we expect to grow in future quarters. Later in 2014, we also expect to see some revenue from partner referral agreements. To date we have not generated material revenues. Strategic Outlook We believe that the virtual goods market will continue to grow over the long term. Within the market, we intend to provide services to the online industry to allow them to transact with children in compliance with COPPA and similar international privacy laws. We believe that this particular opportunity is relatively untapped and expect 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 online market, and compliance with regulatory and reporting requirements are all external conditions that may affect our ability to execute our business plan. In addition, the online payment 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 the addition of several new gaming publishers who are currently in the integration phase and by the introduction of our new prepaid card program backed by Discover. The Oink Discover card is linked to the teens Oink wallet and provides parents with the ability to provide a safe and controlled payment method for their teens on the go. The Oink app gives secure access to parents and teens on the family spending and allows parents to easily add funds, monitor spending, remove and select categories and shut down a card if necessary. We are planning to market our new Discover card offering, our expanded online merchant and gaming network and affiliate marketing programs through a combination of social media programs and co-promotions with publishers merchants and other strategic partners. In addition, we believe our new streamlined teen app to be released in the third quarter of 2014 will drive additional exposure and usage for Oink. 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. 23



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Results of Operations

Comparison of the Three Months Ended June 30, 2014 and 2013

The following discussion analyzes our results of operations for the quarters ended June 30, 2014 and 2013. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto. Revenue/Net Loss We have not generated significant revenue since our inception. For the quarters ended June 30, 2014 and 2013, we generated revenues of $1,253 and $58, respectively. The increase relates to the expansion of our user base and an increase in the number of transactions being processed through our system. We commenced our user acquisition campaign in March 2013 and currently have over 1 million system users. We define a system user as a registered account that has accessed the Oink product within the past 12 months. We have run and continue to run many consumer acquisition programs in conjunction with our retail and gaming partners. During this initial start-up period, not all users have made a purchase, and some have made more than one purchase. As we add additional retailers and in particular, online gaming companies, we anticipate that our transaction volume will increase. Additionally, the addition of the Discover Card program in 2014 is also expected to increase our transaction volume. We earn revenue by charging a percentage to the merchant for each transaction processed through such merchants using the Oink product. In 2013 and 2014, we have added online gaming sites which have generated repeat transactions from gaming users.



Our net loss decreased by 45%, or $1.5 million to $1.9 million for the quarter ended June 30, 2014 compared to $3.4 million for the quarter ended June 30, 2013, as further described below.

Sales and Marketing Expenses

Sales and marketing expenses increased by $0.4 million, or 34% in the quarter ended June 30, 2014 to $1.5 million compared with $1.1 million in the prior year period. During 2014, we expanded the size of our sales and marketing team in the United States and Europe to help increase our merchant base and to continue our user acquisition campaign. We commenced that campaign in March 2013 and are incurring costs for targeted advertising and promotions to achieve additional user sign-ups. We additionally increased costs to rebrand our product to Oink and to promote our product to the target market.



Product Development

Product development expenses increased by $0.2 million, or 32% in the quarter ended June 30, 2014 to $0.8 million compared with $0.6 million in the prior year period. During 2014, we expanded the size of our product development team in the United States and Europe to develop and build our new mobile applications.



Integration and Customer Support

Integration and customer support expenses were $0.2 million for the quarter ended June 30, 2014, relatively unchanged from the prior year period.

General and Administrative Expenses

General and administrative expenses increased by $0.1 million, or 12% in the quarter ended June 30, 2014 to $1.2 million compared with $1.1 million in the prior year period. The increase resulted from the write-off in the second quarter of various patent and trademark applications, the costs of which were previously capitalized. 24



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Strategic Consulting Expenses

Strategic consulting expenses were unchanged at $0.3 million in the three months ended June 30, 2014 and 2013. We engaged various consultants to advise the Company and compensate them in the form of cash and stock or stock options.

Change in Fair Value of Embedded Derivative Liability

As described in Note 7 to the financial statements, in April 2014, the Company, pursuant to a Securities Purchase Agreement issued in a private placement to certain accredited investors 58,150 shares of the Company's Series A Cumulative Convertible Preferred Stock at an original issue price of $100 per and warrants to purchase 5,815,000 shares of the Company's common stock for an aggregate purchase price of $5,815,000. The conversion feature of the Preferred Stock is an embedded derivative, which is classified as a liability and was valued as a beneficial conversion feature at a fair market value of $3,489,000 at April 30, 2014, and was revalued at $3,372,700, a decrease of $116,300, at June 30, 2014. This was classified as an embedded derivative liability and a discount to Preferred Stock. In addition, as described in Note 7 to the financial statements, in January 2014, the Company, pursuant to a Securities Purchase Agreement issued in a private placement to certain accredited investors 50,450 shares of the Company's Series A Cumulative Convertible Preferred Stock at an original issue price of $100 per and warrants to purchase 5,045,000 shares of the Company's common stock for an aggregate purchase price of $5,045,000. The conversion feature of the Preferred Stock is an embedded derivative, which is classified as a liability and was valued as a beneficial conversion feature at a fair market value of $3,834,200 at March 31, 2014, and was revalued to 1,765,750, a decrease of 2,068,450, at June 30, 2014.



For the quarter ended June 30, 2014, the Company recorded a non-cash reduction of expense of $2.2 million for the decrease in the value of these embedded derivative liabilities.

Comparison of the Six Months Ended June 30, 2014 and 2013

The following discussion analyzes our results of operations for the six month periods ended June 30, 2014 and 2013. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto.

Revenue/Net Loss

We have not generated significant revenue since our inception. For the six months ended June 30, 2014 and 2013, we generated revenues of $1,678 and $146, respectively. The increase relates to the expansion of our user base and an increase in the number of transactions being processed through our system. We commenced our user acquisition campaign in March 2013 and currently have over 1 million system users. We define a system user as a registered account that has accessed the Oink product within the past 12 months. We have run and continue to run many consumer acquisition programs in conjunction with our retail and gaming partners. During this initial start-up period, not all users have made a purchase, and some have made more than one purchase. As we add additional retailers and in particular, online gaming companies, we anticipate that our transaction volume will increase. Additionally, the addition of the Discover Card program in 2014 is also expected to increase our transaction volume. We earn revenue by charging a percentage to the merchant for each transaction processed through such merchants using the Oink product. In 2013 and 2014, we added online gaming sites which have generated repeat transactions from gaming users. Our net loss increased $1.5 million to $7.6 million for the six months ended June 30, 2014 compared to $6.1 million for the six months ended June 30, 2013, as described below.



Sales and Marketing Expenses

Sales and marketing expenses increased by $0.7 million, or 34% in the six months ended June 30, 2014 to $2.7 million compared with $2.0 million in the prior year period. During 2014, we expanded the size of our sales and marketing team in the United States and Europe to help increase our merchant base and to continue our user acquisition campaign. We commenced that campaign in March 2013 and incur costs for targeted advertising and promotions to achieve additional user sign-ups. We additionally increased costs to rebrand our product to Oink and to promote our product to the target market. 25



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Product Development

Product development expenses increased by $0.6 million, or 58% in the six months ended June 30, 2014 to $1.7 million compared with $1.1 million in the prior year period. During 2014, we expanded the size of our product development team in the United States and Europe to develop and build our new mobile applications.



Integration and Customer Support

Integration and customer support expenses were $0.4 million for the six months ended June 30, 2014, relatively unchanged from the prior year period.

General and Administrative Expenses

General and administrative expenses increased by $0.3 million, or 15% in the six months ended June 30, 2014 to $2.5 million compared with $2.2 million in the prior year period. During 2014, we increased the size of our offices with related increases in rent expense, in addition to taking a charge for the write-off of various patent and trademark applications, the costs of which were previously capitalized.



Strategic Consulting Expenses

Strategic consulting expenses decreased by $0.2 million, or 41% in the six months ended June 30, 2014 to $0.3 million compared with $0.5 million in the prior year period. During 2013, we engaged various consultants to advise the Company and compensated them in the form of cash and stock options. During 2014, we had fewer consultants engaged by us in that capacity.



Change in Fair Value of Embedded Derivative Liability

As described in Note 7 to the financial statements, in January and April 2014, the Company, pursuant to Securities Purchase Agreements issued in private placements to certain accredited investors 10,860 shares of the Company's Series A Cumulative Convertible Preferred Stock at an original issue price of $100 per and warrants to purchase 10,860,000 shares of the Company's common stock for an aggregate purchase price of $10,860,000. The conversion feature of the Preferred Stock is an embedded derivative, which is classified as a liability and was valued as a beneficial conversion feature at a fair market value of $5,137,825 at date of issuance and $3,834,200 at March 31, 2014. This liability was revalued to $5,138,450 at June 30, 2014, an increase of $625 from the date of issuance, and has been recorded as a non-cash charge for the change in the value of these embedded derivative liabilities.



Liquidity and Capital Resources

Net cash used in operating activities increased $­­­1.9 million to $8.0 million for the six months ended June 30, 2014 as compared to $6.1 million for the six months ended June 30, 2013. The increase resulted primarily from expanded operations including marketing the Oink product, hiring employees and increasing the size of the Company offices. Net cash used in investing activities was $0.2 million for six months ended June 30, 2014, materially unchanged from the $0.2 million for the six months ended June 30, 2013. Investments relate to the purchase of computer equipment, leasehold improvements and investments in patents and trademarks. Net cash provided by financing activities increased $5.2 million to $12.4 million for the six months ended June 30, 2014 from $7.2 million for the six months ended June 30, 2013. Cash provided by financing activities during the six months ended June 30, 2014 consisted of our Series A Preferred stock offering, netting $10.9 million and our warrant exchange offer, netting $2.7 million, offset by the re-payment of our $1.0 million bridge loan. As of July 31, 2014, we had cash resources of approximately $4.8 million. 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. 26



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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 continued development of Oink, and execute the business plan. If we cannot generate sufficient revenue to fund our business plan, we intend 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 marketing of Oink, 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 raised approximately $7.3 million through sales of common stock and warrants, in addition to a bridge loan, in 2013, and $12.4 million in 2014, net of repayment of the bridge loan. The Oink product was introduced to the marketplace in the third quarter of 2011 and formally launched in the U.S. in 2012. We do not project that significant revenue will be developed until late 2014. There can be no assurance that we will raise sufficient proceeds, or any proceeds, for us to implement fully our proposed business plan to aggressively develop and market our Oink product. Moreover there can be no assurance that even if our Oink product is marketed effectively and we achieve our user acquisition goals, 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. 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 for our Oink products.



Contractual Obligations

At June 30, 2014, the Company was obligated under various non-cancelable operating lease arrangements for property as follows:

2014 $ 211,973 2015 305,197 2016 205,197 $ 722,367 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 elsewhere herein. 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). 27



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Compensation expense for unvested options granted to non-employees in previous periods is being amortized over the term of the consulting agreement.

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 will generally recognize revenue from Oink 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.


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Source: Edgar Glimpses


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