NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2013
(Unaudited)
1.
Summary of Significant Accounting Policies
Basis of Presentation and Organization
Yapnn Corp., formerly “Plesk Corp.”, (the “Company”) was incorporated under the laws of the State of Delaware on November 3, 2010. The business plan of the Company is to provide a social media website that will host multi-language conversations based on different topics generating revenues from both corporate sponsorship and access to its analytical platform. The Company has offices in the US and Canada. In March 2013, the Company acquired a concept and technology license from Intertainment Media Inc., a Canadian company, in exchange for 70,000,000 common stock shares of the Company. As a result of this exchange, Intertainment Media Inc. acquired a 70 percent ownership of the Company. The accompanying condensed consolidated financial statements of the Company were prepared from the accounts of the Company under the accrual basis of accounting.
Unaudited Interim Financial Statements
The interim condensed consolidated financial statements of the Company as of August 31, 2013, and for the periods ended August 31, 2013 and 2012, and cumulative from inception, are unaudited. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position as of August 31, 2013, and the results of its operations and its cash flows for the periods ended August 31, 2013 and August 31, 2012 and cumulative from inception. These results are not necessarily indicative of the results expected for the fiscal year ending May 31, 2014. The accompanying financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States. Refer to the Company’s audited financial statements as of May 31, 2013 filed with the SEC, for additional information including significant accounting policies.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Yappn Acquisition Corp. and Yappn Canada, Inc. All inter-company balances and transactions have been eliminated on consolidation.
Development Stage
The accompanying condensed consolidated financial statements have been prepared in accordance with the FASB Accounting Standards Codification No 915,
Development Stage Entities.
A development stage enterprise is one in which planned and principal operations have not commenced or, if its operations have commenced, there has been no significant revenue. Development-stage companies report cumulative costs from the enterprise’s inception.
Cash and Cash Equivalents
For purposes of reporting within the condensed consolidated statement of cash flows, the Company considers all cash on hand, cash accounts not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash and cash equivalents.
Accounts Receivable
Accounts receivable represent trade obligations from customers that are subject to normal trade collection terms, without discount. The Company periodically evaluates the collectability of its accounts receivable and considers the need to record or adjust an allowance for doubtful accounts based upon historical collection experience and specific customer information. The Company has not recorded any allowance for doubtful accounts for the periods ended August 31, 2013 and May 31, 2013. Balances that remain outstanding after the Company has used receivable collection efforts are written off through a charge to the valuation allowance and credit to accounts receivable. Actual amounts could vary from the recorded estimates.
Revenue Recognition
The Company recognizes revenues when completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is reasonably assured.
Advertising and Promotion Costs
Advertising and marketing costs are expensed as incurred and totaled and $110,774 and $0 during the three months ended August 31, 2013 and August 31, 2012, respectively, and $126,662 for the period from November 3, 2010 (inception) through August 31, 2013.
Income (Loss) per Common Share
Basic income (loss) per common share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Fully diluted income (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of August 31, 2013 the Company issued 9,360,000 Units each consisting of one Series A Convertible Preferred Stock and one five year warrant to purchase an additional share of common stock at a per share exercise price of $0.10, which has a dilutive effect on earnings per share when the Company has net income for the period.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Accounting for Income Tax”. It prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. The guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities. The Company is subject to taxation in the United States. All of the Company’s tax years since inception remain subject to examination by Federal and state jurisdictions.
The Company classifies penalties and interest related to unrecognized tax benefits as income tax expense in the statements of operations and comprehensive loss. There have been no penalties nor interest related to unrecognized tax benefits reflected in the statements of operations and comprehensive loss for the three months ended August 31, 2013 and August 31, 2012 and for the period of November 3, 2010 (inception) through August 31, 2013.
Fair Value of Financial Instruments
The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange.
The Company follows FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. US GAAP establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy are described below:
Level 1 - Quoted prices in active markets for identical assets or liabilities;
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The Company’s Level 2 liabilities consist of the derivative liabilities associated with the Series A Preferred Stock and warrants issued March 28, 2013, May 31, 2013 and June 7, 2013 and a loan from a third party provided on July 10, 2013.
As of August 31, 2013 and May 31, 2013, the carrying value of accounts payable, accrued liabilities and loans from related parties approximated fair value due to the short-term nature of these instruments.
Fair Value of Preferred Stock and Warrants Derivative Instruments
The Company entered into subscription agreements whereby it sold Units consisting of one share of Series A Convertible Preferred Stock and one warrant to purchase one share of the Company’s common stock at an exercise price of $0.10. Both the preferred stock and the warrant are treated as liabilities rather than as equity instruments resulting from the variability caused by the favorable terms to the holders. The Series A Preferred Stock and the five year warrants provide the holder with full anti-dilution ratchet provisions that provide the holder with a potential increase in the amount of common stock exchanged or a reduction in the exercise price of the instruments should the Company subsequently issue stock or securities convertible into common stock at a price lower than the stated exercise price of $0.10.
Both instruments are measured at fair value using a binomial lattice valuation methodology and are included in the condensed consolidated balance sheets as derivative liabilities. Both unrealized and realized gains and losses related to the derivatives are recorded based on the changes in the fair values and are reflected as a financing expenses on the consolidated statements of operations and comprehensive loss.
Estimates
The condensed consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States. The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and revenues and expenses for the periods from November 3, 2010 (inception) through August 31, 2013.
The Company’s significant estimates include the fair value of financial instruments including the underlying assumptions to estimate the fair value of derivative financial instruments; income tax rate, income tax provision and valuation allowance of deferred tax assets.
Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, if deemed appropriate, those estimates are adjusted accordingly.
These significant accounting estimates bear the risk of change due to the fact that there are uncertainties attached to those estimates and certain estimates are difficult to measure or value.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentations with no impact on stockholders’ equity or net income (loss).
Recent Accounting Pronouncements
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
2. Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced negative cash flows from operations since inception and has net losses for the period from November 3, 2010 (inception) to August 31, 2013 of $2,326,400. The Company has funded its activities primarily from equity and debt financings. From March 2013 through July 2013, the Company raised funds totaling approximately $936,000 through the sale of Units consisting of a Series A Convertible Preferred stock and a warrant and $336,000 from a loan from a third party.
Implementation of the Company’s business plan will require additional debt or equity financing and there can be no assurance that additional financing can be obtained on acceptable terms. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability.
Management plans to meet its operating cash flow requirements from financing activities until the future operating activities become sufficient to support the business to enable the Company to continue as a going concern. In September 2013, the Company began commercial operations of its web-site, which is expected to generate operating cash flows in the future. Until those cash flows are sufficient the Company will pursue other financing when deemed necessary.
There can be no assurance that the raising of equity will be successful or that the Company’s anticipated financing will be available in the future, at terms satisfactory to the Company. Failure to achieve the equity and financing at satisfactory terms and amounts could have a material adverse effect on the Company’s ability to continue as a going concern. If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations.
3. Concentration of Credit Risk
All of the Company’s sales for the period from November 3, 2010 (inception) through August 31, 2013 are attributed to two customers.
4. Transfer of Assets
On March 28, 2013, the Company purchased a prospective social media platform and related group of assets from Intertainment Media, Inc. for 70,000,000 shares of the Company’s common stock. As a result of this purchase Intertainment Media, Inc. became the majority owner of Yappn Corp. Included in the transfer of assets is a services agreement dated March 21, 2013 by and among Intertainment Media, Inc. and its wholly-owned subsidiaries, collectively “Ortsbo”. The services agreement provides general maintenance and enhancements for the assets provided on a fee and license basis.
The transferred assets are reflected at the historical carrying value of Intertainment Media, Inc. which was Nil.
5. Convertible Promissory Bridge Loan and Loan from Third Party
On February 28, 2013, the Company agreed to a 6% convertible promissory bridge loan in the aggregate principal amount of $200,000 to an accredited investor, with gross proceeds of $200,000. The transfer of the principal did not take place until March 28, 2013, at which time it was exchanged, along with implied accrued interest of $1,000, for the purchase of 4,010,000 Units of Series A Convertible Preferred Stock and attached warrants at a stated value of $0.10 per unit on that date (Note 7).
On July 10, 2013, the Company borrowed $336,000 (Canadian $350,000) from a private individual. The loan has a term of six months and is interest free for the first 120 days and 1% per month for the remainder with a final bullet payment due at the end of the term. As a result of favorable terms to the Company, the fair value of the loan was estimated at $309,313 using an imputed interest rate of 18%.
6. Common Stock
On December 8, 2010, the Company issued 112,500,000 post-split (7,500,000 pre-split) shares of common stock to the officers and directors of the Company for cash proceeds of $750.
During the period from November 3, 2010 (inception) through May 31, 2011 the Company issued 30,000,000 post-split (2,000,000 pre-split) shares of its common stock, par value $0.0001 per share, for $40,000 less issuance costs of $1,828.
On March 11, 2013, the Company authorized a stock dividend, treated as a stock split for accounting purposes, whereby an additional 14 shares of common stock, par value $0.0001 per share, was issued on each one share of common stock outstanding to each holder of record on March 25, 2013. All common stock and per share information has been adjusted retroactively for the stock split.
On March 14, 2013 the Company changed the authorized stock to 200,000,000 shares, par value $0.0001 per share.
On March 28, 2013, immediately following the Asset Purchase, under the terms of an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations, the Company transferred all of its pre-Asset Purchase assets and liabilities to the Company’s wholly-owned subsidiary, Plesk Holdings, Inc., a Delaware corporation. Thereafter, pursuant to a stock purchase agreement, the Company transferred all of the outstanding capital stock of Plesk Holdings, Inc. to certain of the Company’s former shareholders in exchange for cancellation of an aggregate of 112,500,000 shares of our common stock held by such persons.
On June 24, 2013, the Company issued and transferred 300,000 shares of common stock, valued at $42,000, in exchange for business consulting services.
The Company will issue 500,000 shares of common stock to a provider of consulting services for past consulting obligations and in consideration of arrangements entered into for Intertainment Media, Inc. for prior and future obligations. The Company will also issue 449,261 shares of common stock to the same provider of consulting services as partial compensation for services provided for the period ended August 31, 2013. The value of the 949,261 shares of common stock to be issued to this provider is $135,000.
7. Preferred Stock and Warrants
On March 14, 2013 the Company authorized 50,000,000 shares of preferred stock, par value $0.0001.
Series A Preferred Stock
On March 28, 2013 the Company was authorized to issue 5,500,000 shares of Series A Preferred Stock with a par value $0.0001 and a stated value of $0.10.
On March 28, 2013, the Company sold an aggregate of 4,010,000 Units at a per unit price of $0.10 on a private placement basis to certain investors for net cash proceeds, including the conversion of $201,000 from the bridge loan (Note 5) including associated interest, for $401,000. Each Unit consisted of (i) one share of the Series A Convertible Preferred Stock, par value $0.0001 per share, convertible into one share of our common stock; and (ii) a five year warrant to purchase an additional share of the Company’s common stock at a per share exercise price of $0.10. At the time of the sale, the market price of the Company’s common stock was $0.50.
The net cash proceeds from the financing were $401,000. As the instruments are considered derivatives and the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a financing expense on issuance of derivatives for accounting purposes and reported on the Company’s condensed consolidated statements of operations and comprehensive income (loss) below the operating income as an “other expense”.
|
Accounting allocation of initial proceeds
|
|
March 28, 2013
|
|
|
Gross proceeds
|
|
$
|
401,000
|
|
|
Derivative preferred stock liability fair value
|
|
|
(1,610,015
|
)
|
|
Derivative warrant liability fair value
|
|
|
(1,909,161
|
)
|
|
Financing expense on issuance of derivative instruments
|
|
$
|
3,118,176
|
|
On May 31, 2013, the Company amended and restated the Certificate of Designation governing the Series A Preferred Stock in order to increase the number of authorized shares of preferred stock designated as Series A Preferred Stock to 10,000,000 shares. Subsequent to the increase, on May 31, 2013, the Company sold an additional 3,700,000 Units to certain accredited investors for an aggregate purchase price of $370,000. Each Unit consisted of (i) one share of the Series A Convertible Preferred Stock, par value $0.0001 per share, convertible into one share of our common stock; and (ii) a five year warrant to purchase an additional share of the Company’s common stock at a per share exercise price of $0.10. At the time of the sale, the market price of the Company’s common stock was $0.55.
The net cash proceeds from the financing were $370,000. As the instruments are considered derivatives and the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a financing expense on issuance of derivatives for accounting purposes and reported on the Company’s condensed consolidated statements of operations and comprehensive income (loss) below the operating income as an “other expense”.
|
Accounting allocation of initial proceeds
|
|
May 31, 2013
|
|
|
Gross proceeds
|
|
$
|
370,000
|
|
|
Derivative preferred stock liability fair value
|
|
|
(1,670,550
|
)
|
|
Derivative warrant liability fair value
|
|
|
(1,945,830
|
)
|
|
Financing expense on issuance of derivative instruments
|
|
$
|
3,246,380
|
|
On June 7, 2013, the Company sold an additional 1,650,000 Units to certain accredited investors for an aggregate purchase price of $165,000. Each Unit consisted of (i) one share of the Series A Convertible Preferred Stock, par value $0.0001 per share, convertible into one share of our common stock; and (ii) a five year warrant to purchase an additional share of the Company’s common stock at a per share exercise price of $0.10. At the time of the sale, the market price of the Company’s common stock was $0.72.
The net cash proceeds from the financing were $165,000. As the instruments are considered derivatives and the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a financing expense on issuance of derivatives for accounting purposes and reported on the Company’s condensed consolidated statements of operations and comprehensive income (loss) below the operating income as an “other expense”.
|
Accounting allocation of initial proceeds
|
|
June 7, 2013
|
|
|
Gross proceeds
|
|
$
|
165,000
|
|
|
Derivative preferred stock liability fair value
|
|
|
(1,025,475
|
)
|
|
Derivative warrant liability fair value
|
|
|
(1,146,915
|
)
|
|
Financing expense on issuance of derivative instruments
|
|
$
|
2,007,390
|
|
The calculation methodologies for the fair values of the derivative preferred stock liability and the derivative warrant liability are described in Note 8 – Derivative Preferred Stock and Warrant Liabilities.
The following is a summary of preferred stock and warrants issued, forfeited or expired and exercised through August 31, 2013:
|
|
|
Preferred Stock
|
|
|
Warrants
|
|
|
Outstanding as of May 31, 2012 and August 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
Issued on March 28, 2013
|
|
|
4,010,000
|
|
|
|
4,010,000
|
|
|
Issued on May 31, 2013
|
|
|
3,700,000
|
|
|
|
3,700,000
|
|
|
Exercised and expired
|
|
|
-
|
|
|
|
-
|
|
|
Total – as of May 31, 2013
|
|
|
7,710,000
|
|
|
|
7,710,000
|
|
|
Issued on June 7, 2013
|
|
|
1,650,000
|
|
|
|
1,650,000
|
|
|
Exercised and expired
|
|
|
-
|
|
|
|
-
|
|
|
Total – as of August 31, 2013
|
|
|
9,360,000
|
|
|
|
9,360,000
|
|
In connection with a portion of the private placement on May 31, 2013, the broker was eligible for 120,000 warrants under the same full ratchet anti-dilution provisions as the other warrants, valued at $63,108, as part of the broker’s commission with cash of $34,036. As of August 31, 2013, these warrants were not yet issued.
The outstanding warrants at May 31, 2013 and August 31, 2013 have a stated average exercise price of $0.10 per share and have an approximate weighted average remaining life ranging from approximately 4.6 years to 5 years.
8. Derivative Preferred Stock and Warrant Liabilities
The Company has preferred stock and warrants outstanding with price protection provisions that provide the holder with a potential increase in the amount of common stock exchanged or a reduction in the exercise price of the instruments should the Company subsequently issue stock or securities convertible into common stock at a price lower than the stated exercise price of $0.10. Simultaneously, with any reduction to the exercise price, the number of shares of common stock that may be purchased upon exercise of each of these instruments shall be increased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of preferred stock and warrants shall be the same as the aggregate exercise price in effect immediately prior to such adjustment. The price protection on the preferred shares is for a twelve month period, while the price protection on the warrants is for the life of the warrants.
Accounting for Derivative Preferred Stock Liability
The Company’s derivative preferred stock instruments have been measured at fair value at August 31, 2013 and May 31, 2013 using the binomial lattice model. The Company recognizes all of its preferred stock with price protection in its condensed consolidated balance sheet as a liability. The liability is revalued at each reporting period and changes in fair value are recognized currently in the condensed consolidated statements of operations and comprehensive income (loss). The initial recognition and subsequent changes in fair value of the derivative preferred stock liability have no effect on the Company’s condensed consolidated cash flows.
The revaluation of the preferred stock at each reporting period resulted in the recognition of a gain of $4,007,756 and a loss of $199,297 within the Company’s condensed consolidated statements of operations and comprehensive income (loss) for the three months ended August 31, 2013 and the year ended May 31, 2013, respectively, and is included in the condensed consolidated statements of operations and comprehensive income (loss) under the caption “Change in fair value of derivative liabilities”. The fair value of the preferred stock at August 31, 2013 and May 31, 2013 was $497,581 and $3,479,862, respectively, which is reported on the condensed consolidated balance sheets under the caption “Derivative Preferred Stock Liability”.
The following is a summary of the derivative preferred stock liability from May 31, 2012 through August 31, 2013:
|
|
|
Value
|
|
|
No. of Preferred Stock Units
|
|
|
Balance as of May 31, 2012 and August 31, 2012
|
|
$
|
-
|
|
|
|
-
|
|
|
Preferred stock issued March 28, 2013
|
|
|
1,610,015
|
|
|
|
4,010,000
|
|
|
Preferred stock issued May 31, 2013
|
|
|
1,670,550
|
|
|
|
3,700,000
|
|
|
Increase in fair value of derivative preferred stock liability
|
|
|
199,297
|
|
|
|
-
|
|
|
Balance as of May 31, 2013
|
|
|
3,479,862
|
|
|
|
7,710,000
|
|
|
Preferred stock issued June 7, 2013
|
|
|
1,025,475
|
|
|
|
1,650,000
|
|
|
Decrease in fair value of derivative preferred stock liability
|
|
|
(4,007,756
|
)
|
|
|
-
|
|
|
Balance as of August 31, 2013
|
|
$
|
497,581
|
|
|
|
9,360,000
|
|
Fair Value Assumptions Used in Accounting for Derivative Preferred Stock Liability
The Company has determined its derivative preferred stock liability to be a Level 2 fair value measurement and has used the binominal lattice pricing model to calculate the fair value as of August 31, 2013 and May 31, 2013. The binomial lattice model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate.
The key inputs used in the March 28, 2013 issuance of 4,010,000 preferred stock shares for determination of fair value calculations were as follows:
|
|
|
March 28,
2013
|
|
|
May 31,
2013
|
|
|
August 31,
2013
|
|
|
Current stock price
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
0.12
|
|
|
Current exercise price
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
Time to expiration - days
|
|
|
365
|
|
|
|
301
|
|
|
|
209
|
|
|
Risk free interest rate
|
|
|
1.48
|
%
|
|
|
1.48
|
%
|
|
|
1.60
|
%
|
|
Estimated volatility
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The key inputs used in the May 31, 2013 issuance of 3,700,000 preferred stock shares for determination of fair value calculations were as follows:
|
|
|
May 31,
2013
|
|
|
August 31,
2013
|
|
|
Current stock price
|
|
$
|
0.55
|
|
|
$
|
0.12
|
|
|
Current exercise price
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
Time to expiration - days
|
|
|
365
|
|
|
|
273
|
|
|
Risk free interest rate
|
|
|
1.48
|
%
|
|
|
1.60
|
%
|
|
Estimated volatility
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
The key inputs used in the June 7, 2013 issuance of 1,650,000 preferred stock shares for determination of fair value calculations were as follows:
|
|
|
June 7,
2013
|
|
|
August 31,
2013
|
|
|
Current stock price
|
|
$
|
0.72
|
|
|
$
|
0.12
|
|
|
Current exercise price
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
Time to expiration - days
|
|
|
365
|
|
|
|
280
|
|
|
Risk free interest rate
|
|
|
1.48
|
%
|
|
|
1.60
|
%
|
|
Estimated volatility
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
Accounting for Derivative Warrant Liability
The Company’s derivative warrant instruments have been measured at fair value at August 31, 2013 and May 31, 2013 using the binomial lattice model. The Company recognizes all of its warrants with price protection in its condensed consolidated balance sheets as a liability. The liability is revalued at each reporting period and changes in fair value are recognized currently in the condensed consolidated statements of operations and comprehensive income (loss). The initial recognition and subsequent changes in fair value of the derivative warrant liability have no effect on the Company’s condensed consolidated cash flows.
The revaluation of the warrants at each reporting period resulted in the recognition of a gain of $4,173,979 and a loss of $195,287 within the Company’s condensed consolidated statements of operations and comprehensive income (loss) for the three months ended August 31, 2013 and for the year ended August 31, 2013, respectively, and is included in the condensed consolidated statements of operations and comprehensive income (loss) under the caption “Change in fair value of derivative liabilities”. The fair value of the warrants at August 31, 2013 and May 31, 2013 was $1,023,214 and $4,050,278, respectively, which is reported on the condensed consolidated balance sheets under the caption “Derivative Warrant Liability”.
The following is a summary of the derivative warrant liability from May 31, 2012 through August 31, 2013:
|
|
|
Value
|
|
|
No. of Warrants
|
|
|
Balance as of May 31, 2012 and August 31, 2012
|
|
$
|
-
|
|
|
|
-
|
|
|
Warrants issued March 28, 2013
|
|
|
1,909,161
|
|
|
|
4,010,000
|
|
|
Warrants issued May 31, 2013
|
|
|
1,945,830
|
|
|
|
3,700,000
|
|
|
Increase in fair value of derivative warrant liability
|
|
|
195,287
|
|
|
|
-
|
|
|
Balance as of May 31, 2013
|
|
|
4,050,278
|
|
|
|
7,710,000
|
|
|
Warrants issued June 7, 2013
|
|
|
1,146,915
|
|
|
|
1,650,000
|
|
|
Decrease in fair value of derivative warrant liability
|
|
|
(4,173,979
|
)
|
|
|
-
|
|
|
Balance as of August 31, 2013
|
|
$
|
1,023,214
|
|
|
|
9,360,000
|
|
Fair Value Assumptions Used in Accounting for Derivative Warrant Liability
The Company has determined its derivative warrant liability to be a Level 2 fair value measurement and has used the binominal lattice pricing model to calculate the fair value as of August 31, 2013 and May 31, 2013. The binomial lattice model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate.
The key inputs used in the March 28, 2013 issuance of 4,010,000 warrants for determination of fair value calculations were as follows:
|
|
|
March 28,
2013
|
|
|
May 31,
2013
|
|
|
August 31,
2013
|
|
|
Current stock price
|
|
$
|
0.50
|
|
|
$
|
0.55
|
|
|
$
|
0.12
|
|
|
Current exercise price
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
Time to expiration - days
|
|
|
1,826
|
|
|
|
1,762
|
|
|
|
1,670
|
|
|
Risk free interest rate
|
|
|
1.48
|
%
|
|
|
1.48
|
%
|
|
|
1.60
|
%
|
|
Estimated volatility
|
|
|
150
|
%
|
|
|
150
|
%
|
|
|
150
|
%
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The key inputs used in the May 31, 2013 issuance of 3,700,000 warrants for determination of fair value calculations were as follows:
|
|
|
May 31,
2013
|
|
|
August 31,
2013
|
|
|
Current stock price
|
|
$
|
0.55
|
|
|
$
|
0.12
|
|
|
Current exercise price
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
Time to expiration - days
|
|
|
1,826
|
|
|
|
1,734
|
|
|
Risk free interest rate
|
|
|
1.48
|
%
|
|
|
1.60
|
%
|
|
Estimated volatility
|
|
|
150
|
%
|
|
|
150
|
%
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
The key inputs used in the June 7, 2013 issuance of 1,650,000 warrants for determination of fair value calculations were as follows:
|
|
|
June 7,
2013
|
|
|
August 31,
2013
|
|
|
Current stock price
|
|
$
|
0.72
|
|
|
$
|
0.12
|
|
|
Current exercise price
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
Time to expiration - days
|
|
|
1,826
|
|
|
|
1,741
|
|
|
Risk free interest rate
|
|
|
1.48
|
%
|
|
|
1.60
|
%
|
|
Estimated volatility
|
|
|
100
|
%
|
|
|
150
|
%
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
In connection with a portion of the private placement on May 31, 2013, the broker was eligible for 120,000 warrants having the same full ratchet anti-dilution provisions as the other warrants, as part of the broker’s commission. These warrants have been estimated to be valued at $63,108 and $13,248 for the periods ended May 31, 2013 and August 31, 2013, respectively, using the same valuation techniques and included in accrued liabilities. The change in the fair value of $49,860 is reflected in other expense as financing expense on issuance of derivatives for the three months ended August 31, 2013.
9. Employee Benefit and Incentive Plans
On March 28, 2013, the Company adopted an equity incentive plan pursuant to which 10,000,000 shares of common stock may be issued as incentive awards to officers, directors, employees, consultants and other qualified persons. As of May 31, 2013 and August 31, 2013 no shares have been issued under this plan.
10.
Income Taxes
The provision for income taxes for the three months ended August 31, 2013 and August 31, 2012 consisted of the following:
|
|
|
August 31,
2013
|
|
|
August 31,
2012
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred
|
|
|
368,890
|
|
|
|
3,114
|
|
|
Change in valuation allowance
|
|
|
(368,890
|
)
|
|
|
(3,114
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company’s income tax rate computed at the statutory federal rate of 35% differs from its effective tax rate primarily due to permanent items, state taxes and the change in the deferred tax asset valuation allowance.
|
|
|
August 31,
2013
|
|
|
August 31,
2012
|
|
|
Income tax at statutory rate
|
|
|
35.00
|
%
|
|
|
34.00
|
%
|
|
Permanent difference
|
|
|
(42.00
|
)
|
|
|
-
|
|
|
Change in valuation allowance
|
|
|
7.00
|
|
|
|
(34.00
|
)
|
|
Total
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets. Management evaluates whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on Management’s evaluation, the net deferred tax asset was offset by a full valuation allowance. The Company’s deferred tax asset valuation allowance will be reversed if and when the Company generates sufficient taxable income in the future to utilize the tax benefits of the related deferred tax assets.
The tax effects of temporary differences that give rise to the Company’s deferred tax asset as of August 31, 2013 and May 31, 2013 are as follows:
|
|
|
August 31,
2013
|
|
|
May 31,
2013
|
|
|
Net operating loss
|
|
$
|
604,925
|
|
|
$
|
236,035
|
|
|
Less: valuation allowance
|
|
|
(604,925
|
)
|
|
|
(236,035
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As of August 31, 2013, and May 31, 2013 the Company had net operating loss carry-forwards of approximately $1,728,357 and $674,387, respectively, which may be used to offset future taxable income and begins to expire in 2033.
11. Related Party Balances and Transactions
On December 8, 2010, the Company issued 112,500,000 shares of common stock (post stock split) to the officers and directors of the Company for cash proceeds of $750.
During the period from November 3, 2010 (inception) through May 31, 2011, a stockholder advanced $13,525 to the Company for working capital purposes. These amounts were non-interest bearing, due on demand, and were repaid during the year ended May 31, 2011.
During the year ended May 31, 2012, the Company’s officer and director advanced $6,359 to the Company for working capital purposes.
On April 25, 2012, the Company’s previous officer and director agreed to lend the Company up to $100,000 over the next two years provided that at no time can the principal amount outstanding exceed $25,000. No interest accrued on the outstanding principal under the terms of this note. As of the resignation of the officer in March 2013, there was no outstanding balance. There were no obligations outstanding as of May 31, 2013.
In February 2013, a stockholder assumed the Company’s obligation to fulfill a sale of product from which the Company previously received $19,795. These amounts were offset against the stockholders advances.
During the year ended May 31, 2013 a previous officer advanced $4,686 for working capital purposes, assumed liabilities of $5,771 for the Company, and purchased a computer for $536 from the Company for which proceeds were netted against amounts owed to him. There were no further advances provided by that officer prior to his resigning. All obligations were settled as of March 28, 2013.
Total stockholder account forgiven was $36,075. No amounts are due to the stockholder as of May 31, 2013.
From inception until March 28, 2013, a former officer and director of the Company provided office space and other office administrative resources at no cost. Subsequent to March 28, 2013, the Company utilizes office space from Intertainment Media, Inc., through a service agreement.
On March 28, 2013, the Company purchased the Yappn assets from Intertainment Media, Inc. in consideration for 70,000,000 shares of common stock for a controlling 70 percent interest in the Company, The Chief Executive Officer and director of the Company, David Lucatch, and a Director of the Company, Herb Willer, are also Chief Executive Officer and directors of Intertainment Media, Inc.
On March 28, 2013, as part of the assets purchased the Company also assumed a technology services agreement with Ortsbo, a wholly-owned subsidiary of Intertainment Media, Inc. The service agreement requires the Company to pay cost plus thirty percent (30%) for actual cost incurred by Ortsbo in providing technology services. In addition, the Company shall pay to Ortsbo an ongoing revenue share which shall equal seven percent (7%) of the gross revenue generated by the Company’s activities utilizing the technology.
The Company pays for general development and managerial services performed by its parent, Intertainment Media, Inc., Services provided by Intertainment Media, Inc. personnel are invoiced on a per hour basis at a market rate per hour as determined by the type of activity and the skill set provided. Costs incurred by Intertainment Media, Inc. for third party purchases are invoiced at cost. Related party fees incurred and paid under this arrangement totaled $375,334 for the three months ended August 31, 2013. As the arrangement was not in effect as of August 31, 2012, there were no such charges for the three months ended August 31, 2012. After recording fees incurred under this arrangement a related party prepaid balance of $86,505 and $80,518, remained as of August 31, 2013 and May 31, 2013, respectively.
The Company agreed to issue 500,000 shares of common stock, valued at $75,000, to a provider of consulting services for past consulting obligations and in consideration of arrangements entered into for Intertainment Media, Inc. for prior and future obligations. The Company has reflected this transaction in stockholder’s equity as a subscription of the common stock and established a receivable due from Intertainment Media, Inc. which is reflected as a prepaid development and related expense of a related party on the condensed consolidated balance sheets. As of August 31, 2013 no commons stock has been issued.
12. Commitments and Contingencies
None.
13. Subsequent Events
On October 9, 2013 the Company, sold an 8% Convertible Note in the principal amount of $78,500 (the “Note”) pursuant to a Securities Purchase Agreement, which was executed on October 9, 2013. The Note matures on July 2, 2014 and has an interest rate of 8% per annum until the Note becomes due. Any amount of principal or interest on the Note which is not paid when due shall bear interest at the rate of 22% per annum from the due date thereof.
The Note may be converted into common stock of the Company at any time beginning on the 180th day of the date of the Note. However, the Note shall not be converted if the conversion would result in beneficial ownership by the holder of the Note and its affiliates to own more than 9.99% of the outstanding shares of the Company’s common stock. Such limitations on conversion may be waived by the Note holder upon with not less than 61 days’ prior notice to the Company. The conversion price is 61% of the average of the lowest three closing bid prices of the Company’s common stock for the ten trading days immediately prior to the conversion date.