UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended May 31, 2014
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ___________to __________
Commission
file number: 000-55082
YAPPN
CORP.
(Exact
name of registrant as specified in its charter)
Delaware |
|
27-3848069 |
State
or other jurisdiction of
Incorporation
or organization |
|
(I.R.S.
Employer
Identification
No.) |
1001
Avenue of the Americas, 11th Floor
New
York, NY |
|
10018 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s
telephone number, including area code: 888-859-4441
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to section 12(g) of the Act:
Common
Stock, $0.001 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐
Yes ☒ No
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐
Yes ☒ No
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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 the 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 ☐
(Do
not check if a smaller reporting company) |
|
Smaller
reporting company ☒ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The
aggregate market value of the voting and non-voting common stock held by non-affiliates as of February 28, 2014, the last
business day of the registrant’s most recently completed second fiscal quarter, was $1,515,000.
As of August
26, 2014, there were 125,855,794 shares of the registrant’s common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: None
Table
of Contents
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PART
I |
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Item 1. |
Business. |
4 |
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Item 1A. |
Risk Factors. |
9 |
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Item 1B. |
Unresolved Staff
Comments. |
20 |
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Item 2. |
Properties. |
20 |
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Item 3. |
Legal Proceedings. |
20 |
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Item 4. |
Mine Safety Disclosures. |
20 |
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PART
II |
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Item 5. |
Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
20 |
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Item 6. |
Selected Financial
Data. |
23 |
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Item 7. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations. |
23 |
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Item 7A. |
Quantitative and
Qualitative Disclosures About Market Risk. |
30 |
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Item 8. |
Financial Statements
and Supplementary Data. |
30 |
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Item 9. |
Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure. |
30 |
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Item 9A. |
Controls and Procedures. |
30 |
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Item 9B. |
Other Information. |
31 |
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PART
III |
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Item 10. |
Directors, Executive
Officers, and Corporate Governance. |
32 |
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Item 11. |
Executive Compensation. |
37 |
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Item 12. |
Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters. |
38 |
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Item 13. |
Certain Relationships
and Related Transactions, and Director Independence. |
40 |
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Item 14. |
Principal Accountant
Fees and Services. |
41 |
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Item 15. |
Exhibits, Consolidated
Financial Statement Schedules. |
F-1 |
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Certification
Pursuant To Section 302 (A) Of The Sarbanes-Oxley Act Of 2002 |
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Certification
Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 |
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Cautionary
Statement Regarding Forward Looking Statements
The
discussion contained in this Annual Report on Form 10-K (“Annual 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 Annual 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. We discuss many of these risks in greater
detail in “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this
report. You should read this report and the documents that we reference in this report and have filed as exhibits to the report
completely and with the understanding that our actual future results may be materially different from what we expect. Statements in
this Annual 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 Annual 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 undertake no obligation to publicly revise our forward-looking statements to reflect
events or circumstances that arise after the date of this Annual Report or the date of documents incorporated by reference herein
that include forward-looking statements.
Unless
otherwise indicated or the context otherwise requires, all references in this Form 10-K to “we,” “us,”
“our,” “our company,” “Yappn” or the “Company” refer to Yappn Corp.
PART
I
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
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 Yappn. 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.
We
have abandoned our plan to import consumer electronics, home appliances and plastic house wares. 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 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
Yappn is a real-time multilingual
company 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.
Yappn
has 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.
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. 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.
| ● | The
Social Media Wall is an aggregation of major social media accounts for fans and consumers
to interact with in almost 70 languages. |
| | |
| ● | Live
video captioning is to broadcast a live event with real-time video closed captioning
in almost 70 languages. |
| | |
| ● | Post
production video provides closed captioning in almost 70 languages for archive videos
and feature films. |
| | |
| ● | A
live Q&A is an interactive live stream with fans worldwide allowing them to participate
and ask moderated questions in almost 70 languages. |
| | |
| ● | 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. |
| | |
| ● | 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. 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. 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.
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 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 Million USD which
may be paid in cash or restricted shares of the Company's common stock at a per share price of $.15. As part of the enhancement
agreement, we issued Ortsbo 1,666,667 shares of our restricted common stock, subject to all necessary approvals. 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:
|
● |
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. |
|
● |
Companies
that provide web- and mobile-based information and entertainment products and services that are designed to engage users. |
|
● |
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 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.
Employees
As of May 31, 2014, we
had two employees. In June 2014, we entered into an employment agreement with Mr.
Lucatch. Our Chief Financial Officer is not an employees but is retained as part of a related party service agreement. We
believe our employee relations to be good. We, at this time, have a number of contracted service providers, some of
which are related parties.
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.
Investing
in our common stock involves a high degree of risk. Before investing in our common stock you should carefully consider the following
risks, together with the financial and other information contained in this report. If any of the following risks actually occurs,
our business, prospects, financial condition and results of operations could be adversely affected. In that case, the trading
price of our common stock would likely decline and you may lose all or a part of your investment.
Risks
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our current business and future prospects.
We
are a development stage company and have generated limited revenue to date. We have, prior to the purchase of the Yappn assets,
as further described herein, been involved in unrelated businesses. Our efforts to create a social media platform incorporating
multi-language real time translation intellectual property where users will be able to meet, chat, engage and consume content in
almost any language are still in development. Therefore, we have limited history in executing our business model which includes,
among other things, implementing and completing alpha and beta testing programs, attracting and engaging users, developing methods
for analyzing user statistics, developing our gamification program and strategies, offering opportunities for corporate sponsorships
and providing marketers with access to our analytics platform. Our limited operating history makes it difficult to
evaluate our current business model and future prospects.
In
light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development
with limited operating history, there is a significant risk that we will not be able to implement or execute our current business
plan, or demonstrate that our business plan is sound; and/or raise sufficient funds in the capital markets to effectuate our business
plan. If we cannot execute any one of the foregoing or similar matters relating to our operations, our business may
fail.
If
we fail to attract new users, or if our users are not actively engaged with Yappn, our revenue, financial results, and business
may be significantly harmed.
The
size of our user base and our users’ level of engagement will be critical to our success. Our financial performance will
be significantly determined by our success in attracting, retaining, and engaging active users. To the extent we cannot
achieve a sufficiently large user base, our business performance will become increasingly dependent on our ability to increase
levels of user engagement and monetization. If people do not perceive our products to be useful, reliable, and trustworthy, we
may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A
number of social networking companies that achieved early popularity have since seen their active user bases or levels of engagement
decline, in some cases precipitously. In the event that we do develop a large user base, there is no guarantee that we will not
experience a similar erosion of our active user base or engagement levels. Any decrease in user retention, growth, or engagement
could render Yappn less attractive to marketers, which may have a material and adverse impact on our revenue, business, financial
condition, and results of operations. Any number of factors could potentially negatively affect user growth, retention and engagement,
including if:
|
● |
users
increasingly engage with other products or activities; |
|
|
|
|
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we fail to introduce
new and improved products or if we introduce new products or services that are not favorably received; |
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we are unable
to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating
systems and networks, and that achieve a high level of market acceptance; |
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there are changes
in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security,
or other factors; |
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we are unable
to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant
to them; |
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users adopt new
technologies where Yappn may not be featured or otherwise available; |
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there are adverse
changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or
consent decrees; |
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technical or other
problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such
as any failure to prevent spam or similar content; |
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we adopt policies
or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public; |
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we fail to provide
adequate customer service to users or marketers; or |
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we, or other companies
in our industry are the subject of adverse media reports or other negative publicity. |
If
we are unable to maintain and increase our user base and user engagement, our revenue and financial results may be adversely affected.
Yappn
user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards
that we do not control.
There
is no guarantee that popular mobile devices will feature Yappn. We are dependent on the interoperability of Yappn with popular
mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products'
functionality or give preferential treatment to competitive products could adversely affect Yappn usage on mobile devices. Additionally,
in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies,
systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants
in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards.
In the event that it is more difficult for our users to access and use Yappn on their mobile devices, or if our users choose not
to access or use Yappn on their mobile devices or use mobile products that do not offer access to Yappn, our user growth and user
engagement could be harmed.
Our
business is highly competitive. Competition presents an ongoing threat to the success of our business.
We
will face significant competition in every aspect of our business, including from companies that provide multi language real time
translation of social media platforms, tools to facilitate the sharing of information, companies that enable marketers to display
personalized advertising and companies that provide development platforms for applications developers. We will compete with companies
that offer full-featured products that replicate much of the range of communications and related capabilities we provide. These
offerings include, for example, Facebook, 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. We will also complete with companies that develop applications, particularly
mobile applications, such as photo-sharing, messaging, and micro-blogging, and companies that provide web- and mobile-based information
and entertainment products and services that are designed to engage users and capture time spent online and on mobile devices.
In addition, we will face competition from traditional and online businesses that provide media for marketers to reach their audiences
and/or develop tools and systems for managing and optimizing advertising campaigns.
Many
of our potential competitors may have significantly greater resources or better competitive positions in certain product segments,
geographic regions or user demographics than we do. These factors may allow our competitors to respond more effectively than us
to new or emerging technologies and changes in market conditions. We believe that some of our potential users are aware of and
actively engaging with other products and services similar to, or as a substitute for, Yappn. In the event that our users increasingly
engage with other products and services, we may experience a decline in user engagement and our business could be harmed.
Our
competitors may develop products, features, or services that are similar to ours or that achieve greater acceptance, may undertake
more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies.
Certain competitors, including Facebook and Google, could use strong or dominant positions in one or more markets to gain competitive
advantage against us in areas where we operate including: by integrating competing social networking platforms or features into
products they control such as search engines, web browsers, or mobile device operating systems; by making acquisitions; or by
making access to Yappn more difficult. As a result, our competitors may acquire and engage users at the expense of the growth
or engagement of our user base, which may negatively affect our business and financial results. We believe that our ability
to compete effectively will depend upon many factors both within and beyond our control, including:
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the
popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors; |
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the size and composition
of our user base; |
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the engagement
of our users with our products; |
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the timing and
market acceptance of products, including developments and enhancements to our or our competitors' products; |
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our ability to
monetize our products, including our ability to successfully monetize mobile usage; |
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the frequency,
size, and relative prominence of the ads displayed by us or our competitors; |
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customer service
and support efforts; |
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marketing and
selling efforts; |
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changes mandated
by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some of which may have a
disproportionate effect on us; |
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acquisitions or
consolidation within our industry, which may result in more formidable competitors; |
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our ability to
attract, retain, and motivate talented employees, particularly software engineers; |
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our ability to
cost-effectively manage and grow our operations; and |
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our reputation
and brand strength relative to our competitors. |
If
we are not able to compete effectively, our user base and level of user engagement may decrease, which could make us less attractive
to marketers and materially and adversely affect our revenue and results of operations.
As previously explained, implementation of our business plan will require debt or equity financing until we are out of the developmental
stage and can generate sufficient cash flows to operate. Competition may require increased needs for operating cash
to meet such challenges.
Action
by governments to restrict access to Yappn in their countries could substantially harm our business and financial results.
It
is possible that governments of one or more countries may seek to censor content available on Yappn in their country, restrict
access to Yappn from their country entirely, or impose other restrictions that may affect the accessibility of Yappn in their
country for an extended period of time or indefinitely. Access to several existing social media platforms, including Facebook
and Google, has been or is currently restricted in whole or in part in China, Iran, North Korea, and Syria. In addition, governments
in other countries may seek to restrict access to Yappn if they consider us to be in violation of their laws. In the event that
access to Yappn is restricted, in whole or in part, in one or more countries or our competitors are able to successfully penetrate
geographic markets that we cannot access, our ability to retain or increase our user base and user engagement may be adversely
affected, we may not be able to maintain or grow our revenue as anticipated, and our financial results could be adversely affected.
Our
new products and changes to existing products could fail to attract or retain users or generate revenue.
Our
ability to retain, increase, and engage our user base and to increase our revenue will depend heavily on our ability to create
successful new products. We may introduce significant changes to our existing products or develop and introduce new and unproven
products, including using technologies with which we have little or no prior development or operating experience. If new or enhanced
products fail to engage users or marketers, we may fail to attract or retain users or to generate sufficient revenue, operating
margin, or other value to justify our investments, and our business may be adversely affected. In the future, we may invest in
new products and initiatives to generate revenue, but there is no guarantee these approaches will be successful. If
we are not successful with new approaches to monetization, we may not be able to maintain or grow our revenue as anticipated or
recover any associated development costs, and our financial results could be adversely affected.
Improper
access to or disclosure of our users' information, or violation of our terms of service or policies, could harm our reputation
and adversely affect our business.
Our
efforts to protect the information that our users have chosen to share using Yappn may be unsuccessful due to the actions of third
parties, software bugs or other technical malfunctions, employee error or malfeasance, or other factors. In addition, third parties
may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users'
data. If any of these events occur, our users' information could be accessed or disclosed improperly.
Any
incidents involving unauthorized access to or improper use of the information of our users or incidents involving violation of
our terms of service or policies could damage our reputation and our brand and diminish our competitive position. In addition,
the affected users or government authorities could initiate legal or regulatory action against us in connection with such incidents,
which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our
business practices. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
Our
costs are continuing to grow, which could harm our business model and profitability.
Developing
the Yappn platform is costly and we expect our expenses to continue to increase in the future as we implement and complete beta
and alpha testing of our platform, build a user base, as users increase their engagement with us, and as we develop and implement
new product features that require more computing infrastructure. We expect that we will incur increasing costs, in particular
for servers, storage, power, and data centers, to support our anticipated future growth. In addition, our costs may increase as
we hire additional employees, particularly as a result of the significant competition that we face to attract and retain technical
talent. Our expenses may continue to grow faster than our revenue over time. Our expenses may be greater than we anticipate, and
our investments may not be successful. In addition, we may increase marketing, sales, and other operating expenses in order to
grow and expand our operations and to remain competitive. Increases in our costs may adversely affect our business and profitability.
Our
business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other
matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, monetary
penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our new business model.
We
are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business,
including user privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts
and other communications, competition, protection of minors, consumer protection, taxation, securities law compliance, and online
payment services. The introduction of new products may subject us to additional laws and regulations. In addition, foreign data
protection, privacy, and other laws and regulations are often more restrictive than those in the United States. These U.S. federal
and state and foreign laws and regulations, which can be enforced by private parties or government entities, 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. For example, the interpretation of some
laws and regulations that govern the use of names and likenesses in connection with advertising and marketing activities is unsettled
and developments in this area could affect the manner in which we design our products, as well as our terms of use. A number of
proposals are pending before federal, state, and foreign legislative and regulatory bodies that could significantly affect our
business. For example, a revision to the 1995 European Union Data Protection Directive is currently being considered by European
legislative bodies that may include more stringent operational requirements for data processors and significant penalties for
non-compliance. Similarly, there have been a number of recent legislative proposals in the United States, at both the federal
and state level, that would impose new obligations in areas such as privacy and liability for copyright infringement by third
parties. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development
of new products, result in negative publicity, increase our operating costs, require significant management time and attention,
and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing
business practices.
If
we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and
our business may be adversely affected.
We
rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants,
and third parties with whom we have relationships, as well as trademark, copyright, patent, trade secret, and domain name protection
laws, to protect our proprietary rights. In the future we may acquire additional patents or patent portfolios, which
could require significant cash expenditures. Third parties may knowingly or unknowingly infringe our proprietary rights, third
parties may challenge proprietary rights held by us, and pending and future trademark and patent applications may not be approved.
In addition, effective intellectual property protection may not be available in every country in which we operate or intend to
operate our business. In any or all of these cases, we may be required to expend significant time and expense in order to prevent
infringement or to enforce our rights. Although we have taken measures to protect our proprietary rights, there can be no assurance
that others will not offer products or concepts that are substantially similar to ours and compete with our business.
In
addition, from time to time, we may contribute software source code under open source licenses and make other technology we develop
available under other open licenses, and include open source software in our products. As a result of any open source contributions
and the use of open source in our products, we may license or be required to license innovations that turn out to be material
to our business and may also be exposed to increased litigation risk. If the protection of our proprietary rights is inadequate
to prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished
and competitors may be able to more effectively mimic our service and methods of operations. Any of these events could have an
adverse effect on our business and financial results.
Our
business will be dependent on our ability to maintain and scale our technical infrastructure, and any significant disruption in
our service could damage our reputation, result in a potential loss of users and engagement, and adversely affect our financial
results.
Our
reputation and ability to attract, retain, and serve our users will be dependent upon the reliable performance of the Yappn platform
and our underlying technical infrastructure. Our systems may not be adequately designed with the necessary reliability and redundancy
to avoid performance delays or outages that could be harmful to our business. If Yappn is unavailable when users attempt to access
it, or if it does not load as quickly as they expect, users may not return to our website as often in the future, or at all. As
our user base and the amount and types of information shared on Yappn continue to grow, we will need an increasing amount of technical
infrastructure, including network capacity, and computing power, to continue to satisfy the needs of our users. It is possible
that we may fail to effectively scale and grow our technical infrastructure to accommodate these increased demands. In addition,
our business is subject to interruptions, delays, or failures resulting from earthquakes, adverse weather conditions, other natural
disasters, power loss, terrorism, or other catastrophic events.
We
believe that a substantial portion of our network infrastructure will be provided by third parties. Any disruption or failure
in the services we receive from these providers could harm our ability to handle existing or increased traffic and could significantly
harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise
little control over these providers, which increases our vulnerability to problems with the services they provide.
We
could experience unforeseen difficulties in building and operating key portions of our technical infrastructure.
We
intend to design and build software that will rely upon cloud computing infrastructure and we may also develop our own data centers
and technical infrastructure through which we intend to service our products. These undertakings are complex, and unanticipated
delays in the completion of these projects or availability of components may lead to increased project costs, operational inefficiencies,
or interruptions in the delivery or degradation of the quality of our products. In addition, there may be issues related to this
infrastructure that are not identified during the testing phases of design and implementation, which may only become evident after
we have started to fully utilize the underlying equipment, that could further degrade the user experience or increase our costs.
Our
software is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our
products incorporate software that is highly technical and complex. Our software has contained, and may now or in the future contain,
undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been released.
Any errors, bugs, or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of users,
loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.
The
loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future,
could harm our business.
We
currently depend on the continued services and performance of David Lucatch, Craig McCannell, and David Bercovitch, our Chief
Executive Officer and a director, Chief Financial Officer, and Chief Operating Officer, respectively. In June 2014, we entered
into an employment agreement with Mr. Lucatch. As of August 29, 2014 we have not
entered into employment agreements with Mr. McCannell or Mr. Bercovitch and such individuals may resign from Yappn at any time
for any reason. The loss of Mr. Lucatch, Mr. McCannell or Mr. Bercovitch could disrupt our operations and have an adverse effect
on our business.
As
we continue to grow, we cannot guarantee we will be able to attract the personnel we need to achieve a competitive position.
In particular, we intend to hire a significant number of technical personnel in 2014, and we expect to face significant competition
from other companies in hiring such personnel. As we mature, the incentives to attract, retain, and motivate employees
provided by our equity awards or by future arrangements may not be as effective as in the past, and if we issue significant equity
to attract additional employees, the ownership of our existing stockholders may be further diluted. If we do not succeed in attracting,
hiring, and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.
We
may incur liability as a result of information retrieved from or transmitted over the Internet or posted to Yappn and claims related
to our products.
We
may face claims relating to information that is published or made available on Yappn. In particular, the nature of our business
exposes us to claims related to defamation, intellectual property rights, rights of publicity and privacy, and personal injury
torts. This risk is enhanced in certain jurisdictions outside the United States where our protection from liability for third-party
actions may be unclear and where we may be less protected under local laws than we are in the United States. We could incur significant
costs investigating and defending such claims and, if we are found liable, significant damages. If any of these events occur,
our business and financial results could be adversely affected.
Computer
malware, viruses, hacking and phishing attacks, and spamming could harm our business and results of operations.
Computer
malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry and may occur on our systems
in the future. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack,
any failure to maintain performance, reliability, security, and availability of our products and technical infrastructure may
harm our reputation and our ability to retain existing users and attract new users.
In
addition, spammers attempt to use our products to send targeted and untargeted spam messages to users, which may embarrass or
annoy users and make Yappn less user-friendly. We cannot be certain that the technologies and employees that we have to attempt
to defeat spamming attacks will be able to eliminate all spam messages from being sent on our platform. As a result of spamming
activities, our users may use Yappn less or stop using our products altogether.
Risks
Relating to our Organization and our Common Stock
Difficulties
we may encounter managing our growth could adversely affect our results of operations.
If
we experience a period of rapid and substantial growth, and if such growth continues, we will continue to place a strain on our
limited administrative infrastructure. As our needs expand, we may need to hire a significant number of employees. This expansion
could place a significant strain on our managerial and financial resources. To manage the possible growth of our operations and
personnel, we will be required to:
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improve
existing, and implement new, operational, financial and management controls, reporting systems and procedures; |
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install enhanced
management information systems; and |
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train, motivate
and manage our employees. |
We
may not be able to install adequate management information and control systems in an efficient and timely manner, and our current
or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable
to manage growth effectively, our business would be seriously harmed.
Failure
to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a
material adverse effect on our business and operating results.
It
may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting
procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other
finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures.
If
we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control
over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could
result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information
and have a negative effect on the trading price of our common stock.
Pursuant
to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, we are required to prepare assessments regarding internal
controls over financial reporting and, furnish a report by our management on our internal control over financial reporting. We
have begun the process of documenting and testing our internal control procedures in order to satisfy these requirements, which
is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating
activities to compliance activities. While our management is expending significant resources in an effort to complete this important
project, there can be no assurance that we will be able to achieve our objective on a timely basis. Failure to achieve and maintain
an effective internal control environment or complete our Section 404 certifications could have a material adverse effect
on our stock price.
In
addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we
may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company
Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will
not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a
remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented
or detected.
In
the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures
to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls
is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments
and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations
as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify
or that we will implement and maintain adequate controls over our financial process and reporting in the future.
Any
failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that
we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our
operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements.
Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and,
in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor
attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404
of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our common stock.
Our
stock price may be volatile.
The
stock market in general has experienced volatility that often has been unrelated to the operating performance of any specific
public company. The market price of our common stock is likely to be highly volatile and could fluctuate widely in
price in response to various factors, many of which are beyond our control, including the following:
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changes
in our industry; |
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competitive pricing
pressures; |
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our ability to
obtain working capital financing; |
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additions or departures
of key personnel; |
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limited "public
float" in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing
pressure on the market price for our common stock; |
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sales of our common
stock (particularly following effectiveness of any resale registration statements or expiration of lockup agreements); |
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our ability to
execute our business plan; |
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operating results
that fall below expectations; |
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loss of any strategic
relationship; |
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regulatory developments; |
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economic and other
external factors; |
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period-to-period
fluctuations in our financial results; and |
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inability to develop
or acquire new or needed technology. |
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
The
market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect
that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our
share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded.
As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately
influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in
the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned
issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky”
investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our
potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most
of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond
our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether
our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of
common shares for sale at any time will have on the prevailing market price.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic
price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling
broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to
be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive
within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
The occurrence of these patterns or practices could increase the volatility of our share price.
Volatility
in our common share price may subject us to securities litigation, thereby diverting our resources that may have a material effect
on our profitability and results of operations.
As
discussed in the preceding risk factors, the market for our common shares is characterized by significant price volatility when
compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for
the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following
periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
We
have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may
be limited to the value of our common stock.
We
have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment
of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting
us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be
less valuable because a return on investment will only occur if our stock price appreciates.
Our
common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations
that may make it more difficult to sell.
Our
common stock is considered to be a “penny stock.” It does not qualify for one of the exemptions from the definition
of “penny stock” under Section 3a51-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our
common stock is a “penny stock” because it meets one or more of the following conditions (i) the stock trades at a
price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange or (iii) it is not quoted
on the NASDAQ Global Market, or has a price less than $5.00 per share. The principal result or effect of being designated a “penny
stock” is that securities broker-dealers participating in sales of our common stock are subject to the “penny stock”
regulations set forth in Rules 15-2 through 15g-9 promulgated under the Securities Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and
to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction
in a penny stock for the investor's account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account
of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer
to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives;
(ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that
the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions;
(iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination
in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects
the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make
it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose
of them in the market or otherwise.
FINRA
sales practice requirements may also limit a stockholder's ability to buy and sell our stock.
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (FINRA) has adopted
rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing
that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status,
investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability
that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult
for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock
and have an adverse effect on the market for our shares.
Offers
or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If
our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding
period, under Rule 144, expiration of any lock-up agreements, or issued upon the exercise of outstanding options or warrants,
it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price
of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring,
also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities
in the future at a time and price that we deem reasonable or appropriate.
Exercise
of options, warrants, preferred stock and converting any debt may have a dilutive effect on our common stock.
If
the price per share of our common stock at the time of exercise of any warrants, options or any other convertible securities is
in excess of the various exercise or conversion prices of such convertible securities, exercise or conversion of such convertible
securities would have a dilutive effect on our common stock. We issued Series A Convertible Preferred shares, warrants
and convertible notes, some of which have or had full ratchet anti-dilution protection to provide the holder with a potential
increase in amount of common stock exchanged or a reduction in the exercise price of the instruments should we subsequently issue
stock or securities convertible into common stock at a price lower than the stated exercise price. Further, any additional
financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and
which result in additional dilution of the existing ownership interests of our common stockholders.
Investor
relations activities, nominal “float” and supply and demand (limited supply) factors may affect the price of our common
stock.
We
expect to utilize various techniques such as non-deal road shows and investor relations campaigns in order to create investor
awareness for our company. These campaigns may include personal, video and telephone conferences with investors and prospective
investors in which our business model is described, as well as newsletters, emails, mailings and/or video or print distributions
that describe our business model. We may provide compensation to investor relations firms and pay for newsletters,
websites, mailings and email campaigns that are produced by third-parties based upon publicly-available information concerning
us. We will not be responsible for the content of analyst reports and other writings and communications by investor
relations firms not authored by us or from publicly available information. We do not intend to review or approve the
content of such analysts’ reports or other materials based upon analysts’ own research or methods. Investor
relations firms should generally disclose when they are compensated for their efforts, but whether such disclosure is made or
complete is not under our control. Our investors may be willing, from time to time, to encourage investor awareness
through similar activities. Investor awareness activities may also be suspended or discontinued which may impact the
trading market of our common stock.
The
SEC and FINRA enforce various statutes and regulations intended to prevent manipulative or deceptive devices in connection with
the purchase or sale of any security and carefully scrutinize trading patterns and company news and other communications for false
or misleading information, particularly in cases where the hallmarks of “pump and dump” activities may exist, such
as rapid share price increases or decreases. We and our shareholders may be subjected to enhanced regulatory scrutiny
due to the small number of holders who initially will own the registered shares of our common stock publicly available for resale,
and the limited trading markets in which such shares may be offered or sold which have often been associated with improper activities
concerning penny-stocks, such as the OTC Bulletin Board or the OTCQB Marketplace (Pink OTC) or pink sheets. Until such
time as the restricted shares of the Company are registered or available for resale under Rule 144, there will continue to be
a small percentage of shares held by a small number of investors, many of whom acquired such shares in privately negotiated purchase
and sale transactions at prices that may be significantly lower than the current market price, that will constitute the entire
available trading market. The Supreme Court has stated that manipulative action is a term of art connoting intentional
or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities. Often
times, manipulation is associated by regulators with forces that upset the supply and demand factors that would normally determine
trading prices. A small percentage of our outstanding common stock will initially be available for trading, held by
a small number of individuals or entities. Accordingly, the supply of common stock for sale will be extremely limited
for an indeterminate amount of time, which could result in higher bids, asks or sales prices than would otherwise exist. Securities
regulators have often cited thinly-traded markets, small numbers of holders, and awareness campaigns as components of their claims
of price manipulation and other violations of law when combined with manipulative trading, such as wash sales, matched orders
or other manipulative trading timed to coincide with false or touting press releases. There can be no assurance that
our or third-parties’ activities, or the small number of potential sellers or small percentage of stock in the “float,”
or determinations by purchasers or holders as to when or under what circumstances or at what prices they may be willing to buy
or sell stock, will not artificially impact (or would be claimed by regulators to have affected) the normal supply and demand
factors that determine the price of stock. Our market price should not be relied upon as a valid indicator of our value
until such time as a sustained and established market has been established for our common stock.
Our
certificate of incorporation allows for our board to create new series of preferred stock without further approval by our stockholders,
which could adversely affect the rights of the holders of our common stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors
could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right
to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board
of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or
that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution
to our existing stockholders.
Item
1B. Unresolved Staff Comments. |
None.
We do not own or any real
property at this time. We presently utilize office space in New York, New York on a month to month basis and any fees are nominal
and absorbed by IMI with no repayment obligation.
Item
3. Legal Proceedings. |
We
are subject from time to time to litigation, claims and suits arising in the ordinary course of business. As of August 29, 2014,
we were not a party to any material litigation, claim or suit whose outcome could have a material effect on our audited consolidated
financial statements.
Item
4. Mine Safety Disclosures. |
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. |
Our
common stock commenced quotation on the OTC Bulletin Board (the “OTCBB”) under the trading symbol “PSKC”
on October 1, 2012. There was no active trading market for our common stock prior to that. Effective March 8, 2013, our common
stock was quoted under the symbol “YPPN.” on the OTCBB.
The
following table sets forth for the periods indicated the range of high and low bid quotations per share as reported by the OTCBB.
These quotations represent inter-dealer prices, without retail markups, markdowns or commissions and may not necessarily represent
actual transactions. All market prices reflect the effect of a stock dividend.
| |
High | |
Low |
Quarter Ended | |
($) | |
($) |
Interim period ended August 29, 2014 | |
$ | 0.20 | | |
$ | 0.10 | |
May 31, 2014 | |
$ | 0.25 | | |
$ | 0.05 | |
February 28, 2014 | |
$ | 0.08 | | |
$ | 0.04 | |
November 30, 2014 | |
$ | 0.12 | | |
$ | 0.05 | |
August 31, 2014 | |
$ | 0.95 | | |
$ | 0.10 | |
| |
| | | |
| | |
May 31, 2013 | |
$ | 0.75 | | |
$ | 0.30 | |
February 28, 2013 | |
$ | 0 | | |
$ | 0 | |
November 30, 2012 (from October 1, 2012) | |
$ | 0 | | |
$ | 0 | |
On August 26, 2014, the
high and low prices of our common stock as reported on the OTCBB were $0.155 and $0.145, respectively.
Holders
On August 29, 2014,
we had approximately 11 shareholders of record of our common stock, which does
not include shareholders whose shares are held in street or nominee names.
Preferred
Stock
As
of August 29, 2014, we have 2,010,000 shares of Series A Convertible Preferred Stock outstanding which are convertible
into 2,010,000 shares of common stock.
Warrants
The
following table is a summary of warrants outstanding as of May 31, 2014:
| |
Shares
Issuable
Under
Warrants | |
Exercise
Price | |
Expiration |
| |
| |
| |
|
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 | |
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 | |
Total – as of May 31, 2014 | |
| 47,860,000 | | |
| | | |
| | |
Dividend
Policy
We have not paid any dividends
on our common stock since our inception and do not anticipate paying any dividends in the foreseeable future. We plan to retain
our earnings, if any, to provide funds for the expansion of our business.
Recent
Sales of Unregistered Securities
During
the period covered by this report, we have issued unregistered securities to the persons as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, except as specified below, or any public offering, and we believe
that each transaction was exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 3(a)(9)
or Section 4(2) thereof and/or Regulation D promulgated thereunder. All recipients had adequate access to information about us.
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 share 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 share of common stock (individually Series
B Warrant) at an exercise price of $0.20. The purchase price for each unit is $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 5).
The
Notes 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 $0.10 with price protections provisions for twelve months from issuance. Under the subscription agreement, the Company has
granted price protections 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 qualified as a breach of this covenant, therefore all
Series A warrants were re-priced 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.
Item
6. Selected Financial Data. |
None.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The
following discussion and analysis of our results of operations and financial condition should be read in conjunction with (i)
audited consolidated financial statements for the fiscal years ended May 31, 2014 and 2013 and the period from November 3, 2010
(inception) to May 31, 2014 and the notes thereto and (ii) the section entitled “Business”, included elsewhere
in this report. Our consolidated financial statements are prepared in accordance with U.S. GAAP. All references to dollar amounts
in this section are in U.S. dollars unless expressly stated otherwise.
Overview
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 changed our
name to YAPPN Corp. and entered into an asset purchase agreement to acquire a prospective social media platform. We have abandoned
our original business plan and operate a social media platform that will host multi-language conversations based on different
topics, such as interests, brands, and activities, in an environment that incentivizes user engagement through rewards and other
gamification features. The social media platform include the Yappn chat platform, Yappn tool set and FotoYapp, each in different
states of development and commercialization.
For
the years ended May 31, 2014 and 2013, we had revenues of $37,135 and $0, respectively. The lack of operating
revenue together with the costs we incurred for development of our business and products resulted in net losses and
comprehensive losses of $2,641,473 and $7,441,637 for the years ended May 31, 2014 and 2013, respectively. For the
year ended May 31, 2014, we had assets totaling $992,002, liabilities totaling $7,046,301 and a stockholders’ deficit
of $10,138,108. For the year ended May 31, 2013, we had assets totaling $307,595, liabilities totaling $7,729,233 and a
stockholders’ deficit of $7,421,638.
Research
and Development
We
have incurred research and development expenses related to software development totaling $1,375,112 and $197,275 for the years
ended May 31, 2014 and May 31, 2013, respectively and $1,572,387 from November 3, 2010 (inception) through May 31, 2014. The
research and development costs consisted of developmental services provided by Intertainment Media, Inc., of $947,108 and external
consultants fees of $625,279.
Critical
Accounting Policies
General
The
consolidated financial statements and notes included in our quarterly and annual financial statements contain information that
is pertinent to this management's discussion and analysis. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported
amounts of our assets and liabilities, and affect the disclosure of any contingent assets and liabilities. We believe these accounting
policies involve judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related
asset and liability amounts. The significant accounting policies are described in the notes to our financial statements and notes
included elsewhere in this Form 10-K.
Fair
Value of Financial Instruments
The
Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable
judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the
Company could realize in a current market exchange.
The
Company follows FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its
financial instruments. US GAAP establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to
measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted)
in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of
fair value hierarchy are described below:
Level
1 - Quoted prices in active markets for identical assets or liabilities;
Level
2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
and
Level
3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are
determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or estimation.
If
the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization
is based on the lowest level input that is significant to the fair value measurement of the instrument. The warrants and the convertible
promissory notes and debentures are classified as Level 2 financial liabilities.
Fair
Value of Preferred Stock and Warrants Derivative Instruments
The
Company entered into subscription agreements whereby it sold Units consisting of one share of Series A Convertible Preferred Stock
and one warrant to purchase one share of the Company’s common stock. 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 a 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 end after
twelve months and as such any unconverted preferred shares are no longer treated as a liability, but as an equity instrument.
When
applicable, the instruments are measured at fair value using a binomial lattice valuation methodology and are included in the
consolidated balance sheets as derivative liabilities. Both unrealized and realized gains and losses related to the derivatives
are recorded based on the changes in the fair values and are reflected as a financing expenses on the consolidated statements
of operations and comprehensive income (loss).
Hybrid
Financial Instruments
For
certain hybrid financial instruments, the Company elected to apply the fair value option to account for these 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 Notes
The
Company has issued convertible notes 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 and the value using a binomial lattice valuation methodology and are
included in the consolidated balance sheets under the caption “convertible notes at fair value”. Any unrealized
and realized gains and losses related to the convertible notes are recorded based on the changes in the fair values and
are reflected as financing expenses on the consolidated statements of operations and comprehensive loss.
Estimates
The
consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the consolidated financial statements, and revenues and expenses for the periods from
November 3, 2010 (inception) through May 31, 2014.
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.
RESULTS
OF OPERATIONS
For
the Years ended May 31, 2014 and 2013
Revenues
We
generated revenues of $37,135 and $0, for the years ended May 31, 2014 and 2013, respectively. The lack of revenues reflect the
fact that our social media platform and related products have not been fully commercialized. The revenues recognized were to only
a few clients and were short term in nature.
Cost
of revenue
We
incurred costs of revenue of $26,155 and $0, for the years ended May 31, 2014 and 2013, respectively. These costs were directly
attributable to the revenues generated and resulted in a gross profit of $10,980 and $0, for the years ended May 31, 2014 and
2013, respectively.
Total
operating expenses
During
the years ended May 31, 2014 and May 31, 2013, total operating expenses were $4,090,835 and $584,353, respectively.
For
the year ended May 31, 2014 the operating expenses consisted primarily of marketing expense of $585,272, research and development
expenses of $1,375,112, general and administrative expenses of $1,332,000, legal and professional fees of $355,518, and consulting
fees of $442,933. For the comparable year ended May 31, 2013, the operating expenses consisted of marketing expenses of $15,465,
research and development expenses of $197,275, general and administrative expenses of $138,690, legal and professional fees of
$112,221 and consulting fees of $120,221.
In
2013, we changed our business plan in our fiscal fourth quarter. Prior to that quarter, expenses were incurred supporting an electronics
business that was not successful. Beginning in the fiscal fourth quarter of our year ending May 31, 2013, with the change in strategy,
we incurred expenses that related to developing our multi-language platform. Our operating expenses have increased in 2014 in
comparison to the fiscal year 2013 as we have continued the course started in the fourth quarter of 2013 to develop and market
our social media platform and related products.
Research
and development expenses incurred to develop both the software and the website increased by $1,177,837 from the year ended May
31, 2013 and have averaged approximately $350,000 per quarter for the year ended May 31, 2014. These research and development
expenses are primarily for fees to technology consultants from Intermedia 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.
Other
operating expenses also increased and the costs for the year ended May 31, 2014 are more indicative of the normal annual run rate
expected. General and administrative expenses totaled $1,332,000, an increase of $1,204,503 from the prior year. General and administrative
expenses include fees for CEO and CFO services, 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.
Many of the fees of the firms providing these services were paid with common stock. Professional fees increased
by $243,297 from the prior year and were incurred primarily by the use of legal counsel related to financing arrangements for
debt and equity during the year. These costs also include accounting and auditing fees. We expect our legal expenses
to vary from period to period based upon our corporate needs. Consulting fees increased by $322,712 and were primarily 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. Many of the fees of the firms providing these services were paid with common stock.
Total
other expenses
Other
(income) expenses totaled $(1,438,382) and $6,857,284, for the years ended May 31, 2014 and May 31, 2013, respectively. The
change of $8,295,666 is primarily due to the change in the fair value of derivative financial instruments. Many of
our financing instruments are either convertible into our common stock or have provisions that provide an option to convert
into our common stock. For accounting purposes we are required to value such instruments at fair value which can fluctuate as
the market price of our common stock fluctuates.
During
the year ended May 31, 2014, total other (income) of $1,438,382 consisted of interest expense of $110,611, financing expenses
related to private placement of convertible notes and debentures, preferred stock and warrants that are considered derivative
liabilities totaling $4,737,726, a gain resulting from the change in fair value of the derivative liabilities and convertible
notes of $6,318,613 and other miscellaneous expense of $31,894.
During
the year ended May 31, 2013, total other expenses of $6,857,284 consisted of interest expense of $1,000, financing expenses paid
for private placement assistance totaling cash paid of $34,036 and amount accrued for warrants to be issued of $63,108, financing
expenses on the issuance of derivative liabilities of $6,364,556 and a change in fair value of the derivative liabilities of $394,584.
Our
other expenses have increased in 2014 related to the costs of our financial instruments and raising capital offset by gains resulting
from revaluation of our derivative liabilities and convertible notes. Interest expense on our notes payable totaled $110,611,
which is an increase of $109,661 from the prior year when we minimal interest bearing debt. During the years ended May 31, 2014
and May 31, 2013, we raised $3,860,093 and $771,000, respectively, in cash from short term notes payable, line of credit, convertible
notes and debentures and preferred stock 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 were $4,737,726 and $6,461,700, for the years ended May 31, 2014 and May 31, 2013, respectively.
Our
financing expenses of $6,461,700 for the year ended May 31, 2013 related to our raising capital by issuing 7,710,000 units of
preferred stock and warrants for $771,000. The financing expense resulted from calculating the fair value of the instruments
using the binomial lattice model with a primary parameter being the market price of the common stock on the issuance date for
the two tranches of $0.50 and $0.55. The same binomial lattice methodology was used for the year ending May 31, 2014 when we raised
capital using various instruments, however the market price of our common stock ranged from $0.05 to $0.72 on the commitment dates
for those instruments. For the year ended May 31, 2014, as the market price of the common stock declined and the fair value calculation
resulted in gains from the changes of the fair value of the instruments. 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 $6,318,613
for the year ended May 31, 2014 versus a loss of $394,584, a change of $6,713,197.
Net
loss and comprehensive loss
During
the year ended May 31, 2014 and 2013, we had a net loss and comprehensive loss of $2,641,473 and $7,441,637, respectively.
For
the Period from November 3, 2010 (inception) to May 31, 2014
Revenues
We
had $43,051 of revenues for the period from November 3, 2010 (inception) through May 31, 2014. The lack of revenues reflect the
fact that our social media platform and related products have not been fully commercialized. The revenues recognized were to only
a few clients and were short term in nature.
Cost
of revenue
We
incurred costs of revenue of $29,278 for the period from November 3, 2010 (inception) through May 31, 2014. These costs were directly
attributable to the revenues generated and resulted in a gross profit of $13,773 for the period.
Total
operating expenses
During
the period from November 3, 2010 (inception) through May 31, 2014, total operating expenses were $4,732,981, resulting in a loss
from operations of $4,719,208. The operating expenses consisted of marketing of $601,160, research and development expenses of
$1,572,387, general and administrative expenses of $1,476,811, professional fees of $457,920, and consulting fees of
$624,703.
In
2013, we changed our business plan in our fiscal fourth quarter. Prior to that quarter, expenses were incurred supporting an electronics
business that was not successful. Our operating expenses have increased in 2014 as we continued developing our multi-language
platform and website.
Research
and development expenses are for consulting fees of technology consultants incurred to develop both the software and the website
and have totaled $1,572,387 from inception. 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 totaled $1,476,811 since inception. These expenses are primarily fees for CEO and CFO
services, 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. The fees for CEO and CFO
services and administrative services for accounting and general business needs are primarily being provided by our
parent, Intertainment Media, Inc. Many of the fees of the firms providing these services were paid with common stock. Professional fees totaled $457,920 since inception and were incurred primarily for use of legal counsel related to
financing arrangements for preferred stock, 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
of $624,703 were 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. Many of the fees
of the firms providing these services were paid with common stock.
Total
other expenses
During
the period from November 3, 2010 (inception) though May 31, 2014, total other expenses were $5,418,900. The other expenses
consisted of interest expense of $111,611, financing expenses paid for issuance of short term loans, convertible notes, preferred
stock and warrants of $11,193,427 offset by a gain from the change in fair value of the derivative liabilities and convertible
notes of $5,924,029 and miscellaneous expense of $31,891.
The
majority of our other expenses relate to the costs of our financing arrangements and the changes in the fair values of those
financial instruments used. Aside from those items we incurred interest expenses on our short term debt and notes of $111,611
and miscellaneous expense of $31,891 from inception.
Our
financing expense since inception totaled $11,193,427. Since inception we have raised $4,666,819 from the issuance of short term
loans, convertible notes, line of credit, preferred stock and warrants 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 fair value
model upon inception and adjusted accordingly to market at the close of the period. The financing expense resulted
from calculating the fair value of the instruments using the binomial lattice model with a primary parameter being the market
price of the common stock on the issuance date which ranged from $0.05 to $0.72 over this time period.
Our
financial instruments are marked to market at the end of every reporting period and the change in fair value is recorded as other
expense. From inception we have recognized a gain of $5,924,029 from marking the financial instruments to market. The gains resulting
from the change in fair value of derivative liabilities and convertible notes primarily occurred in the year ended May 31, 2014,
as the market price of our common stock fluctuated. Those changes in market price of our common stock coupled with the other parameters
used in the binomial lattice model, resulted in a gain.
Net
loss and comprehensive loss
During
the period from November 3, 2010 (inception) through May 31, 2014, we had a net loss and comprehensive loss of $10,138,108.
Liquidity
and Capital Resources
As
of May 31, 2014, we had a cash balance of $988,692, which is an increase of $771,655 from the ending cash balance of $217,037
as of May 31, 2013. 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 during the year ended May 31, 2014, we have issued convertible preferred stock, short term notes, convertible
debt instruments and warrants under various subscription private placements to accredited investors for total cash receipts of
$3,860,093. 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 totaling $10,138,108 for the period from November 3, 2010 (inception) through May 31, 2014. At May 31,
2014 we had total assets of $992,002 and liabilities totaling $7,046,301 and a working capital deficit of $1,116,688. These factors
raise substantial doubt as to our ability to continue as a going concern. 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.
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.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
None.
Item
8. Financial Statements and Supplementary Data.
Our Financial Statements
begin on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange
Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated
to the company's management, including its principal executive and principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of May 31, 2014 that our disclosure controls and procedures were effective
at the reasonable assurance level over disclosure controls.
Inherent
Limitations Over Internal Controls
Our
internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles
(“GAAP”). Our internal control over financial reporting includes those policies and procedures that:
(i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our
assets;
(ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
GAAP, and that the our receipts and expenditures are being made only in accordance with authorizations of the our management and
directors; and
(iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on the financial statements.
Management,
including our Chief Executive Officer and Chief Financial Officer, does not expect that the our internal controls will prevent
or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods
are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on the Company’s assessment, management has
concluded that its internal control over financial reporting was effective as of May 31, 2014 to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Management
assessed the effectiveness of our internal control over financial reporting as of May 31, 2014 and determined that our controls
and procedures were effective at the reasonable assurance level. This annual report does not include an attestation report of
our independent registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange
Commission that permits us to provide only management's report in this annual report.
We
have assessed the effectiveness of our internal control over financial reporting as of May 31, 2014, the period covered by this
Annual Report on Form 10-K, as discussed above. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on these criteria
and our assessment, we have determined that, as of May 31, 2014, our internal control over financial reporting was effective.
Changes
In Internal Control Over Financial Reporting
During
the quarter ended May 31, 2014, 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.
Item 9B.
Other Information. |
None.
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance. |
Directors
and Executive Officers
All
of our directors hold office until the next annual meeting of stockholders and until their successors have been elected and qualified
or until their earlier resignation or removal unless his or her office is earlier vacated in accordance with our bylaws or he
or she becomes disqualified to act as a director. Our officers shall hold office until the meeting of the Board of Directors following
the next annual meeting of stockholders and until his successor has been elected and qualified or until his earlier resignation
or removal. The Board of Directors may remove any officer for cause or without cause.
Our
executive officers and directors and their respective ages as of the date of this Annual Report are as follows:
Name |
|
Age |
|
Position
Held |
|
|
|
|
|
David Lucatch |
|
52 |
|
Chief Executive
Officer and Director |
|
|
|
|
|
Craig McCannell |
|
37 |
|
Chief Financial
Officer |
|
|
|
|
|
David Bercovitch |
|
46 |
|
Chief Operating
Officer |
|
|
|
|
|
Marc Saltzman |
|
43 |
|
Director |
|
|
|
|
|
Neil Stiles |
|
56 |
|
Director |
|
|
|
|
|
Herb Willer |
|
60 |
|
Chairman of the
Board and Director |
|
|
|
|
|
Steven Wayne Parsons |
|
52 |
|
Director |
The
following is a brief account of the education and business experience of each director, executive officer and key employee during
at least the past five years, indicating each person’s principal occupation during the period, and the name and principal
business of the organization by which he or she was employed, and including other directorships held in reporting companies.
David
Lucatch, Chief Executive Officer and Director. Mr. Lucatch, 52, has served as the Chief Executive Officer and director
of Intertainment Media, Inc., a company listed on the TSX Venture Exchange, on the OTCQX and in Frankfurt, since 2006 and as its
President from 2006 through 2011. He has served as a director of Ortsbo, Inc., a wholly owned subsidiary of Intertainment
Media, Inc., since 2010, as its President from 2010 through 2011 and as its Chief Executive Officer from 2010 through 2012. He
has served as a director of Ortsbo USA, Inc., a wholly owned subsidiary of Ortsbo Inc., since 2011. Mr. Lucatch also
currently serves as an officer and/or director of several other subsidiaries of Intertainment Media, Inc., as the President and
a director of Alimor Ventures Inc. since 2000, as the President and a director of Alimor Consulting, Inc. since 2000, as the President
and a director of Savers Plus Canada, Inc. since 2003, as a director of Poynt Corporation from 2011 to June 2012 and as a director
of Silverbirch, Inc. from 2007 through 2008. Mr. Lucatch was selected to serve on the board of directors due to his
extensive experience with social media, his perspective as the creator of the Yappn concept and his perspective as the Chief Executive
Officer and a director of our largest controlling stockholder. Throughout his business career Mr. Lucatch has been
an active supporter of a number of not for profit organizations and has been recognized internationally for his service and support. Mr.
Lucatch graduated in 1985 from the University of Toronto. Mr. Lucatch continues to mentor at the University of Toronto and
the Management Economics Student Association programs and various leadership programs. In 2010 Mr. Lucatch was a recipient
of an Arbour Award from the University of Toronto, recognizing his continued activities and contributions to the University of
Toronto. Mr. Lucatch is a member of the College of Electors of the University of Toronto and of the Ontario Securities
Commission SME Committee.
Craig
McCannell, Chief Financial Officer. Mr. McCannell, 37, has been the Chief Financial Officer of Intertainment Media,
Inc. since July 3, 2013 and the Director of Finance of Intertainment Media, Inc. from January 2012 to July 2013. Mr.
McCanell served as an account executive for Robert Half Management Resources from April 2011 to September 2011 and the Senior
Manager of Assurance for Ernst & Young LLP from September 1999 to August 2010.
David
Bercovitch, Chief Operating Officer. Mr. Bercovitch, 46, was appointed as Chief Operating Officer of Yappn on February
18, 2014. From May, 2012 to May, 2013, Mr. David Bercovitch was Vice President and co-General Manager Canadian Operations of EPAM
Systems. From September 1997 to May 2012, he was the Co-CEO and CFO of Thoughtcorp, a successful Computer Consulting business.
Thoughtcorp, prior to its acquitision, was a highly profitable enterprise achieving an average annual growth rate of approximately
15% with over 120 staff members and annual sales of approximately $17M and offered a range of professional services, including
custom application development, business intelligence, data warehousing, and Agile consulting. Prior to his positions at Thoughtcorp,
Mr. Bercovitch had sales and management positions at Cognos, the Business Intelligence company acquired by IBM in 2008 and ACNielsen,
spending 5 years selling and servicing, custom built data analytics tools to the Consumer Packaged Goods industry. Mr. Bercovitch
holds a Bachelor of Commerce degree from McGill University where he graduated with distinction, and a Master of Business Administration
from York University where he graduated with honors.
Marc
Saltzman, Director. Mr. Saltzman, 43, has reported on the technology industry since 1996 as a freelance journalist,
author, lecturer, consultant, and radio and TV personality. Along with his weekly syndicated columns with Gannett, the United
States’ largest newspaper group, Mr. Saltzman currently contributes to USA Today, USA Today.com, Yahoo! (U.S. and Canada),
CNN.com, MSN and AARP – The Magazine. Mr. Saltzman writes and hosts “Gear Guide,” a technology-focused
video that runs nationally across Canada at movie theaters before the film trailers start. Mr. Saltzman was selected
to serve on the board of directors due to his extensive knowledge of the technology industry, interactive entertainment and online/social
media trends.
Neil
Stiles, Director. Mr. Stiles, 56, served as the President and publisher of Variety, Inc. from 2008
through 2012. In these positions, Mr. Stiles was responsible for the global business operations of the Variety franchise including
Variety, Daily Variety, Daily Variety Gotham and Variety.com. Additionally, he oversaw the publications
Video Business, Tradeshow Week and 411 Publishing, and played a leading role in the management of MarketCast, a leading
provider of marketing research for the film and television industries. In late 2012 he executed the sale of the Variety
Group. Mr. Stiles has also served on the boards of directors of Randian LLC since 2011 and 2020 Capital LLC since 2011.
Mr. Stiles has more than 30 years of experience in the magazine industry, beginning as a music industry journalist in the mid-1970s
and moving into sales management positions throughout the 1980s. Before joining the Variety team in 2008, Mr. Stiles
played a large role in the management of sister company Reed Business Information-UK (“RBI”) as its board director. As
a director of RBI he oversaw a number of online initiatives including the acquisition of eMedia. Following the acquisition, Mr.
Stiles served as the Chief Executive Officer of eMedia. Mr. Stiles has served on the board of directors of LA’s
BEST, one of the United States’ largest after school programs, and on the boards of BritWeek and BAFTA LA, and has served
as the Chairman of BAFTA LA since 2011. Mr. Stiles was selected to serve on the board of directors due to his extensive
business experience and knowledge of the entertainment industry.
Herb
Willer, Chairman. Mr. Willer, 60, has served as the Chairman of Intertainment Media, Inc. since 2012 and as a Director and
Committee Chair since 2006. He has served on the board of directors of Mill Street Brewery since 2003, Pitchpoint Solutions
Inc. since 2007, and Healthcare 365 Inc. since 2010. Mr. Willer has served on the advisory board for the TSX Venture Exchange
since 2012, as Chairman of the pension committee of the Princess Margaret Hospital in Toronto since 2008 and as a member of the
investment committee of the University Health Network of Toronto. Mr. Willer is a Canadian Chartered Accountant and is the
President and founder of HMW Capital Inc., a Canadian Limited Market Dealer primarily focused on private equity investments. He
has served as the President of HMW Capital Inc. since 2005. From 2003 to 2006, Mr. Willer was a partner of Kingsdale Capital,
a brokerage firm, and prior to 2002 Mr. Willer was a global partner with Arthur Andersen and headed its entrepreneurial practice
group in Ontario. Mr. Willer was selected to serve on the board of directors due to his extensive experience with emerging and
growth companies and his perspective as the Chairman of our largest controlling stockholder.
Steven
Wayne Parsons, Director. Mr. Parsons, 52, has 24 years of experience in the investment
business and founded Parsons Financial Consulting, a consulting company focused on the technology and mining sectors, in 2010
and has served as its president since its inception. Mr. Parsons served as President, Chief Executive Officer, Chief
Financial Officer, Secretary and Treasurer of the Company from March 19, 2013 to March 28, 2013. Mr. Parsons has served on the
board of directors of American Paramount Gold Corp., a company listed on the OTC Pink, since 2010 and also served as its President,
Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary in 2010. Prior to joining American Paramount
Gold Corp., Mr. Parsons was a senior investment manager at National Bank Financial from 2003 through 2009. Mr. Parsons
was selected as our director because of his experience in the financial and technology industries.
Family
Relationships
There are currently no
family relationships between any of the members of our board of directors or our executive officers.
Conflicts
of Interest
Members
of our management are associated with other firms involved in a range of business activities. Consequently, there are potential
inherent conflicts of interest in their acting as officers and directors of our company. Although the officers and directors are
engaged in other business activities, we anticipate they will devote an important amount of time to our affairs.
We
acquired the certain rights under a Services Agreement dated March 21, 2013 between Intertainment Media, Inc. (“IMI”(,
its subsidiaries, and the Company upon the closing of an asset purchase agreement among the parties.. Mr. Lucatch, our Chief Executive
Officer and a director, and Mr. Willer, our Chairman, are board members and the Chief Executive Officer and Chairman, respectively,
of IMI, Ortsbo's controlling stockholder, which may cause a conflict of interest. Furthermore, Mr. McCannell, who became
our Chief Financial Officer on July 22, 2013, is the Chief Financial Officer of IMI.
Our
officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may
be formed for the purpose of engaging in business activities similar to ours. Accordingly, additional direct conflicts of interest
may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts
of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their
duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention
and may relate to our business operations.
Our
officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated
by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will
be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis.
A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with
which the officers and directors are affiliated both desire to take advantage of an opportunity, then said officers and directors
would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy
with respect to such transactions.
Involvement
in Certain Legal Proceedings
None
of the following events have occurred during the past ten years and are material to an evaluation of the ability or integrity
of any director or officer of the Company:
|
1. |
A
petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent
or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was
a general partner at or within two years before the time of such filing, or any corporation or business association of which
he was an executive officer at or within two years before the time of such filing; |
|
|
|
|
2. |
Such
person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations
and other minor offenses); |
|
|
|
|
3. |
Such
person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: |
|
a. |
Acting
as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any
of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director
or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such activity; |
|
b. |
Engaging
in any type of business practice; or |
|
|
|
|
c. |
Engaging
in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of
Federal or State securities laws or Federal commodities laws; |
|
4. |
Such
person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or
State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any
activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity; |
|
|
|
|
5. |
Such
person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal
or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed,
suspended, or vacated; |
|
|
|
|
6. |
Such
person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to
have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or vacated; |
|
|
|
|
7. |
Such
person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding,
not subsequently reversed, suspended or vacated, relating to an alleged violation of: |
|
a. |
Any
Federal or State securities or commodities law or regulation; or |
|
|
|
|
b. |
Any
law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent
injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or
removal or prohibition order; or |
|
c. |
Any
law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
|
8. |
Such
person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined
in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29)), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons associated with a member. |
Meetings
and Committees of the Board of Directors
Our
Board of Directors held 4 formal meetings during the year ended May 31, 2014.
The Board of Directors
has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The
members of our Audit Committee are Steven Wayne Parsons, who serves as Chairperson of the Audit Committee, Herb Willer and Neil
Stiles. Our Board of Directors has determined that Mr. Willer qualifies as a “financial expert” as that term is defined
in the rules of the SEC implementing requirements of the SARBANES-OXLEY Act of 2002. The Audit Committee meets four (4) times
per year.
The Board of Directors
has a separately designated Compensation Committee.
The members of our Compensation
Committee are Steven Wayne Parsons, who serves as Chairperson of the Compensation Committee, Neil Stiles and Marc Saltzman.
The Board of Directors
is responsible for all other committee activity, outside the Audit Committee and Compensation Committee.
We
believe that the Board of Directors through its meetings can perform all of the duties and responsibilities which might be
contemplated
by additional committees. As our business expands we anticipate forming other committees.
Board
Leadership Structure and Role in Risk Oversight
Our
Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives
and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s
assessment of risks. The Board of Directors focuses on the most significant risks facing our company and our company’s general
risk management strategy, and also ensures that risks undertaken by our company are consistent with the Board’s appetite
for risk. While the Board oversees our company, our company’s management is responsible for day-to-day risk management processes.
We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that
our Board leadership structure supports this approach.
Material
Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors
Except
as may be provided in our bylaws, we do not have in place any procedures by which security holders may recommend nominees to the
Board of Directors.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our directors, executive officers, and persons who own more than 10% of our common stock to
file reports of ownership and changes in ownership of our common stock with the SEC. Based on the information available
to us during the year ended May 31, 2014, we believe that all applicable Section 16(a) filing requirements were met on a timely
basis.
Code of Ethics
As
part of our system of corporate governance, our Board of Directors has adopted a Code of Ethics and Conduct that is specifically
applicable to our Chief Executive Officer and senior financial officers. This Code of Ethics and Conduct is attwched to this filing
as Exhibit 14.1. If we make substantive amendments to the Code of Ethics and Conduct or grant any waiver, including any implicit
waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K within four days of
such amendment or waiver.
Item
11. Executive Compensation.
Summary
Compensation
Since
our incorporation on November 3, 2010 until May 31, 2014, we have not paid any compensation to our executive officers in consideration
for their services rendered to us in their capacity as such.
Summary
Compensation Table
The
following table sets forth certain compensation information for: (i) the person who served as the Chief Executive Officer of Yappn
Corp during the year ended May 31, 2014, regardless of the compensation level, and (ii) each of our other executive officers,
serving as an executive officer at any time during 2013. The foregoing persons are collectively referred to in this prospectus
as the “Named Executive Officers.” Compensation information is shown for the year ended May 31, 2014:
Name and Principal Position | |
Year | |
Salary ($) | |
Bonus ($) | |
Stock Awards ($) | |
Option Awards ($) | |
Non- Equity Incentive Plan Comp ($) | |
Non- Qualified Deferred Comp Earnings ($) | |
All Other Comp
($) | |
Totals
($) |
David Lucatch, | |
| 2014 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
0 | |
| 0 | | |
0 |
CEO | |
| 2013 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
0 | |
| 0 | | |
0 |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
|
Craig McCannell, | |
| 2014 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
0 | |
| 0 | | |
0 |
CFO | |
| 2013 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
0 | |
| 0 | | |
0 |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
|
David Bercovitch, COO | |
| 2014 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
0 | |
| 0 | | |
0 |
Employment
Agreements
On
June 1, 2014, we entered into an employment agreement with David Lucatch, our CEO, which has an indefinite term. Under
the terms of this agreement, Mr. Lucatch will continue to serve as our Chief Executive Officer. Mr. Lucatch will receive a
base salary of $190,000 per year in the first year of the agreement, subject to future increases in base salary as well as
options that vest over time. Mr. Lucatch will be entitled to certain bonus payments based on the revenue of the Company and
standard expense reimbursements and benefits. The complete terms and conditions of Mr. Lucatch’s employment agreement are
included in Exhibit 10.32 and attached to this filing.
Aside
from Mr. Lucatch, we have no employment agreements with any of our other directors or executive officers as of August 29, 2014.
Outstanding
Equity Awards as of May 31, 2013
On
March 28, 2013, we adopted an equity incentive plan (the “2013 Incentive Plan”) pursuant to which 10,000,000 shares
of our common stock may be issued as incentive awards to officers, directors, employees, consultants and other qualified persons.
As of May 31, 2014, no shares of common stock have been issued under the 2013 Incentive Plan.
Outstanding
Stock Awards at Year End
None.
Options
Exercises and Stocks Vested
None.
Grants
of Plan-Based Awards
None.
Non-Qualified
Deferred Compensation
None.
Golden
Parachute Compensation
None.
Compensation
of Directors
Directors
are permitted to receive fixed fees and other compensation for their services as Directors. The Board of Directors has the authority
to fix the compensation of Directors. No amounts have been paid to, or accrued to, Directors in such capacity.
Since
our incorporation on November 3, 2010 until May 31, 2014, we have not paid any compensation to our directors in consideration
for their services rendered to our Company in their capacity as such.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The
following tables set forth certain information as of August 29, 2014 regarding the beneficial ownership of our common stock, based
on 125,855,794 shares of common stock issued and outstanding by (i) each executive officer and director; (ii) all of our executive
officers and directors as a group; and (iii) each person or entity who, to our knowledge, owns more than 5% of our common stock.
Beneficial
ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities
to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares
issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days. Except as otherwise
indicated, all persons listed below have sole voting and investment power with respect to the shares beneficially owned by
them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for
any other purpose.
Unless
otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power
and that person’s address is c/o Yappn Corp., 1001 Avenue of the Americas, 11th Floor,
New York, NY 10018.
Name of Beneficial Owner | |
Number of Shares Beneficially Owned (1) | |
Percentage Beneficially Owned (1) |
5% Owners | |
| |
|
Intertainment Media, Inc. (2)(3) | |
| 70,000,000 | | |
| 55.62 | % |
Ortsbo (2) | |
| 15,000,000 | | |
| 11.92 | % |
| |
| | | |
| | |
Officers and Directors | |
| | | |
| | |
David Lucatch (2)(3) | |
| 0 | | |
| 0 | |
Craig McCannell (3) | |
| 0 | | |
| 0 | |
David Bercovitch (3) | |
| 0 | | |
| 0 | |
Steven Wayne Parsons (3) | |
| 0 | | |
| 0 | |
Marc Saltzman (3) | |
| 0 | | |
| 0 | |
Neil Stiles (3) | |
| 0 | | |
| 0 | |
Herb Willer (3) | |
| 0 | | |
| 0 | |
All executive officers and directors as a group (seven persons)(2)(3) | |
| 70,000,000 | | |
| 55.62 | % |
(1) |
Shares
of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assumes the exercise
of all options, warrants and other securities convertible into common stock beneficially owned by such person or entity currently
exercisable or exercisable within 60 days of August 29, 2014. In computing the number of shares beneficially owned
and the percentage ownership, shares of common stock that may be acquired within 60 days of August 29, 2014 pursuant to the
exercise of options, warrants or convertible notes are deemed to be outstanding for that person. Such shares, however,
are not deemed outstanding for the purpose of computing the percentage ownership of any other person. |
|
|
(2) |
David
Lucatch is the Chief Executive Officer of Intertainment Media, Inc., and, as such, has sole voting and investment power over the
70,000,000 shares of common stock held by Intertainment Media, Inc. Mr. Lucatch is also a Director of Ortsbo, Inc. Mr.
Lucatch disclaims beneficial ownership and voting control over such shares of our common stock held by Ortsbo, Inc. |
|
|
(3) |
c/o Yappn Corp.
1001 Avenue of the Americas, 11th Floor, New York, NY 10018. |
Description
of securities
In
March 2013, we filed an amended and restated certificate of incorporation to 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
The
following statements relating to the capital stock set forth the material terms of our securities; however, reference is made
to the more detailed provisions of, and such statements are qualified in their entirety by reference to, the Certificate of Incorporation,
amendment to the Certificate of Incorporation and the By-laws, copies of which are filed as exhibits to this registration statement.
Common
stock
The
holders of our Common Stock are entitled to one vote per share on all matters to be voted on by our stockholders, including the
election of directors. Our stockholders are not entitled to cumulative voting rights, and, accordingly, the holders of a majority
of the shares voting for the election of directors can elect the entire board of directors if they choose to do so and, in that
event, the holders of the remaining shares will not be able to elect any person to our board of directors.
The
holders of the Company’s Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors, in its discretion, from funds legally available there for and subject to prior dividend rights
of holders of any shares of our Preferred Stock which may be outstanding. Upon the Company’s liquidation, dissolution or
winding up, subject to prior liquidation rights of the holders of our Preferred Stock, if any, the holders of our Common Stock
are entitled to receive on a pro rata basis our remaining assets available for distribution. Holders of the Company’s Common
Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions
with respect to such shares. All outstanding shares of the Company’s Common Stock are, and all shares being offered by this
prospectus will be, fully paid and not liable to further calls or assessment by the Company.
Preferred
Stock
The
Company is authorized to issue 50,000,000 shares of preferred stock, par value $0.0001. The designations, rights, and preferences
of such preferred stock are to be determined by the Board of Directors. Subsequently, 10,000,000 shares were designated as Series
A Preferred Stock. The Series A Preferred Stock collectively has liquidation preference and the right to convert to one share
of common stock for each share of preferred stock.
As
of August 26, 2014, we have 2,010,000 shares of Series A Convertible Preferred Stock outstanding which are convertible into 2,010,000
shares of common stock.
Dividends
Dividends,
if any, will be contingent upon our revenues and earnings, if any, capital requirements and financial conditions. The payment
of dividends, if any, will be within the discretion of our Board of Directors. We presently intend to retain all earnings, if
any, for use in its business operations and accordingly, the Board of Directors does not anticipate declaring any dividends prior
to a business combination.
Indemnification
of directors and officers
Under
the Nevada General Corporation Law, we can indemnify our directors and officers against liabilities they may incur in such capacities,
including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Our amended and restated
articles of incorporation provide that, pursuant to Nevada law, our directors shall not be liable for monetary damages for breach
of the directors’ fiduciary duty of care to us and our stockholders. This provision in the articles of incorporation does
not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary
relief will remain available under Nevada law. In addition, each director will continue to be subject to liability for breach
of the director’s duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for any transaction from which the director directly or indirectly derived an improper
personal benefit, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Nevada
law. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
Our
bylaws, as amended, provide for the indemnification of our directors and officers to the fullest extent permitted by the Nevada
General Corporation Law. We are not, however, required to indemnify any director or officer in connection with any (a) willful
misconduct, (b) willful neglect, or (c) gross negligence toward or on behalf of us in the performance of his or her duties as
a director or officer. We are required to advance, prior to the final disposition of any proceeding, promptly on request, all
expenses incurred by any director or officer in connection with that proceeding on receipt of any undertaking by or on behalf
of that director or officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be
indemnified under our bylaws or otherwise.
We
have been advised that, in the opinion of the SEC, any indemnification for liabilities arising under the Securities Act of 1933
is against public policy, as expressed in the Securities Act, and is, therefore, unenforceable.
Amendment
of our Bylaws
Our
bylaws may be adopted, amended or repealed by the affirmative vote of a majority of our outstanding shares. Subject to applicable
law, our bylaws also may be adopted, amended or repealed by our Board of Directors.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
None
of our executive officers serves on the board of directors or compensation committee of another company that has any executive
officer serving on our Board of Directors (or Board of Directors acting as the Compensation Committee).
No
person who served on our Board of Directors (or Board of Directors acting as the Compensation Committee) had any relationship
requiring disclosure under Item 404 of Regulation S-K.
On
November 3, 2010, we issued 75,000,000 post-split (5,000,000 pre-split) shares of our common stock to Gavriel Bolotin in exchange
for cash in the amount of $500.
On
November 3, 2010, we issued 37,500,000 post-split (2,500,000 pre-split) shares of our common stock to Eliezer Mehl, our former
Secretary and a director, in exchange for cash consideration of $250.
On
April 25, 2012, Gavriel Bolotin agreed to lend us up to $100,000 over the next two years provided that at no time can we owe more
than $25,000 to Mr. Bolotin. No interest accrued on the outstanding principal under the terms of this note. As of the resignations
of the officers in March 2013, there was no outstanding balance. There was no obligations outstanding as of May 31,
2013
On
March 28, 2013, we purchased the Yappn assets from IMI in consideration for 70,000,000 shares of our common stock, pursuant to
the Purchase Agreement, as further discussed herein. David Lucatch, our Chief Executive Officer and a director, is
the Chief Executive Officer of IMI and Herb Willer, our director, is a director of IMI.
From
inception until March 28, 2013, Gavriel Bolotin, our former President, Chief Executive Officer, Chief Financial Officer, Treasurer
and director provided office space to us and other office administrative resources to us at no cost.
In
April and May 2013, the Company paid for general development and managerial services performed by its parent, Intertainment Media,
Inc., and prepaid for such services for the subsequent months. The Company also prepaid expenses for the CEO, David
Lucatch. Services provided by Intertainment Media, Inc. personnel are invoiced on a per hour basis at a market rate
per hour as determined by the type of activity and the skill set provided. Costs incurred by Intertainment Media, Inc.
for third party purchases are invoiced at cost. Related party fees incurred and paid under this arrangement totaled
$233,400 for the year end May 31, 2013 and a remaining related party prepaid balance totaling $-0- and $80,518 existed as of May
31, 2014 and May 31, 2013, respectively.
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 and accrued under this arrangement totaled $1,610,715 for the year
ended May 31, 2014 and a remaining related party liability balance totaling $145,316 existed as of May 31, 2014.
We presently utilize office
space in New York, New York on a month to month basis and any fees are nominal and absorbed by Intertainment Media, Inc. with no
repayment obligation.
On
October 23, 2013, we entered into an amendment to the Services Agreement dated March 21, 2013 for an exclusive license to use
the Ortsbo property in exchange for 1,666,667 shares of our restricted common stock. On April 28, 2014 we 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. Ortsbo
is a wholly owned subsidiary of Intertainment Media, Inc. and David Lucatch, our CEO, is a Director of the Ortsbo.
Review,
approval or ratification of transactions with related persons
Our
Board of Directors is responsible to approve all related party transactions. We have not adopted written policies and procedures
specifically for related person transactions.
Director
Independence
Mr.
Marc Saltzman and Mr. Neil Stiles were each deemed to be an “independent director”, as that term is defined by the
listing standards of the national exchanges and SEC rules.
Item
14. Principal Accounting Fees and Services.
Fees
paid to the Company’s current principal accountant, MNP, LLP, were as follows:
| |
Year Ended | |
Year Ended |
| |
May 31, | |
May 31, |
| |
2014 | |
2013 |
Audit fees (1) | |
$ | 48,150 | | |
$ | 47,700 | |
Audit related fees (2) | |
$ | 39,987 | | |
$ | - | |
Tax fees (3) | |
$ | - | | |
$ | - | |
All other fees (4) | |
$ | - | | |
$ | - | |
The
aggregate fees billed by our principal accountant, MNP, LLP, for the May 31, 2014 and May 31, 2013 audit of our annual financial
statements and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or
engagements for the fiscal years ended May 31, 2014 and May 31, 2013.
The
aggregate fees billed by our principal accountants for assurance and advisory services that were related to the performance of
the audit or review of our financial statements for the fiscal years ended May 31, 2014 and May 31, 2013.
The
aggregate fees billed for professional services rendered by our principal accountants for tax compliance, tax advice, tax planning
and tax preparation for the fiscal years ended May 31, 2014 and May 31, 2013.
The
aggregate fees billed for products and services provided by our principal accountants for the fiscal years ended May 31, 2014
and May 31, 2013, other than for audit fees and tax fees.
Pre-Approval
Policies and Procedures
The
Audit Committee pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be
paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s
independence.
PART
IV
Item
15. Exhibits, Consolidated Financial Statement Schedules.
Consolidated Financial
Statements
YAPPN
CORP.
FORM
10-K
YEAR
ENDED MAY 31, 2014
TABLE
OF CONTENTS
|
|
|
Page |
|
PART I |
|
|
Item 1. |
Consolidated Financial
Statements |
|
|
|
Report of Independent
Registered Public Accounting Firm |
|
F-2 |
|
Consolidated
Balance Sheets as of May 31, 2014 and 2013 |
|
F-3 |
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years ended May 31, 2014 and 2013 |
|
F-4 |
|
Consolidated
Statements of Stockholders’ Deficit for the Years ended May 31, 2014 and 2013 |
|
F-5 |
|
Consolidated
Statements of Cash Flows for the Years ended May 31, 2014 and 2013 |
|
F-6 |
|
|
|
|
|
Notes to the Consolidated
Financial Statements |
|
F-7 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board or Directors and Stockholders of Yappn Corp.
We
have audited the accompanying consolidated balance sheets of Yappn Corp. (the "Company") (a development stage company)
as of May 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, stockholders' deficit,
and cash flows for the years then ended. Yappn Corp.’s management is responsible for these consolidated financial statements.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The financial statements
for the cumulative period from November 3, 2010 (Inception) through May 31, 2012 were audited by other auditors who expressed
an opinion without reservation on those statements in their report September 13, 2012. Their report included an explanatory paragraph
regarding going concern. Our opinion, in so far as it relates to the period from November 3, 2010 (Inception) through May 31,
2012, is based solely on the report of other auditors.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of Yappn Corp.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Yappn Corp. (a development stage company) as of May 31, 2014 and 2013, and the results of its operations and its cash flows
for the years then ended and for the period from November 3, 2010 (Inception) to May 31, 2014 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company's experience of negative cash flows from operations and its dependency
upon future financing raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding
these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
|
|
|
|
|
Chartered
Professional Accountants
Licensed Public Accountants |
Toronto,
Ontario
August 25, 2014 |
|
|
|
|
ACCOUNTING
› CONSULTING › TAX
701
EVANS AVENUE, 8TH FLOOR, TORONTO ON, M9C 1A3
P:
416.626.6000 F: 416.626.8650 MNP.ca |
Yappn Corp.
(A Development Stage Company)
Consolidated Balance Sheets
|
| |
As of | | |
As of | |
|
Note | |
May 31, 2014 | | |
May 31, 2013 | |
Assets |
| |
| | |
| |
Current assets: |
| |
| | |
| |
Cash |
| |
$ | 988,692 | | |
$ | 217,037 | |
Prepaid development and related expenses - related party |
13 | |
| - | | |
| 80,518 | |
Prepaid expenses |
| |
| 3,310 | | |
| 10,040 | |
Total current assets |
| |
| 992,002 | | |
| 307,595 | |
|
| |
| | | |
| | |
Total Assets |
| |
$ | 992,002 | | |
$ | 307,595 | |
|
| |
| | | |
| | |
Liabilities and Stockholders' Deficit |
| |
| | | |
| | |
Current liabilities: |
| |
| | | |
| | |
Accounts payable |
| |
$ | 444,041 | | |
$ | 114,532 | |
Accrued expenses |
| |
| 141,176 | | |
| 84,561 | |
Accrued development and related expenses - related party |
13 | |
| 145,316 | | |
| - | |
Short term loans |
5 | |
| 477,311 | | |
| - | |
Line of credit |
6 | |
| 800,000 | | |
| - | |
Convertible promissory notes and debentures |
7 | |
| 100,846 | | |
| - | |
Total current liabilities |
| |
| 2,108,690 | | |
| 199,093 | |
|
| |
| | | |
| | |
Other liabilities: |
| |
| | | |
| | |
Derivative preferred stock liability |
10 | |
| - | | |
| 3,479,862 | |
Derivative warrant liability |
10 | |
| 2,531,282 | | |
| 4,050,278 | |
Convertible promissory notes and debentures |
7 | |
| 2,406,329 | | |
| - | |
Total Liabilities |
| |
| 7,046,301 | | |
| 7,729,233 | |
|
| |
| | | |
| | |
Stockholders' Deficit |
| |
| | | |
| | |
Preferred stock, par value $.0001 per share, 50,000,000 shares authorized: Series "A" Convertible, 10,000,000 shares authorized; 2,010,000 and 7,710,000 shares issued and outstanding, respectively |
9 | |
| 201 | | |
| - | |
Common stock, par value $.0001 per share, 200,000,000 shares authorized; 125,855,794 and 100,000,000 issued and outstanding, respectively |
8 | |
| 12,586 | | |
| 10,000 | |
Additional paid-in capital |
| |
| 4,071,022 | | |
| 64,997 | |
Deficit accumulated during the developmental stage |
| |
| (10,138,108 | ) | |
| (7,496,635 | ) |
Total Stockholders' Deficit |
| |
| (6,054,299 | ) | |
| (7,421,638 | ) |
Total Liabilities And Stockholders' Deficit |
| |
$ | 992,002 | | |
$ | 307,595 | |
See
accompanying notes to the consolidated financial statements
Yappn Corporation
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive
Loss
|
| |
For the year ended
May 31, | | |
From November 3,
2010 (Inception) through May
31, | |
|
Note | |
2014 | | |
2013 | | |
2014 | |
|
| |
| | |
| | |
| |
Revenues |
| |
$ | 37,135 | | |
$ | - | | |
$ | 43,051 | |
|
| |
| | | |
| | | |
| | |
Cost of revenue |
| |
| 26,155 | | |
| - | | |
| 29,278 | |
|
| |
| | | |
| | | |
| | |
Gross profit |
| |
| 10,980 | | |
| - | | |
| 13,773 | |
|
| |
| | | |
| | | |
| | |
Operating expenses: |
| |
| | | |
| | | |
| | |
Marketing |
13 | |
| 585,272 | | |
| 15,465 | | |
| 601,160 | |
Research and development expenses |
13 | |
| 1,375,112 | | |
| 197,275 | | |
| 1,572,387 | |
General and administrative expenses |
13 | |
| 1,332,000 | | |
| 139,171 | | |
| 1,476,811 | |
Professional fees |
| |
| 355,518 | | |
| 112,221 | | |
| 457,920 | |
Consulting |
| |
| 442,933 | | |
| 120,221 | | |
| 624,703 | |
Total operating expenses |
| |
| 4,090,835 | | |
| 584,353 | | |
| 4,732,981 | |
|
| |
| | | |
| | | |
| | |
Loss from operations |
| |
| (4,079,855 | ) | |
| (584,353 | ) | |
| (4,719,208 | ) |
|
| |
| | | |
| | | |
| | |
Other (income) expense: |
| |
| | | |
| | | |
| | |
Interest expense |
| |
| 110,611 | | |
| 1,000 | | |
| 111,611 | |
Financing expense on issuance of derivative liabilities and convertible notes |
| |
| 4,737,726 | | |
| 6,461,700 | | |
| 11,199,427 | |
Change in fair value of derivative liabilities and convertible notes |
| |
| (6,318,613 | ) | |
| 394,584 | | |
| (5,924,029 | ) |
Miscellaneous expense |
| |
| 31,894 | | |
| - | | |
| 31,891 | |
Total other (income) expense |
| |
| (1,438,382 | ) | |
| 6,857,284 | | |
| 5,418,900 | |
|
| |
| | | |
| | | |
| | |
Net loss before taxes |
| |
| (2,641,473 | ) | |
| (7,441,637 | ) | |
| (10,138,108 | ) |
|
| |
| | | |
| | | |
| | |
Provision for income taxes |
12 | |
| - | | |
| - | | |
| - | |
|
| |
| | | |
| | | |
| | |
Net loss and comprehensive loss |
| |
$ | (2,641,473 | ) | |
$ | (7,441,637 | ) | |
$ | (10,138,108 | ) |
|
| |
| | | |
| | | |
| | |
Net loss per weighted-average shares common stock - basic and diluted |
| |
$ | (0.03 | ) | |
$ | (0.06 | ) | |
| | |
|
| |
| | | |
| | | |
| | |
Weighted-average number of shares of common stock issued and outstanding - basic and diluted |
| |
| 102,414,173 | | |
| 134,931,507 | | |
| | |
See accompanying
notes to the consolidated financial statements
Yappn Corp.
(A Development Stage Company)
Consolidated Statements of Stockholders' Deficit
For the Periods from November 3, 2010 (Inception) through
May 31, 2014
| |
Common | | |
Preferred | | |
Additional | | |
Accumulated
Deficit during the | | |
| |
| |
Shares
Outstanding | | |
Amount | | |
Shares
Outstanding | | |
Amount | | |
Paid-in
Capital | | |
development
stage | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance
- November 2010 (Inception) | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of
common stock - at par value ($0.0001) | |
| 112,500,000 | | |
| 11,250 | | |
| - | | |
| - | | |
| (10,500 | ) | |
| - | | |
| 750 | |
Issuance of common stock
- $0.0013 per share | |
| 30,000,000 | | |
| 3,000 | | |
| - | | |
| - | | |
| 37,000 | | |
| - | | |
| 40,000 | |
Payment
of stock issuance costs | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,828 | ) | |
| - | | |
| (1,828 | ) |
Net
loss for the period from inception to May 31, 2011 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (18,392 | ) | |
| (18,392 | ) |
Balance
- May 31, 2011 | |
| 142,500,000 | | |
| 14,250 | | |
| - | | |
| - | | |
| 24,672 | | |
| (18,392 | ) | |
| 20,530 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
loss for the year ended May 31, 2012 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (36,606 | ) | |
| (36,606 | ) |
Balance
- May 31, 2012 | |
| 142,500,000 | | |
| 14,250 | | |
| - | | |
| - | | |
| 24,672 | | |
| (54,998 | ) | |
| (16,076 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cancellation
of common stock | |
| (112,500,000 | ) | |
| (11,250 | ) | |
| - | | |
| - | | |
| 11,250 | | |
| - | | |
| - | |
Issuance
of common stock for asset purchase | |
| 70,000,000 | | |
| 7,000 | | |
| - | | |
| - | | |
| (7,000 | ) | |
| - | | |
| - | |
Forgiveness
of officers & directors advances and liabilities assumed | |
| - | | |
| - | | |
| - | | |
| - | | |
| 36,075 | | |
| - | | |
| 36,075 | |
Issuance
of Series A Convertible preferred stock at par value ($0.0001) and warrants | |
| - | | |
| - | | |
| 7,710,000 | | |
| - | | |
| - | | |
| - | | |
| - | |
Net
loss for the year ended May 31, 2013 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (7,441,637 | ) | |
| (7,441,637 | ) |
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 shares for licensing rights | |
| 1,666,667 | | |
| 167 | | |
|
- |
|
|
| - | | |
| 133,166 | | |
| - | | |
| 133,333 | |
Issuance
of common shares 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 shares on conversion of Series A Preferred shares | |
| 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 | ) |
See accompanying notes to the consolidated financial
statements
Yappn Corporation |
(A Development Stage Company) |
Consolidated Statements of Cash Flows |
| |
For the year Ended May 31, 2014 | | |
For the year Ended May 31, 2013 | | |
From November
3, 2010 (Inception) through May 31, 2014 | |
| |
| | |
| | |
| |
Cash Flows From Operating Activities: | |
| | |
| | |
| |
Net loss and comprehensive loss | |
$ | (2,641,473 | ) | |
$ | (7,441,637 | ) | |
$ | (10,138,108 | ) |
Adjustments to reconcile net loss to cash used in operating activities: | |
| | | |
| | | |
| | |
Amortization and depreciation | |
| - | | |
| 509 | | |
| 1,498 | |
Change in fair value of derivative liabilities and convertible notes | |
| (6,318,613 | ) | |
| 394,584 | | |
| (5,924,029 | ) |
Financing expense on issuance of derivative liabilities, convertible notes, and derivatives | |
| 4,876,118 | | |
| 6,398,592 | | |
| 11,280,480 | |
Stock issuance for consulting services and licensing rights | |
| 349,044 | | |
| - | | |
| 349,044 | |
Imputed interest expense on loan | |
| 27,799 | | |
| - | | |
| 27,799 | |
Changes in operating assets and liabilities: | |
| | | |
| | | |
| | |
Prepaid development and related expenses - related party | |
| 80,518 | | |
| (80,518 | ) | |
| - | |
Prepaid expenses | |
| 6,730 | | |
| (10,040 | ) | |
| (3,310 | ) |
Accounts payable and accrued expenses | |
| 386,124 | | |
| 194,102 | | |
| 585,217 | |
Accrued development and related expense - related party | |
| 145,316 | | |
| - | | |
| 145,316 | |
Net Cash Used in Operating Activities | |
| (3,088,437 | ) | |
| (544,408 | ) | |
| (3,676,093 | ) |
| |
| | | |
| | | |
| | |
Cash Flows From Investing Activities: | |
| | | |
| | | |
| | |
Capital expenditures | |
| - | | |
| - | | |
| (2,034 | ) |
Net Cash Used in Investing Activities | |
| - | | |
| - | | |
| (2,034 | ) |
| |
| | | |
| | | |
| | |
Cash Flows From Financing Activities: | |
| | | |
| | | |
| | |
Proceeds from notes, loans, and derivatives | |
| 3,695,092 | | |
| - | | |
| 3,695,092 | |
Net advances from stockholders forgiven | |
| - | | |
| 4,686 | | |
| 11,045 | |
Deferred revenue liability assumed by shareholders and directors | |
| - | | |
| 19,795 | | |
| 19,795 | |
Net proceeds from the issuance of common stock | |
| - | | |
| - | | |
| 38,923 | |
Proceeds from the issuance of preferred stock and warrants | |
| 165,000 | | |
| 771,000 | | |
| 936,000 | |
Issuance costs of preferred stock and warrants | |
| - | | |
| (34,036 | ) | |
| (34,036 | ) |
Net Cash Provided by Financing Activities | |
| 3,860,092 | | |
| 761,445 | | |
| 4,666,819 | |
| |
| | | |
| | | |
| | |
Net increase in cash | |
| 771,655 | | |
| 217,037 | | |
| 988,692 | |
Cash, beginning of year | |
| 217,037 | | |
| - | | |
| - | |
Cash, end of year | |
$ | 988,692 | | |
$ | 217,037 | | |
$ | 988,692 | |
| |
| | | |
| | | |
| | |
Supplemental Disclosure of Cash Flow Information |
| |
| | | |
| | | |
| | |
Non Cash Investing and Financing Activities Information: | |
| | | |
| | | |
| | |
Forgiveness of Officer and Director Advances | |
$ | - | | |
$ | 36,075 | | |
$ | 36,075 | |
Common stock issued on conversion of convertible debt | |
$ | 86,713 | | |
$ | - | | |
$ | 86,713 | |
Common stock issued on conversion of preferred
stock | |
$ | 735,000 | | |
$ | - | | |
$ | 735,000 | |
Reclassifications of derivative liabilities to additional paid in
capital | |
$ | 1,118,087 | | |
$ | - | | |
$ | 1,118,087 | |
Payment of accrued expenses by Stockholders | |
$ | - | | |
$ | 4,771 | | |
$ | 4,771 | |
Common stock issued for consulting services and licensing right | |
$ | 349,044 | | |
$ | - | | |
$ | 349,044 | |
Cash Paid during the year for Interest | |
$ | 20,532 | | |
$ | - | | |
$ | 20,532 | |
See accompanying
notes to the consolidated financial statements
YAPPN CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2014
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 US and Canada. In March 2013, the Company acquired
a concept and technology license from Intertainment Media Inc., a Canadian company, in exchange for 70,000,000 common stock of
the Company. As a result of this exchange, Intertainment Media Inc. acquired a 70 percent ownership of the Company. The accompanying
consolidated financial statements of the Company were prepared from the accounts of the Company under the accrual basis of accounting.
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Yappn Acquisition Corp. and Yappn Canada, Inc. All inter-company
balances and transactions have been eliminated on consolidation.
Development Stage
The accompanying
consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) No 915, Development Stage Entities. A
development stage enterprise is one in which planned and principal operations have not commenced or, if its operations have
commenced, there has been no significant revenue. Development-stage companies report cumulative costs from the
enterprise’s inception.
Cash and Cash Equivalents
For purposes of reporting within the
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 $585,272 and $15,465 for the years ended May 31, 2014 and May 31, 2013, respectively, and $601,160
for the period from November 3, 2010 (inception) through May 31, 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 May
31, 2014 the Company had outstanding 2,010,000 units of Series A Convertible Preferred Stock with a conversion feature to
common stock at an exercise price of $0.10, five year warrants to purchase an additional 47,860,000 shares of common stock at
a per share exercise price ranging from $0.054 to $0.22, and convertible notes and debentures that are convertible into
24,219,602 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 $0.08 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 consolidated statements of operations and comprehensive
income (loss). There have been no penalties nor interest related to unrecognized tax benefits reflected in the consolidated statements
of operations and comprehensive loss for the years ended May 31, 2014 and May 31, 2013 and for the period of November 3, 2010 (inception)
through May 31, 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 9 and 10) and the convertible promissory notes
and debentures (Note 7) are classified as Level 2 financial liabilities.
As of May 31, 2014 and May 31, 2013,
the carrying value of 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 Warrant
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 are no longer treated as a
liability, but as an equity instrument.
When applicable, the instruments are
measured at fair value using a binomial lattice valuation methodology and are included in the consolidated balance sheets as derivative
liabilities. Both unrealized and realized gains and losses related to the derivatives are recorded based on the changes in the
fair values and are reflected as a financing expenses on the consolidated statements of operations and comprehensive loss.
Hybrid Financial Instruments
For certain hybrid financial instruments,
the Company elected to apply the fair value option to account for these 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
The Company has issued
convertible promissory notes 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 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 consolidated statements of operations and comprehensive
loss.
Estimates
The consolidated financial statements
are prepared on the basis of accounting principles generally accepted in the United States. The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements, and revenues and expenses for the periods from November 3, 2010 (inception) through May
31, 2014.
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 easily adoption is permitted.
The Company plans to adopt ASU 2014-10 for its financial statements for the year ended May 31, 2015.
2. Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced negative
cash flows from operations since inception and has net losses for the period from November 3, 2010 (inception) to May 31, 2014
of $10,138,108.
As of May 31, 2014, the Company had
a working capital deficit of $1,116,688. During the year ended May 31, 2014, net cash used in operating activities was $3,088,437.
The Company expects to have similar cash needs for the next twelve month period. 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 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 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 year ended May 31, 2014, the Company has raised $3,860,093 through various financial instruments. Subsequent to
the year ended May 31, 2014 the Company has raised an additional $669,697.
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
for the period from November 3, 2010 (inception) through May 31, 2014 are attributed to a small number of customers.
4. Transfer of Assets
On March 28, 2013, the Company purchased
a prospective social media platform and related group of assets from Intertainment Media, Inc. for 70,000,000 shares of the Company’s
common stock. As a result of this purchase Intertainment Media, Inc. became the majority owner of Yappn Corp. Included in the transfer
of assets is a services agreement dated March 21, 2013 by and among Intertainment Media, Inc. and its wholly-owned subsidiaries,
collectively “Ortsbo”. The services agreement provides general maintenance and enhancements for the assets provided
on a fee and license basis.
The transferred assets are reflected
at the historical carrying value of Intertainment Media, Inc. which was Nil.
5. Short Term Loans
On February 28, 2013, the Company agreed
to a 6% convertible promissory bridge loan in the aggregate principal amount of $200,000 to an accredited investor, with gross
proceeds of $200,000. The transfer of the principal did not take place until March 28, 2013, at which time it was exchanged, along
with implied accrued interest of $1,000, for the purchase of 4,010,000 Units of Series A Convertible Preferred Stock and attached
warrants at a stated value of $0.10 per unit on that date (Note 9 and 10).
On July 10, 2013, the Company borrowed
$336,000 (Canadian $350,000) from a private individual. The loan had a term of nine months and was interest free for the first
120 days and 1% per month for the remainder with a final bullet payment due at the end of the term. As a result of favorable terms
to the Company, the fair value of the loan on inception was estimated at $309,313 using an imputed interest rate of 18%. On April
1, 2014 this note was amended and $100,000 of this note 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
1,000,000 issuable shares each under Series A and Series B warrants (Note 7). The loan remaining on April 1, 2014 of $236,000 had
similar total interest charges as the original loan, but has a new maturity of July 10, 2014 and had a value of $220,159 on May
31, 2014.
On January 7, 2014, the Company borrowed
$253,200 (Canadian $280,000) from a private individual. 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. As of May 31, 2014, the value
of the note was $257,152.
On January 9, 2014, the Company borrowed
$271,200 (Canadian $300,000) from a private individual. 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.
Principal amounts | |
Bridge Loan | | |
Nine Month Term Loan | | |
Three Month Term Loan | | |
Six Week Term Loan | | |
Total | |
Borrowing on February 28, 2013 | |
$ | 200,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 200,000 | |
Conversion on March 28, 2013 | |
| (200,000 | ) | |
| - | | |
| - | | |
| - | | |
| (200,000 | ) |
Fair value at May 31, 2013 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
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 | |
6. 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 maximum of 8,000,000 warrants are
vested. The common shares 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.
At May 31, 2014 and since
March 26, 2014, the Company borrowed $800,000 from the lender without any repayments and the 8,000,000 warrants previously
issued to the lender on April 7, 2014 are fully vested. The warrants are valued at $1,495,200 and are reflected as a
financing expense and reported on the Company’s consolidated statements of operations and comprehensive loss below
operating income as an “other expense”.
7. 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 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 the commitment date and May 31, 2014.
The following is a summary of the convertible
notes and debentures as of May 31, 2014:
Principal amounts: | |
Asher Enterprises Notes | | |
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 | |
Total | |
$ | 121,000 | | |
$ | 145,000 | | |
$ | 2,219,000 | | |
$ | 50,000 | | |
$ | 2,535,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Convertible notes and debt at fair value at commitment date | |
$ | 141,805 | | |
$ | 295,111 | | |
$ | 2,086,720 | | |
$ | 49,421 | | |
$ | 2,573,057 | |
Change in fair value | |
| (36,226 | ) | |
| (100,968 | ) | |
| 177,420 | | |
| 10,449 | | |
| 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 | |
$ | 40,976 | | |
$ | 142,189 | | |
$ | 2,264,140 | | |
$ | 59,870 | | |
$ | 2,507,175 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Current | |
$ | 40,976 | | |
$ | - | | |
$ | - | | |
$ | 59,870 | | |
$ | 100,846 | |
Long term | |
| - | | |
| 142,189 | | |
| 2,264,140 | | |
| - | | |
| 2,406,329 | |
| |
$ | 40,976 | | |
$ | 142,189 | | |
$ | 2,264,140 | | |
$ | 59,870 | | |
$ | 2,507,175 | |
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 8% 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 8% 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.
The 8% Convertible Note may be converted
into common stock of the Company at any time beginning on the 180th day of the date from issuance. However, it shall not be converted
if the conversion would result in beneficial ownership by the holder and its affiliates to own more than 9.99% of the outstanding
shares of the Company’s common stock. Such limitations on conversion may be waived by the Note holder with not less than
61 days’ prior notice to the Company. The conversion price is 61% of the average of the lowest three closing bid prices of
the Company’s common stock for the ten trading days immediately prior to the conversion date. Subsequent to May 31, 2014,
the Note was repaid (Note 14).
Accounting allocation of initial proceeds: | |
October 9, 2013 | | |
December 12, 2013 | |
Gross proceeds | |
$ | 78,500 | | |
$ | 42,500 | |
Fair value of promissory notes | |
| (100,234 | ) | |
| (41,571 | ) |
Financing expense (gain) on the issuance of promissory notes | |
$ | 21,734 | | |
$ | (929 | ) |
| |
| | | |
| | |
Key inputs to determine the fair value at the commitment date: | |
| | | |
| | |
Stock price | |
$ | 0.09 | | |
$ | 0.06 | |
Current exercise price | |
$ | 0.07 | | |
$ | 0.04 | |
Time to expiration – days | |
| 266 | | |
| 268 | |
Risk free interest rate | |
| .11 | % | |
| .08 | % |
Estimated volatility | |
| 150 | % | |
| 150 | % |
Dividend | |
| - | | |
| - | |
| |
| | | |
| | |
Key inputs to determine the fair value at May 31, 2014: | |
| | | |
| | |
Stock price | |
$ | N/A | | |
$ | 0.16 | |
Current exercise price | |
$ | N/A | | |
$ | 0.09 | |
Time to expiration – days | |
| N/A | | |
| 98 | |
Risk free interest rate | |
| N/A | % | |
| .06 | % |
Estimated volatility | |
| N/A | % | |
| 150 | % |
Dividend | |
| N/A | | |
| - | |
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 8). As of May 31, 2014, the principal borrowing remaining under this agreement was $80,000, with a fair value
of $142,189.
Accounting
allocation of initial proceeds: | |
November 15,
2013 | | |
February 21,
2014 | | |
April
16,
2014 | |
Gross
proceeds | |
$ | 65,000 | | |
$ | 40,000 | | |
$ | 40,000 | |
Fair
value of promissory notes | |
| (142,812 | ) | |
| (54,286 | ) | |
| (98,014 | ) |
Financing
expense on the issuance of promissory notes | |
$ | 77,812 | | |
$ | 14,286 | | |
$ | 58,014 | |
| |
| | | |
| | | |
| | |
Key
inputs to determine the fair value at the commitment date: | |
| | | |
| | | |
| | |
Stock
price | |
$ | 0.07 | | |
$ | 0.05 | | |
$ | 0.14 | |
Current
exercise price | |
$ | 0.05 | | |
$ | 0.03 | | |
$ | 0.05 | |
Time
to expiration – days | |
| 730 | | |
| 632 | | |
| 578 | |
Risk
free interest rate | |
| .11 | % | |
| .08 | % | |
| .37 | % |
Estimated
volatility | |
| 150 | % | |
| 150 | % | |
| 150 | % |
Dividend | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Key
inputs to determine the fair value at May 31, 2014: | |
| | | |
| | | |
| | |
Stock
price | |
$ | N/A | | |
$ | 0.16 | | |
$ | 0.16 | |
Current
exercise price | |
$ | N/A | | |
$ | 0.08 | | |
$ | 0.08 | |
Time
to expiration – days | |
| N/A | | |
| 533 | | |
| 533 | |
Risk
free interest rate | |
| N/A | % | |
| .37 | % | |
| .37 | % |
Estimated
volatility | |
| N/A | % | |
| 150 | % | |
| 150 | % |
Dividend | |
| 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 share 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 share of common stock (individually Series B Warrant) at an exercise price of $0.20.
The purchase price for each unit is $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 5).
The Notes 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 $0.10. Under
the subscription agreement, the Company has granted price protections 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 6) qualified as a breach of this covenant, therefore all Series A warrants were re-priced 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 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 10) | |
| (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 | |
| - | | |
| - | | |
| - | |
Convertible Debentures with Series C 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 debentures, $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 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 debentures, $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 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.
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. The warrants may be
exercised in whole or in part.
Accounting allocation of initial proceeds: | |
April 23,
2014 | | |
May 30,
2014 | |
Gross proceeds | |
$ | 50,000 | | |
$ | 1,000,000 | |
Fair value of the convertible debentures | |
| (40,605 | ) | |
| (812,121 | ) |
Fair value of warrants | |
| (9,395 | ) | |
| (187,879 | ) |
Financing expense on the issuance of derivative instruments | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Key inputs to determine the fair value at the commitment date: | |
| | | |
| | |
Stock price | |
$ | 0.15 | | |
$ | 0.16 | |
Current exercise price | |
$ | 0.15 | | |
$ | 0.15 | |
Time to expiration – days | |
| 731 | | |
| 731 | |
Risk free interest rate | |
| .37 | % | |
| .37 | % |
Estimated volatility | |
| 150 | % | |
| 150 | % |
Dividend | |
| - | | |
| - | |
Market rate for the company | |
| 18 | % | |
| 18 | % |
| |
| | | |
| | |
Key inputs to determine the fair value of the convertible debentures at May 31, 2014: | |
| | | |
| | |
Stock price | |
$ | 0.16 | | |
$ | 0.16 | |
Current exercise price | |
$ | 0.15 | | |
$ | 0.15 | |
Time to expiration – days | |
| 693 | | |
| 730 | |
Risk free interest rate | |
| .37 | % | |
| .37 | % |
Estimated volatility | |
| 150 | % | |
| 150 | % |
Dividend | |
| - | | |
| - | |
Market rate for the company | |
| 18 | % | |
| 18 | % |
Other
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 mature 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. Subsequent to May 31, 2014 these Notes were repaid (Note 14).
Accounting allocation of initial proceeds: | |
December 17,
2013 | |
Gross proceeds | |
$ | 50,000 | |
Fair value of the convertible promissory notes | |
| (49,421 | ) |
Financing expense (gain) on the issuance of convertible promissory notes | |
$ | (579 | ) |
| |
| | |
Key inputs to determine the fair value at the commitment date: | |
| | |
Stock price | |
$ | 0.05 | |
Current exercise price | |
$ | 0.03 | |
Time to expiration – days | |
| 270 | |
Risk free interest rate | |
| .09 | % |
Estimated volatility | |
| 150 | % |
Dividend | |
| - | |
| |
| | |
Key inputs to determine the fair value at May 31, 2014: | |
| | |
Stock price | |
$ | 0.16 | |
Current exercise price | |
$ | 0.08 | |
Time to expiration – days | |
| 105 | |
Risk free interest rate | |
| .06 | % |
Estimated volatility | |
| 150 | % |
Dividend | |
| - | |
8. Common Stock
On December 8, 2010, the Company issued
112,500,000 post-split (7,500,000 pre-split) shares of common stock to the officers and directors of the Company for cash proceeds
of $750.
During the period from November 3, 2010
(inception) through May 31, 2011 the Company issued 30,000,000 post-split (2,000,000 pre-split) shares of its common stock, par
value $0.0001 per share, for $40,000 less issuance costs of $1,828.
On March 11, 2013, the Company authorized
a stock dividend, treated as a stock split for accounting purposes, whereby an additional 14 shares of common stock, par value
$0.0001 per share, was issued on each one share of common stock outstanding to each holder of record on March 25, 2013. All common
stock and per share information has been adjusted retroactively for the stock split.
On March 14, 2013 the Company changed
the authorized stock to 200,000,000 shares, par value $0.0001 per share.
On March 28, 2013, immediately following
the Asset Purchase, under the terms of an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations,
the Company transferred all of its pre-Asset Purchase assets and liabilities to the Company’s wholly-owned subsidiary, Plesk
Holdings, Inc., a Delaware corporation. Thereafter, pursuant to a stock purchase agreement, the Company transferred all of the
outstanding capital stock of Plesk Holdings, Inc. to certain of the Company’s former stockholders in exchange for cancellation
of an aggregate of 112,500,000 shares of our common stock held by such persons.
On June 24, 2013, the Company issued
and transferred 300,000 shares of common stock, valued at $42,000 in exchange for business consulting services. The Company 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 share 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 13. 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 7).
From April 9, 2014 through May 23,
2014, various holders of convertible preferred stock exercised their right to convert to common stock. A total of 7,350,000 shares
of preferred were converted into common stock (Note 9).
9. Preferred Stock and Warrants
Series A Preferred Stock
On March 14, 2013 the Company authorized
50,000,000 shares of preferred stock, par value $0.0001.
On March 28, 2013 the Company was authorized
to issue 5,500,000 shares of Series A Preferred Stock with a par value $0.0001 and a stated value of $0.10. On May 31, 2013, the
Company amended and restated the Certificate of Designation governing the Series A Preferred Stock in order to increase the number
of authorized shares of preferred stock designated as Series A Preferred Stock to 10,000,000 shares.
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 cash proceeds including the conversion of $201,000 from the bridge loan (Note 5). Each Unit
consisted of (i) one share of the Series A Convertible Preferred Stock, par value $0.0001 per share, convertible into one share
of our common stock; and (ii) a five year warrant to purchase an additional share of the Company’s common stock at a per
share exercise price of $0.10. Due to the issuance of common stock to JMJ Financial (Note 7) the May 31, 2013 and June 7, 2013
warrants were re-priced to $0.054. The March 28, 2013 warrants were not re-priced because the one year price protection provision
expired before the issuance of the common shares to JMJ Financial.
Accounting allocation of initial proceeds: | |
March 28,
2013 | | |
May 31,
2013 | | |
June 7,
2013 | |
Gross proceeds | |
$ | 401,000 | | |
$ | 370,000 | | |
$ | 165,000 | |
Derivative preferred stock liability fair value | |
| (1,610,015 | ) | |
| (1,670,550 | ) | |
| (1,025,475 | ) |
Derivative warrant liability fair value | |
| (1,909,161 | ) | |
| (1,945,830 | ) | |
| (1,146,915 | ) |
Financing expense on the issuance of derivative instruments | |
$ | 3,118,176 | | |
$ | 3,246,380 | | |
$ | 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 | |
$ | 0.50 | | |
$ | 0.55 | | |
$ | 0.72 | |
Current exercise price | |
$ | 0.10 | | |
$ | 0.10 | | |
$ | 0.10 | |
Time to expiration – days (preferred stock) | |
| 365 | | |
| 365 | | |
| 365 | |
Time to expiration – days (warrants) | |
| 1,826 | | |
| 1,826 | | |
| 1,826 | |
Risk free interest rate | |
| 1.48 | % | |
| 1.48 | % | |
| 1.48 | % |
Estimated volatility (preferred stock) | |
| 100 | % | |
| 100 | % | |
| 100 | % |
Estimated volatility (warrants) | |
| 150 | % | |
| 150 | % | |
| 150 | % |
Dividend | |
| - | | |
| - | | |
| - | |
In connection with a portion of the
private placement on May 31, 2013, the broker was eligible for 120,000 warrants having the same full ratchet anti-dilution provisions
as the other warrants, as part of the broker’s commission.
The following table reflects the preferred
stock activity for the period of June 1, 2012 to May 31, 2014:
| |
Preferred Stock | |
Outstanding as of June 1, 2012 | |
| - | |
Issued on March 28, 2013 | |
| 4,010,000 | |
Issued on May 31, 2013 | |
| 3,700,000 | |
Exercised and expired | |
| - | |
Total – as of May 31, 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 | |
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 consolidated
balance sheet from a derivative preferred share liability to stockholders’ equity at a value of $201,000 (Note 10).
At May 31, 2013, as a result of the
twelve month price protection provisions in the subscription agreement, the Company recognized its preferred stock in its consolidated
balance sheet as a derivative liability. The calculation methodologies for the fair values of the derivative preferred stock liability
for the year ended May 31, 2014 are described in Note 10 – Derivative Preferred Stock and Warrant Liabilities.
Warrants
Subscription Agreement with Series
A Preferred Shares
The Company issued 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
provisions. The price protection provision 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 re-priced to $0.054.
However, subsequent to May 31, 2014 with the price 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 at a value of $9,636.
Series A, B and C 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 7), as part of the defined 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 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 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.
On April 23, 2014 and May 30,
2014, the Company authorized and issued Series C warrants to acquire 333,333 and 6,666,667 shares of common stock,
respectively, to accredited investors with unsecured 6% convertible debentures as part of a defined Unit under the
subscription agreements for those respective dates. 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.
Line of Credit Arrangement
Pursuant to the loan agreement and promissory
note entered on April 7, 2014 (Note 6), 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.
The following is a summary of warrants
issued, exercised and expired through May 31, 2014:
| |
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 | |
Total – as of May 31, 2014 | |
| 47,860,000 | | |
| | | |
| | |
The outstanding warrants at May 31,
2014 and May 31, 2013 have a weighted average exercise price of approximately $0.16 and $0.08 per share, respectively, and have
an approximate weighted average remaining life of 4.7 and 4.9 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 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 following table is a summary of
those warrants that are reflected in equity as of the year ended May 31, 2014:
| |
Shares Issuable Under Warrants | | |
Equity Value | |
Issued warrants on March 28, 2013 | |
| 4,010,000 | | |
$ | 917,087 | |
Issued Series B warrants on January 29, 2014 | |
| 3,950,000 | | |
| - | |
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 | |
Total – as of May 31, 2014 | |
| 30,700,000 | | |
$ | 2,609,256 | |
For those warrants with price protection
provisions, the calculation methodologies for the fair values of the derivative warrant liability are described in Note 10 –
Derivative Preferred Stock and Warrant Liabilities.
10. Derivative Preferred Stock and
Warrant Liabilities
For the years ended May 31, 2014 and
May 31, 2013, the Company has Series A preferred stock and warrants outstanding with price protection provisions that provide the
holder with a potential increase in the amount of common stock exchanged or a reduction in the exercise price of the instruments
should the Company subsequently issue stock or securities convertible into common stock at a price lower than the stated exercise
price of $0.10. Simultaneously, with any reduction to the exercise price, additional preferred shares will be issued in direct
correlation to a reduction in the exercise price and 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, 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
preferred stock liability and its derivative warrant liability to be Level 2 fair value measurements and has used the binominal
lattice pricing model to calculate the fair value as of May 31, 2014 and May 31, 2013. The binomial lattice model requires six
basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the
estimated volatility of the stock price in the future, and the dividend rate.
Accounting for Derivative Preferred
Stock Liability
The Company’s derivative preferred
stock instruments have been measured at fair value at May 31, 2014 and May 31, 2013 using the binomial lattice model. 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 Company recognizes all of its preferred stock with price protection in its
consolidated balance sheet as a liability. The liability is revalued at each reporting period and changes in fair value are recognized
in the consolidated statements of operations and comprehensive income (loss). The initial recognition and subsequent changes in
fair value of the derivative preferred stock liability have no effect on the Company’s consolidated cash flows.
The following is a summary of the derivative
preferred stock liability from June 1, 2012 through May 31, 2014:
| |
Value | | |
Number of Preferred Stock Units | |
Balance as of June 1, 2012 | |
$ | - | | |
| - | |
Preferred stock issued March 28, 2013 | |
| 1,610,015 | | |
| 4,010,000 | |
Preferred stock issued May 31, 2013 | |
| 1,670,550 | | |
| 3,700,000 | |
Increase in fair value of derivative preferred stock liability | |
| 199,297 | | |
| - | |
Balance as of May 31, 2013 | |
| 3,479,862 | | |
| 7,710,000 | |
Preferred stock issued June 7, 2013 | |
| 1,025,475 | | |
| 1,650,000 | |
Decrease in fair value of derivative preferred stock liability | |
| (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 | |
$ | - | | |
| - | |
The revaluation of the preferred stock
at each reporting period resulted in the recognition of a gain of $3,569,337 within the Company’s consolidated statements
of operations and comprehensive loss for the year ended May 31, 2014 and is included in the consolidated statements of
operations and comprehensive loss under the caption “Change in fair value of derivative liabilities and convertible
notes”. As the price protection provisions for the remaining 2,010,000 outstanding preferred stock expired as of May 31,
2014 the value of $201,000 was reclassified from a derivative preferred stock liability to equity. The fair value of derivative
preferred stock at May 31, 2014 and May 31, 2013 was $0 and $3,479,862, respectively, which is reported on the consolidated balance
sheets under the caption “Derivative preferred stock liability”.
Fair Value Assumptions Used in Accounting
for Derivative Preferred Stock Liability
The key inputs used in the determination of fair value at May 31, 2013: | |
| |
| |
| |
Stock price | |
$ | 0.55 | |
Current exercise price | |
$ | 0.10 | |
Time to expiration - days | |
| 301 and 365 | |
Risk free interest rate | |
| 1.48 | % |
Estimated volatility | |
| 100 | % |
Dividend | |
| - | |
At May 31, 2014, there were no longer
any Series A preferred stock shares that had price protection provisions. The remaining shares were reclassified to equity at the
fair value rate of $0.10 per common share (Note 9).
Accounting for Derivative Warrant
Liability
The Company’s derivative warrant
instruments with price protection provisions have been measured at fair value at May 31, 2014 and May 31, 2013 using the binomial
lattice model. The Company recognizes all of its warrants with price protection provisions in its consolidated balance sheets as
a liability. The liability is revalued at each reporting period and changes in fair value are recognized currently in the 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 consolidated cash flows.
The following is a summary of the derivative
warrant liability from June 1, 2012 through May 31, 2014:
| |
Shares Issuable Under Warrants | | |
Derivative Warrant Value | |
Balance as of June 1, 2012 | |
| - | | |
$ | - | |
Warrants issued March 28, 2013 | |
| 4,010,000 | | |
| 1,909,161 | |
Warrants issued May 31, 2013 | |
| 3,700,000 | | |
| 1,945,830 | |
Increase in fair value of derivative warrant liability | |
| - | | |
| 195,287 | |
Balance as of May 31, 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 (warrants issued March 28, 2013) | |
| (4,010,000 | ) | |
| (917,087 | ) |
Warrants exercised or expired | |
| - | | |
| - | |
Decrease in fair value of derivative warrant liability | |
| - | | |
| (2,822,124 | ) |
Total – as of May 31, 2014 | |
| 17,160,000 | | |
$ | 2,531,282 | |
The revaluation of the warrants at each
reporting period resulted in the recognition of a gain of $2,822,124 within the Company’s consolidated statements of operations
and comprehensive loss for the year ended May 31, 2014 (2013 - $195,287), and is included in the 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 at May 31, 2014 and May 31, 2013 was $2,531,282 and $4,050,278, respectively, which
is reported on the consolidated balance sheets under the caption “Derivative warrant liability”.
Fair Value Assumptions Used in Accounting
for 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 9).
The key inputs used in the determination
of fair value at May 31, 2014 and 2013:
| |
May 31,
2014 | | |
May 31,
2013 | |
Stock price | |
$ | 0.16 | | |
$ | 0.55 | |
Current exercise price | |
$ | 0.054 | | |
$ | 0.10 | |
Time to expiration – days (range) | |
| 1,461 - 1,468 | | |
| 1,762 – 1,826 | |
Risk free interest rate | |
| 1.54 | % | |
| 1.48 | % |
Estimated volatility | |
| 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 7).
The key inputs used in the determination
of fair value of the Series A warrants at the commitment date and reporting period:
| |
January 29,
2014 | | |
February 27, 2014 | | |
April 1, 2014 | | |
May 31, 2014 | |
Warrants – Series A (issuable under warrant) | |
| 3,950,000 | | |
| 3,050,000 | | |
| 4,690,000 | | |
| 11,690,000 | |
| |
| | | |
| | | |
| | | |
| | |
Stock price | |
$ | 0.05 | | |
$ | 0.05 | | |
$ | 0.18 | | |
$ | 0.16 | |
Current exercise price | |
$ | 0.15 | | |
$ | 0.15 | | |
$ | 0.15 | | |
$ | 0.10 | |
Time to expiration – days (range) | |
| 1,826 | | |
| 1,826 | | |
| 1,826 | | |
| 1,704 - 1,766 | |
Risk free interest rate | |
| 0.32 | % | |
| .32 | % | |
| 1.30 | % | |
| 1.54 | % |
Estimated volatility | |
| 150 | % | |
| 150 | % | |
| 150 | % | |
| 150 | % |
Dividend | |
| - | | |
| - | | |
| - | | |
| - | |
11. Employee Benefit and Incentive Plans
On March 28, 2013, the Company adopted
an equity incentive plan pursuant to which 10,000,000 shares of common stock may be issued as incentive awards to officers, directors,
employees, consultants and other qualified persons. As of May 31, 2014 and May 31, 2013 no shares have been issued under this plan.
12. Income Taxes
The provision for income taxes for the
year ended May 31, 2014 and May 31, 2013 consisted of the following:
| |
May 31,
2014 | | |
May 31,
2013 | |
Current | |
$ | - | | |
$ | - | |
Deferred | |
| 1,477,825 | | |
| 217,336 | |
Change in valuation allowance | |
| (1,477,825 | ) | |
| (217,336 | ) |
| |
$ | - | | |
$ | - | |
The Company’s income tax rate
computed at the statutory federal rate of 35% differs from its effective tax rate primarily due to permanent items, state taxes
and the change in the deferred tax asset valuation allowance.
| |
May 31,
2014 | | |
May 31,
2013 | |
Income tax at statutory rate | |
| 35.00 | % | |
| 35.00 | % |
Permanent difference | |
| 21.00 | | |
| (32.00 | ) |
Change in valuation allowance | |
| (56.00 | ) | |
| (3.00 | ) |
Total | |
| 0.00 | % | |
| 0.00 | % |
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. In assessing the realizability of deferred tax assets, management evaluates whether it
is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based on Management’s evaluation, the net deferred tax asset was offset by a full valuation
allowance. The Company’s deferred tax asset valuation allowance will be reversed if and when the Company generates sufficient
taxable income in the future to utilize the tax benefits of the related deferred tax assets.
The tax effects of temporary differences
that give rise to the Company’s deferred tax asset as of May 31, 2014 and May 31, 2013 are as follows:
| |
May 31,
2014 | | |
May 31,
2013 | |
Net operating losses | |
$ | 1,713,860 | | |
$ | 236,035 | |
Less: valuation allowance | |
| (1,713,860 | ) | |
| (236,035 | ) |
Net deferred tax asset | |
$ | - | | |
$ | - | |
As of May 31, 2014 and May 31, 2013
the Company had a net operating loss carry-forward of approximately $4,896,744 and $674,387, respectively, which may be used to
offset future taxable income and begins to expire in 2033.
13. Related Party Balances and Transactions
On December 8, 2010, the Company issued
112,500,000 shares of common stock (post stock split) to the officers and directors of the Company for cash proceeds of $750.
During the period from November 3, 2010
(inception) through May 31, 2011, a stockholder advanced $13,525 to the Company for working capital purposes. These amounts were
non-interest bearing, due on demand, and were repaid during the year ended May 31, 2011.
During the year ended May 31, 2012,
the Company’s officer and director advanced $6,359 to the Company for working capital purposes.
On April 25, 2012, the Company’s
previous officer and director agreed to lend the Company up to $100,000 over the next two years provided that at no time can the
principal amount outstanding exceed $25,000. No interest accrued on the outstanding principal under the terms of this note. As
of the resignation of the officer in March 2013, there was no outstanding balance. There were no obligations outstanding as of
May 31, 2013.
In February 2013, a stockholder assumed
the Company’s obligation to fulfill a sale of product from which the Company previously received $19,795. These amounts were
offset against the stockholders advances.
During the year ended May 31, 2013 a
previous officer advanced $4,686 for working capital purposes, assumed liabilities of $5,771 for the Company, and purchased a computer
for $536 from the Company for which proceeds were netted against amounts owed to him. There were no further advances provided by
that officer prior to his resigning. All obligations were settled as of March 28, 2013.
Total stockholder account forgiven was
$36,075. No amounts are due to the stockholder as of May 31, 2013.
From inception until March 28, 2013,
a former officer and director of the Company provided office space and other office administrative resources at no cost. Subsequent
to March 28, 2013, the Company utilizes office space from Intertainment Media, Inc., when necessary.
On March 28, 2013, the Company purchased
the Yappn assets from Intertainment Media, Inc. in consideration for 70,000,000 shares of common stock for a controlling 70 percent
interest in the Company, The Chief Executive Officer and director of the Company, David Lucatch, and a Director of the Company,
Herb Willer, are also Chief Executive Officer and directors of Intertainment Media, Inc.
On March 28, 2013, as part of the assets
purchased the Company also assumed a technology services agreement with Ortsbo, a wholly-owned subsidiary of Intertainment Media,
Inc. Mr. Lucatch is also the president and a member of the Board of Directors of Ortsbo, Inc. (he was Chief Executive of Ortsbo,
Inc. from 2010 through 2012). 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 were valued at the market price on the date of the agreement for a value
of $133,333 (Note 8). 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 Ortsbo’s carrying value for these assets was $nil, the Company reflected the
acquisition value at nil on the consolidated balance sheet. As of May 31, 2014, Ortsbo holds 15,000,000 restricted common stock shares
of the Company.
In April and May 2013, the Company paid
for general development and managerial services performed by its parent, Intertainment Media, Inc., and prepaid for such services
for the subsequent months. The Company also prepaid expenses for the CEO, David Lucatch. Services provided by Intertainment Media,
Inc. personnel are invoiced on a per hour basis at a market rate per hour as determined by the type of activity and the skill set
provided. Costs incurred by Intertainment Media, Inc. for third party purchases are invoiced at cost. Related party fees incurred
and paid under this arrangement totaled $233,400 for the year end May 31, 2013 and a remaining related party prepaid balance totaling
$-0- and $80,518 existed as of May 31, 2014 and May 31, 2013, respectively.
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 and 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.
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 a related party liability on the balance sheet.
14. Subsequent Events
On June 2, 2014, the Company
repaid $200,000 of the outstanding demand line of credit under the April 7, 2014 loan agreement and promissory note. The
Company borrowed $100,000 under this agreement on June 16, 2014 and another $250,000 on
August 25, 2014.
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 8% Convertible Note to Asher Enterprises
dated December 12, 2013.
On June 12th the Company repaid
$152,000 CDN ($142,056 USD) against the loan originated on January 7th 2014 as described in Note 5.
On June 13, 2014, the Company separately
paid $38,000 each, including prepayment fee and related interest, to settle in full the outstanding balance of two $25,000 8%
convertible promissory notes dated December 17, 2013 to two independent accredited investors.
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 7. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible
debentures, $1,000 par value convertible into shares of the Company’s common stock that mature 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.
In addition, the Company received $125,000
from various subscribers comprising 125 units with the same definition above during August 2014. The Series C warrants at a purchase
price of $0.22 per share in connection with these subscriptions totaled 833,333.
On July 17, 2014 the Company borrowed
$110,000 CDN ($100,915 USD) 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.
On July 23, 2014, the
Company borrowed $53,750 CDN ($50,234 USD) in the form of a bridge loan with combined loan and interest fees of $6,250 CDN
(5,841 USD). This loan and the fees were repaid on August 5, 2014.
On August 4, 2014, the
Company borrowed $100,000 CDN ($93,458 USD) in the form of a bridge loan with combined loan and interest of $3,500, due of
August 14, 2014. The Company repaid $25,000 of this note on August 25, 2014.
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) |
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.* |
14.1 |
|
Code
of Ethics and Conduct * |
21.1 |
|
List of Subsidiaries
(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 |
|
XBRLTaxonomy 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 Exhibit 21.1 of the Company’s Annual Report on Form 10-K, filed with the SEC on September 9, 2013.
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
YAPPN
CORP. |
|
|
|
Date: August
29, 2014 |
By: |
/s/
David Lucatch |
|
David Lucatch |
|
Chief Executive
Officer and Director |
|
(Principal Executive
Officer) |
Date: August
29, 2014 |
By:
|
/s/
Craig McCannell |
|
|
Craig McCannell |
|
|
Chief Financial
Officer |
|
|
(Principal Financial
and Accounting Officer) |
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/
David Lucatch |
|
Chief Executive
Officer and Director |
|
August
29, 2014 |
David Lucatch |
|
(Principal Executive
Officer) |
|
|
|
|
|
|
|
/s/
Craig McCannell |
|
Chief Financial
Officer |
|
August
29, 2014 |
Craig McCannell |
|
(Principal Financial
Officer and Accounting Officer) |
|
|
|
|
|
|
|
/s/
Marc Saltzman |
|
Director |
|
August
29, 2014 |
Marc Saltzman |
|
|
|
|
|
|
|
|
|
/s/
Neil Stiles |
|
Director |
|
August
29, 2014 |
Neil Stiles |
|
|
|
|
|
|
|
|
|
/s/
Herb Willer |
|
Chairman of the
Board and Director |
|
August
29, 2014 |
Herb Willer |
|
|
|
|
/s/
Steven Wayne Parsons |
|
Director |
|
August
29, 2014 |
Steven Wayne Parsons |
|
|
|
|
45
Exhibit 10.32
Exhibit 14.1
CODE
OF ETHICS AND CONDUCT
YAPPN CORP.
YAPPN CORP. will conduct its business honestly
and ethically wherever we operate in the world. We will constantly improve the quality of our services, products and operations
and will create a reputation for honesty, fairness, respectability, responsibility, integrity, trust and sound business judgment.
No illegal or unethical conduct on the part of officers, directors, employees or affiliates is in the company’s best interest.
YAPPN CORP. will not compromise its principles for short-term advantage. The ethical performance of this company is the sum of
the ethics of the men and women who work here. Thus, we are all expected to adhere to high standards of personal integrity.
Officers, directors, and employees of the company
must never permit their personal interests to conflict, or appear to conflict, with the interests of the company, its clients or
affiliates. Officers, directors and employees must be particularly careful to avoid representing YAPPN CORP. in any transaction
with others with whom there is any outside business affiliation or relationship. Officers, directors, and employees shall avoid
using their company contacts to advance their private business or personal interests at the expense of the company, its clients
or affiliates.
No bribes, kickbacks or other similar remuneration
or consideration shall be given to any person or organization in order to attract or influence business activity. Officers, directors
and employees shall avoid excessive gifts, gratuities, fees, bonuses or entertainment, in order to attract or influence business
activity.
Officers, directors and employees of YAPPN CORP.
will often come into contact with, or have possession of, proprietary, confidential or business-sensitive information and must
take appropriate steps to assure that such information is strictly safeguarded. This information – whether it is on behalf
of our company or any of our clients or affiliates – could include strategic business plans, operating results, marketing
strategies, customer lists, personnel records, upcoming acquisitions and divestitures, new investments, and manufacturing costs,
processes and methods. Proprietary, confidential and sensitive business information about this company, other companies, individuals
and entities should be treated with sensitivity and discretion and only be disseminated on a need-to-know basis.
Misuse of material inside information in connection
with trading in the company’s securities can expose an individual to civil liability and penalties under the Securities Exchange
Act of 1934 and or other applicable statutes or acts.
Under this Act, directors, officers, and employees
in possession of material information not available to the public are “insiders.” Spouses, friends, suppliers, brokers,
and others outside the company who may have acquired the information directly or indirectly from a director, officer or employee
are also “insiders.” The Act prohibits insiders from trading in, or recommending the sale or purchase of, the company’s
securities, while such inside information is regarded as “material”, or if it is important enough to influence you
or any other person in the purchase or sale of securities of any company with which we do business, which could be affected by
the inside information. The following guidelines should be followed in dealing with inside information:
| q | Until
the material information has been publicly released by the company, an employee must
not disclose it to anyone except those within the company whose positions require use
of the information. |
| | |
| q | Employees
must not buy or sell the company’s securities when they have knowledge of material
information concerning the company until it has been disclosed to the public and the
public has had sufficient time to absorb the information. |
| | |
| q | Employees
shall not buy or sell securities of another corporation, the value of which is likely
to be affected by an action by the company of which the employee is aware and which has
not been publicly disclosed. |
Code of Ethics |
|
Page1 of 2 |
Officers, directors and employees will seek
to report all information accurately and honestly, and as otherwise required by applicable reporting requirements.
Officers, directors and employees will refrain
from gathering competitor intelligence by illegitimate means and refrain from acting on knowledge which has been gathered in such
a manner. The officers, directors and employees of YAPPN CORP. will seek to avoid exaggerating or disparaging comparisons of the
services and competence of their competitors.
Officers, directors and employees will obey
all Equal Employment Opportunity laws and act with respect and responsibility towards others in all of their dealings.
Officers, directors and employees will do their
best to remain personally balanced so that their personal life will not interfere with their ability to deliver quality products
or services to the company and its clients.
Officers, directors and employees agree to disclose
unethical, dishonest, fraudulent and illegal behavior, or the violation of company policies and procedures, directly to management.
Violation of this Code of Ethics can result
in discipline, including possible termination. The degree of discipline relates in part to whether there was a voluntary disclosure
of any ethical violation and whether or not the violator cooperated in any subsequent investigation.
Remember that good ethics is good business
Code of Ethics |
|
Page 2 of 2 |
Exhibit
31.1
CERTIFICATIONS
I,
David Lucatch, certify that:
1. |
I
have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 registrant, 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 registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
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 auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
|
(a) |
All
significant 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. |
Date:
August 29, 2014
|
By: |
/s/ David
Lucatch |
|
|
David Lucatch |
|
|
Chief
Executive Officer
(Principal
Executive Officer) |
Exhibit
31.2
CERTIFICATIONS
I,
Craig McCannell, certify that:
1. |
I
have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 registrant, 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 registrant’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 registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
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 auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
|
(a) |
All
significant 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. |
Date:
August 29, 2014
|
By: |
/s/ Craig
McCannell |
|
|
Craig McCannell |
|
|
Chief
Financial Officer
(Principal
Financial Officer and Accounting Officer) |
Exhibit
32.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT
TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Yappn Corp. (the “Company”) on Form 10-K for the fiscal year ended May 31, 2014
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. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
|
(1) |
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
|
|
(2) |
The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
Date:
August 29, 2014
|
By: |
/s/ David
Lucatch |
|
|
David Lucatch |
|
|
Chief
Executive Officer
(Principal
Executive Officer) |
Exhibit
32.2
CERTIFICATION
OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT
TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Yappn Corp. (the “Company”) on Form 10-K for the fiscal year ended May 31, 2014
as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Craig McCannell, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
|
(1) |
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
|
|
(2) |
The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
Date:
August 29, 2014
|
By: |
/s/ Craig
McCannell |
|
|
Craig McCannell |
|
|
Chief
Financial Officer
(Principal
Financial Officer and Accounting Officer) |
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