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Wednesday, Feb 8, 2023

Payment App Short on Cash

After years in which it burned through tens of millions of investors’ dollars, a reckoning might be near for Virtual Piggy.

Having generated revenue of less than $10,000 over the last three years as it racked up operating losses of about $43 million, the Hermosa Beach company last week said it had hired San Francisco investment bank Viant Capital “to explore strategic alternatives.”

Viant will have to move fast.

The company, whose main product is a payment app designed to help children learn how to manage their money by giving them some parent-monitored autonomy over their spending, said in mid-March that its cash reserves were down to $1.7 million, enough, it said in a filing with the Securities and Exchange Commission, to fund operations through next month.

The company ran up operating expenses of $15 million last year, $16 million the year before and nearly $12 million in 2012.

Viant, led by Scott Smith, a former Credit Suisse First Boston managing director who established its Silicon Valley office and was co-head of its technology group, is charged with aiding a business that in its latest annual report conceded that its financial situation raised “substantial doubt about the company’s ability to continue as a going concern.”

Smith would not detail any plan for helping the company, but said revenue is not the key benchmark when judging this or any other tech company.

“Revenue is not always the mark of success for high-tech companies,” he said, pointing to Facebook, Snapchat and other wildly successful tech companies whose valuations had gone sky high despite lacking revenue.

“The challenge with all tech companies like this is to reduce your customer acquisition cost while at the same time growing your customer revenue base,” he said. “It’s a platform play and platform plays require a long-term horizon and large investment.”

Burning through investor money is nothing new in the tech world, of course, especially when the market is flush with cash. Three-quarters of venture-backed startups in the United States don’t return investors’ money, according to research done by Harvard University professor Shikhar Ghosh. National Venture Capital Association has estimated that 25 percent to 30 percent of venture-backed startups fail.

But many of them go under quietly. The travails of Virtual Piggy, since its stock is traded over the counter, is more of an open book.

Expanding base

Chief Executive Jo Webber declined to go into detail about the company’s spending, other than to say a lot of money went to acquire users through digital marketing campaigns and co-promotions, sometimes paying for giveaways of in-game virtual hats and T-shirts.

“It does cost money to break through into payments,” said Webber. “We’ve tried using our money, which was raised responsibly, to build our consumer base.”

But while its app, called Oink, has been downloaded more than 1 million times, it is not clear many consumers are actually using the service. Virtual Piggy takes a percentage of each transaction charged through Oink, which is accepted at retailers such as Toys R Us and GameStop. Beginning this year, the company was expected to charge an annual fee of $10 for each Oink prepaid card product.

Spending large amounts of money to build a financial product and acquire users is not uncommon in the payments industry.

“Financial services is an expensive place to be,” agreed Matthew Goldman, chief executive of Pasadena mobile payments company Wallaby Financial.

Merchant sign-up bonuses, advertising costs and state-by-state legal fees can quickly add up.

“It’s very hard to make that work, especially at small scale,” said Goldman. “You have to find something that users decide they can’t live without.”

The trouble is that Virtual Piggy’s teenage customers might balk at having to ask their parent’s permission to spend money, especially when there are alternatives like cash and debit cards available, Goldman said.

Webber acknowledged educating parents and teens on the value of the Oink app can be a costly struggle, but insisted recent lawsuits against online retailers such as Google, Amazon.com Inc. and Apple Inc. alleging that underage users were induced into making unauthorized in-app purchases should help her product’s cause.

However, given the company’s cash shortage any new user acquisition plans will likely be dependent on additional financing, a sale or merger.

Morphing mission

Virtual Piggy traces its roots to suburban Philadelphia, where it was founded in 2008 as Chimera International Group. Later that year, the company went public and changed its name to Moggle, declaring it was developing a massive multiplayer online game.

Moggle morphed into the Virtual Piggy online payments business in 2011 and the business relocated to Hermosa Beach the following year.

The man behind the business, at its inception and now, is Peter Pelullo, chief executive of International Corporate Management Inc., a Plymouth Meeting, Pa., investor relations and strategic planning firm.

Pelullo and ICM own 16.3 million shares, 13.9 percent of shares outstanding, in Virtual Piggy, which last week was trading at less than 30 cents a share.

“I believe this financial platform has significant value, not to mention the support and help it will give to countless 21-and-under consumers throughout our country and around the world,” said Pelullo.

As far as recouping some of his investment from a prospective sale, Pelullo said, “I’ll see what God’s got to say about that. I don’t worry.”

Webber, chairwoman and chief executive, has a 7.2 percent stake in the business and took home $363,000 in salary last year (the entire board sits on Virtual Piggy’s compensation committee).

Virtual Piggy’s other major shareholder is John Paul Dejoria, the billionaire behind Beverly Hills’ Paul Mitchell hair products and Patron Tequila.

Dejoria, who has appeared with Webber in commercials for the company, has about 14.4 million shares, a 12.2 percent stake in the company’s common stock, and 9.2 percent of a Series A class stock, according Virtual Piggy’s most recent proxy statement.

The company also attracted attention from “CSI: NY” actress Sela Ward and Stedman Graham, Oprah Winfrey’s life partner, who joined its advisory board. By late May 2013, Virtual Piggy’s OTC share price climbed to an all-time high of $3.28.

New challenges

With the rise in share price came attention to the company’s financials, and by September 2013 questions were raised in the financial press about the business and its model.

By October 2013, Virtual Piggy stock was trading for around $1.

Since then, something in its trading patterns had drawn the attention of regulators.

In its 10K form filed March 16, the company disclosed that it had received a subpoena from the SEC “with respect to the preservation and production of documents relating to an investigation into trading in the company’s stock.”

Company officials declined to comment on the subpoena, other than to say in filings that it is cooperating fully with the commission.

Representatives of the SEC could not be reached.

Through it all, Dejoria has remained upbeat.

“I invested in Virtual Piggy because I believe it will help protect children while surfing the Internet. I feel that parents and children could benefit from it,” he said in a statement emailed to the Business Journal. “I’m very optimistic of the company’s future financial success.”

The company, which had 29 employees as of Dec. 31, is now relying on Viant to support that success.

Webber shared Smith’s view that the answer, still, is scale.

“What we are looking to do with this is just massively increase our size,” she said. “We need to be more clever about how we get our message out.”

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