U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
One)
☒
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal quarter ended February 28, 2015
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For
the transition period from _______ to _______
YAPPN
CORP.
(Exact
name of small business issuer as specified in its charter)
Delaware |
|
000-55082 |
|
27-3848069 |
(State
of Incorporation) |
|
(Commission
File Number) |
|
(IRS
Employer Identification No.) |
1001
Avenue of the Americas, 11th Floor
New
York, NY 10018
(Address
of principal executive offices) (Zip code)
888-859-4441
(Registrant’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.0001 par value per share
(Title
of Class)
Indicate
by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
☐ |
Accelerated
filer |
☐ |
Non-accelerated
filer |
☐ |
Smaller
reporting company |
☒ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There
were 132,688,139 shares outstanding of registrant’s common stock,
par value $0.001 per share, as of April 13, 2015.
Transitional
Small Business Disclosure Format Yes ☐ No ☒
TABLE
OF CONTENTS
PART I |
|
|
|
|
|
Item 1. |
Financial Statements |
3 |
|
Condensed Consolidated Balance Sheets as of February 28, 2015 (unaudited) and May 31, 2014 |
4 |
|
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended February 28, 2015 and 2014 (unaudited) |
5 |
|
Condensed Consolidated Statement of Stockholders’ Deficit for the nine months ended February 28, 2015 and May 31, 2014 (unaudited) |
6 |
|
Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2015 and 2014 (unaudited) |
7 |
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
8 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operation |
28 |
Item 3 |
Quantitative and Qualitative Disclosures About Market Risk |
37 |
Item 4 |
Controls and Procedures |
37 |
|
|
|
PART II |
|
|
|
|
|
Item 1. |
Legal Proceedings |
37 |
Item 1A. |
Rick Factors |
37 |
Item 2 |
Unregistered Sales of Equity Securities and Use of Proceeds |
37 |
Item 3 |
Defaults Upon Senior Securities |
38 |
Item 4. |
Mine Safety Disclosures |
38 |
Item 5. |
Other Information |
38 |
Item 6. |
Exhibits |
39 |
SIGNATURES |
41 |
PART
I
Item
1.
Interim
Financial Statements and Notes to Interim Financial Statements
General
The
accompanying reviewed interim financial unaudited statements have been prepared in accordance with the instructions to Form 10-Q.
Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results
of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. Except as disclosed
herein, there has been no material change in the information disclosed in the notes to the financial statements included in the
Company's annual report on Form 10-K for the year ended May 31, 2014. In the opinion of management, all adjustments considered
necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments
are of a normal recurring nature. Operating results for the three and nine months ended February 28, 2015 are not necessarily
indicative of the results that can be expected for the year ending May 31, 2015.
All references to “dollars”,
“$” or “US$” are to United States dollars and all references to “CAD$” are to Canadian dollars.
United States dollar equivalents of Canadian dollar figures are based on the exchange rate as reported by the Bank of Canada on
the applicable date.
YAPPN
CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
Note |
|
|
As of
February 28,
2015 |
|
|
(audited)
As of
May 31,
2014 |
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
$ |
10,131 |
|
|
$ |
988,692 |
|
Accounts receivable |
|
|
|
|
|
601,821 |
|
|
|
- |
|
Prepaid expenses |
|
|
|
|
|
26,320 |
|
|
|
3,310 |
|
Total current assets |
|
|
|
|
|
638,272 |
|
|
|
992,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment, net |
|
|
|
|
|
1,298 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
|
|
$ |
639,570 |
|
|
$ |
992,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
$ |
519,790 |
|
|
$ |
444,041 |
|
Accrued expenses |
|
|
|
|
|
411,977 |
|
|
|
141,176 |
|
Accrued development and related expenses - related party |
|
11 |
|
|
|
260,843 |
|
|
|
145,316 |
|
Short term loans |
|
4 |
|
|
|
250,116 |
|
|
|
477,311 |
|
Line of credit |
|
5 |
|
|
|
2,275,000 |
|
|
|
800,000 |
|
Convertible promissory notes and debentures |
|
6 |
|
|
|
1,137,378 |
|
|
|
100,846 |
|
Total current liabilities |
|
|
|
|
|
4,855,104 |
|
|
|
2,108,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liability |
|
9 |
|
|
|
280,462 |
|
|
|
2,531,282 |
|
Convertible promissory notes and debentures |
|
6 |
|
|
|
1,178,377 |
|
|
|
2,406,329 |
|
Total Liabilities |
|
|
|
|
|
6,313,943 |
|
|
|
7,046,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit |
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.0001 per share, 50,000,000 shares authorized: |
|
|
|
|
|
|
|
|
|
|
|
Series 'A' Convertible, 10,000,000 shares authorized; nil and 2,010,000 shares issued and outstanding |
|
8 |
|
|
|
- |
|
|
|
201 |
|
Common stock, par value $.0001 per share, 400,000,000 shares authorized: |
|
|
|
|
|
|
|
|
|
|
|
132,688,139 and 125,855,794, issued and outstanding, respectively |
|
7 |
|
|
|
13,269 |
|
|
|
12,586 |
|
Common stock, par value $.0001 per share, 993,444 and -0- shares subscribed not issued, respectively |
|
|
|
|
|
124,567 |
|
|
|
- |
|
Additional paid-in capital |
|
|
|
|
|
7,306,393 |
|
|
|
4,071,022 |
|
Deficit |
|
|
|
|
|
(13,118,602 |
) |
|
|
(10,138,108 |
) |
Total Stockholders' Deficit |
|
|
|
|
|
(5,674,373 |
) |
|
|
(6,054,299 |
) |
Total Liabilities And Stockholders' Deficit |
|
|
|
|
$ |
639,570 |
|
|
$ |
992,002 |
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
YAPPN
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (Unaudited)
|
|
|
|
|
Three Months Ended
February 28 |
|
|
Nine Months Ended
February 28 |
|
|
|
Note |
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
$ |
528,846 |
|
|
$ |
5,875 |
|
|
$ |
606,821 |
|
|
$ |
37,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
140,183 |
|
|
|
4,870 |
|
|
|
140,389 |
|
|
|
14,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
388,663 |
|
|
|
1,005 |
|
|
|
466,432 |
|
|
|
22,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
11 |
|
|
|
104,383 |
|
|
|
184,027 |
|
|
|
996,107 |
|
|
|
474,459 |
|
Research and development expenses |
|
11 |
|
|
|
100,759 |
|
|
|
338,048 |
|
|
|
597,490 |
|
|
|
1,006,984 |
|
General and administrative expenses |
|
11 |
|
|
|
300,435 |
|
|
|
195,666 |
|
|
|
1,020,468 |
|
|
|
660,409 |
|
Professional fees |
|
|
|
|
|
74,282 |
|
|
|
64,977 |
|
|
|
173,520 |
|
|
|
256,847 |
|
Consulting |
|
|
|
|
|
199,064 |
|
|
|
239,270 |
|
|
|
524,059 |
|
|
|
659,383 |
|
Depreciation |
|
|
|
|
|
57 |
|
|
|
- |
|
|
|
176 |
|
|
|
- |
|
Stock based compensation |
|
|
|
|
|
70,378 |
|
|
|
- |
|
|
|
679,179 |
|
|
|
- |
|
Total operating expenses |
|
|
|
|
|
849,358 |
|
|
|
1,021,988 |
|
|
|
3,990,999 |
|
|
|
3,058,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
(460,695 |
) |
|
|
(1,020,983 |
) |
|
|
(3,524,567 |
) |
|
|
(3,035,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
105,007 |
|
|
|
25,938 |
|
|
|
253,973 |
|
|
|
54,033 |
|
Financing expense on issuance of convertible notes and common stock |
|
|
|
|
|
362,069 |
|
|
|
121,454 |
|
|
|
942,574 |
|
|
|
2,164,530 |
|
Change in fair value of derivative liabilities and convertible notes |
|
|
|
|
|
485,051 |
|
|
|
(1,368,583 |
) |
|
|
(1,647,824 |
) |
|
|
(9,395,021 |
) |
Miscellaneous income |
|
|
|
|
|
(57,224 |
) |
|
|
(80,291 |
) |
|
|
(92,796 |
) |
|
|
(81,469 |
) |
Total other (income) expense |
|
|
|
|
|
894,903 |
|
|
|
(1,301,482 |
) |
|
|
(544,073 |
) |
|
|
(7,257,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before taxes |
|
|
|
|
|
(1,355,598 |
) |
|
|
280,499 |
|
|
|
(2,980,494 |
) |
|
|
4,222,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income and comprehensive (loss) income |
|
|
|
|
$ |
(1,355,598 |
) |
|
$ |
280,499 |
|
|
$ |
(2,980,494 |
) |
|
$ |
4,222,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per weighted-average shares of common stock - basic |
|
|
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.02 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per weighted-average shares of common stock - diluted |
|
|
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.02 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock issued and outstanding – basic |
|
|
|
|
|
131,058,806 |
|
|
|
100,300,000 |
|
|
|
128,258,862 |
|
|
|
100,274,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock issued and outstanding – diluted |
|
|
|
|
|
131,058,806 |
|
|
|
120,450,604 |
|
|
|
128,258,862 |
|
|
|
114,709,493 |
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
YAPPN
CORP.
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED)
For
the year ended May 31, 2014 and nine months ended February 28, 2015
| |
Common | | |
Preferred | | |
Additional | | |
| | |
| |
| |
Shares
Outstanding | | |
Amount | | |
Subscribed
Shares | | |
Subscribed
Amounts | | |
Shares
Outstanding | | |
Amount | | |
Paid-in
Capital | | |
Accumulated
Deficit | | |
Total | |
Balance - May 31, 2013 | |
| 100,000,000 | | |
| 10,000 | | |
| - | | |
| - | | |
| 7,710,000 | | |
| - | | |
| 64,997 | | |
| (7,496,635 | ) | |
| (7,421,638 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for consulting
services | |
| 1,900,000 | | |
| 190 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 215,521 | | |
| - | | |
| 215,711 | |
Issuance of Series A Convertible preferred
stock at par value ($0.0001) and warrants | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,650,000 | | |
| - | | |
| - | | |
| - | | |
| - | |
Issuance of common stock for licensing
rights | |
| 1,666,667 | | |
| 167 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 133,166 | | |
| - | | |
| 133,333 | |
Issuance of common stock for technology | |
| 13,333,333 | | |
| 1,333 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,333 | ) | |
| - | | |
| - | |
Issuance of warrants classified as equity | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,609,256 | | |
| - | | |
| 2,609,256 | |
Imputed interest on short term loan | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 27,799 | | |
| - | | |
| 27,799 | |
Issuance of common stock on conversion
of Series A Preferred stock | |
| 7,350,000 | | |
| 735 | | |
| - | | |
| - | | |
| (7,350,000 | ) | |
| - | | |
| 734,265 | | |
| - | | |
| 735,000 | |
Issuance of common shares on conversion
of convertible debt | |
| 1,605,794 | | |
| 161 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 86,552 | | |
| - | | |
| 86,713 | |
Reclassification of preferred stock from
derivative liability | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 201 | | |
| 200,799 | | |
| - | | |
| 201,000 | |
Net loss for the
year ended May 31, 2014 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,641,473 | ) | |
| (2,641,473 | ) |
Balance - May 31, 2014 | |
| 125,855,794 | | |
| 12,586 | | |
| - | | |
| - | | |
| 2,010,000 | | |
| 201 | | |
| 4,071,022 | | |
| (10,138,108 | ) | |
| (6,054,299 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Reclassification of warrant liabilities
to equity | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,616,121 | | |
| - | | |
| 1,616,121 | |
Issuance of warrants classified as equity | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 37,100 | | |
| - | | |
| 37,100 | |
Stock options issued | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 679,179 | | |
| - | | |
| 679,179 | |
Stock to be issued under prior obligations | |
| - | | |
| - | | |
| 993,444 | | |
| 124,567 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 124,567 | |
Beneficial conversion feature | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 622,636 | | |
| - | | |
| 622,636 | |
Stock issued for consulting services | |
| 1,750,000 | | |
| 175 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 174,825 | | |
| - | | |
| 175,000 | |
Issuance of common stock on conversion
of Series A Preferred stock | |
| 2,010,000 | | |
| 201 | | |
| - | | |
| - | | |
| (2,010,000 | ) | |
| (201 | ) | |
| - | | |
| - | | |
| - | |
Issuance of common stock on conversion
of convertible debt | |
| 3,072,345 | | |
| 307 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 105,510 | | |
| - | | |
| 105,817 | |
Net loss (income) for the period
ended February 28, 2015 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,980,494 | ) | |
| (2,980,494 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - February
28, 2015 | |
| 132,688,139 | | |
| 13,269 | | |
| 993,444 | | |
| 124,567 | | |
| - | | |
| - | | |
| 7,306,393 | | |
| (13,118,602 | ) | |
| (5,674,373 | ) |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
YAPPN
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months
ended
February 28,
2015 |
|
|
For the Nine Months
ended
February 28,
2014 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
Net (loss) income and comprehensive (loss) income |
|
$ |
(2,980,494 |
) |
|
$ |
4,222,126 |
|
Adjustments to reconcile net (loss) income to cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
176 |
|
|
|
- |
|
Stock based compensation |
|
|
679,179 |
|
|
|
- |
|
Change in fair value of derivative liabilities and convertible notes |
|
|
(1,647,824 |
) |
|
|
(9,395,021 |
) |
Financing expense on issuance of convertible notes, and common stock |
|
|
942,574 |
|
|
|
2,125,655 |
|
Stock issuance for consulting services and licensing rights |
|
|
175,000 |
|
|
|
367,044 |
|
Imputed interest expense on loan |
|
|
- |
|
|
|
25,132 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(601,821 |
) |
|
|
(6,254 |
) |
Prepaid development and related expenses - related party |
|
|
- |
|
|
|
80,518 |
|
Prepaid expenses |
|
|
(23,010 |
) |
|
|
8,395 |
|
Accounts payable and accrued liabilities |
|
|
346,550 |
|
|
|
327,072 |
|
Accrued development and related expense - related party |
|
|
115,527 |
|
|
|
172,520 |
|
Net Cash Used in Operating Activities |
|
|
(2,994,143) |
|
|
|
(2,072,813) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,593 |
) |
|
|
- |
|
Net Cash Used in Investing Activities |
|
|
(1,593 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from convertible notes and debentures |
|
|
840,339 |
|
|
|
1,889,901 |
|
Proceeds from line of credit, net |
|
|
1,475,000 |
|
|
|
- |
|
Repayments of short term loans |
|
|
(358,678 |
) |
|
|
- |
|
Proceeds from short term loans |
|
|
264,607 |
|
|
|
- |
|
Repayment of convertible notes and debentures |
|
|
(204,093 |
) |
|
|
- |
|
Proceeds from the issuance of preferred stock and warrants |
|
|
- |
|
|
|
165,000 |
|
Net Cash Provided by Financing Activities |
|
|
2,017,175 |
|
|
|
2,054,901 |
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash |
|
|
(978,561 |
) |
|
|
(17,912 |
) |
Cash, beginning of period |
|
|
988,692 |
|
|
|
217,037 |
|
Cash, end of period |
|
$ |
10,131 |
|
|
$ |
199,125 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Cash Investing and Financing Activities Information: |
|
|
|
|
|
|
|
|
Reclassification of derivative liabilities to additional paid in capital |
|
$ |
1,653,222 |
|
|
$ |
- |
|
Common stock issuances for consulting services |
|
$ |
175,000 |
|
|
$ |
42,000 |
|
Common stock to be issued for consulting and other obligations |
|
$ |
124,567 |
|
|
$ |
325,044 |
|
Common stock issuance from conversions of convertible debt |
|
$ |
105,817 |
|
|
$ |
- |
|
Conversion of short term loans |
|
$ |
100,000 |
|
|
$ |
- |
|
Cash paid for interest during the nine month period |
|
$ |
127,626 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
YAPPN
CORP.
Notes
to Condensed Consolidated Financial Statements
February
28, 2015
(Unaudited)
All
references to “dollars”, “$” or “US$” are to United States dollars and all references to “Canadian”
are to Canadian dollars. United States dollar equivalents of Canadian dollar figures are based on the exchange rate as reported
by the Bank of Canada on the applicable date.
1.
Summary of Significant Accounting Policies
Basis
of Presentation and Organization
Yappn
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 effective unique and proprietary tools and services that create
dynamic solutions that enhance a brand’s messaging, media, e-commerce and support platforms. The Company has offices in
the United States 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 shares of common stock of the Company. As a result of this exchange, Intertainment
Media Inc. acquired, at that time, 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 Condensed Consolidated Financial Statements
The
interim condensed consolidated financial statements (“interim financial statements”) of the Company as of February
28, 2015, and for the three and nine month periods ended February 28, 2015 and 2014, 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 February 28, 2015, and the results of its operations and its cash
flows for the three and nine month periods ended February 28, 2015 and February 28, 2014. These results are not necessarily indicative
of the results expected for the fiscal year ending May 31, 2015. The accompanying interim 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 consolidated financial statements as of May 31, 2014 filed with the Securities and Exchange Commission, for additional
information including significant accounting policies.
Principles
of Consolidation
The
interim 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.
Cash
and Cash Equivalents
For
purposes of reporting within the interim 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.
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.
Cost
of Revenue
The
cost of revenue consists primarily of expenses associated with the delivery and distribution of services. These include expenses
related to the operation of data centers, salaries, benefits and customer project based costs for certain personnel in the Company’s
operations.
Marketing,
Advertising and Promotion Costs
Advertising
and marketing costs are expensed as incurred and totaled $104,383 and $184,027 for the three months ended February 28, 2015 and
February 28, 2014, respectively and totaled $996,107 and $474,459 for the nine months ended February 28, 2015 and February 28,
2014.
Income
(Loss) per Common Share
Basic
income (loss) per common share is computed by dividing the net income (loss) attributable to the common stockholders by the weighted
average number of shares of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic
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 February 28,
2015, the Company had outstanding five year warrants to purchase an additional 55,026,666 shares of common stock (note 8) at a
per share exercise price ranging from $0.054 to $0.22, 5,436,667 stock options (note 10) that have vested with an exercise price
of $0.10, and convertible notes and debentures that are convertible into 21,856,666 shares of common stock at the option of the
holder based on the value of the debt host at the time of conversion with exercise prices ranging from $0.10 to $0.15. All of
these issuances have 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 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 condensed consolidated
statements of operations and comprehensive income (loss). There have been no penalties or interest related to unrecognized tax
benefits reflected in the condensed consolidated statements of operations and comprehensive loss for the three and nine months
ended February 28, 2015 and February 28, 2014.
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 (“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 warrants (Notes 8
and 9) and the convertible promissory notes and debentures (Note 6) are classified as Level 2 financial liabilities.
As
of February 28, 2015 and May 31, 2014, the carrying value of accounts receivable, accounts payable, accrued expenses, short term
loans, accrued development and related expenses and line of credit approximated fair value due to the short-term nature of these
instruments.
Fair
Value of Derivative Instruments, Preferred Stock and Warrants
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. Both the preferred stock and the warrant initially
had price protection provisions and when such provisions are present, the instruments 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. The Company also issued
other five year warrants as part of subscription agreements that included convertible promissory notes, debentures and line of
credit, some of which have similar price protection provisions that expire after twelve months. Upon expiration of the price protection,
the instruments will be treated as an equity instrument. The Series A Preferred Stock ratchet provisions ended after twelve months
and as such any unconverted preferred shares were no longer treated as a liability, but as an equity instrument.
In
the event the Company has exceeded its authorized number of common stock issuable on a diluted basis, the Company applies the
earliest issuance date sequencing approach to determine which derivatives recorded in additional paid in capital, require reclassification
to financial liabilities. Under the earliest issuance date sequencing approach, the financial instruments recorded in equity that
have stock issuable in commons stock (excluding stock options) earlier than the date of the breach of the authorized stock limit
continue to be classified as a component of additional paid in capital. All derivatives that are issuable into common stock (other
than stock options) issued subsequent to the breach of the authorized stock limit on a diluted basis, are recorded as financial
liabilities. Upon a rectification of the breach of the authorized stock limit, those instruments that would otherwise be recorded
as component of additional paid in capital, will be reclassified to additional paid in capital at the time of the rectification.
When
applicable, the 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 condensed consolidated
statements of operations and comprehensive loss.
Hybrid
Financial Instruments
The
Company elected to apply the fair value option to account for its hybrid financial instruments. The Company made an irrevocable
election to measure such hybrid financial instruments at fair value in their entirety, with changes in fair value recognized in
earnings at each balance sheet date. The election may be made on an instrument by instrument basis.
Fair
Value of Convertible Promissory Notes and Debentures
The
Company has issued convertible promissory notes and debentures that are convertible into common stock, at the option of the holder,
at conversion prices based on the trading price per share over a period of time. As a result of the variability in the amount
of common stock to be issued, these instruments are reflected at fair value. These instruments are measured at the greater of
the present value of the note discounted at market rates or using a binomial lattice valuation methodology and are included in
the condensed consolidated balance sheets under the caption “convertible promissory notes and debentures”. Any unrealized
and realized gains and losses related to the convertible promissory notes are recorded based on the changes in the fair values
and are reflected as change in fair value of derivatives and convertible notes on the condensed consolidated statements of operations
and comprehensive loss.
Estimates
The
interim financial statements are prepared on the basis of accounting principles generally accepted in the United States. The preparation
of interim 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.
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 and convertible notes and the 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 the prior period presented have been reclassified to conform to the current period classification. These reclassifications
have no effect on the previously reported net loss.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09: Revenue from Contracts with Customers. The standard outlines
a five-step model for revenue recognition with the core principle being that a company should recognize revenue when it transfers
control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange
for those goods or services. Companies can choose to apply the standard using either the full retrospective approach or a modified
retrospective approach. Under the modified approach, financial statements will be prepared for the year of adoption using the
new standard but prior periods presented will not be adjusted. Instead, companies will recognize a cumulative catch-up adjustment
to the opening balance of retained earnings. This new guidance is effective for annual reporting periods beginning after December
15, 2016, including interim periods within that reporting period. The Company has not yet made a determination as to the method
of application (full retrospective or modified retrospective). It is too early to assess whether the impact of the adoption of
this new guidance will have a material impact on the Company's results of operations or financial position.
“Development
Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements” (“ASU 2014-10”) issued
in June 2014, ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements,
including the elimination of inception-to-date information on the statement of operations, cash flows and stockholder’s
equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15,
2014, and interim periods within those annual periods, however early adoption is permitted. The Company has adopted ASU 2014-10
for its financial statements for the year ended May 31, 2015 beginning with the quarter ended August 31, 2014.
On
August 27, 2014 the FASB issued a new financial accounting standard on going concern, Update 2014-15, “Presentation of Financial
Statements – Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern.” The standard provides guidance about management’s responsibility to evaluate whether there is substantial
doubt about the organization’s ability to continue as a going concern. The amendments in this update apply to all companies.
They become effective in the annual period ending after December 15, 2016, with early application permitted. The Company is currently
evaluating the impact of this accounting standard.
In November 2014, the FASB issued Accounting
Standard Update (“ASU”) 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the
Form of a Share Is More Akin to Debt or to Equity. The ASU clarifies how current guidance should be interpreted in evaluating the
economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically,
the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivatives feature
being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective for fiscal years and interim
period beginning after December 15, 2015. The Company is currently assessing the impact, if any, of implementing this guidance
on its consolidated financial position, results of operations and liquidity.
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 incurred a deficit of $13,118,602
through February 28, 2015.
As of February 28, 2015, the Company
had a working capital deficit of $4,216,832. During the nine months ended February 28, 2015, net cash used in operating activities
was $2,994,143. The Company expects to have similar cash needs for the next three months. At the present time, the Company does
not have sufficient funds to fund operations over the next twelve months.
Implementation
of our business plan will require additional debt or equity financing and there can be no assurance that additional financing
can be obtained on acceptable terms. We have limited revenues to cover our operating costs. As such, we have incurred an operating
loss since inception. This and other factors raise substantial doubt about our ability to continue as a going concern. Our continuation
as a going concern is dependent on our ability to meet our obligations, to obtain additional financing as may be required and
ultimately to attain profitability. Our financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
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. The Company continues to work on generating operating
cash flows from the commercialization of its software platform. Until those cash flows are sufficient the Company will pursue
other financing when deemed necessary.
The
Company is pursuing a number of different financing opportunities in order to execute its business plan. These include, short
term debt arrangements, convertible debt arrangements, common share equity financings, either through a private placement or through
the public markets and has engaged a number of investment brokers to assist management in achieving its financing objectives.
During the nine months ended February 28, 2015, the Company raised $2,017,175 through various financial instruments net of repayments.
There
can be no assurance that the raising of future equity or debt 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 revenues are attributed to a small number of customers.
4.
Short Term Loans
On
April 1, 2014, the Company entered into a short term loan for $219,480 (Canadian $240,000) with a private investor. The Company
previously converted a portion of a previous loan from this lender (Canadian $350,000), from a prior fiscal year, into a convertible
debenture. The loan had a maturity of July 10, 2014 with an interest rate of 1% per month. The Company repaid $46,025 (Canadian
$50,000) of this loan on June 13, 2014 leaving $175,330 ($190,000 Canadian) outstanding. As at February 28, 2015, the loan had
a value of $151,740.
On
January 7, 2014, the Company borrowed $253,200 (Canadian $280,000) from a private investor. The loan had a term of three months
and had an interest rate of 12% per annum payable at the maturity date. A preparation fee of 10% or $25,300 (Canadian $28,000)
was paid at inception. The loan was extended past its due date of April 7, 2014 and is accruing interest without penalty until
payment. On June 12, 2014, the Company repaid $142,056 (Canadian $152,000) against the loan and on June 27, 2014 $90,777 (Canadian
$100,000) was retired and contributed to a subscription agreement for Units that included an unsecured 6% convertible debenture,
$1,000 par value, convertible into shares of the Company’s common stock and 1,666,667 issuable shares of common stock (Series
C warrants) at a purchase price of $0.22 per share (Note 6). As at February 28, 2015 an amount of $22,395 ($28,000 Canadian) remains
outstanding.
On
January 9, 2014, the Company borrowed $271,200 (Canadian $300,000) from a private investor. The loan had an initial term of six
weeks and had an interest rate of 12% per annum payable at the maturity date. A preparation fee of 5% or $13,500 (Canadian $15,000)
was paid at inception. The loan was extended past its due date of February 24, 2014. The loan was fully repaid on May 8, 2014
including interest of $7,426.
On July 17, 2014 the Company borrowed
$100,915 (Canadian $110,000) from a private investor in the form of a short term loan due on December 31, 2014. This loan carries
a 1% arrangement fee and an interest rate of 1% per month. During the nine month period $ 77,145 (Canadian $90,000) was repaid
on this note. As of February 28, 2015, the value of the loan was $15,996 (Canadian $20,000).
On
July 23, 2014, the Company borrowed $50,234 (Canadian $53,750) from a private investor in the form of a bridge loan with combined
loan and interest fees of $5,841 (Canadian $6,250). This loan and the fees were repaid in full on August 5, 2014.
On August 4, 2014, the Company borrowed
$93,458 (Canadian $100,000) in the form of a bridge loan from a private investor, with combined origination fees and interest of
$3,210 (Canadian $3,500), due on August 14, 2014. The Company repaid $22,768 (Canadian $25,000) of this loan on August 25, 2014.
As of February 28, 2015, the value of the remaining balance of the loan was $59,985 (Canadian $75,000).
During
August 2014, the Company received a total of $125,000 from intended subscribers for convertible debentures, which closed on September
2, 2014. The Company treated these as short term loans where interest is accrued at 6% (same rate as the convertible debenture)
for each lender from the date of the loan to the date of the subscription for the convertible debenture.
On January 23, 2015, the Company borrowed
$16,098 ($20,000 Canadian) in the form of a bridge loan from a private investor with a financing fee of $1,610 ($2,000 Canadian).
This loan was paid back on January 26, 2015.
The
following is a summary of Short Term Loans:
Principal amounts |
|
Twelve Month Term Loan |
|
|
Three Month Term Loan |
|
|
Other Loans |
|
|
Total |
|
Borrowing on July 10, 2013 |
|
$ |
336,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
336,000 |
|
Borrowing on January 7, 2014 |
|
|
- |
|
|
|
253,200 |
|
|
|
- |
|
|
|
253,200 |
|
Borrowing on January 9, 2014 |
|
|
- |
|
|
|
- |
|
|
|
271,200 |
|
|
|
271,200 |
|
Total |
|
|
336,000 |
|
|
|
253,200 |
|
|
|
271,200 |
|
|
|
860,400 |
|
Fair value adjustments and accrued interest |
|
|
(15,841 |
) |
|
|
3,952 |
|
|
|
- |
|
|
|
(11,889 |
) |
Repayments |
|
|
- |
|
|
|
- |
|
|
|
(271,200 |
) |
|
|
(271,200 |
) |
Conversions |
|
|
(100,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(100,000 |
) |
Fair value at May 31, 2014 |
|
|
220,159 |
|
|
|
257,152 |
|
|
|
- |
|
|
|
477,311 |
|
Borrowing on July 17, 2014 |
|
|
- |
|
|
|
- |
|
|
|
100,915 |
|
|
|
100,915 |
|
Borrowing on July 23, 2014 |
|
|
- |
|
|
|
- |
|
|
|
50,234 |
|
|
|
50,234 |
|
Borrowing on August 4, 2014 |
|
|
- |
|
|
|
- |
|
|
|
93,458 |
|
|
|
93,458 |
|
Borrowings in August 2014 (multiple dates) |
|
|
- |
|
|
|
- |
|
|
|
125,000 |
|
|
|
125,000 |
|
Borrowing on January 23, 2015 |
|
|
|
|
|
|
|
|
|
|
16,098 |
|
|
|
16,098 |
|
Total |
|
|
- |
|
|
|
- |
|
|
|
385,705 |
|
|
|
385,705 |
|
Fair value adjustments |
|
|
(22,394 |
) |
|
|
(1,474 |
) |
|
|
(51,919 |
) |
|
|
(75,787 |
) |
Repayments |
|
|
(46,025 |
) |
|
|
(142,506 |
) |
|
|
(132,805 |
) |
|
|
(321,336 |
) |
Conversions |
|
|
- |
|
|
|
(90,777 |
) |
|
|
(125,000 |
) |
|
|
(215,777 |
) |
Fair value at February 28, 2015 |
|
$ |
151,740 |
|
|
$ |
22,395 |
|
|
$ |
75,981 |
|
|
$ |
250,116 |
|
5.
Line of Credit - Loan Agreement and Promissory Note
On
March 26, 2014, the Company received an advance in the amount of $150,000 on a loan agreement and promissory note, finalized on
April 7, 2014, whereby the Company can borrow up to $3,000,000 from a third party lender. The loan agreement is for an initial
two year term subject to the lender’s right to demand repayment of the outstanding balance. It carried a one-time arrangement
fee of $60,000 recognized as a financing expense at origination, carries an interest rate of 12% per annum and a 1% draw down
fee on each draw. Pursuant to the loan agreement, the Company issued the lender warrants to purchase up to 8,000,000 shares of
the Company’s common stock at an exercise price of $0.10. Upon the Company’s first draw down of $200,000 from the
line of credit, 2,000,000 five year warrants vest. For each subsequent $100,000 the Company draws, 1,000,000 five year warrants
will vest until the 8,000,000 warrants are vested. The Company’s common stock that are issuable on the exercise of warrants
will be granted registration rights, allowing the shares to be sold, once registration occurs. In addition, the Company entered
into a general security agreement with the lender to which it granted the lender a first position security interest in all of
its assets and in the event of default under the security agreement or the promissory note, the lender may foreclose on the assets
of the Company.
During
the year ended May 31, 2014, the Company borrowed $800,000 from the lender without any repayments and the 8,000,000 warrants issued
to the lender on April 7, 2014 became fully vested. The warrants were valued at $1,495,200 and were reflected as a financing expense
and reported on the Company’s condensed consolidated statements of operations and comprehensive loss below operating income
as an “other expense” for the year ended May 31, 2014.
From
June 1, 2014 to February 28, 2015, the Company drew $1,900,155 against the line of credit and repaid $425,155 resulting in a net
additional amount of $1,475,000 and an outstanding obligation of $2,275,000 at February 28, 2014.
6.
Convertible Promissory Notes and Debentures
The Company has issued various convertible
notes and debentures with various terms. As a result of the variability in the amount of shares of common stock to be issued in
accordance with conversion price protection clauses, the Company has recorded these instruments as liabilities at fair value.
The Company has determined the convertible notes and debentures to be Level 2 fair value measurement and has used the binominal
lattice pricing model to calculate the fair value as of February 28, 2015, May 31, 2014, and the commitment date.
The
following is a summary of the convertible promissory notes and debentures as of February 28, 2015:
Principal amounts: |
|
JMJ
Financial
Notes |
|
|
Convertible Debentures |
|
|
Other
Notes |
|
|
Total |
|
Borrowing on October 9, 2013 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
78,500 |
|
|
$ |
78,500 |
|
Borrowing on November 15, 2013 |
|
|
65,000 |
|
|
|
- |
|
|
|
- |
|
|
|
65,000 |
|
Borrowing on December 12, 2013 |
|
|
- |
|
|
|
- |
|
|
|
42,500 |
|
|
|
42,500 |
|
Borrowing on February 21, 2014 |
|
|
40,000 |
|
|
|
- |
|
|
|
- |
|
|
|
40,000 |
|
Borrowing on December 17, 2013 |
|
|
- |
|
|
|
- |
|
|
|
50,000 |
|
|
|
50,000 |
|
Borrowing on January 29, 2014 |
|
|
- |
|
|
|
395,000 |
|
|
|
- |
|
|
|
395,000 |
|
Borrowing on February 27, 2014 |
|
|
- |
|
|
|
305,000 |
|
|
|
- |
|
|
|
305,000 |
|
Borrowing on April 1, 2014 |
|
|
- |
|
|
|
469,000 |
|
|
|
- |
|
|
|
469,000 |
|
Borrowing on April 16, 2014 |
|
|
40,000 |
|
|
|
- |
|
|
|
- |
|
|
|
40,000 |
|
Borrowing on April 23, 2014 |
|
|
- |
|
|
|
50,000 |
|
|
|
- |
|
|
|
50,000 |
|
Borrowing on May 30, 2014 |
|
|
- |
|
|
|
1,000,000 |
|
|
|
- |
|
|
|
1,000,000 |
|
Conversions |
|
|
(65,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(65,000 |
) |
Repayments |
|
|
- |
|
|
|
- |
|
|
|
(78,500 |
) |
|
|
(78,500 |
) |
Total Borrowings at May 31, 2014 |
|
|
80,000 |
|
|
|
2,219,000 |
|
|
|
92,500 |
|
|
|
2,391,500 |
|
Borrowing on June 27, 2014 |
|
|
- |
|
|
|
250,000 |
|
|
|
- |
|
|
|
250,000 |
|
Borrowing on September 2, 2014 |
|
|
- |
|
|
|
125,000 |
|
|
|
- |
|
|
|
125,000 |
|
Borrowing on September 3, 2014 |
|
|
50,000 |
|
|
|
- |
|
|
|
- |
|
|
|
50,000 |
|
Borrowing on October 6, 2014 |
|
|
- |
|
|
|
50,000 |
|
|
|
- |
|
|
|
50,000 |
|
Borrowing on October 22, 2014 |
|
|
40,000 |
|
|
|
- |
|
|
|
- |
|
|
|
40,000 |
|
Borrowing on October 27, 2014 |
|
|
- |
|
|
|
50,000 |
|
|
|
- |
|
|
|
50,000 |
|
Borrowing on December 24, 2014 |
|
|
- |
|
|
|
- |
|
|
|
75,000 |
|
|
|
75,000 |
|
Borrowing on December 24, 2014 |
|
|
- |
|
|
|
- |
|
|
|
100,000 |
|
|
|
100,000 |
|
Borrowing on December 29, 2014 |
|
|
- |
|
|
|
- |
|
|
|
50,000 |
|
|
|
50,000 |
|
Borrowing on February 4, 2015 |
|
|
- |
|
|
|
- |
|
|
|
115,000 |
|
|
|
115,000 |
|
Borrowing on February 9, 2015 |
|
|
- |
|
|
|
- |
|
|
|
90,750 |
|
|
|
90,750 |
|
Conversions |
|
|
(80,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(80,000 |
) |
Repayments |
|
|
(90,000 |
) |
|
|
- |
|
|
|
(92,500 |
) |
|
|
(182,500 |
) |
Total Borrowings at February 28, 2015 |
|
$ |
- |
|
|
$ |
2,694,000 |
|
|
$ |
430,750 |
|
|
$ |
3,124,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes and debt at fair value at commitment date |
|
$ |
295,111 |
|
|
$ |
2,086,720 |
|
|
$ |
191,226 |
|
|
$ |
2,573,057 |
|
Change in fair value |
|
|
(100,968 |
) |
|
|
177,420 |
|
|
|
(25,777 |
) |
|
|
50,675 |
|
Repayments |
|
|
- |
|
|
|
- |
|
|
|
(64,603 |
) |
|
|
(64,603 |
) |
Conversions to common stock |
|
|
(51,954 |
) |
|
|
- |
|
|
|
- |
|
|
|
(51,954 |
) |
Convertible notes and debt at fair value at May 31, 2014 |
|
|
142,189 |
|
|
|
2,264,140 |
|
|
|
100,846 |
|
|
|
2,507,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes and debt at fair value at the commitment date |
|
|
137,071 |
|
|
|
436,887 |
|
|
|
656,507 |
|
|
|
1,230,465 |
|
Change in fair value (from May 31 or Fiscal 2015 commitment date) |
|
|
(70,223 |
) |
|
|
(890,751 |
) |
|
|
(116,823) |
|
|
|
(1,077,797) |
|
Repayments (cash) |
|
|
(103,220 |
) |
|
|
- |
|
|
|
(135,051 |
) |
|
|
(238,271 |
) |
Conversions to common stock |
|
|
(105,817 |
) |
|
|
- |
|
|
|
- |
|
|
|
(105,817 |
) |
Convertible notes and debt at fair value at
February 28, 2015 |
|
$ |
- |
|
|
$ |
1,810,276 |
|
|
$ |
505,479 |
|
|
$ |
2,315,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
100,846 |
|
|
$ |
100,846 |
|
Long term |
|
|
142,189 |
|
|
|
2,264,140 |
|
|
|
- |
|
|
|
2,406,329 |
|
|
|
$ |
142,189 |
|
|
$ |
2,264,140 |
|
|
$ |
100,846 |
|
|
$ |
2,507,175 |
|
Balance at February 28, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
- |
|
|
$ |
631,899 |
|
|
$ |
505,479 |
|
|
$ |
1,137,378 |
|
Long term |
|
|
- |
|
|
|
1,178,377 |
|
|
|
- |
|
|
|
1,178,377 |
|
|
|
$ |
- |
|
|
$ |
1,810,276 |
|
|
$ |
505,479 |
|
|
$ |
2,315,755 |
|
Asher Enterprises, Inc.
On October 9, 2013, the Company sold
an 8% Convertible Note to Asher Enterprises, Inc. in the principal amount of $78,500 pursuant to a Securities Purchase Agreement,
which was executed on October 9, 2013. The Convertible Note may be converted into shares of common stock of the Company at any
time beginning on the 180th day of the date from issuance. The conversion price is 61% of the average of the lowest three closing
bid prices of the Company’s shares of common stock for the ten trading days immediately prior to the conversion date. The
Convertible Note has a stated maturity date of July 2, 2014 and had an interest rate of 8% per annum until it becomes due. On March
28, 2014, the Company paid approximately $109,000 to settle in full the outstanding balance of $78,500, a prepayment fee and related
interest on the Convertible Note.
On December 12, 2013, the Company sold
an 8% Convertible Note to Asher Enterprises, Inc. in the principal amount of $42,500 pursuant to a Securities Purchase Agreement
which was executed on December 4, 2013. The Convertible Note may be converted into shares of common stock of the Company at any
time beginning on the 180th day of the date from issuance. The conversion price is 61% of the average of the lowest three closing
bid prices of the Company’s shares of common stock for the ten trading days immediately prior to the conversion date. The
Convertible Note matures on September 6, 2014 and has an interest rate of 8% per annum until it becomes due. Any amount of principal
or interest which is not paid when due, shall bear interest at the rate of 22% per annum from the due date thereof. On June 10,
2014, the Company paid $59,051 to settle in full the outstanding balance of $42,500, prepayment fee and related interest on the
Convertible Note.
JMJ Financial
On November 15, 2013, the Company executed
and issued a Convertible Promissory Note agreement with JMJ Financial in the principal amount of $500,000, with a $50,000 original
issue discount that shall be ratably applied towards payments made by the investor and forms part of the amount qualifying for
conversion. On November 15, 2013, the Company borrowed $65,000 against the Note. The agreement was amended on February 21, 2014
and applies retroactively to the date of issuance. The Convertible Promissory Note is due two years from the effective date of
each payment. It is interest free if repaid within 90 days and if not paid within 90 days, it bears a one-time interest charge
of 12%, which is in addition to the original issue discount. The Company agreed to pay a closing and due diligence fee of 8% of
each payment made by the investor which shall be applied to the principal amount of the Convertible Promissory Note. After 90 days
from the effective date and until the maturity date the Company may not make further payments on the note without written approval.
After 180 days from issuance, the principal and any accrued interest are convertible into the Company’s common stock at the
lower of $0.10 per share or 60% of the lowest trade price in the 25 days prior to conversion. The note has piggyback registration
rights with respect to the shares into which the note is convertible. On February 21, 2014 the Company borrowed an additional $40,000
against the Note and on April 16, 2014 the Company borrowed an additional $40,000 against the Note. During May of 2014, JMJ Financial
elected to convert the $65,000 principal, original issue discount, due diligence fees and interest accrued in exchange for 1,605,794
common shares (Note 7). On September 3, 2014 the Company borrowed an additional $50,000 against the Note and on October 22, 2014
the Company borrowed an additional $40,000 against the Note. During September of 2014, JMJ Financial elected to convert $40,000
in principal, original issue discount, due diligence fees and interest accrued in exchange for 1,111,704 common shares (Note 7).
During the same quarter of 2014, JMJ Financial elected to convert an additional $40,000 in principal, original issue discount,
due diligence fees and interest accrued in exchange for 1,960,641 common shares (Note 7). On December 12, 2014 the Company repaid
$50,000 plus original issue discount from the September 3, 2014 borrowings. On January 23, 2015 the Company repaid $40,000 plus
original issue discount from the October 27, 2014 borrowing. On February 10, 2015 the note and associated share reserve was cancelled.
JSJ Investment Inc.
On December 24, 2014, the Company
sold a Convertible Note in the principal amount of $100,000 to JSJ Investments Inc. The Convertible Note matures on June 23,
2015 and has an interest rate of 15% per annum payable at maturity. The note may be converted into shares common stock of the
Company on or after the maturity date at a conversion price of 50% of the lowest 15 days prior to conversion or 10 cents.
Early payback penalties are 140% from 120-150 days and 150% up to the maturity date of the note.
LG Capital Funding, LLC
On December 24, 2014, the Company sold
a Convertible Note in the principal amount of $75,000. The Convertible Note matures on December 24, 2015 and has an interest rate
of 8% per annum. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of
the date of the note at a conversion price of 55% of the average of 2 lowest closing bid prices from the 10 days prior to conversion.
Early payback penalties are 150% and payback is eligible up to 180 days from the inception of the note.
Vista Capital Investments, LLC
On December 29, 2014, the Company sold
a Convertible Note in the principal amount of $110,000, 10% original issuance discount and advanced $50,000 on closing. The Convertible
Note matures on December 29, 2015 and has a one time interest charge of 12%. The note may be converted into shares of common stock
of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 60% of the lowest trading
price from the 25 days prior to conversion or 10 cents. Early payback penalties are 125% up to 90 days and 145% after 90 days.
Typenex Co-Investments, LLC
On February 4, 2015, the Company sold
a Convertible Note in the principal amount of $115,000, 10% original issuance discount. The Convertible Note matures on January
4, 2016 and has an interest rate of 10% per annum. The note may be converted into common stock at an exercise price of 10 cents
per share six months after the sale of the Note. The Company can repay the Note within the first six months at a penalty of 125%
of principal amount. After 6 months, repayments can be made on an installment basis, either in cash (plus OID), or in shares of
common stock, and if paid in shares of common stock it is at a discount to market which is 70% of market price with a look back.
The installments must be made on a monthly schedule if the lender does not convert at their option at the exercise price of 10
cent per share price. Included in this financing was 700,000 fixed price warrants at an exercise price of 10 cents per share with
no price protection. The warrants were recorded at a value of $37,100 in additional paid-in capital (Note 8).
Iconic
Holdings, LLC
On February 9, 2015, the Company sold
a Convertible Note in the face value of $220,000, 10% original issuance discount and advanced $90,750 on closing. The Convertible
Note matures on February 9, 2016 and has a guaranteed interest rate on the principal balance of 10%. The note may be converted
into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price
of 60% of the lowest average daily trading price from the 25 days prior to conversion or 10 cents. Early payback penalties are
115% from 1-60 days, 125% between 61 and 120 days, 130% between 121 and 180 days, and may not be paid back after 180 days without
consent from the Holder.
Accounting
allocation of initial proceeds: |
|
Second
Quarter Fiscal 2014 |
|
|
Third
Quarter Fiscal 2014 |
|
|
Fourth
Quarter Fiscal 2014 |
|
|
Second
Quarter Fiscal 2015 |
|
|
Third
Quarter Fiscal 2015 |
|
Gross
proceeds |
|
$ |
65,000 |
|
|
$ |
40,000 |
|
|
$ |
40,000 |
|
|
$ |
90,000 |
|
|
$ |
430,750 |
|
Fair value
of promissory notes |
|
|
(142,812 |
) |
|
|
(54,286 |
) |
|
|
(98,014 |
) |
|
|
(137,071 |
) |
|
|
(656,507 |
) |
Fair value
of equity warrant |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(37,100) |
|
Financing
expense on the issuance of promissory notes |
|
$ |
77,812 |
|
|
$ |
14,286 |
|
|
$ |
58,014 |
|
|
$ |
47,071 |
|
|
$ |
262,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key inputs
to determine the fair value at the commitment date: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price |
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.14 |
|
|
$ |
0.04-0.12 |
|
|
$ |
0.05-0.07 |
|
Current exercise
price |
|
$ |
0.05 |
|
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.04-0.06 |
|
|
$ |
0.02-0.10 |
|
Time to expiration
– days |
|
|
730 |
|
|
|
632 |
|
|
|
578 |
|
|
|
389-436 |
|
|
|
181-365 |
|
Risk free
interest rate |
|
|
.11 |
% |
|
|
.08 |
% |
|
|
.37 |
% |
|
|
.1-.11 |
% |
|
|
.14-.26 |
% |
Estimated
volatility |
|
|
150 |
% |
|
|
150 |
% |
|
|
150 |
% |
|
|
150 |
% |
|
|
150 |
% |
Dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key inputs
to determine the fair value at May 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price |
|
$ |
N/A |
|
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Current exercise
price |
|
$ |
N/A |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Time to expiration
– days |
|
|
N/A |
|
|
|
533 |
|
|
|
533 |
|
|
|
N/A |
|
|
|
N/A |
|
Risk free
interest rate |
|
|
N/A |
% |
|
|
.37 |
% |
|
|
.37 |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Estimated
volatility |
|
|
N/A |
% |
|
|
150 |
% |
|
|
150 |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key inputs
to determine the fair value at February 28, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price |
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
0.05 |
|
Current exercise
price |
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
0.03-0.10 |
|
Time to expiration
– days |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
115-346 |
|
Risk free
interest rate |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
.07-.22 |
% |
Estimated
volatility |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
150 |
% |
Dividend |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Convertible
Debentures with Series A and B Warrants
On January 29, 2014, February 27, 2014,
and April 1, 2014, the Company issued 395, 305, and 469 Units for $395,000, $305,000, and $469,000 respectively, to accredited
investors under subscription agreements. The Units, as defined in the subscription agreements, consist of (i) one unsecured 6%
convertible promissory note, $1,000 par value, convertible into shares of the Company’s common stock; (ii) a warrant entitling
the holder thereof to purchase 10,000 shares of common stock (individually Series A Warrant) at an exercise price of $0.15; and,
(iii) a warrant entitling the holder thereof to purchase 10,000 shares of common stock (individually Series B Warrant) at an exercise
price of $0.20. The purchase price for each Unit was $1,000 and resulted in a funding total of $1,069,000 in cash and the retirement
of $100,000 debt obligation to a private individual (Note 4).
The Notes matures 24 months from the
issuance date and has an interest rate of 6% per annum payable in arrears on the earlier of a default date or the maturity date.
The Notes may be converted at any time after the original issuance date at the election of their holders to convert all or part
of the outstanding and unpaid principal amount and accrued interest at a conversion price of $0.10 per share. Under the subscription
agreement, the Company has granted price protection provisions that provide the holder of Series A warrants 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 $0.15 for a period
of twelve months from issuance. The Company determined the warrants issued to the Line of Credit lenders (Note 5) qualified as
a breach of this covenant, therefore all Series A warrants were revalued to a $0.10 exercise price with the adjustment reflected
as a change in the fair value. Any amount of principal or interest which is not paid when due, shall bear interest at the rate
of 16% per annum from the date it is due.
As
some of 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 derivative instruments for accounting purposes and reported
on the Company’s condensed consolidated statements of operations and comprehensive loss below the operating income as an
“other expense”.
Accounting allocation of initial proceeds: |
|
January 29, 2014 |
|
|
February 27, 2014 |
|
|
April 1,
2014 |
|
Gross proceeds |
|
$ |
395,000 |
|
|
$ |
305,000 |
|
|
$ |
469,000 |
|
Fair value of the convertible promissory notes |
|
|
(320,787 |
) |
|
|
(247,696 |
) |
|
|
(665,511 |
) |
Derivative warrant liability fair value – Series A (Note 9) |
|
|
(161,950 |
) |
|
|
(125,050 |
) |
|
|
(776,664 |
) |
Financing expense on the issuance of instruments |
|
$ |
87,737 |
|
|
$ |
67,746 |
|
|
$ |
973,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key inputs to determine the fair value at the commitment date: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock price |
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.18 |
|
Current exercise price – promissory notes |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
Current exercise price – Series A warrants |
|
$ |
0.15 |
|
|
$ |
0.15 |
|
|
$ |
0.15 |
|
Time to expiration – days (promissory notes) |
|
|
732 |
|
|
|
731 |
|
|
|
731 |
|
Time to expiration – days (warrants) |
|
|
1,826 |
|
|
|
1,826 |
|
|
|
1,826 |
|
Risk free interest rate (promissory notes) |
|
|
.32 |
% |
|
|
.32 |
% |
|
|
.32 |
% |
Risk free interest rate (warrants) |
|
|
1.52 |
% |
|
|
1.51 |
% |
|
|
1.74 |
% |
Estimated volatility |
|
|
150 |
% |
|
|
150 |
% |
|
|
150 |
% |
Dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Market interest rate for the Company |
|
|
18 |
% |
|
|
18 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Key inputs to determine the fair value of the promissory notes at May 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock price |
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
$ |
0.16 |
|
Current exercise price |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
Time to expiration – days |
|
|
610 |
|
|
|
638 |
|
|
|
671 |
|
Risk free interest rate |
|
|
.37 |
% |
|
|
.37 |
% |
|
|
.37 |
% |
Estimated volatility |
|
|
150 |
% |
|
|
150 |
% |
|
|
150 |
% |
Dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key inputs to determine the fair value of the promissory notes at February 28, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock price |
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Current exercise price |
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Time to expiration – days |
|
|
335 |
|
|
|
364 |
|
|
|
398 |
|
Risk free interest rate |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Estimated volatility |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Convertible
Debentures with Series C or Series D Warrants
On April 23, 2014, the Company authorized
and issued 50 Units for $50,000 to a private investor. The Units, as defined in the subscription agreement, consist of (i) one
unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion
price of $0.15 per share with a price protection clause on any conversion feature issued after the issuance date that mature on
April 23, 2016; and (ii) a warrant entitling the holder thereof to purchase 333,333 shares of common stock (Series C Warrant)
at a purchase price of $0.22 per share that expires on April 23, 2019.
On May 30, 2014, the Company authorized
and issued 1,000 Units for $1,000,000 to Array Capital Corporation. The Units, as defined in the subscription agreement, consist
of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at
a conversion price of $0.15 per share with a price protection clause on any conversion feature issued after the issuance date
that matures on May 30, 2016; and (ii) a warrant entitling the holder thereof to purchase 6,666,667 shares of common stock (Series
C Warrant) at a purchase price of $0.22 per share that expires on May 30, 2019.
On June 27, 2014, the Company authorized
and issued two separate issues of 125 Units. This total authorized and issuance of 250 Units, at a value of $250,000, was to two
independent accredited investors in exchange for $150,000 in cash and release of $90,777 (Canadian $100,000) in the loan originated
on January 7, 2014 as described in Note 4. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6%
convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15
per share with a price protection clause on any conversion feature issued after the issuance date that matures on June 27, 2016;
and (ii) a warrant entitling the holder thereof to purchase 1,666,667 shares of common stock (Series C Warrant) at a purchase
price of $0.22 per share that expires on June 27, 2019.
On September 2, 2014, the Company authorized
and issued three separate issues of 25, 75, and 25 Units. This total authorized and issuance of 125 Units, at a value of $125,000,
was to three independent accredited investors in exchange for $125,000 in cash proceeds (see note 4). The Units, as defined in
the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of
the Company’s common stock at a conversion price of $0.15 per share with a price protection clause on any conversion feature
issued after the issuance date that matures on September 2, 2016; and (ii) a warrant entitling the holder thereof to purchase
833,334 shares of common stock (Series C Warrant) at a purchase price of $0.22 per share that expires on September 2, 2019.
On October 6, 2014, the Company authorized
and issued 50 Units for $50,000 to Subtle Disruption in exchange for the settlement of $50,000 in trade payables. The Units, as
defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into
shares of the Company’s common stock at a conversion price of $0.15 with a price protection clause on any conversion feature
issued after the issuance date that matures on October 6, 2016; and (ii) a warrant entitling the holder thereof to purchase 333,333
shares of common stock (Series D Warrant) at a purchase price of $0.22 per share that expires on October 6, 2019.
On October 27, 2014, the Company authorized
and issued 50 Units for $50,000 to IBEC Holdings Inc. The Units, as defined in the subscription agreement, consist of (i) one
unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion
price of $0.15 with a price protection clause on any conversion feature issued after the issuance date that matures on October
6, 2016; and (ii) a warrant entitling the holder thereof to purchase 333,333 shares of common stock (Series D Warrant) at a purchase
price of $0.22 per share that expires on October 27, 2019.
The debentures mature 24 months from
the issuance date and have an interest rate of 6% per annum payable in arrears on the earlier of a default date or the maturity
date. The notes may be converted at any time after the original issuance date at the election of their holders to convert all
or part of the outstanding and unpaid principal amount and accrued interest at a conversion price of $0.15 per share or as adjusted
based on price protection. The warrants may be exercised in whole or in part.
Due to the Company’s breach of
the authorization limit of common stock on a diluted basis on August 14, 2014, the Company initially classified the above noted
warrants issued since this date as financial liabilities, which would otherwise be recorded as equity instruments and classified
as part of additional paid in capital. All derivatives other than stock options issuable into common stock were to be classified
and accounted for as financial liabilities (see note 1 for applicable accounting policies) until the breach of the Company’s
authorization limit of common stock on a diluted basis was rectified. On December 31, 2014 the company increased its authorized
share issuance limit to 400,000,000 which rectified the breach. The accounting impact of the August 14, 2014, breach only occurred
under the earliest issue date sequencing approach at the date of the next issued applicable derivative, which was September 2,
2014. On December 31, 2014 all derivatives impacted by the Company’s breach of its authorized share limit were reclassified
to equity from liabilities.
Accounting
allocation of initial proceeds: |
|
Fourth
Quarter Fiscal 2014 |
|
|
First
Quarter Fiscal 2015 |
|
|
Second
Quarter Fiscal 2015 |
|
Gross
proceeds |
|
$ |
1,050,000 |
|
|
$ |
250,000 |
|
|
$ |
225,000 |
|
Fair
value of the convertible debentures |
|
|
(852,726 |
) |
|
|
(254,167 |
) |
|
|
(182,720 |
) |
Fair
value of liability warrants |
|
|
- |
|
|
|
- |
|
|
|
(152,951 |
) |
Fair
value of equity warrants |
|
|
(197,274 |
) |
|
|
- |
|
|
|
- |
|
Financing
expense on the issuance of derivative instruments |
|
$ |
- |
|
|
$ |
4,167 |
|
|
$ |
110,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
inputs to determine the fair value at the commitment date: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock
price |
|
$ |
0.15-0.16 |
|
|
$ |
0.20 |
|
|
$ |
N/A |
|
Current
exercise price |
|
$ |
0.15 |
|
|
$ |
0.15 |
|
|
$ |
N/A |
|
Time
to expiration – days |
|
|
731 |
|
|
|
731 |
|
|
|
N/A |
|
Risk
free interest rate |
|
|
.37 |
% |
|
|
.45 |
% |
|
|
N/A |
% |
Estimated
volatility |
|
|
150 |
% |
|
|
150 |
% |
|
|
N/A |
% |
Dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Market
interest rate for the Company |
|
|
18 |
% |
|
|
18 |
% |
|
|
N/A |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
inputs to determine the fair value of the convertible debentures at May 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock
price |
|
$ |
0.16 |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Current
exercise price |
|
$ |
0.15 |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Time
to expiration – days |
|
|
693-730 |
|
|
|
N/A |
|
|
|
N/A |
|
Risk
free interest rate |
|
|
.37 |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Estimated
volatility |
|
|
150 |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Dividend |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Market
interest rate for the Company |
|
|
18 |
% |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
inputs to determine the fair value of the convertible debentures at February 28, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock
price |
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Current
exercise price |
|
$ |
N/A |
|
|
$ |
N/A |
|
|
$ |
N/A |
|
Time
to expiration – days |
|
|
420-457 |
|
|
|
485 |
|
|
|
552-607 |
|
Risk
free interest rate |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Estimated
volatility |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Dividend |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Market
interest rate for the Company |
|
|
N/A |
% |
|
|
N/A |
% |
|
|
N/A |
% |
Other
Notes Fiscal 2014
On
December 17, 2013, the Company sold two 8% convertible promissory notes in the amount of $25,000 each to independent accredited
investors for a total of $50,000. After deductions for banking fees of $2,500 and legal expenses of $1,500 for each note, the
Company received $21,000 for each note for a total of $42,000. The notes would have matured on September 13, 2014. Each note may
be converted into common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price
of 55% of the average prices of the lowest two closing prices on the 10 days prior to conversion pursuant to the requirements
of the note. Any amount of principal or interest which is not paid when due, shall bear interest at the rate of 24% per annum.
On
June 13, 2014, the Company separately paid $76,000, including prepayment fees and related interest, to settle in full the outstanding
balance of the two $25,000 8% convertible promissory notes.
7.
Common Stock
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 issued an additional 300,000 shares of common stock, valued at $33,000; in exchange for business
consulting services over the period ended May 31, 2014.
On
May 9, 2014, the Company issued 700,000 shares of common stock, with a value of $101,711 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; 300,000 shares of common stock, valued at $24,000, in part compensation to a provider of strategic consulting
services; and 300,000 shares of common stock to consulting firms, valued at $15,000, as compensation for services.
On
May 9, 2014 the Company issued 1,666,667 shares of common stock, valued at $133,333, to Ortsbo for amending the Services Agreement
dated March 21, 2013 for an exclusive license to use the Ortsbo property and to issue the Company the right to purchase a copy
of the source code for $2,000,000. On April 28, 2014, the Company exercised its right to purchase a copy of the source code for
the Ortsbo property in exchange for 13,333,333 shares of common stock. Although the common shares had a fair value of $2,000,000
at the date of the exchange, the transaction was ascribed a value of $Nil as described in Note 11. To complete the transactions
15,000,000 shares of common stock were issued on May 9, 2014.
On
May 16, 2014 and May 19, 2014, the Company issued 400,000 and 1,205,794 shares to JMJ Financial as a result of the settlement
and conversion of the convertible note with a principal amount of $65,000 dated November 15, 2013 (Note 6).
On
September 3, 2014, and September 16, 2014, the Company issued 270,000 and 841,704 shares to JMJ Financial as a result of the settlement
and conversion of the convertible note with a principal amount of $40,000 dated November 15, 2013 (Note 6).
On
September 10, 2014, the Company issued and transferred 350,000 shares of common stock, valued at $35,000 in exchange for business
consulting services. On October 1, 2014 the Company issued an additional 300,000 shares of common stock, valued at $30,000, in
exchange for business consulting services. On November 3, 2014, the Company issued an additional 150,000 shares of common stock,
valued at $15,000, in exchange for business consulting services. On November 5, 2014, the Company issued an additional 150,000
shares of common stock, valued at $15,000, in exchange for business consulting services.
On
October 23, 2014, November 5, 2014 and November 20, 2014, the Company issued 450,000, 700,000 and 810,641 shares respectively
to JMJ Financial as a result of the settlement and conversion of $40,000 of principal amount, representing a portion of the convertible
note dated November 15, 2013 (Note 6).
On
December 11, 2014 the Company issued 400,000 shares of common stock, valued at $40,000, in exchange for business consulting services.
On January 5, 2015, the Company issued an additional 400,000 shares of common stock, valued at $40,000, in exchange for business
consulting services.
On December 31, 2014, the Company’s
authorized number of common shares was increased to 400,000,000.
Registration
Statement
The
Company filed a Registration Statement on Form S-1 (File No. 333-199569) (the “Registration Statement”)
with the Securities and Exchange Commission (the “SEC”) for up to 75,926,665 shares of Yappn Corp.’s
$0.0001 par value per share common stock (the "Common Stock") by certain selling stockholders upon conversion of promissory
notes and/or warrants currently held by those selling stockholders, specifically (i) 18,440,000 shares of Common Stock issuable
to them upon exercise of promissory notes and (ii) 45,880,000 shares of Common Stock issuable to them upon exercise of warrants.
The warrants have an exercise prices varying from $0.10 to $0.22 per share (subject to adjustment). The Registration Statement
covering the Shares above noted shares was declared effective under the Securities Act of 1933 on November 17, 2014.
As
part of the contractual rights of certain existing convertible debenture holders, the Company finalized its calculation of shares
to be issued in association with the timing of filing its Registration Statement noted above. This resulted in a value of shares
to be issued in the amount of $124,567.
From April 9, 2014 through February
3, 2015, various holders of convertible preferred stock exercised their right to convert to common stock. A total of 9,360,000
shares of convertible preferred stock were converted into common stock (Note 8).
8.
Preferred Stock and Warrants
Series
A Preferred Stock
The
Company has an authorized limit of 50,000,000 shares of preferred stock, par value $0.0001.
Subscription
Agreement with Series A Preferred Shares and warrants
On
March 28, 2013, May 31, 2013 and June 7, 2013, the Company sold an aggregate of 9,360,000 Units at a per unit price of $0.10 on
a private placement basis to certain investors for an aggregate $936,000 in proceeds. 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 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.
Due to the issuance of common stock to JMJ Financial (Note 6) the May 31, 2013 and June 7, 2013 warrants were revalued to $0.054.
The March 28, 2013 warrants were not revalued because the one year price protection provision expired before the issuance of the
common shares to JMJ Financial.
Accounting allocation of initial proceeds: (Only Fiscal 2014 ) | |
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 the issuance of derivative instruments | |
$ | 2,007,390 | |
| |
| | |
The key inputs used in the determination of fair value of the Series A Preferred Stock and warrants at the commitment date: | |
| | |
Stock price | |
$ | 0.72 | |
Current exercise price | |
$ | 0.10 | |
Time to expiration – days (preferred stock) | |
| 365 | |
Time to expiration – days (warrants) | |
| 1,826 | |
Risk free interest rate | |
| 1.48 | % |
Estimated volatility (preferred stock) | |
| 100 | % |
Estimated volatility (warrants) | |
| 150 | % |
Dividend | |
| - | |
The
following table reflects the preferred stock activity for the year ended May 31, 2014 and the nine month period ended February
28, 2015:
| |
Preferred Stock | |
Outstanding as of June 1, 2013 | |
| 7,710,000 | |
Issued on June 7, 2013 | |
| 1,650,000 | |
Conversion of preferred stock into common stock | |
| (7,350,000 | ) |
Total – as of May 31, 2014 | |
| 2,010,000 | |
Conversion of preferred stock into common stock | |
| (2,010,000 | ) |
Total – as of February 28, 2015 | |
| - | |
As
of May 31, 2014, 7,350,000 shares of Series A Preferred Stock were exchanged for 7,350,000 shares of common stock, at a conversion
value of $735,000. As a result of the price protection being removed after one year, the remaining 2,010,000 preferred shares
were reclassified on the condensed consolidated balance sheet from a derivative preferred share liability to stockholders’
equity at a value of $201,000 (Note 9). The 2,010,000 preferred shares were exchanged into common shares on February 3, 2015.
As
a result of the twelve month price protection provisions in the subscription agreement, the Company recognized its preferred stock
in its condensed consolidated balance sheet as a derivative liability prior to the expiration of the price protection provisions.
The calculation methodologies for the fair values of the derivative preferred stock liability for the year ended May 31, 2014
are described in Note 9 – Derivative Preferred Stock and Warrant Liabilities.
Warrants
Subscription
Agreement with Series A Preferred Shares
On
March 28, 2013, May 31, 2013 and June 7, 2013, the Company issued a total of 9,360,000 five year warrants as part of a Unit under
subscription agreements that included Series A preferred shares with full ratchet anti-dilution protection provisions. The price
protection provisions were effective for twelve months from date of issuance.
On
March 29, 2014, the price protection provisions expired on 4,010,000 shares issuable under warrants and the fair value of $917,087
was reclassified from a derivative liability to equity. As of May 31, 2014, the remaining shares issuable under warrants of 3,700,000
and 1,650,000 with issuance dates of May 31, 2013 and June 7, 2013, respectively were still reflected as a derivative liability
and were revalued to $0.054. However, subsequent to May 31, 2014, when the price protection provisions expired, they were reclassified
from derivative liability to equity.
On
November 15, 2013, the Company issued 120,000 warrants under the same full ratchet anti-dilution provisions as the other warrants,
to a broker as compensation for a portion of the private placement made on May 31, 2013 for these Units. These warrants were estimated
using the same valuation techniques and have a value of $12,888 as at May 31, 2014. However, subsequent to November 15, 2014,
when the price protection provisions expired, they were reclassified from derivative liability to equity.
Series
A, B, C and D Warrants
On
January 29, 2014, February 27, 2014, and April 1, 2014, the Company issued 395 Series A and Series B warrants, 305 Series A and
Series B warrants, and 469 Series A and Series B warrants, respectively, with unsecured 6% convertible promissory notes (Note
6), as part of the defined offered Unit under the subscription agreements on those respective dates. Each Series A warrant entitles
the holder thereof to purchase 10,000 shares of common stock for a purchase price of $0.10 per share after the re-pricing of the
instruments took place. Each Series B warrant entitles the holder thereof to purchase 10,000 shares of common stock for a purchase
price of $0.20 per share.
The
Series A and Series B warrants permit cashless exercise beginning with the effective date unless and until a registration statement
covering the resale of the shares underlying the warrants is effective with the Securities and Exchange Commission. The Series
A warrants, for a period of twelve months from the original date of issuance, provide full ratchet price protection provisions
and as such are treated as a derivative liability at the commitment date and until such provisions expire. The series A warrants
had price protection clauses of January 29, 2015 and February 27, 2015. The Series B warrants do not provide any price protection
provisions and therefore are treated as equity instruments at the commitment date and thereafter. Both the Series A and Series
B warrants have a five year life.
During the fourth quarter of Fiscal
2014, the Company authorized and issued Series C warrants to acquire 333,333 and 6,666,667 shares of common stock on April 23,
2014 and May 30, 2014, respectively, to accredited investors with unsecured 6% convertible debenture, $1,000 par value, convertible
into shares of the Company’s common stock at a conversion price of $0.15 per share with a price protection clause on any
conversion feature issued after the issuance date that matures on April 23, 2016 and May 30, 2016 respectively. The Series C warrants
entitle the holder thereof to purchase shares of common stock at a purchase price of $0.22 per share and have a five year life.
The Series C warrants do not provide any price protection provisions and therefore are treated as equity instruments at the commitment
date and thereafter.
During the first quarter of Fiscal
2015, the Company authorized and issued two separate issues of 125 Units on June 27, 2014. This total authorized and issuance
of 250 Units, at a value of $250,000, was to two independent accredited investors in exchange for $150,000 in cash and release
of $100,000 in the loan originated on January 7, 2014 as described in Note 6. The Units, as defined in the subscription agreement,
consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s at a common
stock conversion price of $0.15 per share with a price protection clause on any conversion feature issued after the issuance date
that matures on June 27, 2016; and (ii) a warrant entitling the holder thereof to purchase 1,666,667 shares of common stock (Series
C Warrant) at a purchase price of $0.22 per share that expires on June 27, 2019.
During the second quarter of Fiscal
2015, the Company authorized and issued Series C warrants to acquire 833,333 shares of common stock on September 2, 2014 and issued
Series D warrants to acquire 333,333 and 333,333 shares of common stock on October 6, 2014, and October 27, 2014 respectively,
to accredited investors. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture,
$1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15 per share with a price
protection clause on any conversion feature issued after the issuance date that matures on September 2, 2016, October 6, 2016,
and October 27, 2016 respectively; and (ii) a warrant entitling the holder thereof to purchase 1,666,667 shares of common stock
(Series D Warrant) at a purchase price of $0.22 per share that expires on September 2, 2016, October 6, 2016, and October 27, 2016
respectively. The Series D warrants do not provide any price protection provisions and therefore should be treated as equity instruments
at the commitment date and thereafter; however these warrants were originally recorded as liabilities as the Company breached its
authorized share limit on a diluted basis, which required any additional warrants that otherwise would have been recorded as equity
instruments to be recorded as liability instruments. On December 31, 2014, the Company rectified its breach of authorized share
limit and the warrants were reclassified to equity.
Line
of Credit Arrangement
Pursuant to the loan agreement and
promissory note entered on April 7, 2014 (Note 5), the Company issued the lender warrants to purchase up to 8,000,000 shares of
the Company’s common stock at an exercise price of $0.10 per share.
The
following is a summary of warrants issued, exercised and expired through February 28, 2015:
| |
Shares Issuable Under Warrants | | |
Exercise Price | | |
Expiration |
Outstanding as of May 31, 2012 | |
| - | | |
| - | | |
- |
Issued on March 28, 2013 | |
| 4,010,000 | | |
$ | 0.10 | | |
March 28, 2018 |
Issued on May 31, 2013 | |
| 3,700,000 | | |
$ | 0.054 | | |
May 31, 2018 |
Exercised and expired | |
| - | | |
| - | | |
- |
Total – as of May 31, 2013 | |
| 7,710,000 | | |
| - | | |
- |
Issued on June 7, 2013 | |
| 1,650,000 | | |
$ | 0.054 | | |
June 7, 2018 |
Issued on November 15, 2013 | |
| 120,000 | | |
$ | 0.10 | | |
November 15, 2018 |
Issued Series A warrants on January 29, 2014 | |
| 3,950,000 | | |
$ | 0.10 | | |
January 29, 2019 |
Issued Series B warrants on January 29, 2014 | |
| 3,950,000 | | |
$ | 0.20 | | |
January 29, 2019 |
Issued Series A warrants on February 27, 2014 | |
| 3,050,000 | | |
$ | 0.10 | | |
February 27, 2019 |
Issued Series B warrants on February 27, 2014 | |
| 3,050,000 | | |
$ | 0.20 | | |
February 27, 2019 |
Issued Series A warrants on April 1, 2014 | |
| 4,690,000 | | |
$ | 0.10 | | |
April 1, 2019 |
Issued Series B warrants on April 1, 2014 | |
| 4,690,000 | | |
$ | 0.20 | | |
April 1, 2019 |
Issued to Lender – Line of Credit | |
| 8,000,000 | | |
$ | 0.10 | | |
April 7, 2019 |
Issued Series C warrants on April 23, 2014 | |
| 333,333 | | |
$ | 0.22 | | |
April 23, 2019 |
Issued Series C warrants on May 30, 2014 | |
| 6,666,667 | | |
$ | 0.22 | | |
May 30, 2019 |
Exercised and expired | |
| - | | |
| | | |
|
Total – as of May 31, 2014 | |
| 47,860,000 | | |
| | | |
|
Issued Series C warrants on June 27, 2014 | |
| 1,666,667 | | |
$ | 0.22 | | |
June 27, 2019 |
Issued Series C warrants on September 2, 2014 | |
| 833,333 | | |
$ | 0.22 | | |
September 2, 2019 |
Issued Series D warrants on October 6, 2014 | |
| 333,333 | | |
$ | 0.22 | | |
October 6, 2019 |
Issued Series D warrants on October 27, 2014 | |
| 333,333 | | |
$ | 0.22 | | |
October 27, 2019 |
Issued warrants – consultants | |
| 3,300,000 | | |
$ | 0.15 | | |
May 30, 2019 |
Issued Warrants on February 4, 2015 | |
| 700,000 | | |
$ | 0.10 | | |
February 04, 2020 |
Exercised and expired | |
| - | | |
| | | |
|
Total – as of February 28, 2015 | |
| 55,026,666 | | |
| | | |
|
The
outstanding warrants at February 28, 2015 and May 31, 2014 have a weighted average exercise price of approximately $0.14 and $0.16
per share, respectively, and have an approximate weighted average remaining life of 4.0 and 4.7 years, respectively.
The price protection provisions of those
warrants issued as part of the Series A Preferred Stock subscription prior to May 31, 2013, have expired and, as such, the instruments
issued on March 28, 2013 are now recognized as equity instruments. The price protection provisions of the Series A warrants issued
as part of the January 29, 2014 and February 28, 2014 convertible debenture financing have expired, and as such, these warrants
are not recognized as equity instruments. The Series B warrants, Series C warrants, and warrants associated with the Line of Credit
arrangement do not provide the holder any price protection, and as there is no variability in the determination of common stock,
these warrants are also reflected as equity instruments.
The
Company issued warrants to two separate consulting firms in the amount of 2,000,000 and 1,300,000 respectively included in financing
expense on October 6, 2014 with an exercise price of $0.15 both with expiry dates of May 30, 2019.
The
following table is a summary of those warrants that are reflected in equity as at February 28, 2015:
| |
Shares Issuable Under Warrants | | |
Equity
Value | |
Issued warrants on March 28, 2013 | |
| 4,010,000 | | |
$ | 917,087 | |
Issued warrants on May 31, 2013 | |
| 3,700,000 | | |
| 543,530 | |
Issued warrants on June 7, 2013 | |
| 1,650,000 | | |
| 211,670 | |
Issued Series A warrants on January 29, 2014 | |
| 3,950,000 | | |
| 397,895 | |
Issued Series B warrants on January 29, 2014 | |
| 3,950,000 | | |
| - | |
Issued Series A warrants on February 27, 2014 | |
| 3,050,000 | | |
| 224,135 | |
Issued Series B warrants on February 27, 2014 | |
| 3,050,000 | | |
| - | |
Issued Series B warrants on April 1, 2014 | |
| 4,690,000 | | |
| - | |
Issued to Loan Agreement - Credit Line | |
| 8,000,000 | | |
| 1,495,200 | |
Issued Series C warrants on April 23, 2014 | |
| 333,333 | | |
| 9,395 | |
Issued Series C warrants on May 30, 2014 | |
| 6,666,667 | | |
| 187,574 | |
Issued Series C warrants on June 27, 2014 | |
| 1,666,667 | | |
| - | |
Issued Series C warrants on September 2, 2014 | |
| 833,333 | | |
| 38,584 | |
Issued Series D warrants on October 6, 2014 | |
| 333,333 | | |
| 15,567 | |
Issued Series D warrants on October 27, 2014 | |
| 333,333 | | |
| 15,667 | |
Warrants issued to consultants | |
| 3,300,000 | | |
| 165,330 | |
Issued warrants November 30, 2013 | |
| 120,000 | | |
| 3,744 | |
Issued warrants on February 4, 2015 | |
| 700,000 | | |
| 37,100 | |
Total – as of February 28, 2015 | |
| 50,336,666 | | |
$ | 4,262,478 | |
For
those warrants with price protection provisions, the calculation methodologies for the fair values of the derivative warrant liability
are described in Note 9 – Derivative Preferred Stock and Warrant Liabilities.
9.
Derivative Preferred Stock and Warrant Liabilities
For the three and nine months ended
February 28, 2015 and the year ended May 31, 2014, the Company has Series A warrants outstanding with price protection provisions
that provide the holder with 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 exercise price of $0.10 per share (the revised price for
the Series A warrants). The conversion price of the warrants will be decreased to the new price. The price protection on the preferred
shares was for a twelve month period from date of issuance and all of these price protection periods have expired (see below),
while the price protection on the warrants varies based on the individual warrant instruments issued with some having twelve months
and others with no protection.
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 February 28, 2015 and May 31, 2014. 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.
Accounting
for Derivative Preferred Stock Liability
As
of May 31, 2014, as a result of the expiration of the price protection provision on the preferred shares outstanding, any outstanding
preferred stock has been reclassified to equity.
The
following is a summary of the derivative preferred stock liability for the year ended May 31, 2014 and the nine months ended February
28, 2015:
| |
Value | | |
Number of Preferred Stock Units | |
Balance as of June 1, 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 | |
| (3,569,337 | ) | |
| - | |
Conversion into common stock | |
| (735,000 | ) | |
| (7,350,000 | ) |
Transfer value of preferred stock to equity | |
| (201,000 | ) | |
| (2,010,000 | ) |
Balance as of May 31, 2014 and February 28, 2015 | |
$ | - | | |
| - | |
For the nine months ended February 28,
2015 and February 28, 2014, the revaluation of the preferred stock at each reporting period resulted in the recognition of $0 and
a gain of $5,088,047 respectively within the Company’s interim condensed consolidated statements of operations and comprehensive
loss under the caption “Change in fair value of derivative liabilities and convertible notes”. The changes in fair
value of the preferred stock liability had no effect on the Company’s condensed consolidated cash flows. As the price protection
provisions for the remaining 2,010,000 outstanding shares of preferred stock expired as of March 28, 2014, the value of $201,000
was reclassified from a derivative preferred stock liability to equity. As a result, the Company no longer has a preferred stock
liability as at May 31, 2014 and February 28, 2015.
Accounting for Derivative Warrant
Liability
The Company’s derivative warrant
instruments with price protection provisions have been measured at fair value at February 28, 2015 and May 31, 2014 using the binomial
lattice model. The Company recognizes all of its warrants with price protection provisions 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 interim 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 following is a summary of the derivative
warrant liability for the year ended May 31, 2014 and the nine months ended February 28, 2015:
|
|
Shares Issuable
Under Warrants |
|
|
Derivative Warrant
Value |
|
Balance as of June 1, 2013 |
|
|
7,710,000 |
|
|
$ |
4,050,278 |
|
Warrants issued June 7, 2013 |
|
|
1,650,000 |
|
|
|
1,146,915 |
|
Warrants issued November 15, 2013 |
|
|
120,000 |
|
|
|
9,636 |
|
Series A warrants issued on January 29, 2014 |
|
|
3,950,000 |
|
|
|
161,950 |
|
Series A warrants issued on February 27, 2014 |
|
|
3,050,000 |
|
|
|
125,050 |
|
Series A warrants issued on April 1, 2014 |
|
|
4,690,000 |
|
|
|
776,664 |
|
Warrants reclassified to equity (price protection expiry) |
|
|
(4,010,000 |
) |
|
|
(917,087 |
) |
Warrants exercised or expired |
|
|
- |
|
|
|
- |
|
Decrease in fair value of derivative warrant liability |
|
|
- |
|
|
|
(2,822,124 |
) |
Balance as of May 31, 2014 |
|
|
17,160,000 |
|
|
|
2,531,282 |
|
Warrants reclassified to equity (price protection expiry and authorized share limit increase Notes 7 and 8) |
|
|
(12,470,000 |
) |
|
|
(1,616,121 |
) |
Warrants exercised or expired |
|
|
- |
|
|
|
- |
|
Decrease in fair value of derivative warrant liability |
|
|
- |
|
|
|
(1,234,699 |
) |
Balance as of February 28, 2015 |
|
|
4,690,000 |
|
|
$ |
280,462 |
|
For the nine months ended February 28,
2015 and February 28, 2014, the revaluation of the warrants at each reporting period resulted in the recognition of a gain of $1,081,984
and $4,817,768 respectively within the Company’s condensed consolidated statements of operations and comprehensive loss and
is included in the condensed consolidated statements of operations and comprehensive income (loss) under the caption “Change
in fair value of derivative liabilities and convertible notes”. The fair value of the warrants February 28, 2015 and May
31, 2014 was $280,462 and $2,531,282, respectively, which is reported on the condensed consolidated balance sheets under the caption
“Derivative warrant liability”.
Warrants under Subscription Agreement
with Series A Preferred Shares
The warrants, issued as part of a Unit
with the Series A preferred shares, have price protection provisions that expire twelve months from the date of issue (Note 8).
Fair values were calculated after the expiry period for the calculation of the value to be transferred to equity.
Fair
Value Assumptions Used in Accounting for Derivative Warrant Liability
The key inputs used in the determination
of fair value after the expiry period on June 8, 2014 and June 1, 2014, the year ended May 31, 2014, January 29, 2015 and February
27, 2015 when these warrants were recorded as liabilities are as follows:
| |
June 8,
2014 | | |
June 1,
2014 | | |
May 31,
2014 | | |
January 29, 2015 | | |
February 27, 2015 | |
Stock price | |
$ | 0.14 | | |
$ | 0.16 | | |
$ | 0.16 | | |
$ | 0.06 | | |
$ | 0.05 | |
Current exercise price | |
$ | 0.054 | | |
$ | 0.054 | | |
$ | 0.054 | | |
$ | 0.10 | | |
$ | 0.10 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Time to expiration – days (range) | |
| 1,461 | | |
| 1,461 | | |
| 1,461–1,468
| | |
| 1,461 | | |
| 1,461 | |
Risk free interest rate | |
| 1.66 | % | |
| 1.54 | % | |
| 1.54 | % | |
| 1.28 | % | |
| 1.50 | % |
Estimated volatility | |
| 150 | % | |
| 150 | % | |
| 150 | % | |
| 150 | % | |
| 150 | % |
Dividend | |
| | | |
| | | |
| | | |
| - | | |
| - | |
The
key inputs used in the May 31, 2014 and November 15, 2013 issuance of 120,000 warrants for determination of fair value calculations
were as follows:
| |
May 31, 2014 | | |
November 15, 2013 | |
Stock price | |
$ | 0.16 | | |
$ | 0.08 | |
Current exercise price | |
$ | 0.10 | | |
$ | 0.10 | |
Time to expiration – days | |
| 1,629 | | |
| 1,826 | |
Risk free interest rate | |
| 1.54 | % | |
| 1.37 | % |
Estimated volatility | |
| 150 | | |
| 150 | % |
Dividend | |
| - | | |
| - | |
Series
A Warrants
The
Series A warrants, issued as part of a Unit including convertible debt, have price protection provisions that expire twelve months
from the date of issue (Note 6).
The
key inputs used in the determination of fair value of the Series A warrants at the commitment date and reporting period:
| |
February 28, 2015 | | |
May 31, 2014 | |
Warrants – Series A (issuable under warrant) | |
| 4,690,000 | | |
| 11,690,000 | |
| |
| | | |
| | |
Stock price | |
$ | 0.04 | | |
$ | 0.16 | |
Current exercise price | |
$ | 0.10 | | |
$ | 0.10 | |
Time to expiration – days (range) | |
| 1,550 -1,674 | | |
| 1,704-1,766 | |
Risk free interest rate | |
| 1.49 | % | |
| 1.54 | % |
Estimated volatility | |
| 150 | % | |
| 150 | % |
Dividend | |
| - | | |
| - | |
10. Employee
Benefit and Incentive Plans
On
August 14, 2014, the Board of Directors approved the adoption of the 2014 Stock Option Plan. The total number of shares of common
stock authorized for issuance under this plan is 15,000,000. The Company completed its first grant of stock options immediately
after the plan was approved. The following table outlines the options granted and related disclosures:
| |
Stock
Options | | |
Weighted- Average Exercise Price | |
Outstanding August 14, 2014 (First Grant) | |
| 10,470,000 | | |
$ | 0.10 | |
Exercised | |
| - | | |
| - | |
Cancelled, forfeited or expired | |
| - | | |
| - | |
Outstanding at February 28, 2015 | |
| 10,470,000 | | |
$ | 0.10 | |
Options exercisable at February 28, 2015 | |
| 5,436,667 | | |
$ | 0.10 | |
Fair value of options vesting during the nine months ended February 28, 2015 | |
$ | 524,349 | | |
| | |
As at February 28, 2015, vested and
exercisable options do not have any intrinsic value and a weighted-average remaining contractual term of 4.0 years. It is expected
the 5,033,333 unvested options will ultimately vest, and each has an exercise price of $0.10 per share and a weighted average
remaining term of 4.4 years. The aggregate intrinsic value of options represents the total pre-tax intrinsic value, the difference
between our closing stock price as at February 28, 2015 and the option’s exercise price, for all options that are in the
money. This value was $nil as at February 28, 2015.
As at February 28, 2015, there is $248,792
of unearned stock based compensation cost related to stock options granted that have not yet vested (5,033,333 options). This
cost is expected to be recognized over a remaining weighted average period of 1.0 years. 7,100,000 of the stock options granted
on August 14, 2014 vest 1/3 immediately, 1/3 after one year and 1/3 after two years. 150,000 options vest contingent on revenue
targets, and 150,000 options have vested on April 1, 2015. The remaining options all have immediate vesting terms.
The
estimated fair value of options granted on August 14, 2014 is measured using the binomial model using the following assumptions:
Total number of shares issued under options |
|
|
10,470,000 |
|
Stock price |
|
$ |
0.10 |
|
Exercise price |
|
$ |
0.10 |
|
Time to expiration – days (2 year options) |
|
|
730 |
|
Time to expiration – days (5 year options) |
|
|
1,826 |
|
Risk free interest rate (2 year options) |
|
|
.42 |
% |
Risk free interest rate (5 year options) |
|
|
1.58 |
% |
Forfeiture rate (all options) |
|
|
0 |
% |
Estimated volatility (all options) |
|
|
150 |
% |
Weighted-average fair value of options granted |
|
|
0.09 |
|
Dividend |
|
|
- |
|
The
assumptions used in the stock based compensation binomial models are consistent with the methodology used in valuing the Company’s
convertible debt instruments with two year lives, and the Company’s warrants with five year lives. Due to a lack of history,
the Company has assumed the expected life of the options, is the contractual life of the options.
11.
Related Party Balances and Transactions
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 (as of that date) in the Company. The Chief Executive Officer and director of the Company, David Lucatch, is the Chief
Executive Officer and director of Intertainment Media, Inc. and Herb Willer, is a director of both the Company and Intertainment
Media, Inc.
On March 28, 2013, as part of the assets
purchased, the Company also assumed a technology services agreement with Ortsbo Inc. (“Ortsbo”), a wholly-owned subsidiary
of Intertainment Media, Inc. Mr. Lucatch is also the president and a member of the Board of Directors of Ortsbo, Inc. Mr. Lucatch
is also a member of the Board of Directors of Ortsbo USA, 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.
On October 23, 2013, the Company and
Ortsbo, entered into an amendment to the Services Agreement dated March 21, 2013 for an exclusive license to use the Ortsbo property
and an option to purchase a copy of the Ortsbo source code in exchange for 1,666,667 shares of restricted common stock of the
Company. The shares of common stock were valued at the market price on the date of the agreement for a value of $133,333. On April
28, 2014, the Company exercised its right to purchase a copy of the source code for the Ortsbo property in exchange for 13,333,333
shares of restricted common stock. Since both the Company and Ortsbo are under the common control of Intertainment Media, Inc.,
and as Ortsbo’s carrying value for these assets was $nil, the Company reflected the acquisition value at $nil on the condensed
consolidated balance sheet. As of February 28, 2015, Ortsbo holds 15,000,000 restricted shares of common stock of the Company.
During
the year ended May 31, 2014, the Company issued 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 in the amount of $75,000 due from Intertainment Media, Inc. which is offset against the related
party liability on the balance sheet.
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. on behalf of the Company for third party purchases are invoiced at cost.
For
the year ended May 31, 2014, the Company paid for general development and managerial services performed by its parent, Intertainment
Media, Inc. Related party fees incurred and paid or accrued under this arrangement totaled $1,668,930 for the year ended May 31,
2014 and a remaining related party liability balance totaling $145,316 existed as of May 31, 2014.
For
the three and nine months ended February 28, 2015, related party fees incurred and paid for general development and managerial
services performed by its parent, Intertainment Media, Inc. and its subsidiary totaled $135,763 and $725,779, respectively, and
for the three and nine months ended February 28, 2014 $415,300 and $1,193,026 respectively. As of February 28, 2015 and May 31,
2014, the related party liability balance totaled $260,843 and $145,316, respectively.
12.
Subsequent Events
Stock
Options
On
March 3, 2015 the Company granted 7,575,000 stock options with an exercise price of $0.10 per common stock to its employees and
select consultants.
March
billings
The
Company continued to bill for development and professional services related to the build of multi-lingual marketing websites that
will provide additional e-commerce opportunities to advertising partners in the amount of $271,318.
Group
10 Holdings LLC
On March 30, 2015, the Company sold
a debenture for the principal amount of $92,000 with a 10% Original Issue Discount of $9,200. The convertible debenture matures
on March 30, 2016 and has an interest rate of 12% per annum. The note may be converted into shares of common stock of the Company
at any time beginning on the 180th day of the date of the note at a conversion price of 55% of the closing bid prices as of the
date a Notice of Conversion is given. The Note may be paid back any time before maturity with a prepayment penalty of 123%.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Unless otherwise indicated, references
in this Quarterly Report on Form 10-Q to “we,” “Yappn,” “us,” and “our” are to
Yappn Corp., unless the context requires otherwise. The following discussion and analysis by our management of our financial condition
and results of operations should be read in conjunction with our unaudited condensed interim financial statements and the accompanying
related notes included in this quarterly report and our audited financial statements and related notes and Management’s Discussion
and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended May
31, 2014 filed with the Securities and Exchange Commission.
Forward Looking Statements
The discussion contained
in this Quarterly Report on Form 10-Q (“Quarterly Report”) contains “forward-looking statements” within
the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the
United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs,
plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements
are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,”
“plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,”
“management believes,” “we believe,” “we intend,” “we may,” “we will,”
“we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases.
We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the
industry in which we operate as of the date of this Quarterly Report. These forward-looking statements are subject to a number
of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially
from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Quarterly Report
describe factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those
anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect. Because the factors discussed in this Quarterly Report could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance
on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will
arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required
by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could
differ materially from those anticipated in these forward-looking statements, even if new information becomes available after the
date of this Quarterly Report or the date of documents incorporated by reference herein that include forward-looking statements.
Management’s
Discussion and Analysis of Results of Financial Condition and Results of Operations (“MD&A”) should be read in
conjunction with our financial statements included herein. Further, this quarterly report on Form 10-Q should be read in conjunction
with our Financial Statements and Notes to Financial Statements included in our fiscal 2014 Annual Report on Form 10-K for the
year ended May 31, 2014, filed with the Securities and Exchange Commission on August 29, 2014. Our actual results could differ
materially from those anticipated by the forward-looking statements due to important factors and risks including, but not limited
to, those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K.
Business History
We were originally
incorporated under the laws of the State of Delaware on November 3, 2010 under the name of “Plesk Corp.” Our
initial business plan was to import consumer electronics, home appliances and plastic house wares. In March 2013, we filed an
amended and restated certificate of incorporation to change our name to “YAPPN Corp.” and increase our authorized
capital stock to 200,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 shares of preferred stock, par
value $0.0001 per share. Further, in March 2013, our Board of Directors declared a stock dividend, whereby an additional
14 shares of our common stock was issued for each one share of common stock outstanding to each holder of record on March 25,
2013. All per share information in this report reflect the effect of such stock dividend. On December 22, 2014, we
held our annual shareholder’s meeting. During the meeting, our shareholders approved the increase of authorized and issued
shares of common stock to 400,000,000 shares of common stock. We filed an amendment with the State of Delaware to affect this
change which was accepted effective December 31, 2014.
On March 28, 2013,
we purchased a prospective social media platform and related group of assets known as Yappn (“Yappn”) from Intertainment
Media, Inc. (“IMI”), a corporation organized under the laws of Canada, for 70,000,000 shares of our common stock, pursuant
to an asset purchase agreement (the “Purchase Agreement” and the transaction, the “Asset Purchase”) by
and among IMI, us, and our newly formed wholly owned subsidiary, Yappn Acquisition Sub., Inc., a Delaware corporation (“Yappn
Sub”). Mr. David Lucatch, our Chief Executive Officer and a director, is the Chief Executive Officer of IMI. IMI,
as a result of this transaction has a controlling interest in our company. Included in the purchased assets is a services
agreement (the “Services Agreement”) dated March 21, 2013 by and among IMI and its wholly owned subsidiaries Ortsbo,
Inc., a corporation organized under the laws of Canada (“Ortsbo Canada”), and Ortsbo USA, Inc., a Delaware corporation
(“Ortsbo USA” and, collectively with Ortsbo Canada, “Ortsbo”). Ortsbo is the owner of certain
multi-language real time translation intellectual property that we believe is a significant component of the Yappn business opportunity.
Immediately following
the Asset Purchase, under the terms of an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations,
we transferred all of our pre-Asset Purchase assets and liabilities (consisting of our former business of import consumer electronics,
home appliances and plastic house wares ) to our wholly owned subsidiary, Plesk Holdings, Inc., a Delaware corporation. Thereafter,
pursuant to a stock purchase agreement, we transferred all of the outstanding capital stock of Plesk Holdings, Inc. to certain
of our former shareholders in exchange for cancellation of an aggregate of 112,500,000 shares of our common stock held by such
persons.
Our principal executive
offices are located at 1001 Avenue of the Americas, 11th Floor, New York, NY 10018 and our telephone number is (888) 859-4441.
Our website is http://www. yappn.com (which website is expressly not incorporated into this filing).
Our Business
The related group
of assets known as Yappn (“Yappn”) is a real-time multilingual business that amplifies brand messaging, helps conduct
commerce and provides customer support by globalizing these experiences with its proprietary approach to language. Through its
Real Time Multilingual Amplification platform, Yappn eliminates the language barrier, allowing the free flow of communications
in nearly 70 languages to support brand and individuals’ marketing objectives, commerce revenue goals and customer support
objectives by making language universal for all fans and consumers. These services are increasingly becoming essential for companies
to conduct business online as English is no longer the language of the internet. Over 73% of the world’s internet users speak
a language other than English (Source: “Internet World Stats 2011” at http://www.internetworldstats.com/stats7.htm).
Even domestically, over 66 million or 21% of the U.S. population does not speak English at home as of 2011 (Source: http://www.census.gov/prod/2013pubs/acs-22.pdf).
We anticipate that those figures are expected to grow significantly in the following five years.
Through Yappn, we
have developed cost effective unique and proprietary technology tools and services that create dynamic solutions that enhance a
brands messaging, media, e-commerce and support platforms. Through the use of Yappn’s services, we contend that device, location
and connection are no long issues for the digital user.
We believe
that Yappn redefines global social marketing by providing a set of stand-alone commercial tools for brands providing easy to implement
and cost effective globalization solutions as they are complementary, not competitive, to today’s top social media networks
such as Twitter, Facebook, Pinterest, Instagram, Flickr and YouTube, web, mobile, video players, blogs, online broadcasting, private
networks and event virtualization.
Yappn will
also be used to enable eCommerce in the multi-language/multi-social media marketing feed of an online store, the multi-language
translation of the store, and the multi-language post-sale support of a transaction. We are planning to work with our customers
on an incremental revenue based model deriving revenue from a percent of each sale plus professional services, when applicable.
Implementation of
our business plan will require additional debt or equity financing and there can be no assurance that additional financing can
be obtained on acceptable terms. We are in the development stage, and have limited revenues to cover our operating costs. As such,
we have incurred an operating loss since inception. This and other factors raise substantial doubt about our ability to continue
as a going concern. Our continuation as a going concern is dependent on our ability to meet our obligations, to obtain additional
financing as may be required and ultimately to attain profitability. Our independent auditors have included an explanatory paragraph,
specifically Footnote 2, in their audit report on our financial statements for the fiscal year ended May 31, 2014 regarding concerns
about our ability to continue as a going concern and Footnote 2 to the Notes to this Quarterly Report also discusses concerns about
our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Our Strategy
The
Yappn e-Commerce business model includes a business plan that we believe allows companies to extend their reach online and become
truly “international” by servicing customers in nearly 70 languages to improve their relationship with their consumers
through the elimination of the language barrier and offering the shopping cart and catalog in multiple languages. Out
of 2.3 billion internet users, only 540 million speak English (Source: Miniwatts Marketing Group). Management believes that prime
markets for eCommerce growth are in China and Eastern Europe. We provide services on a fee for services basis, percentage of revenue
per transaction, professional service fees and in some cases on a CPM (cost per thousand) or as a percentage of revenue to online
advertising and monetization events.
The
Yappn chat platform (chat.yappn.com, which website is expressly not incorporated into this filing) allows users to create and moderate
discussion rooms based on interest topics where users can view content and chat in their native language in real time. Each user's
experience is individualized to their native language allowing for a global free flow of communication without a language barrier.
Revenue in the chat platform is driven by sponsorship programs, private chat boards and other upcoming upgrades in the future.
The
Yappn tool set (yappn.com, which website is expressly not incorporated into this filing) provides brands with a series of technology
add-ons to complement their current social media activities and allows them to reach a global audience by instantly providing
key messaging in almost 70 languages.
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The Social Media Wall is an aggregation of major social media accounts for fans and consumers to interact with in almost 70 languages. |
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Live video captioning is to broadcast a live event with real-time video closed captioning in almost 70 languages. |
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Post production video provides closed captioning in almost 70 languages for archive videos and feature films. |
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A live Q&A is an interactive live stream with fans worldwide allowing them to participate and ask moderated questions in almost 70 languages. |
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Engagement events such as a custom branded Twitter Q&A session which allows for real-time multilingual events to activate on a global scale for brands and individuals. |
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Real-Time Social Imagery allows for the creation of real-time conversation via social media with professional photography at major events |
The
tools are a "build once and deploy everywhere" arrangement allowing brands to embed key social media like Twitter, Facebook,
YouTube, Instagram, Pinterest, Flickr and Tumblr and mobile into existing platforms. Yappn tools have been effectively tested and
commercially deployed through a number of entertainment, sports and commercial brands and they are now available to agencies to
enhance their client's domestic and global outreach plans. The programs are available on a servicing contractual basis and we have
begun to receive contractual commitments from various brands for the use of its tool sets.
Yappn
will continue to develop additional revenue-centric features and tools and refine our current business plan. Each new feature set
is built on a prime revenue driver for our business as it continues to work with clients and their agencies to develop new deployment
tools and programs to reach an expanding global audience.
FotoYapp
Fotoyapp
is a multichannel consumer platform for web, portable and mobile devices and allows users to instantly connect photos and images
to almost any content in almost any language. This builds on the idea that “a picture is worth a thousand words” by
revolutionizing social engagement and allowing images and content to be linked to each other and shared instantly, creating the
ability to share beyond the image. A user simply takes an image from a camera, tablet, computer, etc. and uploads it to Fotoyapp
along with key words that describe the image. Fotoyapp automatically adds the users current social media accounts like Twitter,
Facebook and Sina Wibo and crawls the web for related social media posts using the selected key words. A Web crawler is
a software application that systematically browses the World Wide Web, typically for the purpose of Web indexing.
The result is a stand-alone page where images are socially and visually enabled with all types of related content that automatically
defaults to the view’s language, regardless of what language the social content was posted in.
Fotoyapp
will offer advance features not currently found, to our knowledge, in other leading social and mobile content channels. For example,
a user uploads an image of the dinner they ordered at a restaurant. That image could be connected to the restaurant’s location
and URL, popular restaurant rating sites and other related online content, providing viewers of the image with a total picture
of the image. The restaurant, in turn, could share the image with its other constituents and sites. This process can be duplicated
for products and services where images can be used to create value for commercial purposes and connect to Yappn’s eCommerce
multilingual offerings.
Yappn
has completed a business agreement with Getty Images for its FotoYapp multi-channel app. Pursuant to this agreement, Influencers
(defined as a celebrity, athlete or otherwise famous individual with a social network of fans which consists of but not limited
to, significant Facebook fans, twitter followers and Instagram followers.) that Yappn and Fotoyapp have agreements with will have
authenticated access to photography through the Getty Images platform allowing them to instantly tag, comment and share images
through Fotoyapp, giving them the ability to broaden their social outreach. Additionally, consumers will have access to some of
the world’s best imagery through select Getty Images collections offered on Fotoyapp, providing new opportunities to create
global social engagement with content and FotoYapp’s multi-lingual social sharing with a wide range of business solutions.
Digital Widget Factory
Yappn
has executed a three-year Master Services Agreement and SOW (statement of work) with Digital Widget Factory to develop and manage
a minimum of 200 multilingual E-commerce sites which will include multilingual online marketing through traditional online services
and social engagement. Expected first year revenues for the program are estimated to be up to $3,000,000 in revenues (although
no assurances can be provided that such amounts will be achieved or profitability realized) with rapid expansion of sites planned
for 2016 and 2017. Contract terms allowed for pre-paid fees in association with the project of a minimum of $250,000 plus 20% net
profit on the program for the term duration.
The
Services Agreement
We acquired the
rights under the Services Agreement dated March 21, 2013 between IMI and IMI’s wholly owned Ortsbo subsidiaries upon the
closing of the Asset Purchase. Pursuant to the terms of the Services Agreement, Ortsbo made available to us its representational
state transfer application programming interface (the “Ortsbo API”), which provides multi-language real-time translation
as a cloud service. The Services Agreement also provides that Ortsbo makes its “Live and Global” product offering,
which enables a cross language experience for a live, video streaming production, available to us as a service for marketing and
promoting the Yappn product in the marketplace (the “Services”). The Services do not include the “chat”
technology itself and we shall be solely responsible for creating, securing or otherwise building out our website and any mobile
applications to include chat functionality, user forums, user feedback, and related functionality within which the Ortsbo API can
be utilized to enable multi-language use. Under the initial agreement, no intellectual property owned by Ortsbo would
be transferred to us except to the extent set forth in the Services Agreement as described in “Intellectual Property”
set forth below.
For all ongoing
services provided under the Services Agreement, we shall pay Ortsbo an amount equal to the actual cost incurred by Ortsbo in providing
the Services, plus thirty percent (30%). In addition, we shall pay to Ortsbo an ongoing revenue share which shall equal
seven percent (7%) of the gross revenue generated by our activities utilizing the Services. If we are earning revenue
without use of the Services because, for example, all communications are taking place in English, then no revenue share shall be
owing to Ortsbo with respect thereto. If there is a blend of multi-language and English-English communications, then
the parties shall do their best to pro rate or apportion the revenues appropriately in order to compensate Ortsbo for the portion
of our revenues enabled by use of the Services from Ortsbo. The Services Agreement may be terminated by either party
with 60 days written notice and both parties may not, for the term of the Agreement and a period of two years thereafter, (i) directly
or indirectly assist any business that is competitive with the other party’s business, (ii) solicit any person to leave employment
with the other and (iii) solicit or encourage any customer to terminate or otherwise modify adversely its business relationship
with the other.
In
October 2013, we amended the Services Agreement. Under the terms of the amendment to the Services Agreement, we will
have the first right of refusal to purchase the Ortsbo platform and all its assets and operations for a period of two years; increasing
its use of Ortsbo's technology for business to consumer social programs at a purchase price to be negotiated at the time we exercise
our right. We also have a right to purchase a copy of the source code only applicable to Yappn programs for $2,000,000 which may
be paid in cash or restricted shares of our common stock at a per share price of $.15 per share. As part of the enhancement agreement,
we issued Ortsbo 1,666,667 shares of our restricted common stock. On April 28, 2014, we exercised our right to purchase a copy
of the source code for the Ortsbo property in exchange for 13,333,333 shares of restricted common stock for a value of $2,000,000.
Competition
Our new business
focus relating to and arising from the development of the Yappn assets is characterized by innovation, rapid change, and disruptive
technologies. We will face significant competition in every aspect of this business, including from companies that provide
tools to facilitate the sharing of information, that enable marketers to display personalized advertising and that provide users
with multi-language real-time translation of social media platforms. We will compete with the following, many of whom have
significantly greater resources than we do:
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Companies that offer full-featured products that provide a similar range of communications and related capabilities that we provide. These offerings include, for example, Facebook, LinkedIn, Craigslist, Google+, which Google has integrated with certain of its products, including search and Android, as well as other, largely regional, social networks that have strong positions in particular countries, such as Mixi in Japan and vKontakte and Odnoklassniki in Russia. |
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Companies that provide web- and mobile-based information and entertainment products and services that are designed to engage users. |
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Companies that offer platforms for game developers to reach broad audiences with free-to-play games including Facebook and Apple's iOS and Google's Android mobile platforms. |
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Traditional and online businesses that offer corporate sponsorship opportunities and provide media for marketers to reach their audiences and/or develop tools and systems for managing and optimizing advertising campaigns. |
We anticipate that
we will compete to attract, engage, and retain users, to attract and retain marketers, to attract and retain corporate sponsorship
opportunities, and to attract and retain highly talented individuals, especially software engineers, designers, and product managers.
As we introduce new features to the Yappn platform, as the platform evolves, or as other companies introduce new platforms
and new features to their existing platforms, we may become subject to additional competition. We believe that our ability
to quickly adapt to a changing marketplace, and our experienced management team, will enable us to compete effectively in the market. Further,
we believe that our focus on encouraging user engagement based on topics and interests, rather than on “friends” or
connections, will differentiate us from much of the competition.
Intellectual Property
We own (i) the yappn.com
domain name (which website is expressly not incorporated into this filing) and (ii) the Yappn name and all trademarks, service
marks, trade dress and copyrights associated with the Yappn name, logo and graphic art. We may prepare several patent
filings in the future. Upon payment of the applicable fees pursuant to the Services Agreement, we will become the exclusive owner
of copyright in the literary works or other works of authorship delivered by Ortsbo to us as part of the Services provided under
the Services Agreement (the “Deliverables”). All such rights shall not be subject to rescission upon termination
of the Services Agreement. Also as set forth in the Services Agreement, we shall grant to Ortsbo (i) a non-exclusive
(subject to certain limitations) license to use the Deliverables for the sole purpose of developing its technology, (ii) a non-exclusive
license to use, solely in connection with the provision of the Services, any intellectual property owned or developed by us or
on our behalf and necessary to enable Ortsbo to provide the Services and (iii) a license to use intellectual property obtained
by us from third parties and necessary to enable Ortsbo to provide the Services. All such licenses shall expire upon
termination of the Services Agreement.
On April 28, 2014,
we purchased a copy of the source code for the Ortsbo property and all the rights associated with it.
Marketing
We intend that the
Yappn community will grow virally with users inviting their friends to connect with them, supported by internal efforts to stimulate
user awareness and interest. In addition, we plan to invest in marketing its services to build its brand and user base around the
world and to regularly host online events and conferences to engage with developers, marketers and online consumers.
Government Regulation
We are subject to
a number of U.S. federal and state, and foreign laws and regulations that affect companies conducting business on the Internet,
many of which are still evolving and being tested in courts, and could be interpreted in ways that could harm our business. These
may involve user privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts
and other communications, competition, protection of minors, consumer protection, taxation and online payment services. In particular,
we are subject to federal, state, and foreign laws regarding privacy and protection of user data. Foreign data protection, privacy,
and other laws and regulations are often more restrictive than those in the United States. U.S. federal and state and foreign laws
and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation
of these laws and regulations are often uncertain, particularly in the new and rapidly-evolving industry in which we operate. There
are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies, and foreign governments
concerning data protection which could affect us. For example, a revision to the 1995 European Union Data Protection
Directive is currently being considered by legislative bodies that may include more stringent operational requirements for data
processors and significant penalties for non-compliance.
Legal Proceedings
None.
Registration Statement
We filed a Registration
Statement on Form S-1 (File No. 333-199569) (the “Registration Statement”) with the Securities and Exchange
Commission (the “SEC”) on October 24, 2014 (amended November 7, 2014) for up to 75,926,665 shares of
our $0.0001 par value per share common stock (the "Common Stock") by certain selling stockholders upon conversion of
promissory notes and/or warrants currently held by those selling stockholders, specifically (i) 18,440,000 shares of Common Stock
issuable to them upon exercise of promissory notes and (ii) 45,880,000 shares of Common Stock issuable to them upon exercise of
warrants. The warrants have an exercise prices varying from $0.10 to $0.22 per share (subject to adjustment). The Registration
Statement covering the above noted securities was declared effective under the Securities Act of 1933 on November 17, 2014.
RESULTS OF OPERATIONS
Three Months ended February 28, 2015 and February 28,
2014
Revenues
We are in the
process of commercialization of our multi-language platform. We had revenues of $528,846 and $5,875 for the three
months ended February 28, 2015 and February 28, 2014, respectively. Revenues for the current period relate predominately to
professional services for Digital Widget Factory. Comparative period revenues resulted from services provided for a few
limited customer events prior to launch of the platform. Our management is focusing on developing relationships with
commercial partners and influencers, which has delayed revenue realization in recent quarters.
Cost of revenue
We incurred costs
of revenue of $140,183 and $4,870, for the three months ended February 28, 2015 and 2014, respectively. These costs were directly
attributable to the revenues generated in the comparative period and resulted in a gross profit of $388,663and $1,005, for the
three months ended February 28, 2015 and 2014, respectively.
Total operating expenses
During the three
months ended February 28, 2015 and 2014, total operating expenses were $849,358 and $1,021,988, respectively.
For the three months
ended February 28, 2015, the operating expenses consisted of marketing expense of $104,383, research and development expenses
of $100,759, general and administrative expenses of $300,435, legal and professional fees of $74,282, consulting fees of $199,064
and stock based compensation of $70,378. For the comparable three months ended February 28, 2014, the operating expenses consisted
of marketing expenses of $184,027, research and development expenses of $338,048, general and administrative expenses of $195,666,
professional fees of $64,977 and consulting fees of $239,270.
All of our research
and development costs have been incurred since the fourth quarter of the 2013 fiscal year. These research and development expenses
are primarily for fees to technology consultants from Intertainment Media and Ortsbo. As the social media platform and products
become commercialized we expect the costs of research and development to decrease, but would expect maintenance costs on the social
media platform to increase.
General and administrative
expenses include executive and office salaries, administrative services for accounting and finance, outside consulting costs for
business development, costs for investor relations and general business needs and averaged approximately $325,000 per quarter.
These costs have grown as we have worked to develop a customer base and meet the needs of investors to finance our operation.
Management has made some direct hires over the comparative period which has increased the overall costs as well. Professional
fees were incurred primarily for use of legal counsel related to financing arrangements for convertible promissory notes and warrants
and for accounting and auditing services. We expect our professional fees to vary from period to period based upon our corporate
needs. Consulting fees incurred primarily for consulting service costs for third party consultants. We have used a number of different
outside firms to provide strategic position of our products, markets and customer introductions. Some of the fees of the firms
providing these services were paid with shares of common stock.
Total other income and expenses
Other (income) expenses
totaled $894,903 and $(1,301,482), for the three months ended February 28, 2015 and February 28, 2014, respectively. The change
of $2,196,386 is primarily due to the change in the fair value of derivative financial instruments. Many of our financing instruments
are either convertible into shares of our common stock or have provisions that provide an option to convert into shares of our
common stock. For accounting purposes we are required to value such instruments at fair value which can fluctuate as the market
price of shares of our common stock fluctuates.
During the three
months ended February 28, 2015, total other (income) consisted of interest expense of $105,007, financing expenses related to
convertible debentures, warrants and contractual obligations totaling $362,069, an expense resulting from the change in fair value
of the derivative liabilities and convertible notes of $485,051 and other miscellaneous income of $57,224.
During the three
months ended February 28, 2014, total other income and expenses resulted in losses of $1,301,482. The other expenses
consisted of interest expense of $25,938 and financing expenses on the issuance of derivative liabilities of $121,454. Other income
consisted of the decrease in the fair value of the derivative liabilities resulting in income of $1,368,583 and miscellaneous other
income of $80,291.
During the nine
month period ended February 28, 2015 and year ended May 31, 2014, we raised $2,017,175 and $3,860,093, respectively, in cash from
short term notes payable, line of credit, convertible notes and debentures through normal channels and private placements. For
accounting purposes, since certain financial instruments had convertible provisions and in some cases provisions that protect
the holder by including full ratchet anti-dilution measures, they are treated as derivatives liabilities and are valued using
a binomial lattice fair value model upon inception and adjusted accordingly to market at the close of the period. The
financing expense associated with the capital raises and prior obligations were $362,069 and $121,454, for the three month period
ended February 28, 2015 and February 28, 2014, respectively. There was less financing raised in the quarter ending February 28,
2015 from convertible notes and no financing from preferred share issuance than the comparative period as we primarily relied
on bridge loans and the line of credit arrangement.
For the three month
period ended February 28, 2015, the gain from fair value adjustment largely relates to the passage of time where value naturally
erodes, as well as the moderate decreases in the our stock price. In the comparative period, there was a significant decline in
the market price compared to those prices that were in effect at the time of the original issuance of these convertible instruments
and warrants from fiscal 2013. The changes in market value of our common stock coupled with the other parameters used in the binomial
lattice model for all instruments marked to market, resulted in a loss of $485,051 for the three month period ended February 28,
2015 in contrast to a gain of $1,368,583 for the three month period ended February 28, 2014, a change of $1,853,634.
Net income (loss) and comprehensive income (loss)
During the three
months ended February 28, 2015 and 2014, we had net loss and comprehensive loss of $1,355,597 and $280,499 respectively.
Nine Months ended February 28, 2015 and February 28, 2014
Revenues
We are in the process
of commercialization of our multi-language platform. We had revenues of $606,821 and $37,135 for the nine months ended
February 28, 2015 and February 28, 2014, respectively. Revenues for the current period relate predominately to professional services
for Digital Widget Factory. Comparative period revenues resulted from services provided for a few limited customer events prior
to launch of the platform. Our management is focusing on developing relationships with commercial partners and influencers, which
has delayed revenue realization in recent quarters.
Cost of revenue
We incurred costs
of revenue of $140,389 and $14,854, for the nine months ended February 28, 2015 and 2014, respectively. These costs were directly
attributable to the revenues generated in the comparative period and resulted in a gross profit of $466,432 and $22,281, for the
nine months ended February 28, 2015 and 2014, respectively.
Total operating expenses
During the nine
months ended February 28, 2015 and 2014, total operating expenses were $3,990,999 and $3,058,082, respectively.
For the nine
months ended February 28, 2015, the operating expenses consisted of marketing expense of $996,107, research and development
expenses of $597,490, general and administrative expenses of $1,020,468, professional fees of $173,520, consulting fees of
$524,059 and stock based compensation of $679,179. For the comparable nine months ended February 28, 2014 the operating
expenses consisted of marketing expenses of $474,459, research and development expenses of $1,006,984, general and
administrative expenses of $660,409, professional fees of $256,847 and consulting fees of $659,383.
All of our research
and development costs have been incurred since the fourth quarter of the 2013 fiscal year. These research and development expenses
are primarily for fees to technology consultants from Intertainment Media and Ortsbo. As the social media platform and products
become commercialized we expect the costs of research and development to decrease, but would expect maintenance costs on the social
media platform to increase.
General and administrative
expenses include executive and office salaries, administrative services for accounting and finance, outside consulting costs for
business development, costs for investor relations and general business needs and averaged approximately $325,000 per quarter.
These costs have grown as we have worked to develop a customer base and meet the needs of investors to finance our operation.
Management has made some direct hires over the comparative period which has increased the overall costs as well. Professional
fees were incurred primarily for use of legal counsel related to financing arrangements for, convertible promissory notes and
warrants and for accounting and auditing services. We expect our professional fees to vary from period to period based upon our
corporate needs. Consulting fees incurred primarily for consulting service costs for third party consultants. We have used a number
of different outside firms to provide strategic position of our products, markets and customer introductions. Some of the fees
of the firms providing these services were paid with shares of common stock.
Total other income and expenses
Other (income)
expenses totaled $(544,073) and $(7,257,927), for the nine months ended February 28, 2015 and February 28, 2014, respectively.
The change of $(6,713,854) is primarily due to the change in the fair value of derivative financial instruments. Many of our financing
instruments are either convertible into shares of our common stock or have provisions that provide an option to convert into shares
of our common stock. For accounting purposes we are required to value such instruments at fair value which can fluctuate as the
market price of shares of our common stock fluctuates.
During the nine months
ended February 28, 2015, total other (income) consisted of interest expense of $253,973, financing expenses related to convertible
debentures, and warrants that are considered derivative liabilities totaling $942,574, a gain resulting from the change in fair
value of the derivative liabilities and convertible notes of $1,647,824 and other miscellaneous income of $92,796.
During the nine
months ended February 28, 2014, total other income and expenses resulted in income of $(7,257,927). The other expenses
consisted of interest expense of $54,033 and financing expenses on the issuance of derivative liabilities of $2,164,530. Other
income consisted of the increase in the fair value of the derivative liabilities resulting in a gain of $9,395,021 and miscellaneous
other income of $81,469.
The financing expenses
related to the issuance of derivative liabilities increased for the nine months ended February 28, 2014 related to our raising
capital by issuing 1,650,000 units of preferred stock and warrants. For accounting purposes, since these instruments
protect the holder by including full ratchet anti-dilution measures, they are treated as derivatives liabilities and are valued
using a binomial fair value model upon inception and adjusted accordingly to market at the close of the period. The
accounting for the derivative liabilities are recorded as a financing expense on the Statements of Operations and Comprehensive
(Loss) Income.
As of February 28,
2014, we adjusted the fair value of the derivatives instruments related to the sale of 9,360,000 units of preferred stock and warrants
previously issued. The market price of the common shares declined from a May 31, 2013 share price of $0.55 to a February 28, 2015
share price of $0.05. As a result of the revaluation of the derivative instruments on February 28, 2014, the related derivative
liabilities were reduced, which contribute to the vast majority of the $9,395,021 recorded gain for the nine months ended February
28, 2014
During the nine
month period ended February 28, 2015 and year ended May 31, 2014, we raised $2,017,175 and $3,860,093, respectively, in cash from
short term notes payable, line of credit, convertible notes and debentures through normal channels and private placements. For
accounting purposes, since certain financial instruments had convertible provisions and in some cases provisions that protect
the holder by including full ratchet anti-dilution measures, they are treated as derivatives liabilities and are valued using
a binomial lattice fair value model upon inception and adjusted accordingly to market at the close of the period. The
financing expense associated with the capital raises and prior obligations were $942,574 and $2,164,530 for the nine month period
ended February 28, 2015 and February 28, 2014, respectively. There were less financing raised in the quarter ending February 28,
2015 from convertible notes and no financing from preferred share issuance than the comparative period as we primarily relied
on bridge loans and the line of credit arrangement.
For the nine month
period ended February 28, 2015, the gain from fair value adjustment largely relates to the passage of time where value naturally
erodes, as well as the moderate decreases in our stock price. In the comparative period, there was a significant decline in the
market price compared to those prices that were in effect at the time of the original issuance of these convertible instruments
and warrants from fiscal 2013. The changes in market value of our common stock coupled with the other parameters used in the binomial
lattice model for all instruments marked to market, resulted in a gain of $1,647,824 for the nine month period ended February
28, 2015 in contrast to a larger gain of $9,395,021 for the nine month period ended February 28, 2014, a change of $7,747,197.
Net income (loss) and comprehensive income (loss)
During the nine
months ended February 28, 2015 and 2014, we had net (loss) income and comprehensive (loss) income of $(2,980,494) and $4,222,126
respectively.
Liquidity and Capital Resources
As of February 28,
2015, we had a cash balance of $10,131, which is a decrease of $978,561 from the ending cash balance of $988,692 as of May 31,
2014. We do not have sufficient funds to fund our expenses over the next twelve months. There can be no assurance that additional
capital will be available to us. Since we have no other financial arrangements or plans currently in effect, our inability to raise
funds for the above purposes will have a severe negative impact on our ability to remain a viable going concern.
To fund our operations,
we have issued convertible preferred stock, short term notes, convertible debt instruments, and warrants under various subscription
private placements to accredited investors for gross cash receipts of $2,017,175 and $3,860,092 for the nine months ended February
28, 2015 and the year ended May 31, 2014, respectively.
We have used this financing for funding operations and replacing short
term high cost debt instruments with lower cost longer term financial instruments where the economics made sense.
We estimate we will
need additional capital to cover our ongoing expenses and to successfully market our product offerings. This is only an estimate
and may change as we receive feedback from customers and have a better understanding of the demand for our application and the
ability to generate revenues from our new products. Both of these factors may change and we may not be able to raise the necessary
capital and if we are able to, that it may not be at favorable rates.
Going Concern Consideration
We incurred net losses and comprehensive
losses resulting in a deficit of $13,118,602 through February 28, 2015. At February 28, 2015, we had total assets of $639,570 and
liabilities totaling $6,313,943 and a working capital deficit of $4,216,832. These factors raise substantial doubt as to our ability
to continue as a going concern.
Implementation of
our business plan will require additional debt or equity financing and there can be no assurance that additional financing can
be obtained on acceptable terms. We are in the development stage, and have limited revenues to cover our operating costs.
As such, we have incurred an operating loss since inception. Our ability to continue as a going concern is dependent on its ability
to raise adequate capital to fund operating losses until we are able to engage in profitable business operations. This and other
factors raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent
on our ability to meet our obligations, to obtain additional financing as may be required and ultimately to attain profitability.
Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
There can be no
assurance that the raising of equity or debt will be successful or that our anticipated financing will be available in the future,
at terms satisfactory us. Failure to achieve the equity and financing at satisfactory terms and amounts could have a material adverse
effect on our ability to continue as a going concern. If we 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 we may
have to cease operations.
Off-Balance Sheet Arrangements
We do not have any
off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that are material to investors.
Critical Accounting Policies
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
Our management is
responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information
required to be disclosed by us in the reports it files or submits under the Securities Exchange Act of 1934, as amended (Exchange
Act), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our
disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports it files or submits under the Exchange Act is accumulated and communicated to management,
including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate,
to allow timely decisions regarding required disclosure. Because of inherent limitations, disclosure controls and procedures, as
well as internal control over financial reporting, may not prevent or detect all inaccurate statements or omissions.
Our management,
with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as of February 28, 2015 were effective such that the information
required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our
management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that
the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
(b) Changes In Internal Control Over
Financial Reporting
During the three
and nine months ended February 28, 2015, there were no changes in our internal controls over financial reporting that materially
affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
We are subject
from time to time to litigation, claims and suits arising in the ordinary course of business. As of February 28, 2015, we were
not a party to any material litigation, claim or suit whose outcome could have a material effect on our unaudited consolidated financial
statements.
ITEM 1A. RISK FACTORS
Not required under
Regulation S-K for “smaller reporting companies”.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
On December 11,
2014, the Company issued 400,000 shares of common stock, valued at $40,000, in exchange for business consulting services. On January
5, 2015, the Company issued an additional 400,000 shares of common stock, valued at $40,000, in exchange for business consulting
services.
The issuance of
such shares of our common stock was effected in reliance on the exemptions for sales of securities not involving a public offering,
as set forth in Rule 506 promulgated under the Securities Act of 1933, as mended (the “Securities Act”) and in Section
4(2) of the Securities Act, based on the following: the investors confirmed to us that they were “accredited investors,”
as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in
financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was
no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure
materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being
purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent
registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities
during the period ended February 28, 2015.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
There is no information
with respect to which information is not otherwise called for by this form.
WHERE YOU CAN FIND MORE INFORMATION
We file annual,
quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission”).
Our Commission filings are available to the public over the Internet at the Commission’s website at http://www.sec.gov.
The public may also read and copy any document we file with the Commission at its Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on
the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. We maintain a website at http://www. yappn.com
(which website is expressly not incorporated by reference into this filing). Information contained on our website is not part
of this report on Form 10-Q.
ITEM 6. EXHIBITS
Index to Exhibits
Exhibit No. |
|
Description |
|
|
|
2.1 |
|
Asset Purchase Agreement by and among Yappn Corp., Yappn Acquisition Sub., Inc. and Intertainment Media, Inc., dated March 28, 2013 (2) |
3.1 |
|
Amended and Restated Certificate of Incorporation filed on March 14, 2013. (1) |
3.2 |
|
Amended and Restated Bylaws. (1) |
3.3 |
|
Amended and Restated Certificate of Designation and Preferences of Series A Convertible Preferred Stock, filed with the Secretary of State of Delaware on May 31, 2013 (3) |
3.4 |
|
Amended Certificate of Incorporation filed on December 31, 2014 *
|
4.1 |
|
Convertible Promissory Note (4) |
4.2 |
|
Convertible Promissory Note Issued in Favor of JMJ Financial (6) |
4.3 |
|
8% Convertible Note (7) |
4.4 |
|
Form of 8% Convertible Note (8) |
4.5 |
|
Form of 6% Convertible Promissory Note (9) (10) (12) |
4.6 |
|
Form of Promissory Note (13) |
4.7 |
|
Common Stock Purchase Warrant (13) |
10.1 |
|
Lock-Up Agreement by and between Yappn Corp. and Intertainment Media, Inc. (2) |
10.2 |
|
Form of Warrant (2) |
10.3 |
|
Form of Subscription Agreement (2) |
10.4 |
|
Form of Registration Rights Agreement (2) |
10.5 |
|
Form of Note Purchase Agreement (2) |
10.6 |
|
Form of Note (2) |
10.7 |
|
Form of First Amendment to Note Purchase Agreement (2) |
10.8 |
|
Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (2) |
10.9 |
|
Stock Purchase Agreement (2) |
10.10 |
|
2013 Equity Incentive Plan (2) |
10.11 |
|
Bill of Sale dated March 28, 2013 (2) |
10.12 |
|
Services Agreement by and between Ortsbo, Inc., Ortsbo USA, Inc. and Intertainment Media, Inc. dated March 21, 2013 (2) |
10.13 |
|
Form of Indemnification Agreement (2) |
10.14 |
|
Securities Purchase Agreement (4) |
10.15 |
|
Amendment to Services Agreement (5) |
10.16 |
|
Amendment Agreement to Convertible Promissory Note Issued in Favor of JMJ Financial (6) |
10.17 |
|
Securities Purchase Agreement (7) |
10.18 |
|
Securities Purchase Agreement between Yappn Corp. and GEL Properties LLC (8) |
10.19 |
|
Securities Purchase Agreement between Yappn Corp. and LG Capital Funding LLC (8) |
10.20 |
|
Form of Securities Purchase Agreement (9) (10) (12) |
10.21 |
|
Form of Registration Rights Agreement (9) (10) (12) |
10.22 |
|
Form of Series A Warrant (9) (10) (12) |
10.23 |
|
Form of Series B Warrant (9) (10) (12) |
10.24 |
|
Amendment Agreement to Convertible Promissory Note issued in favor of JMJ Financial (11) |
10.25 |
|
Loan Agreement (13) |
10.26 |
|
General Security Agreement between Yappn Corp. and Toronto Tree Top Holdings Ltd. (13) |
10.27 |
|
General Security Agreement (Yappn Canada Inc.) (13) |
10.28 |
|
General Security Agreement (Intertainment Media Inc.) (13) |
10.29 |
|
Guaranty and Indemnity (Yappn Canada Inc.) (13) |
10.30 |
|
Guaranty and Indemnity (Intertainment Media Inc.) (13) |
10.31 |
|
Assignment of Monies and Debt Due Arrangement (13) |
10.32 |
|
Employment
Agreement between Yappn Corp. and Mr. David Lucatch dated June 1, 2014. (14) |
10.33 |
|
Form of Series C Warrant (15) |
10.34 |
|
Form of Series D Warrant (15) |
10.35 |
|
Amendment to the Employment Agreement between Yappn Corp. and Mr. David Lucatch dated September 2, 2014. (16) |
10.36 |
|
Form of Master Services Agreement between Yappn Corp. and Digital Widget Factory, dated November 6, 2014. (16) |
14.1 |
|
Code of Ethics and Conduct (14) |
31.1 |
|
Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer.* |
31.2 |
|
Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer.* |
32.1 |
|
Section 1350 Certifications of Principal Executive Officer * |
32.2 |
|
Section 1350 Certifications of Principal Financial Officer * |
101.INS |
|
XBRL Instance Document * |
101.SCH |
|
XBRL Taxonomy
Extension Schema Document * |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase * |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase * |
101.LAB |
|
XBRL Taxonomy Extension Labels Linkbase * |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase * |
(1) Incorporated by reference to the
Company’s Current Report on Form 8-K, as filed with the SEC on March 18, 2013.
(2) Incorporated by reference to the
Company’s Current Report on Form 8-K as filed with the SEC on April 3, 2013.
(3) Incorporated by reference to the
Company’s Current Report on Form 8-K as filed with the SEC on June 3, 2013.
(4) Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on October 15, 2013.
(5) Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on October 29, 2013.
(6) Incorporated by reference to
the Company’s Current Report on Form 8-K, filed with the SEC on November 21, 2013.
(7) Incorporated by reference to
the Company’s Current Report on Form 8-K, filed with the SEC on December 18, 2013.
(8) Incorporated by reference to
the Company’s Current Report on Form 8-K, filed with the SEC on December 20, 2013.
(9) Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on January 30, 2014.
(10) Incorporated by reference
to the Company’s Current Report on Form 8-K, filed with the SEC on February 27, 2014.
(11) Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on March 4, 2014.
(12) Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on April 1, 2014.
(13) Incorporated by reference to the
Company’s Current Report on Form 8-K, filed with the SEC on April 11, 2014.
(14) Incorporated by reference to the
Company’s Annual Report on Form 10-K, filed with the SEC on August 29, 2014.
(15) Incorporated by reference to the
Company’s Registration Statement on Form S-1 filed with the SEC on October 24, 2014.
(16) Incorporated by reference to the
Company’s Quarterly Report on Form 10-Q, filed with the SEC on January 13, 2015.
* Filed herewith.
SIGNATURES
In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized
on this 14th day of April 2015.
|
YAPPN CORP. |
|
|
|
|
By: |
/s/ David Lucatch |
|
|
DAVID LUCATCH |
|
|
Chief Executive Officer |
|
|
|
|
By: |
/s/ Craig McCannell |
|
|
Craig McCannell |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
41
Exhibit
3.4
|
State
of Delaware |
|
Secretary
of State |
|
Division
of Corporations |
|
Delivered
01:20 PM 12/31/2014 |
|
FILED
01:20 PM 12/31/2014 |
|
SRV
150011187 - 4893182 FILE |
STATE
OF DELAWARE
CERTIFICATE
OF AMENDMENT
OF CERTIFICATE
OF INCORPORATION
The corporation
organized and existing under and by virtue of the General Corporation Law of the State of Delaware does hereby certify:
FIRST:
That at a meeting of the Board of Directors of
Yappn Corp.
resolutions
were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment
to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting
forth the proposed amendment is as follows:
RESOLVED,
that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered “Fourth”
so that, as amended, said Article shall be and read as follows:
A. Classes
and Number of Shares. The total number of shares of stock that the Corporation shall have authority to issue is Four Hundred
Fifty Million (450,000,000). The classes and aggregate number of shares of each class (see attached exhibit A) |
SECOND:
That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was
duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which
meeting the necessary number of shares as required by statute were voted in favor of the amendment.
THIRD:
That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN
WITNESS WHEREOF, said corporation has caused this certificate to be signed this 31st day of December, 2014.
|
By: |
/s/
Craig McCannell |
|
|
Authorized
Officer |
|
|
|
|
Title: |
Chief
Financial Officer |
|
|
|
|
Name |
Craig
McCannell |
|
|
Print
or Type |
Exhibit
A
which
the Corporation shall have authority to issue are as follows:
|
1. |
Four Hundred Million (400,000,000) shares of common stock, par value $0.0001
per share (the “Common Stock”); and |
|
2. |
Fifty Million (50,000,000) shares of preferred stock, par value $0.0001
per share (the “Preferred Stock"). |
B. Blank
Check Powers. The Corporation may issue any class of the Preferred Stock in any series. The Board of Directors shall have
authority to establish and designate series, and to fix the number of shares included in each such series and the variations
in the relative rights, preferences and limitations as between series, provided that, if the stated dividends and amounts
payable on liquidation are not paid in full, the shares of all series of the same class shall share ratably in the payment of
dividends including accumulations, if any, in accordance with the sums which would be payable on such shares if all dividends
were declared and paid in full, and in any distribution of assets other than by way of dividends in accordance with the sums
which would be payable on such distribution if all sums payable were discharged in full. Shares of each such series when
issued shall be designated to distinguish the shares of each series from shares of all other series.
Exhibit 31.1
Certification of CEO pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to
Section 302 and 906 of the Sarbanes-Oxley Act of 2002.
I, David Lucatch, certify that:
1. I have reviewed this annual report on Form
10-Q of Yappn Corp.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying
officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the Issuer, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the Issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report
any change in the Issuer’s internal control over financial reporting that occurred during the Registrant’s fiscal quarter
ending February 28, 2015 that has materially affected, or is reasonably likely to materially affect, the Issuer’s internal
control over financial reporting.
5. The Registrant’s other certifying
officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s
auditor and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All deficiencies and
material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether
or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: April 14, 2015
|
/s/ David Lucatch |
|
David Lucatch, Chief Executive Officer |
Exhibit 31.2
Certification of CFO pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of 2002.
I, Craig McCannell, certify that:
1. I have reviewed this annual report on Form
10-Q of Yappn Corp. ;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying
officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the Issuer, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the Issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report
any change in the Issuer’s internal control over financial reporting that occurred during the Registrant’s fiscal quarter
ending February 28, 2015 that has materially affected, or is reasonably likely to materially affect, the Issuer’s internal
control over financial reporting.
5. The Registrant’s other certifying
officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s
auditor and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a) All deficiencies and
material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether
or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: April 14, 2015
|
/s/ Craig McCannell |
|
Craig McCannell, Chief Financial Officer (Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
(18 U.S.C. SECTION 1350)
In connection with the annual report of Yappn
Corp. (the "Company") on Form 10-Q for the period ending February 28, 2015, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, David Lucatch, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information
contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Dated: April 14, 2015
|
/s/ David Lucatch |
|
David Lucatch, Chief Executive Officer |
Exhibit 32.2
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
(18 U.S.C. SECTION 1350)
In connection with the annual report of Yappn
Corp. (the "Company") on Form 10-Q for the period ending February 28, 2015, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Craig McCannell, Chief Financial Officer (Principal Accounting Officer)
of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information
contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Dated: April 14, 2015
|
/s/ Craig McCannell |
|
Craig McCannell, Chief Financial Officer
(Principal Accounting Officer) |
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