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 shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of November 30, 2016, the last
day of registrant’s second fiscal quarter, the aggregate market value of the registrant’s common stock, $0.001 par
value, held by non-affiliates, computed by reference to the closing sale price of the common stock reported on the OTCQB as of
November 30, 2016, was approximately $1,041,225. For purposes of the above statement only, all directors, executive officers and
10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of July 27, 2017, there were 49,277,248 shares of
the registrant’s common stock outstanding.
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. 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 assume no obligation
to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those
anticipated in these forward-looking statements, even if new information becomes available after the date of this Annual Report
or the date of documents incorporated by reference herein that include forward-looking statements.
Management’s Discussion
and Analysis of Results of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction
with our financial statements included herein. 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. and its subsidiaries.
PART I
Item 1. BUSINESS
Business History
We were originally incorporated
under the laws of the State of Delaware on November 3, 2010 with an initial business plan to import consumer electronics, home
appliances and plastic housewares. In March 2013, we filed an amended and restated certificate of incorporation to change our
name to “YAPPN Corp.” and increase our authorized capital stock to 200,000,000 shares of common stock, par value $0.0001
per share and 50,000,000 shares of preferred stock, par value $0.0001 per share. Further, in March 2013, our Board of Directors
declared a stock dividend, whereby an additional 14 shares of our common stock was issued for each one share of common stock outstanding
to each holder of record on March 25, 2013. All per share information in this report reflect the effect of such stock dividend.
On December 22, 2014, our shareholders approved the increase of authorized and issued shares of common stock to 400,000,000 shares
of common stock.
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 7,000,000 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 prior Chief Executive Officer was the Chief
Executive Officer of IMI at that time. Included in the purchased assets was a services agreement (the “Services
Agreement”) dated March 21, 2013 and later amended in October 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”). On July 6, 2015, we
entered into a definitive agreement to acquire all of the intellectual property assets of Ortsbo (see below).
On July 15, 2015 IMI and Yappn entered into a definitive agreement to acquire all of the intellectual
property assets of Ortsbo and the amended services agreement was terminated.
The purchased assets
include US Patent No. 8,983,850 B2, US Patent No. 8,917,631 B2, US Patent No. 9,053,097 B2, and other intellectual property including
eCommerce and Customer Care know-how for a total purchase price of approximately $17 Million, which was paid by the assumption
of approximately $1 Million in debt and the obligation to issue $16 Million worth of our restricted common shares (32 Million
shares at $0.50 per share).
Intertainment Media received
Toronto Stock Venture Exchange final approval on September 14, 2015 to proceed with the transaction. On September 15, 2015, the
acquisition of Ortsbo Intellectual property by our company was closed.
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 (Our website is expressly not incorporated into this filing).
Our Business
Yappn delivers real-time
language translation products which enable vendors and consumers to communicate freely with one another, each in their own preferred
languages.
Being able to
conduct business in multiple languages is essential. According to Common Sense Advisory (
an
independent Massachusetts-based market research company
specializing in the areas of translation, localization, interpreting,
internationalization, globalization, marketing, international strategy, market intelligence, web content, and procurement), Global
eCommerce sales continue to increase at a rate of 15 percent per year and more than 72 percent of consumers say they are more likely
to purchase online if the experience is in their preferred language.
Breaking down
language barriers creates business opportunities and promotes efficiency and effectiveness within organizations. While internet
challenges have largely been solved, resolving language barriers remains a costly issue for every company wishing to access global
markets.
Through its
proprietary innovative language solutions, we believe Yappn has altered the translation paradigm by offering a completely customizable
set of tools to engage consumers in up to 67 languages. Yappn’s technology gives people, brands and organizations the power
to be social, conduct commerce, and communicate freely without a language barrier.
Generic machine
translation, which can be found from providers like Google Translate
TM
or Microsoft Bing
TM
, employ a “word-for-word”
approach. Unfortunately, the translated result does not always reflect the essence of the original text and may not make sense.
Context (cultural, political and ethnic), syntax and meaning are typically not captured through generic machine translation methods.
Yappn provides
far more than simple word-for-word translation. Yappn can translate the words as well as the context and syntax, thereby ensuring
that what is written in one language is translated into another in an accurate, meaningful, and relevant way. This capability is
Yappn’s key differentiator.
Yappn has the
ability to detect the online or mobile user’s preferred language and can translate the communication into the user’s
language in real-time. Yappn provides very “high fidelity” and accurate translation, without the necessity of direct
human translation or intervention, with an added option to customize translation settings, making the results simple, elegant,
and cost effective.
Yappn offers
products for eCommerce, customer care, enhanced messaging collaboration (such as intranets, gaming or social platforms), online
marketing, and custom translation solutions to a variety of verticals including entertainment, retail, and marketing.
Continued expansion of our business rollout 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
early stage of commercialization and management believes that we have insufficient 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
in their audit report on our financial statements for the fiscal year ended May 31, 2017 regarding concerns about our ability
to continue as a going concern. Footnote 2 to the Notes to this Form 10-K Report also discusses concerns about our ability to
continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Our Strategy
Our
management believes that Yappn approaches the challenge of real-time language translation in a unique way. The result is enhanced
translations based on the context of the content or discussion, thereby significantly improving the translation result.
To
accomplish this, Yappn leverages the power of multiple generic machine translation (MT) providers, recognizing that many of these
commodity services specialize and produce substantially better results in some languages over others. This aggregated generic machine
translation is then passed through Yappn’s proprietary algorithms and enhancement processes which, in turn, provide the optimal
translation for the language requested. Yappn then applies yet another overlay of refinement through ‘lexicons’. Lexicons
are essentially custom dictionaries designed to improve the translation by contextualizing the result and making it relevant to
the specific commercial requirement. Lexicons can be industry or brand specific or both.
An
illustrative example of how Yappn’s lexicons work is reflected in its ability to distinguish between a car transmission versus
a radio transmission. Similarly, the system understands that the word “travel” means something different in basketball
than it does when planning a trip. Companies use various words in unique ways and Yappn’s lexicons continuously evolve, improve
and store these subtle nuances, and then apply them to the final output to provide an enhanced and more optimal translation.
Yappn
is not a generic machine translation provider but an enhancement to create better, customized results. Additionally, Yappn is
not a Language Service Provider (LSP) simply returning a document in another language; instead Yappn provides tools and solutions
to better utilize translation in the course of business.
Yappn’s
tools and solutions are built with industry leading technology and hosted on the Microsoft Azure® cloud-based platform which
provides Yappn with global reach, dependable presence and dynamic scalability.
To
be certain that translation is highly accurate, Yappn’s services team initially works with the customer to develop an appropriate
database of lexicon additions which can be further improved after deployment using Yappn’s professional services or custom
tools. The lexicon can be enhanced on an on-going basis by the customer’s staff as-needed when additions and revisions are
required or by Yappn via our services team.
Yappn
can enable an auto update feature that can be used on demand or as a persistent connection that senses updates to the translation
source then has each addition either automatically changed or optionally human verified for fidelity, followed by an update to
the customer’s lexicon. For example, when a product description is updated; the machine translation will instantly display
the change in the store.
The
Yappn application suite is designed to provide a competitive advantage to commercial enterprises and power social users to communicate
more effectively without a language barrier, fostering and driving a competitive edge in a global marketplace.
Offering
an “a la carte” menu of tools to engage consumers, Yappn helps clients improve their customer’s experiences
and therefore increase customer satisfaction.
eCommerce
Platform Integration
: Dynamic translation encompassing the entire eCommerce experience, from online marketing to sales and
customer care
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eCommerce
website
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Vendor
input manager
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Chat
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Multilingual
search
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Customer
Care
: Real-time translation of chat-based customer care
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Customer
care integration
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Enhanced
Messaging
: Real-time translation support for messaging platforms
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Intranet
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Social sharing & messaging
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Business messaging
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Gaming messaging
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Marketing
:
Online marketing, engagement and socialization
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Social
Wall
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Global
tweets
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Twitter
chats
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Multilingual
live captioning & flash social events
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Custom
Translation Solutions
: Solutions for unique translation requirements
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Dynamic
website translations
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Software
localization
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Video
closed captioning
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Virtual
trade shows
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eCommerce Platform
Integration
Our
technology is, we believe, a game changing solution, providing a set of stand-alone commercial tools for brands to easily implement
cost effective globalization solutions that support the entire sales cycle, inclusive of the eCommerce website, shopping cart checkout,
marketing, sales and support. Management contends that no longer is a company constrained to whom they can sell to because of language.
The
Yappn eCommerce experience is more than a simple translation of a store. eCommerce applications exist today to translate a copy
of a store to another language. However, creating a separate instance of a store in another language is problematic as it can cause
several business issues that are difficult to rectify; for example, inventory reconciliation and amalgamated sales reporting would
be left to the vendor to handle manually. The Yappn solution of enabling a single store that is presented in the customer’s
language of choice is a better business solution as we believe it will negate these issues.
We have made the integration of these services
into a store quite simple. We use standardized web technologies to connect a secondary database of the translations of the text,
metadata and keywords on the site. The benefit of the database connection is the ability to call accompanying data such as imagery,
(e.g. replacing an English ad with a Spanish ad) and the ability to manage translation without coding expertise. This integration
also allows Yappn to access the text components of a secure third party checkout screen, thereby reducing cart abandonment, which
we contend is unique to our services.
Security
and privacy is maintained via a variety of solutions such as SSL encryption and the exception of customer/user identification and
private information from machine translation services.
Customer
Care Platform Integration
Yappn Customer Care allows customers to chat in their language of choice so our clients don’t
have to provide multilingual staff for the purposes of customer care.
Chat
continues to become the preferred means for companies to communicate with their customers. Chat is replacing voice and e-mail,
providing a window of opportunity for companies to better serve their customers and to do so more cost effectively.
Using
the Yappn system’s multilingual translation API in conjunction with the client’s existing chat portal, a Customer Service
Representative (CSR) can converse with customers in the customer’s language of choice with Yappn’s technology bridging
the language gap between the two individuals.
This
allows the CSR to think and type in their native language thereby providing better and more accurate service while reducing customer
care costs. Employing multilingual CSR staff is expensive and unnecessary with the use of Yappn’s customer care solution.
Enhanced
Messaging Platform Integration
Our
proprietary and easily integrated Enhanced Messaging Solution allows for real time communication between languages in a myriad
of platforms for social, business and gaming messaging. The translation is contextualized to provide superior translation results.
Much
of the communication that transpires on messaging platforms is conducted in a single language. This is not always by choice but
instead, is driven by the limitations of the platforms themselves.
Companies
that communicate internally but have staff, partners and customers with different languages can communicate more effectively, we
believe, when the barrier of language is removed.
Our management contends that our technology can securely integrate into existing chat platforms through
a simple API connection to our Microsoft Azure® cloud platform, reducing existing workflow disruptions which would require
changes to a client work environment.
Marketing Platform
Integration
We
have created several tools to support online marketing customized for a global audience.
Social
Wall: a fully branded and customized page, which includes the aggregation of a company’s major social media accounts and
#hashtags automatically displayed in any of the up to 67 languages. This allows followers to interact with all their social media
accounts, in their language and on the company’s website, giving the company back control of its marketing initiatives. Essentially,
a company can present a variety of social media sources on a single page in the language of a customer’s choice, regardless
of the original language the social media content was written in.
Multilingual
Chat: provides companies, brands, organizations and consumers with the ability to have topical discussions in almost any language.
Each user sees the chat experience in their preferred language and communicates to others in that language, allowing every user
to have a native experience in their individual language. The chat can be embedded to facilitate commenting on blogs, special event
discussions with brand ambassadors or as a standalone program, providing a place to discuss the company’s brand.
Live
and Global Events: a tool to promote a company’s brand which embeds our interface directly onto the company’s website
where the company can direct their consumers to attend a live Q&A while promoting the company’s brand on social media.
The technology allows the company to filter and reply to questions posted on Twitter™ and display them in an easy to read
format on the company’s website, creating a captive audience to market to. Yappn’s easy-to-use backend even allows
the company to reply to the attendees in their native language while automatically displaying the entire event in a user’s
individual language.
Video
Captioning: If video promotion is an element of a company’s marketing strategy, allowing a global audience to watch and understand
these videos is a natural complement to the presentation. Yappn’s translation system provides simple and accurate video sub-titling
in up to 67 languages, on a live or pre-recorded video, without disruption to the company’s current broadcast process.
Custom
Translation Solutions
Our company, we believe, is a consistent agile developer of tools and solutions to address the three important elements
of conducting business: online marketing, sales and customer care. We are, however, keenly aware that technologies and trends
are evolving almost as fast as we are. For this reason, Yappn publishes its technology via a secured API to enable today’s
entrepreneurs to enhance their innovations with language capabilities. This secure credential-enabled connection is available
in a SaaS or by way of pay per use models and can be tested in sandbox environments. Each installation comes with full support
from our development teams.
Competition
Our business relating
to and arising from the development of our assets is characterized by innovation, rapid change, patented, proprietary and disruptive
technologies. We may face significant competition, including from companies that provide translation and tools to facilitate the
sharing of information that enable marketers to display advertising and that provide users with multilingual real-time translation
of eCommerce, events and proprietary social media and chat platforms. These may include:
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Companies
that offer full-featured products that provide a similar range of communications and related capabilities that we provide.
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Companies
that provide web and mobile-based information and entertainment products and services that are designed to engage users.
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Companies that offer eCommerce solutions with built in language support.
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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.
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Competitors, in some
cases, may have access to significantly more resources than Yappn.
We anticipate that we will compete to attract, engage and retain clients and 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.
Intellectual Property
We own (i) the yappn.com domain name (which website is expressly not incorporated into this filing)
and (ii) the Yappn name and all trademarks, service marks, trade dress and copyrights associated with the Yappn name, logo and
graphic art. We may prepare several patent filings in the future. Upon payment of the applicable fees pursuant to the Services
Agreement described above, we became 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.
On July 16, 2015, we entered into a definitive agreement to acquire all of the intellectual property assets
of Ortsbo which closed on September 15, 2015. The purchased assets include US No. 8,983,850 B2, US Patent No. 8,917,631 B2, US
Patent No. 9,053,097 B2, and other intellectual property including eCommerce and Customer Care know-how (Proprietary lexicons and
linguistic databases that integrate into our language services platform). Upon completion of the transaction on September 15, 2015
the amended Services Agreement was terminated.
We continue to engage
in activities to maintain and further build differentiated technologies that increase our intellectual properties.
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. We are also monitoring the consequences on our industry as a result of
the new administration commencing January 20, 2017 including the legislation on the open Internet and the March 2017 repeal of
broadband privacy rules.
Legal Proceedings
None.
Registration Statement
On October 3, 2016, the
Company filed a Registration Statement on Form S-1 (File No.333-213947) (the “
Registration Statement
”)
with the Securities and Exchange Commission for up to 14,840,964 shares of our Company’s $0.0001 par value per share common
stock (the "Common Stock") issuable to certain selling stockholders that are issued and outstanding upon conversion
of promissory notes, related past due accrued interest and penalties and/or common stock purchase warrants currently held by those
selling stockholders, specifically (i) 8,227,821 shares of Common Stock issued and outstanding (ii) 907,200 shares of Common Stock
issuable to them upon exercise of promissory notes (iii) 273,272 shares of Common Stock issuable underlying past due accrued interest
and penalties and (iv) 5,432,671 shares of Common Stock issuable to them upon exercise of common stock purchase warrants. The
common stock purchase warrants have an exercise price varying from $0.25 to $2.20 per share (subject to adjustment). The Registration
Statement covering the above noted shares was declared effective under the Securities Act of 1933 on January 24, 2017.
Item 1A. Risk Factors.
The following risk factors
should be considered carefully in addition to the other information contained in this report. This report contains forward-looking
statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,”
“believes,” “estimates,” “predicts,” “potential” or “continue” or
the negative of these terms or other similar words. These statements are only predictions. The outcome of the events described
in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our
customers’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied
by these forward-looking statements, to differ. “Risk Factors,” “Management’s Discussion and Analysis”
and “Business,” as well as other sections in this report, discuss some of the factors that could contribute to these
differences.
The forward-looking statements
made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
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.
SHOULD ONE OR MORE OF
THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED, OR PLANNED.
Risks Relating to Our Business
Our limited operating history makes
it difficult to evaluate our current business and future prospects
.
We
are transitioning from a development stage company to a growth company and have generated relatively limited revenue to date.
We have, prior to the purchase of the Yappn assets, as further described herein, been involved in unrelated businesses. 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 clients, customers and users, and developing methods for providing clients, customers
and users with access to our services 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.
Competition presents an ongoing threat
to the success of our business.
We may face significant
competition in our business, including from companies that provide translation, tools to facilitate the sharing of information,
companies that enable marketers to display advertising and companies that provide development platforms for applications developers.
We may compete with companies that attempt to or offer products that replicate services we provide.
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 our business prospects.
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 could use strong or dominant positions
in one or more market areas not serviced by Yappn to gain competitive advantage against us in areas where we operate. As a result,
our competitors may acquire and engage clients at the expense of the growth or engagement, 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 engagement of our clients and their 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.
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If we are not able to
compete effectively, our customer 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 from operations. Competition may require increased needs for operating cash to meet such challenges.
Our new products and changes to existing
products could fail to generate revenue.
Our ability to retain, increase
and engage our customer base and to escalate our revenue will depend heavily on our ability to enhance our current products and
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 clients, we may fail to attract or retain clients 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.
Few customers have accounted for a significant portion
of our business.
We have derived, in recent
history, a significant portion of our revenues from a few customers. For example, three customers accounted for a total of 83%
of our revenues for the year ended May 31, 2017 and one customer accounted for a total of 83% of our revenues for the year ended
May 31, 2016. The loss of one of these customers could materially and adversely affect our results of operations, financial position
and liquidity.
Our costs are continuing to grow,
which could harm our business model and profitability.
Developing the
Yappn platform has been a costly undertaking and we expect our expenses to continue to increase in the future as we implement
and complete continued rollout of our services and platform, build up our client base and develop and implement new product features.
We expect that we will incur increasing costs 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, 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 as well as 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.
Because from time to time we hold
a portion of our cash reserves in Canadian dollars and have a portion of our operating expenses in Canadian dollars, we may experience
losses due to foreign exchange translations.
From time to time we
hold a portion of our cash reserves in Canadian dollars. Due to foreign exchange rate fluctuations, the value of these Canadian
dollar reserves can result in translation gains or losses in U.S. dollar terms. If there was a significant decline in the Canadian
dollar versus the U.S. dollar, our converted Canadian dollar cash balances presented in U.S. dollars on our balance sheet would
significantly decline. If the US dollar significantly declines relative to the Canadian dollar our quoted US dollar cash position
would significantly decline as it would be more expensive in US dollar terms to pay Canadian dollar expenses. We have not entered
into derivative instruments to offset the impact of foreign exchange fluctuations. Such foreign exchange declines could cause
us to experience losses.
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 customers and adversely affect our financial results.
Our reputation and ability to attract, retain and serve our users may be dependent upon the reliable performance
of the Yappn platform and our underlying technical infrastructure. Performance delays or outages could be harmful to our business.
If Yappn’s technology is unavailable when customers attempt to access it, or if it does not load as quickly as they expect,
customers may not return to our service in the future or cancel service with us. As Yappn continues 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 customers.
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 our cloud services provider and / or
factors beyond the normal control of Yappn.
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 are exposed to general economic
conditions, which could have a materially adverse impact on our business, operating results and financial condition.
Recently there have been adverse conditions and uncertainty in the global economy as
the result of unstable global financial and credit markets, inflation and recession. These unfavorable economic conditions and
the weakness of the credit market may continue to have an impact on our Company’s business and financial condition. The
current global macroeconomic environment may affect our Company’s ability to access the capital markets and may be severely
restricted at a time when our Company wishes or needs to access such markets, which could have a materially adverse impact on
our Company’s flexibility to react to changing economic and business conditions or to carry on our operations.
Breaches of network or information
technology security, natural disasters or terrorist attacks could have an adverse effect on our business.
Cyber-attacks or other breaches of network or information technology (IT) security, natural disasters,
terrorist acts or acts of war may cause equipment failures or disrupt systems and operations. We or our customers may be subject
to attempts to breach the security of our networks and IT infrastructure through cyber-attack, malware, computer viruses and other
means of unauthorized access. This could cause us to lose customers, resellers, alliance partners or other business partners, thereby
causing our revenues to decline. If we or our customers were to experience a breach of our internal systems, our business could
be severely harmed by adversely affecting the market’s perception of our products and services.
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 customer 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.
Our business may be impacted by information technology
system failures or network disruptions.
We may be subject to information technology system
failures and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures,
acts of terrorism or war, computer viruses, physical or electronic break-ins, or other events or disruptions. Such failures or
disruptions could, among other things, prevent access to our services, compromise our delivery of services or customer data and
result in delayed or cancelled use of our services. Such failures or disruptions can have a materially adverse impact on the Company’s
financial condition and operating 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 Edward Karthaus, Craig McCannell, and Anthony R. Pearlman, our Chief Executive Officer
and a director, Chief Financial Officer, and Chief Technology Officer, respectively.
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 technical
and sales personnel in fiscal 2018, 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.
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.
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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.
Although
management does not anticipate having to fully comply with section 404 of the Sarbanes-Oxley Act in the next fiscal year, it is
important to note, pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, if we do meet the requirements
to fully comply with section 404 of the Sarbanes-Oxley Act 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. Failure to achieve
and maintain an effective internal control environment or complete our Section 404 certifications could have a materially adverse
effect on our stock price.
In addition, in connection with
a future possible 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 in the future, 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 would require 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.
If applicable 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, it 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.
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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.
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 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. 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 could 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.
Public disclosure requirements and
compliance with changing regulation of corporate governance pose challenges for our management team and result in additional expenses
and costs which may reduce the focus of management and the profitability of our company.
Changing laws, regulations
and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer
Protection Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act and SEC regulations, have created
uncertainty for public companies and significantly increased the costs and risks associated with accessing the U.S. public markets.
Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative expenses and a diversion of management time and
attention from revenue generating activities to compliance activities.
SHOULD ONE OR MORE OF THE FOREGOING
RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED
Item 1B. Unresolved Staff Comments.
This Item is not applicable to us as we
are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer.
Item 2. Properties.
We do not own 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.
We have a Canadian office with a monthly lease which was assigned from Intertainment Media Inc. in the fourth quarter of fiscal
2016. Monthly lease payments are approximately $7,500 per month with the lease ending September 30, 2018.
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 July 27, 2017, 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 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
|
|
|
|
|
|
Ed Karthaus
|
|
58
|
|
Chief Executive Officer and Director
|
|
|
|
|
|
Craig McCannell
|
|
40
|
|
Chief Financial Officer
|
|
|
|
|
|
Anthony R. Pearlman
|
|
55
|
|
Chief Technology Officer
|
|
|
|
|
|
David Berry
|
|
52
|
|
Director
|
|
|
|
|
|
C. Kent Jespersen
|
|
71
|
|
Chairman of the Board and Director
|
|
|
|
|
|
Carrie Stone
|
|
60
|
|
Director
|
|
|
|
|
|
Tracie Crook
|
|
52
|
|
Director
|
|
|
|
|
|
David Fleck
|
|
57
|
|
Director
|
|
|
|
|
|
Luis Vazquez Senties
|
|
69
|
|
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.
Ed Karthaus,
Chief Executive Officer and Director.
Ed Karthaus has more than 30 years of experience in the technology, financial services
and telecommunications industries. He was previously the COO of Teneda Inc. and has held senior executive leadership roles at
Prophix Software Inc., D+H, Filogix LP and NCR Canada. He has served on the Board of Directors of the Research, Innovation and
Commercialization Centre (RIC Centre) and remains an Advisor today. Ed began his career with Xerox Canada and Oracle Canada.
Craig McCannell,
Chief Financial Officer.
Mr. McCannell, 40, is the Chief Financial Officer of Yappn Corp. and the former CFO of Intertainment
Media Inc. from July 2013 to November 2016 and the Director of Finance of Intertainment Media, Inc. from January 2012 to July
2013. Mr. McCannell served as an account executive for Robert Half Management Resources in 2011 and previously as a Senior Manager
in the Assurance practice for Ernst & Young LLP as part of an 11 year tenure.
Anthony
R. Pearlman, Chief Technology Officer.
Mr. Pearlman, 55, is a seasoned technology expert with over 25 years of experience
providing high-tech services and solutions including all facets of technology and business development, combined with an extensive
relationship network and global technology market knowledge to Government, Public, and Private Organizations. Mr. Pearlman was
the President of Enghouse Systems Limited (TSX: ESL) for six years, where he was responsible for the operational management of
a global software development company serving the needs of multiple verticals with a diversified offering of enterprise software
and service solutions. Prior to working for Enghouse, Mr. Pearlman was the CIO for Valu-net Corporation for six years and was
responsible for the operational management of one of the first leading edge eCommerce development companies in North America.
Steven
Taylor, Former Chief Sales Officer
,
Mr.
Taylor, 48 has over 23 years of experience in driving profitable growth in Advertising, Digital Media and Software as a Service
(SaaS). Prior to joining Yappn, Mr. Taylor was the CEO of Resolver Inc. from 2002 until 2015 when the company was sold to Klass
Capital. During his tenure at Resolver, Mr. Taylor oversaw all aspects of the business including Sales, Marketing, Technology,
M&A, Finance and Investor Relations. Prior to Resolver, Mr. Taylor was an instrumental part of Cyberplex’s growth in
revenue from $1 Million to almost $40 Million over a five-year period. He speaks extensively at conferences on various topics
including growing SaaS businesses, corporate governance and the translation technology solutions and industry. Mr. Taylor resigned
from his position as Yappn’s Chief Sales Officer on July 13, 2017.
David Berry,
Director.
David Berry, 52 obtained a BSc honours in mathematics from Queen’s University, an MBA in Finance and Accounting
from Rotman School of Management as well as a CFA and a CA. After leaving Ernst & Young LLP in 1995, David moved to Scotia
McLeod. He ran the preferred share department from 1997 – 2005 and built it from a department that made virtually no money
and had very little market share to the biggest profit center at Scotia Bank and a market share of 70%, numbers never seen before
in Canada. He became the highest paid trader on Bay Street for this period. Since leaving Scotia he has been managing his personal
portfolio, a portion of which he uses in a merchant bank type capacity financing companies that have great potential but have
poor means to finance.
C. Kent Jespersen,
Chairman.
Kent Jespersen, 71, has extensive and diverse international experience in government, business, and executive leadership.
He has diverse governance experience in a number of industries. He has held numerous leadership positions in national and international
non-profit organizations. Mr. Jespersen is also a Chairman and Director of Seven Generations Ltd. and Chairman and Director of
Iskander Energy Corp. Mr. Jespersen holds a Bachelor of Science in Education and a Master of Science in Education from the University
of Oregon.
Carrie
Stone, Director.
Carrie Stone, 60, is President of cStone & Associates, an international executive search firm, performing
senior executive and board assignments since 2003. She advises companies and boards on complex business issues and strategies
for talent acquisition, pay for performance, transition, and succession planning. Ms. Stone served as a venture partner with Enterprise
Partners Venture Capital, a $1.1B venture fund investing in disruptive technologies and biotechnology. Prior CEO leadership and
senior executive experience includes building high growth consumer products and retail business with the Walt Disney Company and
JCrew. Ms. Sone is a member of the corporate directors forum, serving on the director of the year nominating committee. Ms. Stone
was named to the Agenda Compensation 100, identifying the 100 top candidates to serve on compensation committees. Ms. Stone co-founded
the San Diego Women Corporate Directors Chapter in 2013. She serves on the Executive Committee. She is an 18 year Member of Young
Presidents’ Organization/World President’s Organization including serving on the International Board Of Directors,
International Forum Committee Chair, Compensation And Diversity Committees, and, Committee Leadership of 8 Global Leadership Conferences.
Ms. Stone Holds a B.S. From the University Of Vermont, attended Stanford University Law School Director’s College, and Harvard
Business School’s Executive Education, Compensation Committees.
David Fleck,
Director
. Mr. Fleck, 57, has had a 27 year career in the financial services industry starting as an investment banker with
Merrill Lynch Canada in 1986. In 1989 he joined the Institutional Equity team at Burns Fry Ltd. and remained with the firm after
it was bought out by the Bank of Montreal in 1994. A few years later he became Global Co-Head of the Equity Group at the bank.
In 2008, David retired from BMO Capital Markets and started an interesting career path in the midst of a global financial crisis.
In 2009 he became president of an international quantitatively based money manager called Mapleridge Capital. In 2011 he accepted
the position of President and CEO of Macquarie Capital Markets Canada, a full service capital markets business. David is currently
a partner at Delaney Capital Management, a Canadian based money management firm with approximately $2 billion in assets under
management. David is a board member of Alamos Gold Inc. as well as Kew Media Group Inc. and has served as a director of a number
of Canadian based charities. He is currently Vice-Chair of Soulpepper Theatre Company and a board member of the Art Gallery of
Ontario Foundation. He received his MBA from INSEAD and recently completed the Institute of Corporate Directors program at the
Rotman School of Management.
Luis Vazquez-Senties,
Director,
Mr. Vazquez-Senties, 69, Luis is the founder and Chairman of the Board of Directors of Diavaz since 1982 to date.
Diavaz is a 100% Mexican business partnership made up by several basic business units jointly created through strategic and business
alliances. The activities of DIAVAZ are related to the Mexican energy industry, ranging from oil and gas exploration and production,
its process, transportation, storage until its final consumption. He has been and still is an advisor of several national and
international companies, all of them related to the energy industry. Luis Vázquez actively participates in a wide variety
of Chambers, Associations, as well as Professional and Entrepreneurial Organizations. Eng. Vázquez is former president
and current member of Mexico´s Chapter of the World Energy Council, as well as of the Mexican Natural Gas Association. Luis
Vázquez is a chemical engineer; he graduated from Ryerson University in Toronto, Canada.
Tracie
Crook, Director
. Tracie Crook, 52, is the Chief Operating Officer of McCarthy Tétrault LLP. Prior to that she was President
and CEO of the ResMor Trust Company, a federally regulated mortgage provider, Director of Business Management for the TSX Group
and Director of Management and Outsourcing with Sprint Canada. A Certified Director, Tracie currently sits on the advisory board
of Intapp Inc., Women of Influence, and a former Board member of the Ontario Public Service Employees’ Union, the Housing
Services Inc., and the GMAC Residential Funding of Canada Limited and The Fraser Institute. Ms. Crook holds a Master of Science
from Central Michigan University, a Bachelor of Business Administration from Ferris State University and has taken executive courses
at Harvard Business School, the Massachusetts Institute of Technology (MIT) and Queen’s University.
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.
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 5 formal meetings during the year ended May 31, 2017.
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 David Fleck, who serves as Chairperson of the Audit Committee, Tracie Crook and C.
Kent Jespersen. Our Board of Directors has determined that Mr. Fleck 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 Carrie Stone, who serves as Chairperson of the Compensation Committee, David Berry and C. Kent
Jespersen.
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, 2017, 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. 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 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, 2017, regardless of the compensation level, and (ii) each of our other executive officers, serving
as an executive officer
whose total
compensation exceeded $100,000 at any time during 2017. The foregoing persons are collectively referred to in this prospectus
as the “Named Executive Officers.” Compensation information is shown for the years ended May 31, 2017 and May 31,
2016:
Name and Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
(1)
($)
|
|
|
Non-
Equity
Incentive
Plan
Comp
($)
|
|
|
Non-
Qualified
Deferred
Comp
Earnings
($)
|
|
|
All
Other
Comp
($)
|
|
|
Totals
(1)
($)
|
|
Ed Karthaus, CEO
|
|
|
2017
|
|
|
|
170,139
|
|
|
|
0
|
|
|
|
0
|
|
|
|
233,880
|
|
|
|
0
|
|
|
|
0
|
|
|
|
11,343
|
|
|
|
415,362
|
|
|
|
|
2016
|
|
|
|
47,633
|
|
|
|
0
|
|
|
|
0
|
|
|
|
193,006
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,176
|
|
|
|
243,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony R. Pearlman, CTO
|
|
|
2017
|
|
|
|
160,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
125,306
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,000
|
|
|
|
297,306
|
|
|
|
|
2016
|
|
|
|
66,667
|
|
|
|
0
|
|
|
|
0
|
|
|
|
131,041
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,000
|
|
|
|
202,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Tylor, CSO
(2)
|
|
|
2017
|
|
|
|
136,111
|
|
|
|
0
|
|
|
|
0
|
|
|
|
116,940
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,444
|
|
|
|
258,495
|
|
|
|
|
2016
|
|
|
|
27,425
|
|
|
|
0
|
|
|
|
0
|
|
|
|
96,503
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,097
|
|
|
|
125,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig McCannell, CFO
|
|
|
2017
|
|
|
|
160,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
125,306
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,000
|
|
|
|
297,306
|
|
|
|
|
2016
|
|
|
|
160,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
131,041
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,000
|
|
|
|
303,041
|
|
(1)
|
The values in the
“Option Awards” and included within the “Total” columns above do not represent a cash payment of any kind
related to the “Option Awards”. Rather these values represent the calculated Binomial lattice model theoretical value
of granted options. It is important to note that these granted options may or may not ever be exercised. Whether granted options
are exercised or not will be based primarily, but not singularly, on the Company’s future stock price and whether the granted
options become “in-the-money”. If these granted options are unexercised and expire, the cash value or benefit to the
above noted individuals is $nil.
|
(2)
|
Resigned position on July 13, 2017
|
Employment Agreements
On September
1, 2014 we entered into an employment agreement with Craig McCannell, our CFO, which has an indefinite term. Under the terms of
this agreement, Mr. McCannell will continue to serve as our Chief Financial Officer. Mr. McCannell will receive a base salary
of $160,000 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. McCannell will be entitled to certain bonus payments based on the revenue of the Company and standard expense reimbursements
and benefits.
On January
1, 2016 we entered into an employment arrangement with Anthony R. Pearlman, our CTO, finalized by agreement on March 30, 2016
which has an indefinite term. Under the terms of this agreement, Mr. Pearlman will continue to serve as our Chief Technology Officer.
Mr. Pearlman will receive a base salary of $160,000 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. Pearlman will be entitled to certain bonus payments based on the revenue
of the Company and standard expense reimbursements and benefits.
On February
22, 2016, we entered into an employment agreement with Edward Karthaus, our CEO, which has an indefinite term. Under the terms
of this agreement, Mr. Karthaus will continue to serve as our Chief Executive Officer. Mr. Karthaus will receive a base salary
of $225,000 CAD 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. Karthaus will be entitled to certain bonus payments based on the revenue of the Company and standard expense
reimbursements and benefits.
On March 21,
2016, we entered into an employment agreement with Steve Taylor, our CSO, which has an indefinite term. Under the terms of this
agreement, Mr. Taylor will continue to serve as our Chief Sales Officer. Mr. Taylor will receive a base salary of $180,000 CAD
per year in the first year of the agreement, subject to future increases in base salary as well as options that vest over time.
Mr. Taylor will be entitled to certain bonus payments based on the revenue of the Company and standard expense reimbursements
and benefits. Mr. Taylor resigned from his position as Yappn’s Chief Sales Officer on July 13, 2017.
Outstanding Equity Awards as of May 31, 2017
Outstanding
stock options granted to Named Executive Officers (“NEO’s”) and Directors as at May 31, 2017 are as follows:
|
|
Option
Awards
|
Name
|
|
No.
of Securities Underlying Unexercised
Options Exercisable
(#)
|
|
|
No. of Securities Underlying
Unexercised Options
Unexercisable (#)
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration
Date
|
Edward Karthaus
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
$
|
0.25
|
|
|
March
21, 2021
|
Craig McCannell
|
|
|
60,000
|
|
|
|
-
|
|
|
$
|
0.25
|
|
|
August 14, 2019
|
Craig McCannell
|
|
|
100,000
|
|
|
|
-
|
|
|
$
|
0.25
|
|
|
March 2, 2020
|
Craig McCannell
|
|
|
750,000
|
|
|
|
750,000
|
|
|
$
|
0.25
|
|
|
March 21, 2021
|
David Berry
|
|
|
112,500
|
|
|
|
337,500
|
|
|
$
|
0.25
|
|
|
August 25, 2021
|
C. Kent Jespersen
|
|
|
225,000
|
|
|
|
675,000
|
|
|
$
|
0.25
|
|
|
August 25, 2021
|
Carrie Stone
|
|
|
125,000
|
|
|
|
375,000
|
|
|
$
|
0.25
|
|
|
August 25, 2021
|
Tracie Crook
|
|
|
112,500
|
|
|
|
337,500
|
|
|
$
|
0.25
|
|
|
August 25, 2021
|
David Fleck
|
|
|
112,500
|
|
|
|
337,500
|
|
|
$
|
0.25
|
|
|
August 25, 2021
|
Luis Vazquez-Senties
|
|
|
112,500
|
|
|
|
337,500
|
|
|
$
|
0.25
|
|
|
August 25, 2021
|
The Company has no stock appreciation
rights.
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 who provide services
to the Company in other capacities have been previously reported under “Summary Compensation”. The following table
summarizes compensation paid to or earned by our directors who are not Named Executive Officers for their service as directors
of our company during the fiscal year ended May 31, 2017.
Name
|
|
Fees
Earned or Paid in Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
(1)
($)
|
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
|
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
($)
|
|
|
All
other
Compensation
($)
|
|
|
Total
(1)
($)
|
|
David Berry
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
C. Kent Jespersen
|
|
|
0
|
|
|
|
0
|
|
|
|
104,269
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
104,269
|
|
Carrie Stone
|
|
|
0
|
|
|
|
0
|
|
|
|
57,927
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
57,927
|
|
Tracie Crook
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
David Fleck
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
Luis Vazquez Senties
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
52,135
|
|
(1)
|
The values in the
“Option Awards” and included within the “Total” columns above do not represent a cash payment of any
kind. Rather these values represent the calculated Binomial lattice model theoretical value of granted options. It is important
to note that these granted options may or may not ever be exercised. Whether granted options are exercised or not will be
based primarily, but not singularly, on the Company’s future stock price and whether the granted options become “in-the-money”.
If these granted options are unexercised and expire, the cash value or benefit to the above noted individuals is $nil
.
|
On March 21,
2016, the Board of Directors passed a resolution for a contingent common stock award in line with the metrics used in the CEO’s
targets for additional bonus compensation. The award would see the members of the Board of Directors as well as the Advisory Board
receive common shares for the Company reaching revenue milestones. Per the resolution, 500,000 common shares for each member of
the Board of Directors and 250,000 for each Advisory Board member would be issued when the following milestones are met: (i) $3.5
million in new revenue generated and realized within 12 months of the start date of the CEO which was February 22, 2016 and minimum
of 5 new recurring revenue contracts being signed within 12 months of the start date; or (ii) $5 million of new revenue generated
and realized within 24 months of the start date and minimum of 5 new recurring revenue contracts being signed within 12 months
of the start date. As of February 22, 2017 (the 12 months since the CEO start date of February 22, 2016), milestone in (i) was
not met.
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 and until May 31, 2017, we have not paid any cash compensation to our Directors in consideration
for their services rendered to our Company in their capacity as such. Directors have been granted stock options and the contingent
stock award noted above.
Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following
tables set forth certain information as of July 21, 2017 regarding the beneficial ownership of our common stock, based on an aggregate
of 63,215,740 shares of common stock consisting of (a) 49,277,248 shares of common stock issued and outstanding and (b) 13,938,492
issuable upon the conversion of securities, 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
|
|
|
|
|
|
|
ITF Mizrahi (128 Hazelton) Inc. (2)
|
|
|
8,954,934
|
|
|
|
14.17
|
%
|
Array Capital Corporation (3)
|
|
|
5,268,076
|
|
|
|
8.33
|
%
|
2541843 Ontario Inc. (4)
|
|
|
4,812,500
|
|
|
|
7.61
|
%
|
Relouw Family 2004 Discretionary Trust (5)
|
|
|
3,572,543
|
|
|
|
5.65
|
%
|
|
|
|
|
|
|
|
|
|
Officers and Directors
|
|
|
|
|
|
|
|
|
Edward Karthaus (6)
|
|
|
1,500,000
|
|
|
|
2.37
|
%
|
Anthony R. Pearlman (7)
|
|
|
910,000
|
|
|
|
1.44
|
%
|
Craig McCannell (8)
|
|
|
910,000
|
|
|
|
1.44
|
%
|
Luis Vazquez-Senties (9)
|
|
|
7,640,193
|
|
|
|
12.09
|
%
|
C. Kent Jespersen (10)
|
|
|
1,518,200
|
|
|
|
2.40
|
%
|
David Berry (11)
|
|
|
858,354
|
|
|
|
1.36
|
%
|
Carrie Stone (12)
|
|
|
516,667
|
|
|
|
0.82
|
%
|
Tracie Crook (13)
|
|
|
315,000
|
|
|
|
0.50
|
%
|
David Fleck (14)
|
|
|
1,561,632
|
|
|
|
2.47
|
%
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (ten persons) (15)
|
|
|
15,730,046
|
|
|
|
24.88
|
%
|
(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 July 21, 2017. In computing the number of shares beneficially owned and the percentage ownership, shares of common stock that may be acquired within 60 days of July 21, 2017 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)
|
Consists of 8,954,934 shares of common stock held by ITF Mizrahi (128 Hazelton) Inc. ITF Mizrahi (128 Hazelton) Inc. is controlled by Sam Mizrahi and has an address of 320 Bay Street Suite 1600 Toronto Ontario M5H 4A6
|
|
|
(3)
|
Consists of 4,601,409 shares of common stock and 666,667 beneficially owned shares of common stock underlying convertible securities held by Array Capital Corporation. Array Capital Corporation is controlled by Benny Lau and has an address of 1370 Don Mills Road, Suite 300, Toronto Ontario M3B 3N7
|
|
|
(4)
|
Consists of 4,812,500 shares of common stock held by 2541843 Ontario Inc. 2541843 Ontario Inc. is controlled by S. Wayne Parsons and has an address of 4575 Blakie Road, London Ontario N6L 1P8
|
|
|
(5)
|
Consists of 3,572,543 shares of common stock held by Relouw Family 2004 Discretionary Trust. Relouw Family 2004 Discretionary Trust is controlled by Anthony Relouw and has an address of c/o Exacon Inc. 254 Thames Road East, Exeter Ontario, N0M 1S3
|
|
|
(6)
|
Consists solely of beneficially owned shares of common stock underlying convertible securities.
|
|
|
(7)
|
Consists solely of beneficially owned shares of common stock underlying convertible securities.
|
|
|
(8)
|
Consists solely of beneficially owned shares of common stock underlying convertible securities.
|
|
|
(9)
|
Consists of 800,000 shares of common stock and 6,840,193 beneficially owned shares of common stock underlying convertible securities.
|
|
|
(10)
|
Consists of 768,200 shares of common stock and 750,000 beneficially owned shares of common stock underlying convertible securities
|
|
|
(11)
|
Consists of 450,021 shares of common stock and 408,333 beneficially owned shares of common stock underlying convertible securities.
|
|
|
(12)
|
Consists of 200,000 shares of common stock and 316,667 beneficially owned shares of common stock underlying convertible securities.
|
|
|
(13)
|
Consists of 40,000 shares of common stock and 275,000 beneficially owned shares of common stock underlying convertible securities
|
|
|
(14)
|
Consists of 200,000 shares of common stock and 1,361,632 beneficially owned shares of common stock underlying convertible securities.
|
|
|
(15)
|
Consists of an aggregate of 2,685,321 shares of common stock and 13,271,825 beneficially owned shares of common stock underlying convertible securities.
|
Description of Securities
In March 2013,
we filed an amended and restated certificate of incorporation to increase the Company’s 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
On December
31, 2014, we filed an amended and restated certificate of incorporation to increase the Company’s authorized number of common
shares to 400,000,000 shares of common 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.
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 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 July
27, 2017, we have no Series A Convertible Preferred Stock issued and outstanding.
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
Delaware 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 Delaware 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 Delaware 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 Delaware
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 Delaware 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.
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. C. Kent
Jespersen, Ms. Carrie Stone, Ms. Tracie Crook, Mr. Luis Vazquez-Senties and Mr. David Fleck 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,
|
|
|
|
2017
|
|
|
2016
|
|
Audit fees (1)
|
|
$
|
53,500
|
|
|
|
64,200
|
|
Audit related fees (2)
|
|
$
|
55,105
|
|
|
|
67,677
|
|
Tax fees (3)
|
|
$
|
22,836
|
|
|
|
3,852
|
|
All other fees (4)
|
|
$
|
-
|
|
|
|
-
|
|
(1)
|
Audit Fees
|
|
|
|
The aggregate fees billed by our principal accountant, MNP, LLP, for the May 31, 2017 and
May 31, 2016 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, 2017 and May 31, 2016.
|
(2)
|
Audit-Related Fees
|
|
|
|
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,
2017 and May 31, 2016.
|
(3)
|
Tax Fees
|
|
|
|
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, 2017 and May 31, 2016.
|
(4)
|
All Other Fees
|
|
|
|
The aggregate fees billed for products and services provided by our principal accountants
for the fiscal years ended May 31, 2017 and May 31, 2016, 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.
Notes
to Consolidated Financial Statements
May
31, 2017
All
references to “dollars”, “$” or “US$” are to United States dollars and all references to “Canadian”
are to Canadian dollars. United States dollar equivalents of Canadian dollar figures are based on the exchange rate as reported
by the Bank of Canada on the applicable date.
1.
Summary of Significant Accounting Policies
Basis
of Presentation and Organization
Yappn
Corp., formerly “Plesk Corp.”, (the “Company”) was incorporated under the laws of the State of Delaware
on November 3, 2010. The business plan of the Company is to provide effective unique and proprietary tools and services that create
dynamic solutions that enhance language translation quality. The Company has offices in the United States and Canada. In March
2013, the Company acquired a concept and technology license from Intertainment Media Inc., a Canadian company. On September 15,
2015, the Company closed the acquisition of Ortsbo Inc.’s (a subsidiary of Intertainment Media Inc.) intellectual property
to allow the Company full ownership of the acquired technology as opposed to having a license to use this technology. 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.
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.
Intangible
Assets
Intangible
assets consist of acquired technology, and patents, acquired from a related party and were accordingly recorded at the cost as
recorded in the records of the related party at the time of acquisition (Note 4). The Company amortizes acquired technology over
its estimated useful life, considered to be 5 years, on a straight-line basis. Patents are amortized commencing at the receipt
of approval from the applicable jurisdiction as an issued patent or from the date of acquisition of issued patents. Should the
patent process be unsuccessful, the entire amount relating to the pending patent is expensed in the period this is determined.
The Company continually evaluates the remaining estimated useful life of its intangible assets to determine whether events and
circumstances warrant a revision to the remaining period of amortization.
Intangible
Asset Impairment
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable through undiscounted future cash flows. If impairment exists based on expected future undiscounted
cash flows, a loss is recognized in income. The amount of the impairment loss is the excess of the carrying amount of the impaired
asset over the fair value of the asset, typically based on discounted future cash flows. The Company has assessed its long-lived
assets and has determined that there was no impairment in their carrying amounts at May 31, 2017.
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. All of the Company’s current revenues are classified as services. Services are billed on a time and
materials basis and are recognized as revenue as services are rendered at the time of billing which is typically a bi-weekly or
monthly basis.
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 $17,829 and $236,083 for the years ended May 31, 2017 and May 31, 2016.
Loss
per Common Share
Basic loss per common share is computed
by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding
during the period. Fully diluted 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, 2017, the Company had outstanding warrants to purchase an additional
47,846,633 shares of common stock (Note 10) at a per share exercise price ranging from $0.01 to $2.20, 13,205,000 stock options
(Note 11) with an exercise price of $0.25 to $1.00, and convertible notes and debentures that are convertible into 9,146,872 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 $0.25 to $1.50. All of these issuances have a dilutive effect on earnings per share when the exercise price is lower
than Yappn’s quoted market price and 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 consolidated 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 and Canada. All of the Company’s tax
years since inception remain subject to examination by Federal, Provincial, 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 loss. There have been no penalties or interest related to unrecognized tax benefits reflected
in the consolidated statements of operations and comprehensive loss for the years ended May 31, 2017 and May 31, 2016.
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 convertible promissory
notes and debentures (Note 7) are classified as Level 2 financial liabilities.
As of May 31, 2017 and May 31, 2016, the
carrying value of cash, accounts receivable, note receivable, accounts payable, accrued expenses, short term loans, accrued development
and related expenses, and accrued interest approximated fair value due to the short-term nature of these instruments.
Fair
Value of Derivative Instruments, and Warrants
The Company issued five year common stock
purchase warrants as part of subscription agreements that included convertible promissory notes, debentures and line of credit,
some of which had price protection provisions that expired after twelve months. Upon expiration of the price protection, the instruments
were treated as equity instruments.
In
the event the Company has exceeded its authorized number of common stock issuable on a diluted basis, the Company applies the
earliest issuance date sequencing approach to determine which derivatives recorded in additional paid in capital, require reclassification
to financial liabilities. Under the earliest issuance date sequencing approach, the financial instruments recorded in equity that
have stock issuable in common stock (excluding stock options) earlier than the date of the breach of the authorized stock limit
continue to be classified as a component of additional paid in capital. All derivatives that are issuable into common stock (other
than stock options) issued subsequent to the breach of the authorized stock limit on a diluted basis, are recorded as financial
liabilities. Upon a rectification of the breach of the authorized stock limit, those instruments that would otherwise be recorded
as component of additional paid in capital, will be reclassified to additional paid in capital.
When
applicable, the instruments are measured at fair value using a binomial lattice valuation methodology and are included in the
consolidated balance sheets as financial liabilities. Both unrealized and realized gains and losses related to these liabilities
are recorded based on the changes in the fair values and are reflected as a change in fair value on the consolidated statements
of operations and comprehensive loss.
Fair Value of Convertible Debentures
with Attached Common Stock Purchase Warrants
The Company has issued secured convertible
debentures that are convertible into common stock along with common stock purchase warrants as part of the subscription agreements.
The Company allocates value between the debt, common stock purchase warrants, and a beneficial conversion feature, if applicable.
The Company determines a fair value for each component being the debt and common stock purchase warrants and then uses the relative
fair value method to allocate value to these components. The present value method was used to determine the fair values of the
debt and the binomial tree option pricing model was used to determine the fair value of the common stock purchase warrants. A
convertible debenture instrument includes a beneficial conversion feature when the effective conversion price is less than the
Company’s market price of common stock on the commitment date. The difference between the fair value and face value of the
debentures is accreted up to face value over the term to maturity using the effective interest method. Any unrealized and realized
gains and losses related to the convertible promissory notes and debentures are recorded based on the changes in the fair values
and are reflected as change in fair value of convertible debentures and 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.
The Company’s significant estimates
include useful life of intangible assets, impairment of intangible assets, fair value of financial instruments including the underlying
assumptions to estimate the fair value of secured convertible promissory notes and debentures 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 year presented have been reclassified to conform to the current year 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 which was amended in August 2015 by Update No 2015-14: 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, 2017, 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.
On
August 27, 2014 the FASB issued a new financial accounting standard on going concern, Update 2014-15, “Presentation of Financial
Statements – Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern.” The standard provides guidance about management’s responsibility to evaluate whether there is substantial
doubt about the organization’s ability to continue as a going concern. The amendments in this update apply to all companies.
They become effective in the annual period ending after December 15, 2016, with early application permitted. As a result of the
adoption of this new standard there were no changes required to the Company’s Going Concern disclosures
In November 2014, the FASB issued Accounting
Standard Update (“ASU”) 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued
in the Form of a Share Is More Akin to Debt or to Equity.” The ASU clarifies how current guidance should be interpreted
in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the
form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including
the embedded derivatives feature being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective
for fiscal years beginning after December 15, 2015 and interim periods beginning after December 15, 2016. As a result of the adoption
of this new standard there were no changes required in the Company’s financial statements related to Hybrid Financial instruments.
There
are various other updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to a have a material impact on the Company’s financial position, results of
operations or cash flows.
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 incurred a deficit of $27,960,756 through
May 31, 2017.
As
of May 31, 2017, the Company had a working capital deficit of $654,186. During the year ended May 31, 2017, net cash used in operating
activities was $2,614,675. The Company expects to have similar cash needs for the next twelve months. At the present time, the
Company does not have sufficient funds to fund operations over the next twelve months.
Implementation of the Company business plan
will require additional debt or equity financing and there can be no assurance that additional financing can be obtained on acceptable
terms. The Company has realized limited revenues to cover its operating costs. As such, the Company has incurred an operating
loss since inception. This and other factors raise substantial doubt about its ability to continue as a going concern. The Company’s
continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be
required, and ultimately to attain profitability. The consolidated 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 business. 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, secured convertible debt arrangements and common share equity financings. During the year ended May 31, 2017,
the Company raised $2,488,576 net of repayments primarily from Directors, expected to be subscribed into long term secured convertible
debentures.
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 financing at satisfactory terms and
sufficient amounts could have a materially 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 and Note Receivable
All of the Company’s revenues are
attributed to a small number of customers. Three customers comprised 83% of the Company’s revenue for the year ended May
31, 2017. Our former largest customer comprises 0% of the revenue recorded for the year ended May 31, 2017 and had comprised 83%
of the revenue for the year ended May 31, 2016. One client (the “Client”) comprised 25% of revenue recorded for the
year ended May 31, 2017. Due to the long period without payment, the Company determined the revenue recognition criteria starting
at the beginning of the Company’s second quarter of fiscal 2016 for Digital Widget Factory (Belize) (“DWF”) was
not met.
Effective February 29, 2016, Digital Widget
Factory (Belize) (“DWF”) sold the technology platform, partially developed by Yappn, in conjunction with DWF’s
principals, to the Client in exchange for common shares of that client. As part of the transaction, DWF received ownership and
rights to 24 million common shares of that Client for a large minority shareholder position of the Client (the “Client Transaction”).
During the fourth quarter of fiscal 2016, the Company executed a promissory note from DWF for the outstanding value of the billings
of $2,125,000. The promissory note was secured by DWF’s Client stock holdings in the amount of 2,250,000 restricted common
shares, which at the market value at the time of execution significantly exceeded the value of the promissory note. The note receivable
included monthly payments of differing amounts with the final payment scheduled by November 30, 2016. Additionally, the Company
received stock options for the purchase of shares of common stock of the Client from DWF which expired on November 30, 2016.
The Company has not received any payments
from DWF during the second, third, and fourth quarter of fiscal 2017, and the promissory note final payment date was contracted
to be fully paid by November 30, 2016. During the second quarter of fiscal 2017, as at November 30, 2016, management recorded
a full impairment on the remaining $968,289 recorded in its consolidated financial statements.
In early 2017, a dispute arose between
the Client and DWF over the terms in the asset purchase agreement. The parties agreed to unwind the original transaction. DWF regained
title to the assets developed by Yappn and DWF in addition to the additional enhancements while under the Client’s control.
The Client’s publicly traded stock was cease traded by the regulators (although subsequently resumed trading) and the original
security of the Client shares between DWF and the Client securing the DWF note receivable was, at that time, unmarketable.
On
February 28, 2017, management reached a resolution with DWF stakeholders. Yappn agreed to reduce its stake in the DWF assets to
$800,000 which will be in the form of a new investment in DWF with the specific terms to be determined. This reduced position
in DWF’s assets is in exchange for DWF stakeholders forgiving all unsecured debentures, secured debenture, term debt, and
related interest that were obligations of Yappn. More specifically, the Company settled $305,000 of unsecured convertible debentures
and accrued interest of $91,408, $250,000 of unsecured convertible debentures and accrued interest of $43,613, $65,228 of unsecured
term loans and related interest of $16,512 (Note 5), and $200,000 of secured convertible debentures and accrued interest of $20,000
issued to a consultant (Note 8). In addition to the above, the Company has negotiated its release from various past consulting
obligations. The Series A, B, and D common stock purchase warrants were repriced to $0.25 from $1.00, $2.00, and $2.20 respectively
and extended an additional one year to expire in 2020.
Due to the uncertainty of ultimate collectability,
the Company will not record any value for the $800,000 investment in DWF until cash collection is reasonably assured or a liquid
market with quoted market prices exist to allow realization from a sale of the investment.
4.
Intangible Assets
On
September 15, 2015, the Company finalized its purchase of intellectual property assets of Ortsbo, Inc. (“Ortsbo”)
pursuant to an Asset Purchase Agreement executed and closed on July 15, 2015. With this closing, the Company had an obligation
to issue 31,987,000 shares of common stock of Yappn to Ortsbo or its designees. Yappn also assumed $975,388 of debt as part
of the transaction. This assumed debt was immediately subscribed as part of the secured debenture in Yappn (Note 6). The fair
value for the agreed upon consideration for the acquisition of intellectual property from Ortsbo was $16,968,888, however, due
to the common control of Ortsbo and the Company, the value of the intangible assets acquired from Ortsbo was recorded at the carrying
value in the financial records of Ortsbo. This value was $5,421,067 on September 15, 2015.
During the second quarter of fiscal 2016,
from the share issuance obligations from the purchase of the Ortsbo intellectual property assets, 12,998,682 shares were issued
comprising 8,312,500 to Ortsbo and 4,686,182 to the former debt and minority shareholders of Ortsbo, which were valued at $1,806,608
leaving 18,988,318 shares to be issued. During the fourth quarter of fiscal 2017, as a result of an agreement between Winterberry
Investments Inc. and its investors, the Company issued 16,320,903 common stock purchase warrants (with an exercise price of $0.01
per common share) with an additional 1,600,000 common stock purchase warrants to be issued in settlement of the previous obligation
of 17,687,500 shares to be issued to Winterberry Investments Inc. As at the filing date, the 1,300,818 shares at a value of $180,793
remain reserved but not issued and subject to issuance based on the instructions from the recipients.
Intangible Assets
|
|
Technology
|
|
|
Pending Patents
|
|
|
Issued
Patents
|
|
|
Total
|
|
Balance on Acquisition - September 15, 2015
|
|
$
|
5,278,773
|
|
|
$
|
142,294
|
|
|
$
|
-
|
|
|
$
|
5,421,067
|
|
Additions
|
|
|
-
|
|
|
|
21,522
|
|
|
|
-
|
|
|
|
21,522
|
|
Amortization
|
|
|
(747,830
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(747,830
|
)
|
Disposal
|
|
|
-
|
|
|
|
(18,538
|
)
|
|
|
-
|
|
|
|
(18,538
|
)
|
Balance, May 31, 2016
|
|
$
|
4,530,943
|
|
|
$
|
145,278
|
|
|
$
|
-
|
|
|
$
|
4,676,221
|
|
Additions
|
|
|
-
|
|
|
|
34,097
|
|
|
|
-
|
|
|
|
34,097
|
|
Reclassification
|
|
|
-
|
|
|
|
(61,879
|
)
|
|
|
61,879
|
|
|
|
-
|
|
Amortization
|
|
|
(1,055,760
|
)
|
|
|
-
|
|
|
|
(7,314
|
)
|
|
|
(1,063,074
|
)
|
Disposal
|
|
|
-
|
|
|
|
(38,189
|
)
|
|
|
-
|
|
|
|
(38,189
|
)
|
Balance, May 31, 2017
|
|
$
|
3,475,183
|
|
|
$
|
79,307
|
|
|
$
|
54,565
|
|
|
$
|
3,609,055
|
|
5.
Short Term Loans
The
Company has a past due term loan originated on April 1, 2014 with an interest rate of 1% per month. The Company repaid $15,483
(Canadian $20,000) during the first quarter of fiscal 2017. As at May 31, 2017, the loan had a value of $88,011 ($118,815 Canadian).
The
Company had a past due term loan originated on January 7, 2014 with an interest rate of 1% per month. The Company repaid $13,899
(Canadian $18,125) during the first quarter of fiscal 2017. During the third quarter, the balance of the loan was settled with
the debt holder as part of the DWF settlement (Note 3), leaving a value of $nil as at May 31, 2017.
During
the fourth quarter of fiscal 2016, the Company received $100,000 from a director as an intended subscription in anticipation of
a third closing of a private placement of units consisting of one common stock at $0.25 per share and one common stock purchase
warrant with an exercise price of $0.25 per share. The Company completed this closing on August 31, 2016 and the loan was applied
against the private placement (Note 9).
The
following is a summary of Short Term Loans:
Principal amounts
|
|
April 1,
2014
Term Loan
|
|
|
January 7,
2014
Term Loan
|
|
|
Other
Loans
|
|
|
Total
|
|
Fair value at May 31, 2015
|
|
$
|
152,545
|
|
|
$
|
82,817
|
|
|
$
|
556,566
|
|
|
$
|
791,928
|
|
Borrowing during the first quarter
|
|
|
-
|
|
|
|
-
|
|
|
|
328,265
|
|
|
|
328,265
|
|
Borrowing during the second quarter
|
|
|
-
|
|
|
|
-
|
|
|
|
1,201,000
|
|
|
|
1,201,000
|
|
Borrowing during the third quarter
|
|
|
-
|
|
|
|
-
|
|
|
|
170,468
|
|
|
|
170,468
|
|
Borrowing during the fourth quarter
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Fair value adjustments
|
|
|
(9,446
|
)
|
|
|
(4,251
|
)
|
|
|
(19,726
|
)
|
|
|
(33,423
|
)
|
Conversions
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,832,768
|
)
|
|
|
(1,832,768
|
)
|
Repayments
|
|
|
(37,214
|
)
|
|
|
-
|
|
|
|
(403,805
|
)
|
|
|
(441,019
|
)
|
Fair value at May 31, 2016
|
|
$
|
105,885
|
|
|
$
|
78,566
|
|
|
$
|
100,000
|
|
|
$
|
284,451
|
|
Fair value adjustments
|
|
|
(2,391
|
)
|
|
|
(760
|
)
|
|
|
-
|
|
|
|
(3,151
|
)
|
Conversions
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Repayments
|
|
|
(15,483
|
)
|
|
|
(13,899
|
)
|
|
|
-
|
|
|
|
(29,382
|
)
|
Settlement
|
|
|
-
|
|
|
|
(63,907
|
)
|
|
|
-
|
|
|
|
(63,907
|
)
|
Fair value at May 31, 2017
|
|
$
|
88,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
88,011
|
|
6.
Non-Convertible Secured Debentures
During fiscal 2016, Yappn closed a financing of
secured debentures (secured by general security of the Company’s assets) in the amount of $4,550,388. The secured debentures
carry an annual interest rate of 12% payable at maturity. Maturity was initially the earlier of the date proceeds are available
from a public offering or December 31, 2015. During the third quarter of fiscal 2016, the holders of the Secured Debentures (the
“Holders”) agreed to extend the maturity date of the Secured Debentures from December 31, 2015 to July 15, 2020 and
were provided with the right to amend the Secured Debenture such that a Holder shall have the right to require the Company to
satisfy the outstanding obligations underlying the Secured Debenture; provided, however, that at least two thirds (66.67%) of
the Holders of the principal amount of secured debentures consent to a put of their Secured Debentures to the Company. The secured
debentures balance as at May 31, 2017, was $4,550,388 (Note 12). Interest expense for the year ended May 31, 2017 was $546,045
($467,206 for the year ended May 31, 2016) and the corresponding accrual is classified as long term interest since there is no
requirement to pay interest until the maturity date of the secured debentures.
7.
Unsecured Convertible Promissory Notes and Debentures
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. The Units consist of (i) one unsecured 6% convertible promissory note, $100 par value, convertible into
shares of the Company’s common stock; (ii) a common stock purchase warrant entitling the holder thereof to purchase 1,000
shares of common stock (individually “Series A Warrant”) at an exercise price of $1.50; and, (iii) a common stock
purchase warrant entitling the holder thereof to purchase 1,000 shares of common stock (individually “Series B Warrant”)
at an exercise price of $2.00 (Note 10). The purchase price for each Unit was $1,000 and resulted in a funding total of $1,069,000
in cash and the retirement of $100,000 debt obligation to a private investor.
The
notes matured 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 $1.00 per share. 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. Both the Series A and Series B warrants have a five year life.
The convertible debentures due on January
29, 2016, February 27, 2016, and April 1, 2016 respectively were not repaid or converted into common shares of the Company by
the maturity dates. Management made offers to the remaining debenture holders with either extension terms or conversion into common
shares as the Company did not have the ability to repay these debtholders in cash. In fiscal 2016, $260,000 in principal value
of debenture holders took the offer for additional investment and repricing of both common stock purchase warrants. During the
year ended May 31, 2017, $299,000 in principal value of debenture holders converted to common stock at a rate of $0.25 per share
with only the Series A Warrants repriced (Notes 9 and 10). The holders of $299,000 in principal converted had the right to an
additional issuance of shares if the Company closed a financing below $0.25 per common share for a six month period to a floor
of $0.20 per common share which has expired as at May 31, 2017. In addition, on September 21, 2016, a debenture holder with a
principal value of $100,000 agreed to extend the outstanding debenture to May 31, 2017 with no penalty interest from default date
to May 31, 2017 in exchange for both Series A and B Warrants repriced to $0.35. The Company accounted for the extension as a debt
modification as opposed to a debt extinguishment. On February 28, 2017, a debenture holder with $305,000 in principal forgave
their debenture and accrued interest in exchange for amending terms for Series A and B Warrants to $0.25 from $1.50 and $2.00
each respectively as well as an extension of one year to the terms of the common stock purchase warrants in conjunction with the
settlement of DWF (Note 3). Interest expense for the year ended May 31, 2017 was $99,214 ($101,881 for the year ended May 31,
2016).
Convertible
Debentures with Series C or Series D Warrants
During
late fiscal 2014, and early fiscal 2015 the Company authorized and issued 1,050 Units for $1,050,000 to private investors, and
475 Units for $475,000 to seven independent accredited investors respectively. The 475 Units were issued in exchange for $300,000
in cash and release of $90,777 (then Canadian $100,000) in the loan originated on January 7, 2014 and $50,000 in settlement of
trade payables. The Units consist of (i) one unsecured 6% convertible debenture, $100 par value, convertible into shares of the
Company’s common stock at a conversion price of $1.50 per share; and (ii) a common stock purchase warrant entitling the
holder thereof to purchase 700,000 shares of common stock (“Series C Warrant”) and 316,666 shares of common stock
(“Series D Warrant”) at a purchase price of $2.20 per share that expires in 5 years (Note 10).
The
debentures matured 24 months from the issuance date and have an interest rate of 6% (with certain other penalties on overdue interest
when debt is past due) per annum payable in arrears on the earlier of a default date or the maturity date. The debentures may
be converted at any time after the original issuance date at the election of their holders, who may convert all or part of the
outstanding and unpaid principal amount and accrued interest at a conversion price of $1.50 per share. The common stock purchase
warrants may be exercised in whole or in part.
During the year ended May 31, 2017, $1,225,000
in principal value of debenture holders converted their outstanding debentures and accrued interest into common stock of the Company
as well as received amendments to their common stock purchase warrants price of $0.25 (Notes 9 and 10). The holders of the $1,225,000
in principal converted had the right to an additional issuance of shares if the Company closed a financing below $0.25 per common
share for a six month period to a floor of $0.20 per common share which has expired as at May 31, 2017. All remaining term and
conditions are unchanged. On February 28, 2017, two debenture holders with $250,000 in principal forgave their debentures and
accrued interest in exchange for amending terms for Series D warrants to $0.25 from $2.20 as well as an extension of one year
to the terms of the common stock purchase warrants in conjunction with settlement of DWF (Note 3). Interest expense for the year
ended May 31, 2017 was $42,127 ($91,731 for the year ended May 31, 2016).
The
following is a summary of the unsecured convertible promissory notes and debentures as of May 31, 2017:
Principal amounts:
|
|
Convertible Promissory Notes and
Debentures
|
|
|
Conversions
|
|
|
DWF
Settlement
|
|
|
Total Outstanding Principal
|
|
Total Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing on January 29, 2014
|
|
$
|
395,000
|
|
|
$
|
(260,000
|
)
|
|
|
-
|
|
|
$
|
135,000
|
|
Borrowing on February 27, 2014
|
|
|
305,000
|
|
|
|
-
|
|
|
|
(305,000
|
)
|
|
|
-
|
|
Borrowing on April 1, 2014
|
|
|
469,000
|
|
|
|
(299,000
|
)
|
|
|
-
|
|
|
|
170,000
|
|
Borrowing on April 23, 2014
|
|
|
50,000
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Borrowing on May 31, 2014
|
|
|
1,000,000
|
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Borrowing on June 27, 2014
|
|
|
250,000
|
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
|
-
|
|
Borrowing on September 2, 2014
|
|
|
125,000
|
|
|
|
(125,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Borrowing on October 6, 2014
|
|
|
50,000
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Borrowing on October 27, 2014
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
Total
|
|
$
|
2,694,000
|
|
|
$
|
(1,784,000
|
)
|
|
$
|
(555,000
|
)
|
|
$
|
355,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,945,833
|
|
Fair value adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
768,991
|
|
Conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260,000
|
)
|
Balance at May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,454,824
|
|
Fair value adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,824
|
)
|
Conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,524,000
|
)
|
Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(555,000
|
)
|
Balance at May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
355,000
|
|
8.
Convertible Secured Debentures
On December 30, 2015, the Company completed
a convertible secured debenture (secured by general security of the Company’s assets) and common stock purchase warrant financing
of $2,040,000 ($1,075,000 from directors of the Company) (Note 12) through the offering of units by way of private placement, with
each unit consisting of (i) a 12% secured convertible debenture with a maturity date of five years from issuance convertible at
$0.25 per common stock and (ii) ten (10) five year common stock purchase warrants, vesting in 1/3 increments with 1/3 vested in
one year, 1/3 to be vested in two years and 1/3 to be vested in three years and having an exercise price of $0.01 per share (Note
10). The units were sold at $1.00 per unit.
Values were allocated for this private
placement between the debt, common stock purchase warrants and the beneficial conversion feature. The valuation approach involved
determining a fair value for the debt and common stock purchase warrants and then using the relative fair value method to allocate
value to these components. Based on relative fair values, the present value method was used to determine the fair values of the
debt and the binomial tree option pricing model was used to determine the fair value of the common stock purchase warrants. The
value of the interest and principal payments of the debentures resulted in a value of $459,020 for the debentures and the binomial
model resulted in a value for common stock purchase warrants for $1,580,980. The assumptions used for the binomial model are:
Volatility 177%, expected life of five years, risk free interest rate of 1.80%, and dividend rate of 0%. Additionally, this convertible
secured debenture instrument includes a beneficial conversion feature as the effective conversion price is less than the Company’s
market price of common stock on the commitment date. The value of this beneficial conversion feature is $459,020. The resulting
fair value of the debt is $nil, with $1,580,980 allocated to common stock purchase warrants (Note 10) and $459,020 to the beneficial
conversion feature, both which are recorded as components of additional paid in capital.
On May 1, 2016, the Company closed a secured
convertible debenture and common stock purchase warrant financing through conversion of a short term loan of $170,468 from a director
of the Company (secured by general security of the Company’s assets) that was otherwise payable on demand in cash. The offering
of units was by way of private placement, with each unit consisting of (i) a 12% secured convertible debenture with a maturity
date of five years from issuance convertible at $0.25 per common stock and (ii) ten (10) five year common stock purchase warrants,
vesting in 1/3 increments with 1/3 vested immediately, 1/3 to be vested in one year and 1/3 to be vested in two years and having
an exercise price of $0.01 per share (Note 10). The units were sold at $1.00 per unit.
Values were allocated for this private
placement between debt, common stock purchase warrants, and the beneficial conversion feature similar to the secured debenture
and common stock purchase warrant financing of $2,040,000 closed in the third quarter of fiscal 2016 (see above). The value of
the interest and principal payments of the debentures resulted in a value of $51,396 for the debentures and the binomial model
resulted in a value for common stock purchase warrants for $119,072. The assumptions used for the binomial model are: Volatility
180%, expected life of five years, risk free interest rate of 1.28% and dividend rate of 0%. Additionally, this convertible secured
debenture instrument includes a beneficial conversion feature as the effective conversion price is less than the Company’s
market price of common stock on the commitment date. The value of this beneficial conversion feature is $51,396. The resulting
fair value of the debt is $nil, with $119,072 allocated to common stock purchase warrants (Note 10) and $51,396 to the beneficial
conversion feature, both which are recorded as components of additional paid in capital.
The
difference between the fair value and face value of the debentures is to be accreted up to face value over the term to maturity
using the effective interest method. The carrying value of the debenture liability as at May 31, 2017 is $578,708 for the December
30, 2015 closing and $36,877 for the May 1, 2016 closing.
The following table summarizes the fair values of the components of the convertible secured debentures, including
the debt, common stock purchase warrants and the beneficial conversion feature.
Accounting allocation of initial proceeds:
|
|
December 30,
2015
|
|
|
May 1,
2016
|
|
|
Total
|
|
Gross proceeds
|
|
$
|
2,040,000
|
|
|
$
|
170,468
|
|
|
$
|
2,210,468
|
|
Fair value of the convertible secured debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Fair value of common stock purchase warrants (Note 10)
|
|
|
(1,580,980
|
)
|
|
|
(119,072
|
)
|
|
|
(1,700,052
|
)
|
Beneficial conversion feature
|
|
|
(459,020
|
)
|
|
|
(51,396
|
)
|
|
|
(510,416
|
)
|
Change in fair value (from commitment date)
|
|
|
170,932
|
|
|
|
4,347
|
|
|
|
175,279
|
|
Convertible secured debenture at fair value at May 31, 2016
|
|
$
|
170,932
|
|
|
$
|
4,347
|
|
|
$
|
175,279
|
|
Change in fair value
|
|
|
407,776
|
|
|
|
32,530
|
|
|
|
440,306
|
|
Convertible secured debenture at fair value at May 31, 2017
|
|
$
|
578,708
|
|
|
$
|
36,877
|
|
|
$
|
615,585
|
|
On May 1, 2016, the Company completed a secured
convertible debenture financing with a consultant in settlement of $200,000 in obligations with similar terms as the above private
placement with no warrant financing, through the offering of units by way of private placement, with each unit consisting of (i)
a 12% secured convertible debenture with a maturity date of five years from issuance convertible at $0.25 per common. The $200,000
debenture was accounted for as a single debt instrument. On February 28, 2017, the Company reached an agreement with the consultant
(as a DWF stakeholder) to settle the outstanding debenture and accrued interest in exchange for Yappn’s revised position
in DWF (Note 3).
Interest expense for the year ended
May 31, 2017 was $283,256 ($136,275 for the year ended May 31, 2016) and the corresponding accrual is classified as long term interest
since there is no requirement to pay interest until the maturity date of the secured debentures.
During the second, third,
and fourth quarter of fiscal 2017, Company received $2,226,348 in bridge financing (Note 12). These loans are classified as a
long term loans which are to be subscribed into a convertible secured debenture with an expected term of 5 years to maturity.
The Company expects additional participation, although not guaranteed at which time a final closing will be completed with the
final agreed to terms for this financing. Interest expense for the year ended May 31, 2017 was $100,242 ($nil for the year ended
May 31, 2016) and the corresponding accrual is classified as long term interest. While terms are not finalized for this financing,
there is no cash payment on interest expected for at least twelve months.
9.
Common Stock
On August 31, 2015, the Company issued
11,667 shares of common stock in the form of a cashless exercise common stock purchase warrants with a previous allocation to equity
of $37,100 in full settlement of common stock purchase warrants issued to a variable note holder that was extinguished in fiscal
2016.
On September 15, 2015, the Company closed an agreement with Ortsbo to acquire all of its intellectual
property assets. The purchased assets include US Patent No. 8,983,850 B2, US Patent No. 8,917,631 B2, US Patent No. 9,053,097
B2 and other intellectual property including eCommerce and Customer Care know-how (Note 4).
During the fourth quarter of fiscal 2017,
as a result of an agreement between Winterberry Investments Inc. and its investors, the Company issued 16,320,903 common stock
purchase warrants (with an exercise price of $0.01 per common share) with an additional 1,600,000 common stock purchase warrants
to be issued in settlement of the previous obligation of 17,687,500 shares to be issued to Winterberry Investments Inc. As at the
filing date, the 1,300,818 shares at a value of $180,793 remain reserved but not issued (Note 4) and subject to issuance based
on the instructions from the recipients.
On April 18, 2016, the Company issued 1,008,000
shares of common stock for $252,000 cash received against the first tranche of a private placement of units, at a purchase price
of $0.25 per unit, consisting of one common stock and one common stock purchase warrant with an exercise price of $0.25 per share
and expiry of five years from the date of issuance (Note10). These common stock purchase warrants will vest in increments of thirds
with the first 1/3 vested on April 17, 2017, second increment of 1/3 on April 17, 2018, and last 1/3 on April 17, 2019. The Company
completed a relative fair value calculation to allocate the proceeds between common stock and common stock purchase warrants for
$157,046 and $94,854 respectively. The assumptions used for valuation were: Volatility 180%, expected life of five years, risk
free interest rate of 1.24%, and dividend rate of 0%.
On May 17, 2016, the Company issued 2,640,000
shares of common stock for $660,000 cash received against the second tranche of a private placement of units, at a purchase price
of $0.25 per unit, consisting of one common stock and one common stock purchase warrant with an exercise price of $0.25 per share
and expiry of five years from the date of issuance (Note 10). 1,200,000 of the shares from the second tranche for $300,000 were
issued to two members of the Board of Directors (Note 12). These common stock purchase warrants will vest in increments of thirds
with the first 1/3 vested on May 16, 2017, second increment of 1/3 on May 16, 2018, and last 1/3 on May 16, 2019. The Company completed
a relative fair value calculation to allocate the proceeds between common stock and common stock purchase warrants for $411,515
and $248,221 respectively. The assumptions used for valuation were: Volatility 179%, expected life of five years, risk free interest
rate of 1.29%, and dividend rate of 0%.
On June 13, 2016, principal and interest
totaling $305,307 was converted into 1,221,228 of common shares as part of the conversion of convertible debt as described in Note
7. The common shares to be issued were recorded as an obligation as at May 17, 2016, however the issuance did not occur until June
13, 2016.
On August 31, 2016, the Company issued
1,000,000 shares of common stock for $200,000 cash received and settlement of $50,000 in prior obligations against the third tranche
of a private placement of units, at a purchase price of $0.25 per unit, consisting of one common stock and one common stock purchase
warrant with an exercise price of $0.25 per share and expiry of five years from the date of issuance (Note 10). All of the shares
from the third tranche were issued to four members of the Board of Directors (Note 12). These common stock purchase warrants will
vest in increments of thirds with the first 1/3 being vested on August 31, 2017, second increment of 1/3 on August 31, 2018, and
last 1/3 on August 31, 2019. The Company completed a relative fair value calculation to allocate the proceeds between common stock
and common stock purchase warrants for $141,307 and $108,693 respectively. The assumptions used for valuation were: Volatility
191%, expected life of five years, risk free interest rate of 1.19%, and dividend rate of 0%.
On August 31, 2016, principal and interest
totaling $1,496,931 was converted into 5,956,226 common shares as part of the conversion of convertible debt as described in Note
7.
On September 23, 2016, the Company issued
780,000 shares of common stock for $195,000 cash received against the fourth tranche of a private placement of units, at a purchase
price of $0.25 per unit, each unit consisting of one share of common stock and one common stock purchase warrant with an exercise
price of $0.25 per share and expiry of five years from the date of issuance (Note 10). 80,000 of the shares from the fourth tranche
for $20,000 were issued to a member of the Advisory Board (Note 12). These common stock purchase warrants will vest in increments
of thirds with the first 1/3 being vested on September 23, 2017, second increment of 1/3 on September 23, 2018, and last 1/3 on
September 23, 2019. The Company completed a relative fair value calculation to allocate the proceeds between common stock and common
stock purchase warrants for $112,327 and $82,673 respectively. The assumptions used for valuation were: Volatility 200%, expected
life of five years, risk free interest rate of 1.16%, and dividend rate of 0%.
On September 23, 2016 principal and interest
totaling $262,592 was converted into 1,050,368 of common shares as part of the conversion of convertible debt as described in Note
7.
On September 30, 2016, the Company issued
120,000 shares of common stock as settlement against prior accounts payables with a fair value of $30,000.
On November 15, 2016, the Company issued
88,844 shares of common stock in association with the timing of filing its Registration Statement as part of the contractual rights
of certain existing convertible debenture holders.
The Company had an obligation to issue
17,687,500 shares of common stock for the purchase of Ortsbo intellectual property assets to a related party. The value of this
equity obligation as part of the acquisition consideration was recorded at that time in the amount of $2,458,278. The obligation
to issue the common stock was settled through the issuance of 16,320,903 warrants and 1,600,000 warrants to be issued. With the
settlement of the obligation to issue common shares by way of an issuance of warrants, the aforementioned $2,458,278 value was
moved from subscribed amounts to additional paid in capital within the statement of stockholders’ deficit. On April 28,
2017, 9,749,616 warrants were exercised and 8,954,934 shares of common stock issued under the cashless exercise provision.
Registration
Statement
On October 3, 2016, the Company filed a
Registration Statement on Form S-1 (File No. 333-213947) (the “
Registration Statement
”) with the Securities
and Exchange Commission for up to 14,840,964 shares of our Company’s $0.0001 par value per share common stock (the "Common
Stock") issuable to certain selling stockholders that are issued and outstanding upon conversion of promissory notes, related
past due accrued interest and penalties and/or common stock purchase warrants currently held by those selling stockholders, specifically
(i) 8,227,821 shares of Common Stock issued and outstanding (ii) 907,200 shares of Common Stock issuable to them upon exercise
of promissory notes (iii) 273,272 shares of Common Stock issuable underlying past due accrued interest and penalties and (iv) 5,432,671
shares of Common Stock issuable to them upon exercise of common stock purchase warrants. The common stock purchase warrants have
an exercise price varying from $0.25 to $2.20 per share (subject to adjustment). The Registration Statement covering the above
noted shares was declared effective under the Securities Act of 1933 on January 24, 2017.
10.
Preferred Stock and Warrants
Series A Preferred Stock and attached
common stock purchase warrants
The
Company has an authorized limit of 50,000,000 shares of preferred stock, par value $0.0001 with none issued and outstanding as
at May 31, 2017 and May 31, 2016.
Warrants
The
following is a summary of common stock purchase warrants issued, exercised and expired through May 31, 2017:
|
|
Shares
Issuable
Under
Warrants
|
|
|
Equity
Value
|
|
|
Exercise
Price
|
|
|
Expiration
|
|
Issued on March 28, 2013
|
|
|
401,000
|
|
|
|
917,087
|
|
|
$
|
1.00
|
|
|
|
March 28, 2018
|
|
Issued on May 31, 2013
|
|
|
370,000
|
|
|
|
543,530
|
|
|
$
|
0.54
|
|
|
|
May 31, 2018
|
|
Issued on June 7, 2013
|
|
|
165,000
|
|
|
|
211,365
|
|
|
$
|
0.54
|
|
|
|
June 7, 2018
|
|
Issued on November 15, 2013
|
|
|
12,000
|
|
|
|
3,744
|
|
|
$
|
1.00
|
|
|
|
November 15, 2018
|
|
Issued Series A warrants on January 29, 2014
|
|
|
135,000
|
|
|
|
135,989
|
|
|
$
|
1.00
|
|
|
|
January 29, 2019
|
|
Issued Series A warrants on January 29, 2014 - Repriced
|
|
|
260,000
|
|
|
|
268,770
|
|
|
$
|
0.25
|
|
|
|
January 29, 2019
|
|
Issued Series B warrants on January 29, 2014
|
|
|
135,000
|
|
|
|
-
|
|
|
$
|
2.00
|
|
|
|
January 29, 2019
|
|
Issued Series B warrants on January 29, 2014 - Repriced
|
|
|
260,000
|
|
|
|
9,022
|
|
|
$
|
0.25
|
|
|
|
January 29, 2019
|
|
Issued Series A warrants on February 27, 2014 - Repriced
|
|
|
305,000
|
|
|
|
228,344
|
|
|
$
|
0.25
|
|
|
|
February 27, 2019
|
|
Issued Series B warrants on February 27, 2014 - Repriced
|
|
|
305,000
|
|
|
|
4,728
|
|
|
$
|
0.25
|
|
|
|
February 27, 2019
|
|
Issued Series A warrants on April 1, 2014
|
|
|
70,000
|
|
|
|
147,294
|
|
|
$
|
1.00
|
|
|
|
April 1, 2019
|
|
Issued Series A warrants on April 1, 2014 - Repriced
|
|
|
299,000
|
|
|
|
97,442
|
|
|
$
|
0.25
|
|
|
|
April 1, 2019
|
|
Issued Series A warrants on April 1, 2014 - Repriced
|
|
|
100,000
|
|
|
|
2,490
|
|
|
$
|
0.35
|
|
|
|
April 1, 2019
|
|
Issued Series B warrants on April 1, 2014
|
|
|
369,000
|
|
|
|
-
|
|
|
$
|
2.00
|
|
|
|
April 1, 2019
|
|
Issued Series B warrants on April 1, 2014 - Repriced
|
|
|
100,000
|
|
|
|
3,140
|
|
|
$
|
0.35
|
|
|
|
April 1, 2019
|
|
Issued to Lender – Line of Credit
|
|
|
800,000
|
|
|
|
1,495,200
|
|
|
$
|
1.00
|
|
|
|
April 7, 2019
|
|
Issued Series C warrants on April 23, 2014 - Repriced
|
|
|
33,333
|
|
|
|
10,642
|
|
|
$
|
0.25
|
|
|
|
April 23, 2019
|
|
Issued Series C warrants on May 30, 2014 - Repriced
|
|
|
666,667
|
|
|
|
214,212
|
|
|
$
|
0.25
|
|
|
|
May 30, 2019
|
|
Issued Series D warrants on June 27, 2014 - Repriced
|
|
|
166,667
|
|
|
|
2,384
|
|
|
$
|
0.25
|
|
|
|
June 27, 2019
|
|
Issued Series D warrants on September 2, 2014 - Repriced
|
|
|
83,333
|
|
|
|
41,593
|
|
|
$
|
0.25
|
|
|
|
September 2, 2019
|
|
Issued Series D warrants on October 6, 2014 - Repriced
|
|
|
33,333
|
|
|
|
16,607
|
|
|
$
|
0.25
|
|
|
|
October 6, 2019
|
|
Issued Series D warrants on October 27, 2014
|
|
|
33,333
|
|
|
|
15,667
|
|
|
$
|
2.20
|
|
|
|
October 27, 2019
|
|
Issued warrants – consultants
|
|
|
330,000
|
|
|
|
165,330
|
|
|
$
|
1.50
|
|
|
|
May 30, 2019
|
|
Issued warrants on February 4, 2015 Typenex Co-Investments, LLC
|
|
|
70,000
|
|
|
|
-
|
|
|
$
|
1.00
|
|
|
|
February 4, 2020
|
|
Issued warrants – consultant on May 31, 2015
|
|
|
5,000
|
|
|
|
990
|
|
|
$
|
1.00
|
|
|
|
May 31, 2017
|
|
Issued warrants – consultant on May 31, 2015
|
|
|
15,000
|
|
|
|
2,970
|
|
|
$
|
1.50
|
|
|
|
May 31, 2017
|
|
Issued warrants to advisory board on September 28, 2015 - Repriced
|
|
|
300,000
|
|
|
|
233,490
|
|
|
$
|
0.25
|
|
|
|
August 31, 2020
|
|
Issued to Lender – Line of Credit on November 5, 2015
|
|
|
1,700,000
|
|
|
|
519,520
|
|
|
$
|
1.00
|
|
|
|
April 7, 2019
|
|
Issued warrants to consultant on November 5, 2015
|
|
|
100,000
|
|
|
|
23,240
|
|
|
$
|
1.00
|
|
|
|
October 16, 2017
|
|
Issued warrants on December 30, 2015
|
|
|
20,400,000
|
|
|
|
1,580,980
|
|
|
$
|
0.01
|
|
|
|
December 29, 2020
|
|
Issued warrants to advisory board on March 21, 2016
|
|
|
1,750,000
|
|
|
|
232,530
|
|
|
$
|
0.25
|
|
|
|
March 21, 2021
|
|
Issued warrants to consultant on May 1, 2016
|
|
|
4,000,000
|
|
|
|
721,200
|
|
|
$
|
0.25
|
|
|
|
May 1, 2021
|
|
Issued warrants on May 1, 2016
|
|
|
1,704,680
|
|
|
|
119,072
|
|
|
$
|
0.01
|
|
|
|
May 1, 2021
|
|
Issued warrants for private placement on April 18, 2016
|
|
|
1,008,000
|
|
|
|
94,854
|
|
|
$
|
0.25
|
|
|
|
April 18, 2021
|
|
Issued warrants for private placement on May 17, 2016
|
|
|
2,640,000
|
|
|
|
248,221
|
|
|
$
|
0.25
|
|
|
|
May 17, 2021
|
|
Exercised Warrants Typenex Co-Investments, LLC
|
|
|
(70,000
|
)
|
|
|
-
|
|
|
$
|
1.00
|
|
|
|
-
|
|
Total – as of May 31, 2016
|
|
|
39,055,346
|
|
|
|
8,311,647
|
|
|
|
|
|
|
|
|
|
Issued warrants to consultant on July 6, 2016
|
|
|
90,000
|
|
|
|
22,500
|
|
|
$
|
0.25
|
|
|
|
July 6, 2018
|
|
Issued warrants to advisory board member on August 25, 2016
|
|
|
250,000
|
|
|
|
22,593
|
|
|
$
|
0.25
|
|
|
|
August 25, 2021
|
|
Issued warrants for private placement on August 31, 2016
|
|
|
1,000,000
|
|
|
|
108,693
|
|
|
$
|
0.25
|
|
|
|
August 31, 2021
|
|
Issued warrants for private placement on September 23, 2016
|
|
|
780,000
|
|
|
|
82,673
|
|
|
$
|
0.25
|
|
|
|
September 23, 2021
|
|
Issued warrants to consultant on November 10, 2016
|
|
|
100,000
|
|
|
|
8,440
|
|
|
$
|
0.25
|
|
|
|
November 10, 2020
|
|
Issued warrants in satisfaction of obligation to issue common shares on April 27, 2017
|
|
|
9,749,616
|
|
|
|
1,337,392
|
|
|
$
|
0.01
|
|
|
|
April 27, 2022
|
|
Issued warrants in satisfaction of obligation to issue common shares on April 28, 2017
|
|
|
869,447
|
|
|
|
119,265
|
|
|
$
|
0.01
|
|
|
|
April 28, 2022
|
|
Issued warrants in satisfaction of obligation to issue common shares on May 31, 2017
|
|
|
5,701,840
|
|
|
|
782,143
|
|
|
$
|
0.01
|
|
|
|
May 31, 2022
|
|
Exercised Warrants
|
|
|
(9,749,616
|
)
|
|
|
(1,337,392
|
)
|
|
$
|
0.01
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total – as of May 31, 2017
|
|
|
47,846,633
|
|
|
|
9,457,954
|
|
|
|
|
|
|
|
|
|
As at May 31, 2017, vested and exercisable
common stock purchase warrants have a weighted average price of approximately $0.27 (May 31, 2016 - $0.87) and have a weighted-average
remaining contractual term of 1.91 years (May 31, 2016 – 0.71 years). It is expected the 21,798,453 unvested common stock
purchase warrants will ultimately vest. The unvested common stock purchase warrants have a weighted average exercise price of $0.09
(May 31, 2016 - $0.07) per share and a weighted average remaining term of 1.70 years (May 31, 2016 – 3.62 years).
Warrants vesting terms and repricing related
to Convertible Debentures, Secured Converted Debentures, and Common Stock Private Placement are described in Notes 7, 8, and Note
9. All common stock purchase warrants not described in other notes to the consolidated financial statements vested immediately
upon issuance. Common stock purchase warrants issued to consultants and the Advisory Board in fiscal 2016 and 2017 are described
below.
The Company issued 300,000 common stock
purchase warrants on September 28, 2015 to new advisors in advance of their appointment to the Board of Directors at an exercise
price of $1.00 with expiry of five years from September 1, 2015. These were expensed as stock based compensation. The common stock
purchase warrants exercise price was repriced on March 21, 2016 to $0.25 and a nominal expense was recorded. The assumptions used
for initial and repricing valuation are: Volatility 178-180%, expected life of five years, risk free interest rate of 1.38%-1.42%,
and dividend rate of 0%.
The Company issued 1,700,000 common stock
purchase warrants to the issuer of Company’s previous secured line of credit holder included in financing expense in contemplation
of taking a pari passu security position and allowing Winterberry to act as collateral agent for the secured debenture financing.
These common stock purchase warrants were issued November 5, 2015 have an exercise price of $1.00 with expiry date of April 7,
2019. The assumptions used for valuation were: Volatility 178%, expected life of five years, risk free interest rate of 1.65%,
and dividend rate of 0%.
The
Company issued common stock purchase warrants to a consultant in the amount of 100,000 included in financing expense on November
5, 2015 at an exercise price of $1.00 with expiry date of October 16, 2017. The assumptions used for valuation were: Volatility
178%, expected life of approximately two years, risk free interest rate of 0.85%, and dividend rate of 0%.
The Company issued 1,750,000 common stock
purchase warrants on March 21, 2016 to the new Advisory Board at an exercise price of $0.25 with expiry date of March 21, 2021.
These were expensed as stock based compensation. These common stock purchase warrants will vest in increments of 1/3 with the first
1/3 being vested on March 21, 2017, second increment of 1/3 on March 21, 2018, and last 1/3 on March 21, 2019. The assumptions
used for valuation were: Volatility 180%, expected life of five years, risk free interest rate of 1.38%, and dividend rate of 0%.
On May 1, 2016 the Company issued 4,000,000
common stock purchase warrants to an entity, Imagination 7 Ventures, LLC controlled by the former CEO at an exercise price of
$0.25 included in consulting expense with an expiry of May 1, 2021. These common stock purchase warrants will vest in increments
of 1/3 with the first 1/3 being vested on May 1, 2016, second increment of 1/3 on April 30, 2017, and last 1/3 on April 30, 2018.
The assumptions used for valuation were: Volatility 180%, expected life of five years, risk free interest rate of 1.28%, and dividend
rate of 0%.
The Company issued 250,000 common stock
purchase warrants on August 25, 2016 to a new Advisory Board member at an exercise price of $0.25 with expiry date of August 25,
2021. These were expensed as stock based compensation. These common stock purchase warrants will vest in increments of 1/3 with
the first 1/3 being vested on August 25, 2017, second increment of 1/3 on August 25, 2018, and last 1/3 on August 25, 2019. The
assumptions used for valuation were: Volatility 191%, expected life of five years, risk free interest rate of 1.13%, and dividend
rate of 0%.
The
Company issued common stock purchase warrants to a consultant in the amount of 100,000 included in consulting expense on November
10, 2016 at an exercise price of $0.25 with expiry date of November 10, 2020. The assumptions used for valuation were: Volatility
215%, expected life of approximately four years, risk free interest rate of 1.17%, and dividend rate of 0%.
During the fourth quarter of fiscal 2017,
as a result of an agreement between Winterberry Investments Inc. and its investors, the Company issued 16,320,903 common stock
purchase warrants (with an exercise price of $0.01 per common share) with an additional 1,600,000 common stock purchase warrants
to be issued in settlement of the obligation to issue 17,687,500 shares from the purchase of the Ortsbo intellectual property
assets. These common stock purchase warrants have an expiry date of 5 years from the date of issuance and vest immediately. During the fourth quarter
of fiscal 2017, the Company issued 8,954,934 shares of common stock as a result of a cashless exercise of 9,749,616 issued common
stock purchase warrants.
11.
Employee Benefit and Incentive Plans
On
August 14, 2014, the Board of Directors approved the adoption of the 2014 Stock Option Plan, which was ratified by the shareholders
on December 22, 2014. On August 21, 2015, the Company amended its 2014 Stock Option Plan to increase the number of shares reserved
pursuant to the 2014 Stock Option Plan to 25,000,000.
The
following table outlines the options granted and related disclosures:
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at May 31, 2015
|
|
|
1,804,500
|
|
|
$
|
1.00
|
|
Granted in fiscal 2016
|
|
|
8,775,000
|
|
|
|
0.25
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(189,500
|
)
|
|
|
1.00
|
|
Outstanding at May 31, 2016
|
|
|
10,390,000
|
|
|
$
|
0.28
|
|
Granted in fiscal 2017
|
|
|
3,200,000
|
|
|
|
0.25
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(385,000
|
)
|
|
|
1.00
|
|
Outstanding at May 31, 2017
|
|
|
13,205,000
|
|
|
$
|
0.25
|
|
Options exercisable at May 31, 2017
|
|
|
6,430,000
|
|
|
$
|
0.25
|
|
Fair value of options vested as at May 31, 2017
|
|
$
|
2,333,927
|
|
|
$
|
N/A
|
|
As
at May 31, 2017, vested and exercisable options do not have any intrinsic value and have a weighted-average remaining contractual
term of 3.60 years. It is expected the 6,775,000 unvested options will ultimately vest. These options have a weighted average
exercise price of $0.25 per share and a weighted average remaining term of 3.96 years. The aggregate intrinsic value of options
represents the total pre-tax intrinsic value, the difference between our closing stock price as at May 31, 2017 and the option’s
exercise price, for all options that are in the money. This value was $nil as at May 31, 2017.
As
at May 31, 2017, there is $1,293,208 of unearned stock based compensation cost related to stock options granted that have not
yet vested (6,775,000 options). This cost is expected to be recognized over a remaining weighted average vesting period of 1.28
years.
8,750,000 and 3,200,000 of the stock options
granted on March 21, 2016 and August 25, 2016 respectively vest 1/4 immediately, 1/4 after one year, 1/4 after two years, and
1/4 after three years. The remaining 25,000 options issued on March 21, 2016 have immediate vesting terms.
The
estimated fair value of options granted is measured using the binomial model using the following assumptions:
|
|
Fiscal
2016
|
|
|
Fiscal
2017
|
|
Total number of shares issued under options
|
|
|
8,775,000
|
|
|
|
3,200,000
|
|
Stock price
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
Exercise price
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Time to expiration – days (5 year options)
|
|
|
1,826
|
|
|
|
1,826
|
|
Risk free interest rate (5 year options)
|
|
|
1.38
|
%
|
|
|
1.13
|
%
|
Forfeiture rate (all options)
|
|
|
0
|
%
|
|
|
0
|
%
|
Estimated volatility (all options)
|
|
|
180
|
%
|
|
|
191
|
%
|
Weighted-average fair value of options granted
|
|
|
0.25
|
|
|
|
0.25
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
The
assumptions used in the stock based compensation binomial models are consistent with the methodology used in valuing the Company’s
other derivatives from debt and warrant financings. Due to a lack of history regarding the exercise of options, the Company has
assumed the expected life of the options is the contractual life of the options.
12.
Related Party Balances and Transactions
Services provided by Intertainment Media Inc.
personnel in the prior fiscal year were invoiced on a per hour basis at a market rate per hour as determined by the type of activity
and the skill set provided. Costs incurred by Intertainment Media Inc. on behalf of the Company for third party purchases are
invoiced at cost. There were no services provided by Intertainment Media Inc. to Yappn for the year ended May 31, 2017. For the
year ended May 31, 2016, related party fees incurred and paid for general development and managerial services performed by Intertainment
Media Inc. and its subsidiary totaled $146,982. $92,589 is related to managerial services and $54,393 related to development.
As of May 31, 2016, the related party liability balance totaled $16,654. As at May 31, 2017, there is no obligation to Intertainment
Media Inc.
On September 15, 2015, the Company finalized
its purchase of intellectual property assets of Ortsbo Inc. (“Ortsbo”) pursuant to an Asset Purchase Agreement executed
and closed on July 15, 2015. With this closing, the Company had an obligation to issue 31,987,000 shares of common stock of Yappn
to Ortsbo or its designees. Yappn also assumed $975,388 of debt as part of the transaction. This assumed debt was immediately
subscribed as part of the secured debenture in Yappn (Note 6). The fair value for the agreed upon consideration for the acquisition
of intellectual property from Ortsbo was $16,968,888, however, due to the common control of Ortsbo and the Company, the value
of the intangible assets acquired from Ortsbo was recorded at the carrying value in the financial records of Ortsbo. This value
was $5,421,067 on September 15, 2015 (Note 4).
During the second quarter of fiscal 2016,
from the share issuance obligations from the purchase of the Ortsbo intellectual property assets, 12,998,682 shares were issued
comprising 8,312,500 to Ortsbo and 4,686,182 to the former debt and minority shareholders of Ortsbo, which were valued at $1,806,608
leaving 18,988,318 shares to be issued. During the fourth quarter of fiscal 2017, as a result of an agreement between Winterberry
Investments Inc. and its investors, the Company issued 16,320,903 common stock purchase warrants (with an exercise price of $0.01
per common share) with an additional 1,600,000 common stock purchase warrants to be issued in settlement of the previous obligation
of 17,687,500 shares to be issued to Winterberry Investments Inc. As at the filing date, the 1,300,818 shares at a value of $180,793
remain reserved but not issued and subject to issuance based on the instructions from the recipients.
Directors subscribed for $1,783,526 of $4,550,388
from the secured debenture private placement that closed in September 2015 at which time they were not directors (Note 6). Significant
investments made by directors include Luis Vasquez Senties (a current member of the Board of Directors) subscribed for $500,000
from the secured debenture offering that closed in September 2015, David Berry (a current member of the Board of Directors) subscribed
for $733,526 from the secured debenture offering that closed in September 2015, and Winterberry Investments Inc. (an entity controlled
by David Berry, a current member of the Board of Directors) subscribed for $500,000 from the secured debenture offering that closed
in September 2015.
Directors also
subscribed for $1,075,000 of the $2,040,000 convertible secured debentures issued on December 30, 2015 (Note 8). Significant investments
made by directors include Luis Vasquez Senties (a current member of the Board of Directors) who subscribed for $500,000 from the
secured debenture offering that closed in December 2015, and David Berry (a current member of the Board of Directors) through
a related entity which he does not control which subscribed for $500,000 from the secured debenture offering that closed in December
2015.
David Berry (a current member of
the Board of Directors) through a related entity in which he does not control advanced $170,468 to the Company on an anticipated
second closing of the same convertible secured debenture financing that closed on December 30, 2015 (Note 8). This $170,468 closing
occurred on May 1, 2016.
The Company issued 300,000 common
stock purchase warrants on September 28, 2015 to advisors prior to their appointment as members of the Board of Directors at an
exercise price of $1.00 with expiry of five years from September 1, 2015. $227,100 was expensed as stock based compensation. These
common stock purchase warrants were repriced to $0.25 on March 21, 2016 and are revalued at $233,490. The additional $6,390 was
also expensed to stock based compensation.
The Company issued 1,750,000 common stock purchase
warrants on March 21, 2016 to members of the Company’s Advisory Board at an exercise price of $0.25 with expiry date of March
21, 2021. The common stock purchase warrants were valued at $349,825 and stock based compensation is recognized over a graded
vesting schedule as described in Note 10.
The Company issued 250,000 common stock purchase
warrants on August 25, 2016 to a recently appointed Advisory Board member at an exercise price of $0.25 with expiry date of August
25, 2021. The common stock purchase warrants were valued at $48,075 and stock based compensation is recognized over a graded vesting
schedule as described in Note 10.
On May 1, 2016, the Company completed
a secured debenture financing with a consultant, whose principal is the former CEO of the Company, for $200,000 with no warrant
financing, through the offering of units by way of private placement, with each unit consisted of a 12% secured convertible debenture
with a maturity date of five years from issuance convertible at $0.25 per common. This closing was a conversion of $200,000 in
consulting expense. The Company also issued 4,000,000 common stock purchase warrants, valued at $721,200, at an exercise price
of $0.25 included in consulting expense, with an expiry of May 1, 2021. This consultant was also granted a $100,000 signing bonus
payable in cash.
All obligations prior to May 1,
2016 due directly or indirectly to the former CEO of Yappn including $294,906 in cash obligations as an employee and $18,200 as
a consultant, have been forgiven. All obligations being forgiven were recorded as general and administrative expenses within fiscal
2016 and were reversed out from general and administrative expenses.
1,200,000 of the shares from the 2nd tranche
of common stock private placement at $0.25 per unit totaling $300,000 in cash proceeds were issued to members of the Board of
Directors. Significant investments made by Directors include Luis Vasquez Senties (a current member of the Board of Directors)
who advanced $200,000 to the Company (Note 9).
1,000,000 of the shares from the 3rd tranche
of common stock private placement at $0.25 per unit totaling $250,000 in cash proceeds and compensation for consulting work were
issued to members of the Board of Directors. Significant investments made by Directors include Winterberry Investments Inc. (an
entity controlled by David Berry, a current member of the Board of Directors) who advanced $100,000 to the Company (Note 9).
80,000
of the shares from the 4th tranche of common stock private placement at $0.25 per unit totaling $20,000 in cash proceeds were
issued to a member of the advisory board (Note 9).
On March 21, 2016, the Board of Directors
passed a resolution for a contingent common stock award in line with the metrics used in the CEO’s targets for additional
bonus compensation. The award would see the members of the Board of Directors as well as the Advisory Board receive common shares
for the Company reaching revenue milestones. Per the resolution, 500,000 common shares for each member of the Board of Directors
and 250,000 for each Advisory Board member would be issued when the following milestones are met: (i) $3.5 million in new revenue
generated and realized within 12 months of the start date of the CEO which was February 22, 2016 and minimum of 5 new recurring
revenue contracts being signed within 12 months of the start date; or (ii) $5 million of new revenue generated and realized within
24 months of the start date and minimum of 5 new recurring revenue contracts being signed within 12 months of the start date.
As of February 22, 2017 (the 12 months since the CEO start date of February 22, 2016), milestone (i) was not met.
On
August 25, 2016 a recently appointed Advisory Board member received the same contingent common stock award of 250,000 common shares
as described above for the March 21, 2016 award to Advisory Board members.
During
the second, third, and fourth quarter of fiscal 2017, Company received $2,226,348 in bridge financing from three directors. These
loans are classified as long term loans which are to be subscribed into a convertible secured debenture with an expected term
of 5 years to maturity. The Company expects additional participation, although not guaranteed, at which time a final closing will
be completed with the final agreed to terms for this financing.
13.
Income Taxes
The
provision for income taxes for the years ended May 31, 2017 and 2016 consisted of the following:
|
|
May 31,
2017
|
|
|
May 31,
2016
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
969,732
|
|
|
|
(6,473,887
|
)
|
Change in valuation allowance
|
|
|
(969,732
|
)
|
|
|
6,473,887
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company’s income tax rate computed at the statutory federal rate of 35% (2016 – 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,
2017
|
|
|
May 31,
2016
|
|
Income tax at statutory rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Permanent differences
|
|
|
(10.50
|
)
|
|
|
(8.00
|
)
|
Change in valuation allowance
|
|
|
(24.50
|
)
|
|
|
(27.00
|
)
|
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, 2017 and May 31, 2016
are as follows:
|
|
May
31,
2017
|
|
|
May
31,
2016
|
|
Net operating
losses
|
|
$
|
6,038,787
|
|
|
$
|
5,116,331
|
|
Intangible Assets
|
|
|
3,999,543
|
|
|
|
4,193,378
|
|
Less: valuation allowance
|
|
|
(10,038,330
|
)
|
|
|
(9,309,709
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As of May 31, 2017 and May 31, 2016 the Company
had a net operating losses carry-forward of approximately $18,353,871 and $14,618,084 respectively, which may be used to offset
future taxable income and begins to expire in 2033.
PART
IV
Item
15. Exhibits, Financial Statement Schedules.