YPPN YAPPN Corporation (CE)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to “we,” “Yappn,” “us,” and “our” are to Yappn Corp., unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited Interim Condensed consolidated financial statements and the accompanying related notes included in this quarterly report and our audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended May 31, 2016 filed with the Securities and Exchange Commission.

Forward Looking Statements

The discussion contained in this Quarterly Report on Form 10-Q (“Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases. We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Quarterly Report. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Quarterly Report describe factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in this Quarterly Report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available after the date of this Quarterly Report or the date of documents incorporated by reference herein that include forward-looking statements.

The discussion and analysis of the Company’s financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States (or “GAAP”). The preparation of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions. 

Management’s Discussion and Analysis of Results of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our financial statements included herein. Further, this quarterly report on Form 10-Q should be read in conjunction with our Financial Statements and Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended May 31, 2016, filed with the Securities and Exchange Commission on August 18, 2016. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K.

Business History

We were originally incorporated under the laws of the State of Delaware on November 3, 2010 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. IMI, as a result of this transaction had a controlling interest in our company. Included in the purchased assets is a services agreement (the “Services Agreement”) dated March 21, 2013 by and among IMI and its wholly owned subsidiaries Ortsbo, Inc., a corporation organized under the laws of Canada (“Ortsbo Canada”), and Ortsbo USA, Inc., a Delaware corporation (“Ortsbo USA” and, collectively with Ortsbo Canada, “Ortsbo”). 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, after the approval of the Board of Directors of each company, Intertainment Media and our company entered into a definitive agreement to acquire all of the intellectual property assets of Ortsbo.

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. The result is increased business and customer satisfaction.

Being able to conduct business in multiple languages is essential. As per Common Sense Advisory (a 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 simply not captured through generic machine translation methods.

Yappn provides far more than simple word-for-word translation. Yappn translates 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 translates 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 likely 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, 2016 regarding concerns about our ability to continue as a going concern. Footnote 2 to the Notes to this Form 10-Q 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 an entirely 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.

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

Customer Care : Real-time translation of chat-based customer care

Enhanced Messaging : Real-time translation support for messaging platforms

Marketing : Online marketing, engagement and socialization

Custom Translation Solutions : Solutions for unique translation requirements

eCommerce Platform Integration

Our technology is, we contend, 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. 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, while our clients can staff their customer care operations in their language of choice.

Chat is quickly becoming 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 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 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 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 automatically.

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. 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.

The Services Agreement

We acquired the rights to use the technology and management and development support services under the Services Agreement, dated March 21, 2013 and amended October 2013, between Intertainment Media, Inc. (“IMI”), and IMI’s wholly owned Ortsbo subsidiaries. Pursuant to the terms of the Services Agreement, Ortsbo made available to us its representational state transfer application programming interface (the “Ortsbo API”), which provides multi-language real-time translation as a cloud service. The Services Agreement also provides that Ortsbo makes its “Live and Global” product offering, which enables a cross language experience for a live, video streaming production, available to us as a service for marketing and promoting the Yappn product in the marketplace (the “Services”). The Services did not include the “chat” technology itself and we were solely responsible for creating, securing or otherwise building out our website and any mobile applications to include chat functionality, user forums, user feedback, and related functionality within which the Ortsbo API could be utilized to enable multi-language use. Under the initial agreement, no intellectual property owned by Ortsbo would be transferred to us except to the extent set forth in the Services Agreement as described in “Intellectual Property” set forth below.

In October 2013, we amended the Services Agreement. Under the terms of the amendment to the Services Agreement, we had the first right of refusal to purchase the Ortsbo platform and all its assets and operations for a period of two years; increasing the use of Ortsbo's technology for business to consumer social programs at a purchase price to be negotiated at the time we exercise our right. We had a right to purchase a copy of the source code only applicable to Yappn programs for $2,000,000 which may be paid in cash or restricted shares of our common stock at a per share price of $1.50 per share. As part of the agreement, we issued Ortsbo 166,667 shares of our restricted common stock. On April 28, 2014, we exercised our right to purchase a copy of the source code for the Ortsbo property in exchange for 1,333,333 shares of restricted common stock for a value of $2,000,000.

On July 6, 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 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 issuance of $16 Million worth of our restricted common shares (32 Million shares at $0.50 per share). Upon the completion of the transaction on September 15, 2015 the amended Services Agreement was terminated. 

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:

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 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.

RESULTS OF OPERATIONS

Three months ended February 28, 2017

Revenues

We are in the process of the commercialization of our various product offerings. We had revenues of $65,130 and $101,537 for the three months ended February 28, 2017 and February 29, 2016, respectively. The majority of the revenue earned in the three months ended February 28, 2017 is from two customers and accounts for 91% of the total revenue. No revenue earned for the three months ended February 28, 2017 related to professional services provided for Intelligent Content Enterprises Inc. (“ICE”). Comparative period revenues resulted from the professional services related to the Digital Widget Factory (Belize) (“DWF”) program. The DWF assets were acquired by ICE effective February 29, 2016 and thus no further billings were made to DWF since that date. Billings as part of professional and language services for the program subsequent to February 29, 2016 were through ICE and as expected were lower than the average billings to DWF. Our management has focused on developing relationships with large commercial partners and influencers, which has delayed revenue realization from prospective customers in recent quarters.

Cost of revenue

We incurred costs of revenues of $42,343 and $9,134, for the three months ended February 28, 2017 and February 29, 2016, respectively. These costs were directly attributable to the revenues generated in the applicable periods and vary due to different customer mix between the periods and resulted in a gross profit of $22,787 and $92,403, for the three months ended February 28, 2017 and February 29, 2016, respectively.

Total operating expenses

During the three months ended February 28, 2017 and February 29, 2016, total operating expenses were $1,268,376 and $1,295,610, respectively.

For the three months ended February 28, 2017, the operating expenses consisted of marketing expense of $3,251, research and development expenses of $183,396, general and administrative expenses of $357,671, professional fees of $46,724, consulting fees of $72,438, depreciation of $3,341, amortization of $265,880, and stock based compensation of $335,675. For the comparable three months ended February 29, 2016 the operating expenses consisted of marketing expenses of $26,152, research and development expenses of $109,203, general and administrative expenses of $497,826, professional fees of $241,025, consulting fees of $92,590, depreciation of $102, amortization of $263,940 and stock based compensation of $64,772.

Marketing Expenses

The reduction in marketing expenses of $22,901 or 88% is due mainly to a realignment of spending by the company. In the three months period ending February 29, 2016 we incurred higher costs as a result of promoting the Yappn brand through consultants and various promotional expenses. In three months ending February 28, 2017, we substantially reduced the spending on consultants engaged in marketing activities and focused our efforts on operationalizing the current products based on more direct sales channels.

Research and Development

Research and development expenses increased by $74,193 or 28% in the three months ended February 28, 2017 over the three months ended February 29, 2016. The increase in the current three month period is due to expansion of the internal development team while also keeping third party consultants engaged. There were no research and development costs from Intertainment Media and Ortsbo in fiscal 2017. There were significant costs incurred in development of the various technologies supporting the business towards the commencement of commercialization. There will continue to be maintenance and ongoing development customization to ensure our technology solutions meet required standards for our current and prospective customers.

General and administrative expenses

General and administrative expenses decreased by $140,155 or 68% in the three months ended February 28, 2017 over the three months ended February 29, 2016. These costs generally include executive and office salaries, as well as general office expenses or costs. Salary costs have remained relatively consistent due to a combination of factors. The overall headcount has decreased but employee costs are higher due to the addition of executives in late fiscal 2016. Certain other costs have been reduced or eliminated such as billings from Intertainment Media under the services agreement and employee headcount in the US office. Billings from Intertainment Media ceased due to the acquisition of the Intellectual Property and assets from Ortsbo on September 15, 2015 and the subsequent cancellation of the Services Agreement. We anticipate that costs in fiscal 2017 will be relatively consistent period over period as we continue to work to develop a customer base and meet the needs of investors to finance our operation. Upon further significant increases in revenue, management will continue to hire qualified personnel, but the growth of this cost, we believe, will be far less than the impact to Net Loss.

Professional fees

Professional fees decreased by $194,301 or 81% for the three months ended February 28, 2017 over the three months ended February 29, 2016 and includes audit and audit related services pertaining to the year-end audits, and legal fees related to both ongoing operational compliance for the business and for financing closings. Although audit related fees have generally stayed consistent, the comparative period had higher legal fees as a result of various financings that closed during fiscal 2016.

Consulting fees

Consulting fees decreased by $20,152 or 22% and are mainly due to a reduction in spending on consultants. In the comparative period, Company had five different consultants engaged whereas in the current three month period, Company has only three consultants engaged. This is expected to be consistent in the near term due to the Company’s overall realignment of spending.

Amortization of Intangible Assets

Amortization of $265,880 relates almost entirely to Technology and Intellectual Property purchased during fiscal 2016 which we are amortizing over 5 years on a straight-line basis as well as a patent that was granted in late fiscal 2016. The difference of $1,940 or 1% increase over the comparative period is nominal and due to amortization of a patent issued late fiscal 2016. On September 15, 2015, we finalized our purchase of Intellectual property assets of Ortsbo pursuant to an Asset Purchase Agreement executed and closed on July 15, 2015.

Stock based compensation

Stock based compensation increased by $270,903 or 418%. This increase is due mainly to issuance of options to management and the Board of Directors, and warrants to the new advisory board in late fiscal 2016. Additional warrants were also issued to the board of directors and a new advisory board member in early fiscal 2017. Overall values ascribed will be different for each period based on the underlying assumptions used at the time of each grant. The stock options expense is determined using the binomial tree valuation method, which is an acceptable method under US GAAP.

Total other income and expenses

Other (income)/expenses totaled $(729,361) and $576,376, for the three months ended February 28, 2017 and February 29, 2016, respectively. The change of $1,305,736 is due to interest expense, change in fair value of convertible debentures and notes, impairment of note receivable, gain on debt settlement, and miscellaneous (income)/expense. During the three months ended February 28, 2017, total other (income)/expense consisted of interest expense of $272,402, a loss resulting from the change in fair value of the convertible debentures and notes of $108,950, other miscellaneous expense of $8,376, and gain on debt settlement of $(1,119,089). During the three months ended February 29, 2016, total other (income)/expense consisted of interest expense of $268,222, a loss resulting from the change in the fair value of the convertible debentures and notes of $289,881, prepayment fees on variable notes of $29,350, and miscellaneous other income of $(11,077).

Interest Expense

Interest expense increased by $4,180 or 2% for the three months ended February 28, 2017 over the three months ended February 29, 2016. The slight increase is mainly due to an increase in interest expense due to additional financings closed in fiscal 2016 which were offset by lower interest expense on previous convertible debentures that converted late fiscal 2016 and early fiscal 2017. We closed multiple secured debenture financings in fiscal 2016 totaling approximately $6.7 million, most of which was new debt for us at the time. Additionally, we incurred a higher penalty interest on convertible debentures from fiscal 2014 that reached maturity in late fiscal 2016 and early fiscal 2017.

Change in fair value of convertible promissory notes and convertible secured debentures

Change in fair value of convertible debentures and notes expense was a loss resulting in decrease in the recognized loss by $180,931 in the three months ended February 28, 2017 over three months ended February 29, 2016 as the existing debt instruments continued to have fair value adjustments until they reached maturity in late fiscal 2016 and early fiscal 2017, in addition to the new secured debentures that were issued during the prior fiscal year 2016. The loss from fair value adjustment largely relates to accretion fair value changes on various convertible debentures and notes.

Payment fees on variable conversion priced notes

Payment fees on variable conversion priced promissory notes is significantly lower by $29,350 or 100% in three months ended February 28, 2017 over three months ended February 29, 2016, as we repaid the variable conversion priced notes in the prior fiscal year. As of February 28, 2017, we do not have any further variable conversion priced promissory notes.

Miscellaneous expense/(income)

Miscellaneous expense/(income) was an expense of $8,376 for the three months ended February 28, 2017, compared to a gain of $(11,077) for the three months ended February 29, 2016 resulting in incremental change in the recognized gain/loss by $19,453. The expense/(income) is largely a function of foreign exchange expense/(income) and write-off of payables that Company is no longer required to pay either due to a settlement or management has concluded the obligations are barred by the statute of limitations. A small portion of the foreign exchange is a cash expense in bank spread for currency variance conversion between the US dollar and the Canadian dollar. The remaining foreign exchange expense/ (income) was incurred on changes in the foreign exchange rate and the foreign denominated liabilities.

Gain on debt settlement

In the three month period ending February 28, 2017, the gain on debt settlement of $1,119,089 was related entirely to settlement of various debt obligations of our company in conjunction with a settlement arrangement with DWF. On February 28, 2017, management reached a go forward resolution with DWF stakeholders. We agreed to reduce our 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 our company. More specifically, we settled $305,000 of unsecured convertible debentures and accrued interest of $91,408 with Series A and B common stock purchase warrants repriced to $0.25 and an extension of one year to maturity of both warrants, $250,000 of unsecured convertible debentures and accrued interest of $43,613 with Series D warrants repriced to $0.25 and an extension of one year to maturity of the warrants, $65,228 of unsecured term loans and related interest of $16,512, and $200,000 of secured convertible debentures and accrued interest of $20,000 issued to a consultant.

Net loss and comprehensive loss

During the three months ended February 28, 2017 and February 29, 2016, we had net loss and comprehensive loss of $516,228 and $1,779,583 respectively.

Nine months ended February 28, 2017

Revenues

We are in the process of the commercialization of our various product offerings. We had revenues of $272,196 and $911,918 for the nine months ended February 28, 2017 and February 29, 2016, respectively. The majority of the revenue earned in the nine months ended February 28, 2017 is from three customers and accounts for 88% of the total revenue. $88,390 of revenue for the nine months ended February 28, 2017 related to professional services provided for Intelligent Content Enterprises Inc. (“ICE”). Comparative period revenues resulted from the professional services related to the Digital Widget Factory (Belize) (“DWF”) program. The DWF assets were acquired by ICE effective February 29, 2016 and thus no further billings were made to DWF since that date. Billings as part of professional and language services for the program subsequent to February 29, 2016 were through ICE, and were expected and have been lower than the average billings to DWF. Our management has focused on developing relationships with large commercial partners and influencers, which has delayed revenue realization from prospective customers in recent quarters.

Cost of revenue

We incurred costs of revenues of $93,760 and $146,068, for the nine months ended February 28, 2017 and February 29, 2016, respectively and vary due to different client mix between the periods. These costs were directly attributable to the revenues generated in the applicable periods and resulted in a gross profit of $178,436 and $765,850, for the nine months ended February 28, 2017 and February 29, 2016, respectively.

Total operating expenses

During the nine months ended February 28, 2017 and February 29, 2016, total operating expenses were $3,938,554 and $3,457,744, respectively.

For the nine months ended February 28, 2017, the operating expenses consisted of marketing expense of $20,596, research and development expenses of $469,967, general and administrative expenses of $1,159,021, professional fees of $155,482, consulting fees of $184,747, depreciation of $5,773, amortization of $797,630, and stock based compensation of $1,145,338. For the comparable nine months ended February 29, 2016 the operating expenses consisted of marketing expenses of $224,900, research and development expenses of $301,168, general and administrative expenses of $1,272,484, professional fees of $401,048, consulting fees of $295,665, depreciation of $300, amortization of $483,890 and stock based compensation of $478,289.

Marketing Expenses

The reduction in marketing expenses of $204,304 or 91% is due mainly to a realignment of spending by the company. In the nine months ending February 29, 2016 we incurred higher costs as a result of promoting the Yappn brand through consultants and various marketing and promotional initiatives. In the nine months ending February 28, 2017, we reduced the spending on consultants engaged in marketing activities and focused our efforts on operationalizing the current products based on more direct sales channels.

Research and Development

Research and development expenses increased by $168,799 or 56% in the nine months ended February 28, 2017 over the nine months ended February 29, 2016. Our research and development costs in the comparative period are partially for fees to technology consultants from Intertainment Media and Ortsbo, with a much higher weighting on our own employees and arm’s length third party consultants. There were no research and development costs from Intertainment Media and Ortsbo in fiscal 2017. There were significant costs incurred in development of the various technologies supporting the business towards the commencement of commercialization. These included expanding the internal development team while also keeping third party consultants engaged. There will continue to be maintenance and ongoing development customization to ensure our technology solutions meet required standards for our current and prospective customers.

General and administrative expenses

General and administrative expenses decreased by $113,463 or 9% in the nine months ended February 28, 2017 over the nine months ended February 29, 2016. These costs generally include executive and office salaries, as well as general office expenses or costs. Salary costs have relatively remained consistent due to a combination of factors. The overall headcount has decreased but employee costs are higher due to the addition of executives late in fiscal 2016. Certain other costs have been reduced or eliminated such as billings from Intertainment Media under the services agreement and employee headcount in the US office. Billings from Intertainment Media ceased due to the acquisition of the Intellectual Property and assets from Ortsbo on September 15, 2015 and the subsequent cancellation of the Services Agreement. We anticipate that costs in fiscal 2017 will be relatively consistent period over period as we continue to work to develop a customer base and meet the needs of investors to finance our operation. Upon further significant increases in revenue, management will continue to hire qualified personnel, but the growth of this cost, we believe, will be far less than the impact to Net Loss.

Professional fees

Professional fees decreased by $245,566 or 61% for the nine months ended February 28, 2017 over the nine months ended February 29, 2016 and includes audit and audit related services pertaining to the year-end audits, and legal fees related to both ongoing operational compliance for the business and for financing closings. Although audit related fees have generally stayed consistent, the comparative period had higher legal fees as a result of our various financings that closed during fiscal 2016.

Consulting fees

Consulting fees went down by $110,918 or 38% and are mainly due to a significant reduction in spending on consultants. In the comparative period, the Company had more consultants engaged at various times during the prior period whereas in the current nine month period, the Company has had very few consultants engaged. This is expected to be consistent in the near term due to the Company’s overall realignment of spending.

Amortization of Intangible Assets

Amortization of $797,630 relates entirely to Technology and Intellectual Property purchased during fiscal 2016 which we are amortizing over 5 years on a straight-line basis as well as a patent that was granted in late fiscal 2016. The difference of $313,740 or 65% increase over the comparative period is due to the purchase taking place beginning of the second quarter in the prior fiscal year. On September 15, 2015, we finalized our purchase of Intellectual property assets of Ortsbo pursuant to an Asset Purchase Agreement executed and closed on July 15, 2015.

Stock based compensation

Stock based compensation increased by $667,049 or 139%. This increase is due mainly to the issuance of options to management and the Board of Directors, and warrants to the new advisory board in late fiscal 2016. Additional warrants were also issued to the Board of Directors and a new advisory board member in early fiscal 2017. Overall values ascribed will be different for each period based on the underlying assumptions used at the time of each grant. The stock options expense is determined using the acceptable binomial tree valuation method, which is an acceptable method under US GAAP.

Total other income and expenses

Other expenses totaled $1,061,117 and $976,700, for the nine months ended February 28, 2017 and February 29, 2016, respectively. The change of $84,417 is due to interest expense, financing expense on issuance of convertible notes and common stock, change in fair value of convertible debentures and notes, prepayment fees on variable notes, miscellaneous (income)/expense, gain on debt settlement, and impairment of note receivable. During the nine months ended February 28, 2017, total other expense consisted of interest expense of $794,693, a loss resulting from the change in fair value of the convertible debentures and notes of $405,137, other miscellaneous expense of $12,087, gain on debt settlement of $(1,119,089), and impairment of note receivable of $968,289. During the nine months ended February 29, 2016, total other expense consisted of interest expense of $616,609, financing expenses on the issuance of convertible promissory notes and common stock totaling $632,250, a gain resulting from the change in the fair value of convertible debentures and notes of $(550,456), prepayment fees on variable notes of $306,140, and miscellaneous other income of $(27,843).

Interest Expense

Interest expense increased by $178,084 or 29% for the nine months ended February 28, 2017 over the nine months ended February 29, 2016. The significant increase is mainly a result of the additional financings closed in fiscal 2016 which were offset by lower interest expense on previous convertible debentures that converted late fiscal 2016 and early fiscal 2017. We closed multiple secured debenture financings in fiscal 2016 totaling approximately $6.7 million, most of which was new debt for us at the time. Additionally, we incurred a higher penalty interest on convertible debentures from fiscal 2014 that reached maturity in late fiscal 2016 and early fiscal 2017.

Financing expense on issuance of convertible promissory notes and common stock

Financing expense decreased by $632,250 or 100% as common stock purchase warrants issued in the comparative period accounted for most of the expense. In addition we did not fund our company through variable rate promissory notes in fiscal 2017 whereas there was still a minor financing completed on a variable rate convertible promissory note in the nine month period ended February 29, 2016. The expense is a function of the underlying assumptions at the time of the grant and is mainly driven by the strike price of the instrument and the stock price at the time of the grant. As this is a non-cash expense, based on financings and model outputs it is hard to estimate variability for this account.

During the nine months ended February 28, 2017, we raised $1,326,348 through private placement financing of common stock and warrants and other loans. During the nine months ended February 29, 2016, we raised $2,268,846, in net cash from short term notes payable, line of credit, convertible notes, secured notes, and debentures through normal channels.

Change in fair value of convertible promissory notes and convertible secured debentures

Change in fair value of convertible debentures and notes had an incremental change in the recognized gain/loss by $955,593 between the nine months ended February 28, 2017 and the nine months ended February 29, 2016. There was a $405,137 expense for the nine months ended February 28, 2017 since the existing unsecured debt instruments continued to have fair value adjustments until they reached maturity, in addition to the secured debentures that were issued during fiscal 2016. There was a $550,456 gain for the nine months ended February 29, 2016 due to the revaluations on the variable conversion priced notes and the underlying assumptions used to value them using the binomial tree valuation method which includes elapsed time, and market price fluctuations.

For the nine months ended February 28, 2017, the loss from fair value adjustment largely relates to accretion fair value changes on various convertible debentures and notes and repricing of various warrants. In the comparative period in 2016, there was a significant decline in the market price compared to those prices that were in effect at the time of the original issuance of these convertible instruments. The changes in market value of our common stock coupled with the other parameters used in the binomial lattice model for all instruments marked to market, resulted in an expense recorded for fair value changes to the market price of variable convertible notes.

Payment fees on variable conversion priced notes

Payment fees on variable conversion priced promissory notes is significantly lower by $306,140 or 100% in nine months ended February 28, 2017 over nine months ended February 29, 2016 as we repaid the variable conversion priced promissory notes in the prior fiscal year. We have not had any further variable conversion priced promissory notes outstanding during fiscal 2017.

Miscellaneous expense/(income)

Miscellaneous expense/(income) was an expense of $12,087 for the nine months ended February 28, 2017 compared to a gain of $(27,843) for the nine months ended February 29, 2016 resulting in incremental change in the recognized gain/loss by $39,930. The expense/(income) is largely a function of foreign exchange expense/(income) and write-off of payables that the Company is no longer required to pay either due to a settlement or management has concluded the obligations are barred by the statute of limitations. A small portion of the foreign exchange is a cash expense in bank spread for currency variance conversion between the US dollar and the Canadian dollar. The remaining foreign exchange expense/ (income) was incurred on changes in the foreign exchange rate and the foreign denominated liabilities. 

Gain on debt settlement

In the nine month period ending February 28, 2017, the gain on debt settlement of $1,119,089 was related entirely to settlement of various debt obligations of Yappn in conjunction with a settlement arrangement with DWF. On February 28, 2017, management reached a go forward 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 with Series A and B common stock warrants repriced to $0.25 and an extension of one year to maturity of both warrants, $250,000 of unsecured convertible debentures and accrued interest of $43,613 with Series D warrants repriced to $0.25 and an extension of one year to maturity of the warrants, $65,228 of unsecured term loans and related interest of $16,512, and $200,000 of secured convertible debentures and accrued interest of $20,000 issued to a consultant. In addition to the above, the Company has negotiated its release from various past consulting obligations.

Impairment of note receivable

We have not received any payments from DWF during the second quarter, and the secured note final payment date was contracted to be fully paid by November 30, 2016. While management continued to work with DWF on a resolution as at November 30, 2016, the current conditions resulted in a much greater uncertainty around collection of the note receivable as at November 30, 2016. Management recorded a full impairment of $968,289 which was the remaining recorded amount previously recorded in its financial statements. Impairment expense of $968,289 was recorded during the nine month period ended February 28, 2017, specifically on November 30, 2016.

Net loss and comprehensive loss

During the nine months ended February 28, 2017 and February 29, 2016, we had a net loss and comprehensive loss of $4,821,235 and $3,668,594 respectively.

Liquidity and Capital Resources

As of February 28, 2017, we had a cash balance of $138,951, which is a decrease of $309,624 from the ending cash balance of $448,575 as of May 31, 2016. We do not have sufficient funds to fund our operations over the next twelve months. There can be no assurance that additional capital will be available to us. Since we have no other financial arrangements currently in effect, our inability to raise funds for the above purposes will have a severe negative impact on our ability to remain a viable going concern.

To fund our operations, we raised $1,588,576 through private placement financing of common stock and common stock purchase warrants as well as proceeds from a long term loan expected to be subscribed to a convertible secured debenture in the nine months ended February 28, 2017. During the nine months ended February 29, 2016, we issued secured debentures, convertible debt instruments, and received short term loans for net cash receipts of $2,268,846. 

We have used this financing for funding operations and replacing short term high cost debt instruments with lower cost longer term financial instruments where the economics made sense.

We estimate we will need additional capital to cover our ongoing expenses and to successfully market our product offerings. This is only an estimate and may change as we receive feedback from customers and have a better understanding of the demand for our application and the ability to generate revenues from our new products. Both of these factors may change and we may not be able to raise the necessary capital and if we are able to, that it may not be at favorable rates.

On July 15, 2015, we completed a secured debt financing of $4.5 Million of 12% Secured Debentures. The Secured Debentures had an original maturity date of December 31, 2015. Subsequent to the end of the second 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, at any time after the earlier of (i) six (6) months from the date of first issuance of any subsequent Debentures; and (ii) June 30, 2016, to require us 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 the Secured Debentures consent to a put of their Secured Debentures to our company.

We received $2.5 million of this financing in the form of cash and cash commitments, including conversion of the short term loans obtained on May 11, 2015 and June 19, 2015. $2,000,000 of the $4.5 million financing is conversion of a portion of our existing debt that remained in the secured debenture. $925,000 was repaid out of the secured debenture, in the form of cash in the amount of $465,000 with the remainder in the form of the release of secured deposit that was applied against accounts receivable. On September 15, 2015, we closed the acquisition of intellectual property from Ortsbo and as part of this closing, assumed debt and non-controlling equity interests from Ortsbo in the amount of $975,388 that was immediately subscribed to a second tranche of secured debentures. The secured debentures balance as at February 28, 2017, was $4,550,388.

On December 30, 2015, we completed a secured debenture and common stock purchase warrant financing for $2,040,000 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 and (ii) ten (10) five year common share purchase warrants, vesting in 1/3 increments and having an exercise price of $0.01 per share. The units were sold at $1.00 per unit. This closing includes conversion of $1,201,000 in short term loans advanced during the quarter prior to the closing of this secured debenture. On May 1, 2015 we closed a final tranche of this financing for $370,468 which includes $170,468 in cash and $200,000 in settlement of a consultant obligation. The $200,000 debenture did not include the attached warrants as they were waived by the consultant.

During the nine months ended February 28, 2017, we raised $1,588,576 through various financial instruments, net of repayments. Subsequent to February 28, 2017, we raised $250,000 in cash proceeds. During the nine months ended February 29, 2016, we raised $90,750 via various convertible promissory notes and debentures, $2,096,653 from secured debentures, $2,040,000 from secured convertible debentures, and $168,823 from short term loans. We also repaid $883,564 of various convertible promissory notes and debentures, $1,092,025 of line of credit, and $151,791 of short term loans.

Going Concern Consideration

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. We experienced negative cash flows from operations since inception and have incurred a deficit of $26,485,660 through February 28, 2017.

As of February 28, 2017, we had a working capital deficit of $977,033. During the nine months ended February 28, 2017, net cash used in operating activities was $1,871,893. Management expects to have similar cash needs for the next twelve months. At the present time, we do not have sufficient funds to fund operations over the next twelve months.

Implementation of our business plan will require additional debt or equity financing and there can be no assurance that additional financing can be obtained on acceptable terms. We have realized limited revenues to cover our operating costs. As such, we have incurred an operating loss since inception. This and other factors raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent on our ability to meet our obligations, to obtain additional financing as may be required and ultimately to attain profitability. Our 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 us to continue as a going concern. Management continues to work on generating operating cash flows from the commercialization of its business. Until those cash flows are sufficient, we will pursue other financing when deemed necessary.

Management is pursuing a number of different financing opportunities in order to execute our business plan. These include, short term debt arrangements, convertible debt arrangements, common share equity financings, either through a private placement or through the public markets. During the nine months ended February 28, 2017, we raised $1,588,576 through various financial instruments, net of repayments. Subsequent to February 28, 2017, we raised $250,000 in cash proceeds.

There can be no assurance that the raising of future equity or debt will be successful or that our anticipated financing will be available in the future, at terms satisfactory to us. Failure to achieve the equity and financing at satisfactory terms and amounts could have a materially adverse effect on our ability to continue as a going concern. If we cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and we may have to cease operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies

None.