NOTES TO FINANCIAL STATEMENTS
December 31, 2013
NOTE 1
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NATURE OF OPERATIONS
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Engage Mobility, Inc. (the “Company”), was incorporated on December 28, 2011 under the laws of the State of Florida as MarketKast Incorporated. On March 22, 2013, the Company changed its name to Engage Mobility, Inc. The Company functions as a provider of mobile technology, marketing and data solutions for business.
Prior to the quarter ended December 31, 2013, the Company was a development stage company. During the quarter ended December 31, 2013, the Company commenced its principal planned operations and emerged from the development stage.
The Company has adopted its fiscal year end to be June 30.
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and Rule 8.03 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements of the Company as of June 30, 2013, and for the period from inception through June 30, 2013, including notes thereto included in our Form 10-K.
NOTE 2
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SUMMARY OF ACCOUNTING POLICIES
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Basis of Presentation
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Bank overdrafts are presented in the financial statements under the caption “Due to Bank”.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Revenue Recognition
In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The following reflects specific criteria for the various revenues streams of the Company:
Revenue is recognized at the time the product is delivered or the service is performed. Where the Company has entered into a revenue sharing agreement with a third party, the Company will record its’ proportionate share of the revenue.
Deferred revenue is recorded for amounts received in advance of the time at which services are performed and included in revenue at the completion of the related services.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts, if any. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers' ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible.
Intangible Assets and Long Lived Assets
The Company reviews its long-lived assets and certain identifiable finite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.
During January 2013, the Company entered into a licensing and development agreement with a third party to develop and integrate a mobile communication platform for a fee aggregating $73,000. The Company terminated its arrangement with this developer for which an aggregate of $48,000 had been paid and instead acquired a basic mobile platform from a third party at a cost of $50,000 of which $25,000 has been paid at December 31, 2013. The Company will use its internal development team to complete its own proprietary mobile platform. The new platform will replace the original platform which will be phased out during 2014. Amortization for the old platform will commence in 2014 for a ten month period at which time it will be fully amortized and amortization of the new platform will begin upon completion of the platform.
Property and Equipment
Depreciation of office and production equipment is recognized by the straight-line method over the 5 year estimated useful lives of the related assets.
Fair value of financial instruments
The Company’s short-term financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. The carrying amounts of the financial instruments approximate fair value because of their short-term maturities. The Company does not hold or issue financial instruments for trading purposes nor does it hold or issue interest rate or leveraged derivative financial instruments. The carrying value of the Company’s long-term debt approximates fair value based on the terms and conditions at which the Company could obtain similar financing.
Income Taxes
Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is recognized to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
All tax periods from inception remain open to examination by taxing authorities.
Stock-Based Compensation
The Company records the cost resulting from all share-based transactions in the financial statements. The Company applies a fair-value-based measurement in accounting for share-based payment transactions with employees and when the company acquires goods or services from non-employees in share-based payment transactions.
Net Income (Loss) Per Common Share
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, common stock equivalents, if any, are not considered, as their effect would be anti dilutive.
Recent Pronouncements
The Company does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the accompanying financial statements, the Company had an accumulated deficit of $1,179,154 at December 31, 2013, and has incurred losses for all periods presented. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s cash position and operations may not be sufficient to support the Company’s daily operations without significant financing. The Company believes in the viability of its strategy to produce sales volume and in its ability to raise additional funds; however there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern.
As of June 30, 2013, the Company had borrowed an aggregate of $280,000 pursuant to non-convertible promissory notes, bearing interest at 10% per annum. Interest is payable monthly and the principal, together with any unpaid interest, is due 48 months from the dates of the notes. During the six month period ended December 31, 2013, the Company borrowed an additional $100,000 pursuant to non-convertible promissory notes with similar terms. In addition, the Company repaid $35,000 of the previously issued notes.
The notes are due as follows:
Year ending June 30, 2017
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$
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345,000
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$
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280,000
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NOTE 5
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CONVERTIBLE NOTES PAYABLE
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During the six month period ended December 31, 2013, the Company issued $250,000 of 10% convertible promissory notes to certain private investors. The convertible notes mature after three years, at which time all outstanding principal and accrued interest is due. The notes are convertible at any time by the investors into the Company's current registered offering (see Note 6) with $200,000 being convertible into the offering at a 20% discount to the offering price of $1.60 per share, or $1.28 per share, and $50,000 being convertible at a 50% discount to the offering price, or $0.80 per share. In addition to the interest due, the Company has agreed to issue 125,000 warrants to the lenders at an exercise price of 125% of the share price of the proposed offering or $2.00 per share. These convertible notes are secured by all of the Company’s assets.
The warrants are exercisable at $2.00 per share and expire after three years. The aggregate fair value of the warrants was estimated at $157,584, using a binomial option pricing model and the following assumptions:
Volatility 154% - Dividend rate 0% - Interest rate 0.77% - Term 3 years
In addition, the Company recognized a beneficial conversion feature related to the convertible notes of $90,444, which was credited to additional paid-in capital. Interest on the notes is being recognized using the effective yield method over the three year life of the notes.
Convertible notes payable consist of the following:
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Notes payable
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$
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250,000
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Beneficial conversion feature and unamortized warrants
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(131,320
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)
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$
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118,680
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Interest expense related to the warrants and beneficial conversion feature during the three and six month period ended December 31, 2013, was $116,708.
NOTE 6
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STOCKHOLDERS’ EQUITY (DEFICIT)
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The Company is authorized to issue 100,000,000 shares of no par value Common Stock. At December 31, 2013, 20,575,000 shares were issued and outstanding.
During December 2011, the Company issued to its founders 20,000,000 shares of common stock for cash at $0.0025 per share, for total proceeds of $50,000.
From March through June 2012, the Company issued 126,500 shares of common stock for cash at $1.00 per share, for aggregate proceeds of $126,500. The Company incurred $10,000 in costs associated with the private offering, which were been charged against the proceeds of the offering.
During the period ended December 31, 2013, the Company received cash proceeds of $422,135 for 568,550 shares of common stock. The Company issued 393,550 of these shares and 175,000 of these shares remain to be issued. In addition, 54,950 common shares were issued for services to be performed over a one year period, which were valued at their estimated fair value of $100,000 based on the trading price of the Company’s common shares. The value of these shares has been recorded as deferred compensation and is being amortized over the one year period during which the related services will be received. At December 31, 2013, $66,668 of deferred compensation remains to be amortized (see Note 7).
On July 31, 2013, the Company’s registration statement on Form S-1 became effective. The Company is offering for sale a maximum of 6,250,000 shares of its no par value common stock at a price of $1.60 per share. As of December 31, 2013, no shares had been sold pursuant to the offering.
NOTE 7
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COMMITMENTS AND CONCENTRATIONS
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During the period ended December 31, 2013, the Company madea sale toa single foreign customer for an aggregate of $300,000.
During the period ended December 31, 2013, the Company entered into a consulting agreement for a one year period. The Company advanced $103,000 in cash and issued 54,950 shares of common stock for these services, which shares were valued at their estimated fair value of $100,000. The total consideration paid of $203,000 is being amortized over the one year period of the agreement commencing in September 2013. The unamortized balance of $129,274 is included in prepaid expenses for the cash payment ($62,606) and deferred compensation for the share payment ($66,668).
During the period ended December 31, 2013, the Company entered into employment contracts with two employees, with no set duration, for aggregate compensation of $260,000 per year. The employees were granted an aggregate of 614,000 five year options which vested immediately as to 114,000 options and as to 125,000 options per year over the next 4 years. The options are exercisable at $2.50 per share for 114,000 options, $3.00 per share for 125,000 options, $3.50 per share for 125,000 options, $3.75 for 125,000 options and $4.00 for 125,000 options. The aggregate grant date fair value of the options was approximately $1,419,000, of which $339,372 has been charged to expense during the period ended December 31, 2013. The balance of the fair value of the options will be charged to operations over the vesting period. The options were valued using the Black-Scholes option pricing model with the following assumptions:
Volatility 154% - Dividend rate 0% - Interest rate 1.36-1.66% - Term 5 years
During February 2014 the holder of the $200,000 convertible note agreed to convert the note into 200,000 shares of the Company’s common stock. This note holder also agreed to purchase an additional 100,000 shares of the Company’s common stock for $100,000 in cash. These shares have not yet been purchased. In addition, the Company granted the note holder an option to purchase 200,000 common shares at $1.50 per share and 200,000 shares at $2.00 per share for a three year period.