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EX-21 - YAPPN ACQUISITION SUB INC., A CORPORATION INCORPORATED UNDER THE LAWS OF DELAWARE; - YAPPN CORP.f10k2015ex21_yappncorp.htm
EX-31.1 - CERTIFICATION - YAPPN CORP.f10k2015ex31i_yappncorp.htm
EX-32.1 - CERTIFICATION - YAPPN CORP.f10k2015ex32i_yappncorp.htm
EX-31.2 - CERTIFICATION - YAPPN CORP.f10k2015ex31ii_yappncorp.htm
EX-32.2 - CERTIFICATION - YAPPN CORP.f10k2015ex32ii_yappncorp.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended May 31, 2015 

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________to __________

 

Commission file number: 000-55082 

 

YAPPN CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   27-3848069

State or other jurisdiction of
Incorporation or organization

 

(I.R.S. Employer
Identification No.)

 

1001 Avenue of the Americas, 11th Floor

New York, NY

  10018
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code:  888-859-4441

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.001 Par Value

  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes  ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes  ☒ No  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes   ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes   ☐  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer

Non-accelerated filer 

Smaller reporting company ☒ 
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes  ☒  No

  

As of November 30, 2014, 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, 2014, was approximately $1,780,126. 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 August 26, 2015, there were 134,228,139 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 

 
 

 

 YAPPN CORP.

INDEX TO ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended May 31, 2015

 

    Page
     
PART I
     
Item 1. Business. 4
     
Item 1A. Risk Factors. 10
     
Item 1B. Unresolved Staff Comments. 19
     
Item 2. Properties. 20
     
Item 3. Legal Proceedings. 20
     
Item 4. Mine Safety Disclosures. 20
     
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 21
     
Item 6. Selected Financial Data. 23
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 23
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 29
     
Item 8. Financial Statements and Supplementary Data. 29
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 29
     
Item 9A. Controls and Procedures. 29
     
Item 9B. Other Information. 31
     
PART III
     
Item 10. Directors, Executive Officers, and Corporate Governance. 32
     
Item 11. Executive Compensation. 37
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 39
     
Item 13. Certain Relationships and Related Transactions, and Director Independence. 41
     
Item 14. Principal Accountant Fees and Services. 42
     
Item 15. Exhibits, Consolidated Financial Statement Schedules. F-1
     
  Certification Pursuant To Section 302 (A) Of The Sarbanes-Oxley Act Of 2002  
     
  Certification Pursuant To 18 U.S.C. Section 1350 As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002  

 

2
 

  

Forward Looking Statements

 

The discussion contained in this Annual Report on Form 10-K (“Annual Report”) contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases. We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Annual Report. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. 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.

 

3
 

 

PART I

Item 1. BUSINESS

 

Business History

 

We were originally incorporated under the laws of the State of Delaware on November 3, 2010 under the name of “Plesk Corp.”  Our initial business plan was to import consumer electronics, home appliances and plastic house wares. In March 2013, we filed an amended and restated certificate of incorporation to change our name to “YAPPN Corp.” and increase our authorized capital stock to 200,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 shares of preferred stock, par value $0.0001 per share.  Further, in March 2013, our Board of Directors declared a stock dividend, whereby an additional 14 shares of our common stock was issued for each one share of common stock outstanding to each holder of record on March 25, 2013.  All per share information in this report reflect the effect of such stock dividend. On December 22, 2014, our shareholders approved the increase of authorized and issued shares of common stock to 400,000,000 shares of common stock. We filed an amendment with the State of Delaware to affect this change which was accepted effective December 31, 2014.

 

On March 28, 2013, we purchased a prospective social media platform and related group of assets known as Yappn (“Yappn”) from Intertainment Media, Inc. (“IMI”), a corporation organized under the laws of Canada, for 70,000,000 shares of our common stock, pursuant to an asset purchase agreement (the “Purchase Agreement” and the transaction, the “Asset Purchase”) by and among IMI, us, and our newly formed wholly owned subsidiary, Yappn Acquisition Sub., Inc., a Delaware corporation (“Yappn Sub”).  Mr. David Lucatch, our Chief Executive Officer and a director, is the Chief Executive Officer of IMI.  IMI, as a result of this transaction has a controlling interest in our company.  Included in the purchased assets is a services agreement (the “Services Agreement”) dated March 21, 2013 by and among IMI and its wholly owned subsidiaries Ortsbo, Inc., a corporation organized under the laws of Canada (“Ortsbo Canada”), and Ortsbo USA, Inc., a Delaware corporation (“Ortsbo USA” and, collectively with Ortsbo Canada, “Ortsbo”).  Ortsbo is the owner of certain multi-language real time translation intellectual property that we believe is a significant component of the Yappn business opportunity.

 

Immediately following the Asset Purchase, under the terms of an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations, we transferred all of our pre-Asset Purchase assets and liabilities (consisting of our former business of import consumer electronics, home appliances and plastic house wares ) to our wholly owned subsidiary, Plesk Holdings, Inc., a Delaware corporation. Thereafter, pursuant to a stock purchase agreement, we transferred all of the outstanding capital stock of Plesk Holdings, Inc. to certain of our former shareholders in exchange for cancellation of an aggregate of 112,500,000 shares of our common stock held by such persons.

 

Our principal executive offices are located at 1001 Avenue of the Americas, 11th Floor, New York, NY 10018 and our telephone number is (888) 859-4441. Our website is http://www. yappn.com (which website is expressly not incorporated into this filing).

 

4
 

 

Our Business

 

 Yappn Corp. is a real-time multilingual company that amplifies brand and social messaging, expands online commerce and provides customer support by globalizing these experiences with its proprietary technologies, solutions and linguistic computational approach to language service and engagement in a cost effective way. Through its real-time multilingual amplification platform, Yappn eliminates the language barrier, allowing the free flow of communications in 67 languages to support brand and individuals’ marketing objectives, commerce revenue goals and customer support objectives by making language universal for all fans and consumers.

 

Focused on delivering global reach and efficiencies without the primary need of human intervention, these services are increasingly becoming essential for companies to conduct business online, as English is no longer the language of the Internet. According to InternetWorldStats.com, as of December 2014, there were over 3 billion Internet users and over 73% engage online in a language other than English. The US Census released by the Center of Immigration Studies last October, 2014 cites that in 2013, a record 61.8 million U.S. residents spoke a language other than English at home, which means that approximately one in five U.S. residents speaks a language other than English, representing a 32% increase from 2010 and almost a 94% increase since 1990.

 

Yappn’s offerings engage through all phases of Ecommerce, online events, and content programming. Through its recently launched Windrose Global Ecommerce framework (“WGE”), Yappn provides an end-to-end multilingual Ecommerce solution for companies of all sizes. Covering everything from pre to post sale, WGE’s proprietary suite includes all the tools for multilingual marketing (advertising), shopping (store, catalog, shopping cart and check-out) and customer support.

Yappn’s cloud-based platform is built from the ground up upon Yappn’s first-in-class technology that automatically detects an online or mobile user’s language. WGE completes the process through advanced technology to understand the meaning and interpretation of a message to seamlessly return a translation that is reflective of the meaning and spirit of the message.

Yappn’s WGE technology is, in managements’ opinion, a game changing solution that can help a retailer revolutionize their business quickly and cost effectively. By interfacing with a retailer’s existing Ecommerce solution, Yappn can assist the E-tailer to greatly expand their global reach by presenting and promoting their store as well as supporting sales in multiple languages. An E-tailer no longer has to be constrained to whom they can sell to because of language.

 

Yappn derives revenue from a percentage of each sale and/or through professional services fees, when applicable, depending on the application and installation of its offerings. Yappn redefines global social marketing by providing a set of stand-alone commercial tools for brands to easily implement cost effective globalization solutions as they are complementary, not competitive, to today’s top social media networks such as Twitter, Facebook, Pinterest, Instagram, Flickr and YouTube, web, mobile, video players, blogs, online broadcasting, private networks, event virtualization and Ecommerce platforms.

Continued expansion of Yappn’s 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. Yappn is in the early stage of commercialization, and has insufficient revenues to cover its operating costs. As such, Yappn has incurred an operating loss since inception. This and other factors raise substantial doubt about our ability to continue as a going concern. Yappn’s 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. Yappn’s independent auditors have included an explanatory paragraph, in their audit report on our financial statements for the fiscal year ended May 31, 2015 regarding concerns about our ability to continue as a going concern. Footnote 2 to the Notes to this Annual Report also discusses concerns about our ability to continue as a going concern. Yappn’s financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Our Strategy

 

The Yappn Ecommerce business model includes a business plan that we believe allows companies to extend their reach online and become truly “international” by servicing customers in 67 languages. This advantage can improve their relationship with their consumers through the elimination of the language barrier and by offering the shopping cart and catalog in multiple languages.   Out of 3 billion Internet users, only 800.6 million engage online in English, according to Internet World Stats.com. Management believes that prime markets for Ecommerce growth are in China, Eastern Europe and Latin America.

 

The Yappn tool set is comprised of three segments: Online Marketing, Ecommerce Sales, and Customer Care, to provide brands with a series of technology add-ons to complement their current social media activities and allows them to reach a global audience by instantly providing key messaging in 67 languages.

 

Online Marketing: Advertisement, Social Wall and FotoYapp, Live and Global Events, Video Capturing 

 

Digital Advertisement will be presented in the viewer’s choice of language, regardless of their location. The WGE technology will automatically detect the language of the customers’ browser and present the ad in that language, inclusive of local promotions.

 

5
 

 

The Social Wall is an aggregation of major social media accounts for fans and consumers to interact with in 67 languages on up to 54 social media platforms.
   
FotoYapp is a mobile app that provides brands with the ability to share media content instantly across the global social sphere, engaging customers via pictures and short burst video, deploying coupons presented as images. Customers can also use FotoYapp to draw users into their Estore from their social network pages with a unique embeddable FotoWall that resides in their web-store, thereby dramatically increasing traffic to their store. FotoYapp can currently connect to 54 different networks.

 

                       A live Q&A is an interactive live stream with fans worldwide that allows them to participate and ask moderated questions in 67 languages.
     
                       Engagement events such as a custom branded Twitter Q&A session which allows for real-time multilingual events to activate on a global scale for brands and individuals.
     
         

Live video captioning is to broadcast a live event with real-time video closed captioning in 67 languages.

     
Post-production video provides closed captioning in 67 languages for archive videos and feature films.  

 

Ecommerce Sales: Store, Catalog, Shopping Cart & Check-Out

 

By interfacing with a retailer’s existing Ecommerce solution, the WGE technology helps a retailer greatly expand their global reach by presenting its store, catalog, shopping cart and check-out in up to 67 different languages instantaneously using enhanced machine-based translation.

  

Customer Care: Multilingual Chat

 

  Multilingual Chat provides companies, brands, organizations and consumers with the ability to have topical discussions in almost any language in real-time. Instant globalization allows a company to converse in a customer’s language of choice without incurring the heavy cost of a Customer Service Representative having fluency in every language that the business chooses to service in.

 

The tools are a "build once and deploy everywhere" arrangement allowing brands to embed key social media like Twitter, Facebook, YouTube, Instagram, Pinterest, Flickr and Tumblr and mobile into a total of 54 existing platforms. Yappn tools have been effectively tested and commercially deployed through a number of entertainment, sports and commercial brands and they are now available to agencies to enhance their client's domestic and global outreach plans. The programs are available on a servicing contractual basis and we have begun to receive commitments from various brands for the use of its tool sets.

 

According to eMarketer.com, China and USA are the world’s leading Ecommerce markets, combining for more than 55% of the world’s Internet retail in 2014. In 2015, worldwide web sales are expected to increase nearly 21% to $1.59 Trillion. With this view in mind, Yappn’s newly launched WGE platform is focused on the Ecommerce market to enable retailers to break the language barrier that prevents them from accessing global markets. Yappn has altered this paradigm with an API (application program interface) that renders any Ecommerce site into a global site in real-time and in up to 67 languages inclusive of the shopping cart checkout. With very high fidelity experience and without any human translation or intervention, the Software as a Service (SaaS) application is focused on three distinct sales models: Partner, Direct and Channel.

 

The Partner Model is a “One to Many” sales model based on the Yappn Sales Team building relationships directly with partners with the intent of establishing contacts into the partner’s own community in addition to working with the partner themselves. This includes agencies, developer networks and software partnership communities.

 

The Direct Sales model is a “One-to-One” Model based on the Yappn Sales Team directly selling to a particular customer. This model is generally reserved for strategic and high brand value sales opportunities.

 

The Channel Sales Model is “One-to-One-to-Many” sales model based on the Yappn Sales Team building relationships directly with software and platform developers, like Shopify and other Ecommerce systems.

 

6
 

 

Yappn will continue to develop additional revenue-centric features and tools and refine our current business plan. Each new feature set is built on a prime revenue driver for our business as it continues to work with clients and their agencies to develop new deployment tools and programs to reach an expanding global audience.

 

Digital Widget Factory

 

Yappn has executed a three-year Master Services Agreement (MSA) and Statement of Work (SOW) with Digital Widget Factory to develop and manage a minimum of 200 multilingual Ecommerce sites which will include multilingual online marketing through traditional online services and social engagement. Expected first year revenues for the program are estimated to be up to $3,000,000 (although no assurances can be provided that such amounts will be achieved or profitability realized) with rapid expansion of sites planned for 2016 and 2017. Contract terms allowed for pre-paid fees in association with the project of a minimum of $700,000 plus ongoing professional fees and 20% net profit on the program for the term duration.

 

The Global Content Market is an ever growing market, with Ipsos Market Research stating that 7 out of 10 online consumers in 24 countries indicate that in a month they share some type of content on social media sites, including pictures as well as articles and something recommended, such as a product, service, movie or book. Emarketer.com also points out that global ad spending will be nearly $600 billion worldwide in 2015 with the increase in digital and mobile platforms being the key growth in ad spending.

 

Yappn will provide multilingual online marketing through traditional online services and social engagement with its proprietary patented technology to DWF by scheduling and supporting DWF’s revenue programs related to direct and network online advertising, schedule and support DWF’s affiliate and Ecommerce partnerships and also support DWF users to customize their content experience, submit original content and provides tools to incent sharing of content and encourage users to build the membership base.

 

Revenues recognized to May 31, 2015 from this program totals $1,374,384, which are from ongoing development, programs. Future higher revenues are expected, but not guaranteed, based on an advertising model and an affiliate/membership model which has been effective after the fiscal year end. With over 73% of the Internet surfing languages other than English, this program is designed to capture the foreign advertising market for content that is dominated in English speaking ad partners.

 

The Services Agreement

 

We acquired the rights to use technology and management and development support services under the Services Agreement, dated March 21, 2013, between 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 do not include the “chat” technology itself and we shall be solely responsible for creating, securing or otherwise building out our website and any mobile applications to include chat functionality, user forums, user feedback, and related functionality within which the Ortsbo API can be utilized to enable multi-language use.  Under the initial agreement, no intellectual property owned by Ortsbo would be transferred to us except to the extent set forth in the Services Agreement as described in “Intellectual Property” set forth below.

  

For all ongoing services provided under the Services Agreement, we shall pay Ortsbo an amount equal to the actual cost incurred by Ortsbo in providing the Services, plus thirty percent (30%).  In addition, we shall pay to Ortsbo an ongoing revenue share which shall equal seven percent (7%) of the gross revenue generated by our activities utilizing the Services.  If we are earning revenue without the use of the Services because, for example, all communications are taking place in English, then no revenue share shall be owing to Ortsbo with respect thereto.  If there is a blend of multi-language and English-English communications, then the parties shall do their best to pro rate or apportion the revenues appropriately in order to compensate Ortsbo for the portion of our revenues enabled by use of the Services from Ortsbo.  The Services Agreement may be terminated by either party with 60 days written notice and both parties may not, for the term of the Agreement and a period of two years thereafter, (i) directly or indirectly assist any business that is competitive with the other party’s business, (ii) solicit any person to leave employment with the other and (iii) solicit or encourage any customer to terminate or otherwise modify adversely its business relationship with the other.

 

7
 

 

In October 2013, we amended the Services Agreement.  Under the terms of the amendment to the Services Agreement, we would have the first right of refusal to purchase the Ortsbo platform and all its assets and operations for a period of two years; increasing its use of Ortsbo's technology for business to consumer social programs at a purchase price to be negotiated at the time we exercise our right. We would also have a right to purchase a copy of the source code only applicable to Yappn programs for $2,000,000 which may be paid in cash or restricted shares of our common stock at a per share price of $.15 per share. As part of the enhancement agreement, we issued Ortsbo 1,666,667 shares of our restricted common stock. On April 28, 2014, we exercised our right to purchase a copy of the source code for the Ortsbo property in exchange for 13,333,333 shares of restricted common stock for a value of $2,000,000.

 

On July 6, 2015, Yappn 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 US $17 Million, which will be paid by the assumption of US $1 Million in debt and the issuance of US $16 Million worth of Yappn restricted common shares (320 Million shares at US $0.05 per share). The transaction is subject to closing conditions including each party obtaining all necessary approvals, including stock exchange approval and shareholder approval, if required. Upon the completion of the transaction the amended Services Agreement will be terminated.

 

Competition

 

Our business relating to and arising from the development of the Yappn assets is characterized by innovation, rapid change, patented, proprietary and disruptive technologies.  We may face significant competition, including from companies that provide translation, 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:

 

  Companies that offer full-featured products that provide a similar range of communications and related capabilities that we provide.  
     
  Companies that provide web- and mobile-based information and entertainment products and services that are designed to engage users.
     
  Companies that offer Ecommerce solutions with built in language support.
     
  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.

 

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.  Further, we believe that our focus on encouraging user engagement based on topics and interests, rather than on “friends” or connections, will differentiate us from much of the competition.

 

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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, Yappn 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, Yappn 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 (Proprietary lexicons and linguistic databases that integrate into Yappn’s language services platform).

 

Yappn continues to engage in activities to maintain and further build differentiated technologies that increase its 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.

 

Legal Proceedings

 

None.

 

Registration Statement

 

We filed a Registration Statement on Form S-1 (File No. 333-199569) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) on October 24, 2014 (amended November 7, 2014) for up to 75,926,665 shares of our $0.0001 par value per share common stock (the "Common Stock") issuable to certain selling stockholders upon conversion of promissory notes and/or warrants currently held by those selling stockholders, specifically (i) 18,440,000 shares of Common Stock issuable to them upon exercise of promissory notes and (ii) 45,880,000 shares of Common Stock issuable to them upon exercise of warrants. The warrants have an exercise prices varying from $0.10 to $0.22 per share (subject to adjustment). The Registration Statement covering the above noted securities was declared effective under the Securities Act of 1933 on November 17, 2014.

 

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Item 1A.     Risk Factors.

 

Investing in our common stock involves a high degree of risk. Before investing in our common stock you should carefully consider the following risks, together with the financial and other information contained in this report. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations could be adversely affected. In that case, the trading price of our common stock would likely decline and you may lose all or a part of your investment.

 

Risks Relating to Our Business

 

Our limited operating history makes it difficult to evaluate our current business and future prospects.

 

We are 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, developing methods for engaging users, and 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 user engagement and our business could be harmed.

 

Our competitors may develop products, features, or services that are similar to ours or that achieve greater acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Certain competitors, 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:

 

  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;
     
  the timing and market acceptance of products, including developments and enhancements to our or our competitors' products;
     
  our ability to monetize our products, including our ability to successfully monetize mobile usage;
     
  the frequency, size, and relative prominence of the ads displayed by us or our competitors;
     
  customer service and support efforts;
     
  marketing and selling efforts;
     
  changes mandated by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some of which may have a disproportionate effect on us;
     
  acquisitions or consolidation within our industry, which may result in more formidable competitors;
     
  our ability to attract, retain, and motivate talented employees, particularly software engineers;
     
  our ability to cost-effectively manage and grow our operations; and
     
  our reputation and brand strength relative to our competitors.

 

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 to operate.  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.

 

One customer accounts for a significant portion of our business.

 

We have derived, and over the near term we expect to continue to derive, a significant portion of our revenues from one customer. For example, this customer accounted for a total of 90% of our revenues for the year ended May 31, 2015. The loss of this customer or non-payment of outstanding amounts due to our company from this customer 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.

 

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Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our new business model.

 

We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including user privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation, securities law compliance, and online payment services. The introduction of new products may subject us to additional laws and regulations. In addition, foreign data protection, privacy, and other laws and regulations are often more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations, which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. For example, the interpretation of some laws and regulations that govern the use of names and likenesses in connection with advertising and marketing activities is unsettled and developments in this area could affect the manner in which we design our products, as well as our terms of use. A number of proposals are pending before federal, state, and foreign legislative and regulatory bodies that could significantly affect our business. For example, a revision to the 1995 European Union Data Protection Directive is currently being considered by European legislative bodies that may include more stringent operational requirements for data processors and significant penalties for non-compliance. Similarly, there have been a number of recent legislative proposals in the United States, at both the federal and state level, that would impose new obligations in areas such as privacy and liability for copyright infringement by third parties. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.

 

If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

 

We rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants, and third parties with whom we have relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, to protect our proprietary rights.  In the future we may acquire additional patents or patent portfolios, which could require significant cash expenditures. Third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business. In any or all of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we have taken measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to ours and compete with our business.

 

In addition, from time to time, we may contribute software source code under open source licenses and make other technology we develop available under other open licenses, and include open source software in our products. As a result of any open source contributions and the use of open source in our products, we may license or be required to license innovations that turn out to be material to our business and may also be exposed to increased litigation risk. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our service and methods of operations. Any of these events could have an adverse effect on our business and financial results.

 

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Our business will be dependent on our ability to maintain and scale our technical infrastructure, and any significant disruption in our service could damage our reputation, result in a potential loss of users and engagement, and adversely affect our financial results.

 

Our reputation and ability to attract, retain, and serve our users 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 is unavailable when users attempt to access it, or if it does not load as quickly as they expect, users may not return to our service in the future, or at all. 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 users. It is possible that we may fail to effectively scale and grow our technical infrastructure to accommodate these increased demands. In addition, our business is subject to interruptions, delays, or failures resulting from 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 material 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 our Company’s financial condition. The current global macroeconomic environment may affect our Company’s ability to access the capital markets 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 carry on our operations.

 

We could experience unforeseen difficulties in building and operating key portions of our technical infrastructure.

 

We intend to design and build software that will rely upon cloud computing infrastructure and we may also develop our own data centers and technical infrastructure through which we intend to service our products.  These undertakings are complex, and unanticipated delays in the completion of these projects or availability of components may lead to increased project costs, operational inefficiencies, or interruptions in the delivery or degradation of the quality of our products. In addition, there may be issues related to this infrastructure that are not identified during the testing phases of design and implementation, which may only become evident after we have started to fully utilize the underlying equipment, that could further degrade the user experience or increase our costs.

 

Our software is highly technical, and if it contains undetected errors, our business could be adversely affected.

 

Our products incorporate software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been released. Any errors, bugs, or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.

 

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The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.

 

We currently depend on the continued services and performance of David Lucatch, Craig McCannell, and David Bercovitch, our Chief Executive Officer and a director, Chief Financial Officer, and Chief Operating Officer, respectively. In June 2014, we entered into an employment agreement with Mr. Lucatch. Under the terms of this agreement, Mr. Lucatch will continue to serve as our Chief Executive Officer. Mr. Lucatch will receive a base salary of $190,000 per year in the first year of the agreement, subject to future increases in base salary as well as options that vest over time. Mr. Lucatch will be entitled to certain bonus payments based on the revenue of the Company and standard expense reimbursements and benefits.

 

On October 31, 2014, we entered into a consulting agreement with Maranden Holdings, Inc., an entity controlled by David Bercovitch, memorializing the agreement by which David Bercovitch would act as our Chief Operating Officer. Under the terms of this agreement, Mr. Bercovitch will continue to serve as our Chief Operating Officer. Maranden Holdings, Inc will received one million, five hundred thousand (1,500,000) common stock purchase warrants as compensation in lieu of cash salary, such common stock purchase warrants vesting over two years. Maranden Holdings, Inc., is entitled to certain bonus payments and payment of expenses.

 

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.

 

Aside from Mr. Lucatch and Mr. McCannell (and the consulting agreement with Maranden Holdings, Inc.), we have no employment agreements with any of our other directors as of the date of this Annual Report.

 

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 2016, 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:

 

  improve existing, and implement new, operational, financial and management controls, reporting systems and procedures;
     

 

install enhanced management information systems; and
     
  train, motivate and manage our employees.

 

We may not be able to install adequate management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage growth effectively, our business would be seriously harmed.

 

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results.

 

It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures.

 

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If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, we are required to prepare assessments regarding internal controls over financial reporting and, furnish a report by our management on our internal control over financial reporting. We have begun the process of documenting and testing our internal control procedures in order to satisfy these requirements, which is likely to result in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While our management is expending significant resources in an effort to complete this important project, there can be no assurance that we will be able to achieve our objective on a timely basis. Failure to achieve and maintain an effective internal control environment or complete our Section 404 certifications could have a material adverse effect on our stock price.

 

In addition, in connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.

 

In the event that a material weakness is identified, we will employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future.

 

Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

 

Our stock price may be volatile.

 

The stock market in general has experienced volatility that often has been unrelated to the operating performance of any specific public company.  The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

  changes in our industry;
     
  competitive pricing pressures;
     
  our ability to obtain working capital financing;
     
  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;
     
  sales of our common stock (particularly following effectiveness of any resale registration statements or expiration of lockup agreements);
     
  our ability to execute our business plan;
     
  operating results that fall below expectations;
     
  loss of any strategic relationship;
     
  regulatory developments;
     
  economic and other external factors;
     
  period-to-period fluctuations in our financial results; and
     
  inability to develop or acquire new or needed technology. 

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date, and uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

 

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.

 

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Volatility in our common share price may subject us to securities litigation, thereby diverting our resources that may have a material effect on our profitability and results of operations.

 

As discussed in the preceding risk factors, the market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

 

We have not paid dividends in the past and do not expect to pay dividends in the future.  Any return on investment may be limited to the value of our common stock.

 

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future.  The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant.  If we do not pay dividends, our common stock may be less valuable because a return on investment will only occur if our stock price appreciates.

  

Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.

 

Our common stock is considered to be a “penny stock.” It does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our common stock is a “penny stock” because it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange or (iii) it is not quoted on the NASDAQ Global Market, or has a price less than $5.00 per share. The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock are subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Securities Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor's account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

 

FINRA sales practice requirements may also limit a stockholder's ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (FINRA) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

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Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period, under Rule 144, expiration of any lock-up agreements, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall.  The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

Exercise of options, warrants, preferred stock and converting any debt may have a dilutive effect on our common stock.

 

If the price per share of our common stock at the time of exercise of any warrants, options or any other convertible securities is in excess of the various exercise or conversion prices of such convertible securities, exercise or conversion of such convertible securities would have a dilutive effect on our common stock.  We issued Series A Convertible Preferred shares, warrants and convertible notes, some of which had full ratchet anti-dilution protection to provide the holder with a potential increase in amount of common stock exchanged or a reduction in the exercise price of the instruments should we subsequently issue stock or securities convertible into common stock at a price lower than the stated exercise price.  Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and which result in additional dilution of the existing ownership interests of our common stockholders.

 

Investor relations activities, nominal “float” and supply and demand (limited supply) factors may affect the price of our common stock.

 

We expect to utilize various techniques such as non-deal road shows and investor relations campaigns in order to create investor awareness for our company. These campaigns may include personal, video and telephone conferences with investors and prospective investors in which our business model is described, as well as newsletters, emails, mailings and/or video or print distributions that describe our business model.  We may provide compensation to investor relations firms and pay for newsletters, websites, mailings and email campaigns that are produced by third-parties based upon publicly-available information concerning us.  We will not be responsible for the content of analyst reports and other writings and communications by investor relations firms not authored by us or from publicly available information.  We do not intend to review or approve the content of such analysts’ reports or other materials based upon analysts’ own research or methods.  Investor relations firms should generally disclose when they are compensated for their efforts, but whether such disclosure is made or complete is not under our control.  Our investors may be willing, from time to time, to encourage investor awareness through similar activities.  Investor awareness activities may also be suspended or discontinued which may impact the trading market of our common stock.

  

The SEC and FINRA enforce various statutes and regulations intended to prevent manipulative or deceptive devices in connection with the purchase or sale of any security and carefully scrutinize trading patterns and company news and other communications for false or misleading information, particularly in cases where the hallmarks of “pump and dump” activities may exist, such as rapid share price increases or decreases.  We and our shareholders may be subjected to enhanced regulatory scrutiny due to the small number of holders who initially will own the registered shares of our common stock publicly available for resale, and the limited trading markets in which such shares may be offered or sold which have often been associated with improper activities concerning penny-stocks, such as the OTC Bulletin Board or the OTCQB Marketplace (Pink OTC) or pink sheets.  Until such time as the restricted shares of the Company are registered or available for resale under Rule 144, there will continue to be a small percentage of shares held by a small number of investors, many of whom acquired such shares in privately negotiated purchase and sale transactions at prices that may be significantly lower than the current market price, that will constitute the entire available trading market.  The Supreme Court has stated that manipulative action is a term of art connoting intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.  Often times, manipulation is associated by regulators with forces that upset the supply and demand factors that would normally determine trading prices.  A small percentage of our outstanding common stock will initially be available for trading, held by a small number of individuals or entities.  Accordingly, the supply of common stock for sale will be extremely limited for an indeterminate amount of time, which could result in higher bids, asks or sales prices than would otherwise exist.  Securities regulators have often cited thinly-traded markets, small numbers of holders, and awareness campaigns as components of their claims of price manipulation and other violations of law when combined with manipulative trading, such as wash sales, matched orders or other manipulative trading timed to coincide with false or touting press releases.  There can be no assurance that our or third-parties’ activities, or the small number of potential sellers or small percentage of stock in the “float,” or determinations by purchasers or holders as to when or under what circumstances or at what prices they may be willing to buy or sell stock, will not artificially impact (or would be claimed by regulators to have affected) the normal supply and demand factors that determine the price of stock.  Our market price should not be relied upon as a valid indicator of our value until such time as a sustained and established market has been established for our common stock.

 

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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.

 

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Item 2.    Properties.

 

We do not own or any real property at this time. We presently utilize office space in New York, New York on a month to month basis and any fees are nominal. We have a Canadian office with a monthly lease which is absorbed by IMI and eligible for repayment in accordance with the services agreement.


Item 3.    Legal Proceedings.

 

We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. As of August 26, 2015, 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.

 

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PART II

 

 Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock commenced quotation on the OTC Bulletin Board (the “OTCBB”) under the trading symbol “PSKC” on October 1, 2012. Effective March 8, 2013, our common stock was quoted on the OTC Markets under the symbol “YPPN.QB”.

 

The following table sets forth for the periods indicated the range of high and low bid quotations per share as reported by the OTCQB. These quotations represent inter-dealer prices, without retail markups, markdowns or commissions and may not necessarily represent actual transactions.  All market prices reflect the effect of a stock dividend.

 

   High   Low 
Quarter Ended  ($)   ($) 
         
May 31, 2015  $0.06   $0.06 
February 28, 2015  $0.06   $0.05 
November 30, 2014  $0.04   $0.04 
August 31, 2014  $0.13   $0.11 
           
May 31, 2014  $0.25   $0.05 
February 28, 2014  $0.08   $0.04 
November 30, 2013  $0.12   $0.05 
August 31, 2013  $0.95   $0.10 

 

On August 25, 2015, the high and low prices of our common stock as reported on the OTCQB were $0.071 and $0.08, respectively.

 

Holders

 

On August 25, 2015, we had approximately 11 shareholders of record of our common stock, which does not include shareholders whose shares are held in street or nominee names.

 

Warrants

 

The following table is a summary of warrants outstanding as of May 31, 2015:

 

   Shares Issuable
Under
Warrants
   Exercise
Price
   Expiration
Outstanding as of May 31, 2012   -    -   -
Issued on March 28, 2013   4,010,000   $0.10   March 28, 2018
Issued on May 31, 2013   3,700,000   $0.054   May 31, 2018
Exercised and expired   -    -   -
Total – as of May 31, 2013   7,710,000    -   -
Issued on June 7, 2013   1,650,000   $0.054   June 7, 2018
Issued on November 15, 2013   120,000   $0.10   November 15, 2018
Issued Series A warrants on January 29, 2014   3,950,000   $0.10   January 29, 2019
Issued Series B warrants on January 29, 2014   3,950,000   $0.20   January 29, 2019
Issued Series A warrants on February 27, 2014   3,050,000   $0.10   February 27, 2019
Issued Series B warrants on February 27, 2014   3,050,000   $0.20   February 27, 2019
Issued Series A warrants on April 1, 2014   4,690,000   $0.10   April 1, 2019
Issued Series B warrants on April 1, 2014   4,690,000   $0.20   April 1, 2019
Issued to Lender – Line of Credit   8,000,000   $0.10   April 7, 2019
Issued Series C warrants on April 23, 2014   333,333   $0.22   April 23, 2019
Issued Series C warrants on May 30, 2014   6,666,667   $0.22   May 30, 2019
Exercised and expired   -         
Total – as of May 31, 2014   47,860,000         
Issued Series C warrants on June 27, 2014   1,666,667   $0.22   June 27, 2019
Issued Series C warrants on September 2, 2014   833,333   $0.22   September 2, 2019
Issued Series D warrants on October 6, 2014   333,333   $0.22   October 6, 2019
Issued Series D warrants on October 27, 2014   333,333   $0.22   October 27, 2019
Issued warrants – consultants   3,300,000   $0.15   May 30, 2019
Issued Warrants on February 4, 2015 Typenex Co-Investments, LLC   700,000   $0.10   February 04, 2020
Issued warrants – consultants   50,000   $0.10   May 31, 2017
Issued warrants – consultants   150,000   $0.15   May 31, 2017
Exercised and expired   -         
Total – as of May 31, 2015   55,226,666         

 

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Dividend Policy

 

We have not paid any dividends on our common stock since our inception and do not anticipate paying any dividends in the foreseeable future. We plan to retain our earnings, if any, to provide funds for the expansion of our business.

 

Recent Sales of Unregistered Securities

 

During the year covered by this annual report, we have issued unregistered securities to the persons as described below. None of these transactions involved any underwriters, underwriting discounts or commissions, except as specified below, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 3(a)(9) or Section 4(2) thereof and/or Regulation D promulgated thereunder. All recipients had adequate access to information about us. 

 

On September 3, 2014, and September 16, 2014, the Company issued 270,000 and 841,704 shares respectively, to JMJ Financial as a result of the settlement and conversion of the convertible note with a principal amount of $40,000 dated November 15, 2013

 

On October 23, 2014, November 5, 2014, and November 20, 2014, the Company issued 450,000, 700,000 and 810,641 shares respectively to JMJ Financial as a result of the settlement and conversion of the convertible note with a principal amount of $40,000 dated November 15, 2013.

 

 During the Company’s second quarter of Fiscal 2015, the Company issued 950,000 shares of common stock to consultants at a value of $95,000. During the Company’s third quarter of Fiscal 2015, the Company issued 800,000 shares of common stock to consultants at a value of $80,000. During the Company’s fourth quarter of Fiscal 2015, the Company issued 500,000 shares of common stock to consultants at a value of $50,000.

 

On May 25, 2015 the Company issued 1,000,000 shares of common stock in partial settlement of an amount owing to a vendor of the Company.

 

The issuance of such shares of our common stock was effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933, as mended (the “Securities Act”) and in Section 4(2) of the Securities Act, based on the following: the investors confirmed to us that they were “accredited investors,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and had such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities; (b) there was no public offering or general solicitation with respect to the offering; (c) the investors were provided with certain disclosure materials and all other information requested with respect to our company; (d) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act; and (e) a legend was placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequent registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

 

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Item 6.    Selected Financial Data.

 

None.

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following is management’s discussion and analysis (“MD&A”) of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying  financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with (i) audited consolidated financial statements for the fiscal years ended May 31, 2015 and 2014 and the notes thereto and (ii) the section entitled “Business”, included elsewhere in this report.

 

The Company's MD&A is comprised of significant accounting estimates made in the normal course of its operations, overview of the Company's business conditions, results of operations, liquidity and capital resources and contractual obligations. The Company did not have any off balance sheet arrangements as of May 31, 2015 or 2014.

 

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.

 

Overview

 

We were originally incorporated under the laws of the State of Delaware on November 3, 2010 under the name of “Plesk Corp.”  Our initial business plan was to import consumer electronics, home appliances and plastic house wares. In March 2013, we changed our name to YAPPN Corp. and entered into an asset purchase agreement to acquire a prospective social media platform. We operate a real-time multilingual company that amplifies brand and social messaging, expands online commerce and provides customer support by globalizing these experiences with its proprietary approach to language. Through its real-time multilingual amplification platform, we eliminate the language barrier, allowing the free flow of communications in 67 languages.

 

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For the years ended May 31, 2015 and 2014, we had revenues of $1,521,984 and $37,135, respectively.  The relatively low levels operating revenue together with the costs we incurred for development of our business and increases in headcount resulted in net losses and comprehensive losses of $4,624,744 and $2,641,473 for the years ended May 31, 2015 and 2014, respectively.  For the year ended May 31, 2015, we had assets totaling $1,470,823, liabilities totaling $8,114,106, and a stockholders’ deficit of $6,643,283. For the year ended May 31, 2014, we had assets totaling $992,002, liabilities totaling $7,046,301 and a stockholders’ deficit of $6,054,299.

 

Research and Development

 

We have incurred research and development expenses related to software development totaling $671,312 and $1,375,112 for the years ended May 31, 2015 and May 31, 2014, respectively.  The research and development costs consisted of developmental services provided by Intertainment Media Inc. and our own development team of $498,979 and external consultants’ fees of $172,333.

 

Critical Accounting Policies

 

General

 

The consolidated financial statements and notes included in our quarterly and annual financial statements contain information that is pertinent to this management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities, and affect the disclosure of any contingent assets and liabilities. We believe these accounting policies involve judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related asset and liability amounts. While our critical accounting policies are described in the notes to our financial statements appearing elsewhere in this report, we believe the following policies are important to understanding and evaluating our reported financial results:

 

Fair Value of Financial Instruments

 

The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange.

 

The Company follows FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. US GAAP establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy are described below:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities;

 

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

 

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The warrants and the convertible promissory notes and debentures are classified as Level 2 financial liabilities.

 

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Related Parties

 

For the purposes of these financial statements, parties are considered to be related if one party has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Company and the party are subject to common control or common significant influence. Related parties may be individuals or other entities.

 

Fair Value of Derivative Instruments

 

The Company has previously issued attached five year warrants as part of a 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 an equity instrument.

 

When applicable, the instruments are measured at fair value using a binomial lattice valuation methodology and are included in the consolidated balance sheets as derivative liabilities. Both unrealized and realized gains and losses related to the derivatives are recorded based on the changes in the fair values and are reflected as a financing expenses on the consolidated statements of operations and comprehensive income (loss).

 

Hybrid Financial Instruments

 

For certain hybrid financial instruments, the Company elected to apply the fair value option to account for these instruments. The Company made an irrevocable election to measure such hybrid financial instruments at fair value in their entirety, with changes in fair value recognized in earnings at each balance sheet date. The election may be made on an instrument by instrument basis.

 

Fair Value of Convertible Notes

 

The Company has issued convertible notes that are convertible into common stock, at the option of the holder, at conversion prices based on the trading price per share over a period of time. As a result of the variability in the amount of common stock to be issued, these instruments are reflected at fair value. These instruments are measured at the greater of the present value of the note discounted at market rates and the value using a binomial lattice valuation methodology and are included in the consolidated balance sheets under the caption “convertible promissory notes and debentures”. Any unrealized and realized gains and losses related to the convertible notes are recorded based on the changes in the fair values and are reflected as financing expenses on the consolidated statements of operations and comprehensive loss.

 

Estimates

 

The consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and revenues and expenses for the fiscal year ended May 31, 2015 and 2014.

 

The Company’s significant estimates include the fair value of financial instruments including the underlying assumptions to estimate the fair value of derivative financial instruments and convertible notes and the valuation allowance of deferred tax assets.

 

Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, if deemed appropriate, those estimates are adjusted accordingly.

 

These significant accounting estimates bear the risk of change due to the fact that there are uncertainties attached to those estimates and certain estimates are difficult to measure or value.

 

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RESULTS OF OPERATIONS

 

Year ended May 31, 2015 and May 31, 2014

 

Revenues

 

We are in the process of commercialization of our multi-language e-commerce and marketing businesses.  We had revenues of $1,521,984 and $37,135 for the year ended May 31, 2015 and May 31, 2014, respectively. Revenues for the current year relate predominately to professional services for Digital Widget Factory. Comparative period revenues resulted from services provided for a few limited customer events. Our management is focusing on developing and refining its technologies, and its relationships with commercial partners and influencers, which has delayed revenue realization in recent quarters related to e-commerce.

 

Cost of revenue

 

We incurred costs of revenues of $316,907 and $9,443, for the year ended May 31, 2015 and 2014, respectively. These costs were directly attributable to the revenues generated in the applicable periods and resulted in a gross profit of $1,205,077 and $27,692, for the year ended May 31, 2015 and 2014, respectively.

 

Total operating expenses

 

During the year ended May 31, 2015 and 2014, total operating expenses were $5,186,787 and $4,107,547, respectively.

 

For the year ended May 31, 2015, the operating expenses consisted of marketing expense of $1,099,054, research and development expenses of $671,312, general and administrative expenses of $1,394,474, professional fees of $293,373, consulting fees of $745,719, amortization of $231, and stock based compensation of $982,624. For the comparable year ended May 31, 2014 the operating expenses consisted of marketing expenses of $633,272, research and development expenses of $1,375,112, general and administrative expenses of $1,348,712, professional fees of $355,518 and consulting fees of $394,933.

 

All of our research and development costs have been incurred since the fourth quarter of the 2013 fiscal year. These research and development expenses are primarily for fees to technology consultants from Intertainment Media and Ortsbo, in the prior year, with higher weighting on Yappn’s own employees and third party consultants in the latter half of fiscal 2015. There were significant costs incurred in development of the various technologies supporting the business towards the commencement of commercialization. Many of these costs will not continue into the future, however there will continue to be maintenance and ongoing development customization to ensure our technology solutions meet required standards for our current and prospective customers.

 

Marketing expenses include costs incurred for public relations, and promotional events and related activities. In the current year, there was a significant launch event in regard to the Company’s FotoYapp application early in our second quarter. A similar event did not incur in the year ended May 31, 2014, which is the main reason for the increase in marketing expenses for the year ended May 31, 2015.

 

General and administrative expenses include executive and office salaries, administrative services for accounting and finance, and general office needs and averaged approximately $350,000 per quarter. These costs have remained relatively consistent year over year as we continue to work to develop a customer base and meet the needs of investors to finance our operation. Management has made some direct employee engagements over the comparative period, while certain other costs have been reduced. Upon further significant increases in revenue, the Company will continue to hire, but the growth of this cost will be far less than the impact to Net Income (Loss).

 

Professional fees were incurred primarily for use of legal counsel related to financing arrangements for convertible promissory notes and warrants and for accounting and auditing services. We expect our professional fees to vary from period to period based upon our corporate needs and were relatively consistent year over year.

 

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Consulting fees incurred primarily for consulting service costs for third party consultants. We have used a number of different outside firms to provide investor relations services, strategic position of our products, markets and customer introductions. Some of the fees of the firms providing these services were paid with shares of common stock. Consultants were used more extensively in the year ended May 31, 2015 than in the year ended May 31, 2014. Although consultants are more expensive on a per hour basis, the effort required for some consultants would not support a full time engagement, but overall more services for the Company were required.

 

Stock based compensation relates to our two grants of stock options during the year ended May 31, 2015. Stock based compensation is recorded using the binomial lattice model which provides a fair value based on assumptions determined to be appropriate by management. Stock based compensation is recorded over the vesting period using a graded vesting schedule. We did not have any grants of stock options for the year ended May 31, 2014, therefore there was no stock based compensation recorded for that year.

 

Total other income and expenses

 

Other (income) expenses totaled $643,034 and $(1,438,382), for the year ended May 31, 2015 and May 31, 2014, respectively. The change of $2,081,416 is primarily due to the change in the fair value of derivative financial instruments. Many of our financing instruments are either convertible into shares of our common stock or have provisions that provide an option to convert into shares of our common stock. For accounting purposes we are required to value such instruments at fair value which can fluctuate as the market price of shares of our common stock fluctuates.

 

During the year ended May 31, 2015, total other (income) consisted of interest expense of $367,895, financing expenses related to convertible debentures, and derivative liabilities totaling $1,128,257, a gain resulting from the change in fair value of the derivative liabilities and convertible notes of ($1,291,743) and other miscellaneous income of ($161,375).

 

During the year ended May 31, 2014, total other income and expenses resulted in income of $(1,438,382).  The other (income) consisted of interest expense of $110,611 and financing expenses on the issuance of derivative liabilities of $4,737,726. Other income consisted of the increase in the fair value of the derivative liabilities resulting in a gain of ($6,318,613) and miscellaneous other income of $31,894.

 

The financing expenses related to the issuance of derivative liabilities for the year ended May 31, 2015 related primarily to the raising of convertible notes with exercise prices tied to a discount to market rates. In the prior year, the financing expense related to issuances of preferred shares and convertible debentures that had anti-dilution ratchet provisions thus requiring fair value accounting. For accounting purposes, since certain financial instruments had convertible provisions and in some cases provisions that protect the holder by including full ratchet anti-dilution measures, they were treated as derivatives liabilities and are valued using a binomial lattice fair value model upon inception and adjusted accordingly to market at the close of the period.  Based on our stock price on the date of issuance, which is the date the fair value exercise was completed, the initial financing expense was significant for the year ended May 31, 2014. The financing expense associated with the capital raises and prior obligations were $1,128,257 and $4,737,726 for the year ended May 31, 2015 and May 31, 2014, respectively. There were fewer dilutive financings raised in the year ending May 31, 2015 from convertible notes and no financing from preferred share issuance than the comparative period as we primarily relied on bridge loans and the line of credit arrangement for financing during the year ended May 31, 2015.

 

As of May 31, 2014, we adjusted the fair value of the derivatives instruments related to the sale of preferred stock and warrants and debentures previously issued. This reduction was based on both a decline in our share price as the market price of the common shares declined from a May 31, 2013 share price of $0.55 to a May 31, 2014 share price of $0.16 as well as an element due to elapsed time. There was a further reduction in fair values for the year ended May 31, 2015 as the market price of the common shares declined from a May 31, 2014 share price of $0.16 to a May 31, 2015 share price of $0.06. The changes in market value of our common stock coupled with the other parameters used in the binomial lattice model for all instruments marked to market, resulted in a gain of $691,743 for the year ended May 31, 2015 in contrast to a larger gain of $6,318,613 for the year ended May 31, 2014, a change of $5,626,870.

 

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During the year ended May 31, 2015 and year ended May 31, 2014, we raised $2,742,263 and $3,860,092, respectively, in cash from short term notes payable, line of credit, convertible notes and debentures through normal channels and private placements.

 

Net loss and comprehensive loss

 

During the year ended May 31, 2015 and 2014, we had net loss and comprehensive loss of $4,624,744 and $2,641,473 respectively.

 

Liquidity and Capital Resources

 

As of May 31, 2015, we had a cash balance of $19,496, which is a decrease of $969,196 from the ending cash balance of $988,692 as of May 31, 2014. We do not have sufficient funds to fund our expenses over the next twelve months. There can be no assurance that additional capital will be available to us. Since we have no other financial arrangements or plans currently in effect, our inability to raise funds for the above purposes will have a severe negative impact on our ability to remain a viable going concern.

 

To fund our operations, we have issued convertible preferred stock, short term notes, convertible debt instruments, and warrants under various subscription private placements to accredited investors for gross cash receipts of $2,742,263 and $3,860,092 for the year ended May 31, 2015 and the year ended May 31, 2014, respectively.

 

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

 

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

 

On July 6, 2015, Yappn 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 US $17 Million, which will be paid by the assumption of US $1 Million in debt and the issuance of US $16 Million worth of Yappn restricted common shares (320 Million shares at US $0.05 per share). The transaction is subject to closing conditions including each party obtaining all necessary approvals, including stock exchange approval and shareholder approval, if required.

 

On July 7, 2015, the Board of Directors and the holders of a majority of the voting power approved a resolution to effectuate a 10:1 Reverse Stock Split (“Reverse Stock Split”).  Under this Reverse Stock Split each 10 shares of our Common Stock will be automatically converted into 1 share of Common Stock.  To avoid the issuance of fractional shares of Common Stock, the Company will issue an additional share to all holders of fractional shares.  The effective date of the Reverse Stock Split will be on or after the publication of this Annual Report.

 

On July 15, 2015, we completed a secured debt financing of US $4.5 Million of 12% Secured Debentures. The Secured Debentures have a maturity date of December 31, 2015 but may be accelerated under certain conditions. $2.0 million of the $4.5 Million secured debt financing is in the form of conversion of previously existing debt of the Company.

 

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Going Concern Consideration

 

We incurred net losses and comprehensive losses resulting in a deficit of $14,762,852 through May 31, 2015. At May 31, 2015, we had total assets of $1,470,823 and liabilities totaling $8,114,106 and a working capital deficit of $6,332,047. These factors raise substantial doubt as to our ability to continue as a going concern.

 

Implementation of our business plan will require additional debt or equity financing and there can be no assurance that additional financing can be obtained on acceptable terms.  We are in the development stage, and have limited revenues to cover our operating costs. As such, we have incurred an operating loss since inception. Our ability to continue as a going concern is dependent on its ability to raise adequate capital to fund operating losses until we are able to engage in profitable business operations. This and other factors raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent on our ability to meet our obligations, to obtain additional financing as may be required and ultimately to attain profitability. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting companies.

 

Item 8.    Financial Statements and Supplementary Data.

 

Our Financial Statements begin on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.

 

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports it files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Because of inherent limitations, disclosure controls and procedures, as well as internal control over financial reporting, may not prevent or detect all inaccurate statements or omissions.

 

Our management, with the supervision and participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of May 31, 2015 were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

29
 

 

Inherent Limitations Over Internal Controls

 

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). Our internal control over financial reporting includes those policies and procedures that:

 

(i)     pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

(ii)    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of the our management and directors; and

 

(iii)   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on the Company’s assessment, management has concluded that its internal control over financial reporting was effective as of May 31, 2015 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.

 

Management assessed the effectiveness of our internal control over financial reporting as of May 31, 2015 and determined that our controls and procedures were effective at the reasonable assurance level. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permits us to provide only management's report in this annual report.

 

We have assessed the effectiveness of our internal control over financial reporting as of May 31, 2015, the period covered by this Annual Report on Form 10-K, as discussed above. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on these criteria and our assessment, we have determined that, as of May 31, 2015, our internal control over financial reporting was effective.

 

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(b) Changes In Internal Control Over Financial Reporting

 

During the year ended May 31, 2015, there were no changes in our internal controls over financial reporting that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

Where You Can Find More Information

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “Commission”). Our Commission filings are available to the public over the Internet at the Commission’s website at http://www.sec.gov. The public may also read and copy any document we file with the Commission at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. We maintain a website at http://www. yappn.com (which website is expressly not incorporated by reference into this filing). Information contained on our website is not part of this report on Form 10-K.

 

31
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

All of our directors hold office until the next annual meeting of stockholders and until their successors have been elected and qualified or until their earlier resignation or removal unless his or her office is earlier vacated in accordance with our bylaws or he or she becomes disqualified to act as a director. Our officers shall hold office until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor has been elected and qualified or until his earlier resignation or removal.  The Board of Directors may remove any officer for cause or without cause.

 

Our executive officers and directors and their respective ages as of the date of this Annual Report are as follows:

 

Name   Age   Position Held
         
David Lucatch   53   Chief Executive Officer and Director
         
Craig McCannell   38   Chief Financial Officer
         
David Bercovitch   47   Chief Operating Officer
         
Marc Saltzman   44   Director
         
Neil Stiles   57   Director
         
Herb Willer   61   Chairman of the Board and Director
         
Steven Wayne Parsons   53   Director

 

The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he or she was employed, and including other directorships held in reporting companies.

 

David Lucatch, Chief Executive Officer and Director.  Mr. Lucatch, 53, has served as the Chief Executive Officer and director of Intertainment Media, Inc., a company listed on the TSX Venture Exchange, on the OTCQX and in Frankfurt, since 2006 and as its President from 2006 through 2011.  He has served as a director of Ortsbo, Inc., a wholly owned subsidiary of Intertainment Media, Inc., since 2010, as its President from 2010 through 2011 and as its Chief Executive Officer from 2010 through 2012.  He has served as a director of Ortsbo USA, Inc., a wholly owned subsidiary of Ortsbo Inc., since 2011.  Mr. Lucatch also currently serves as an officer and/or director of several other subsidiaries of Intertainment Media, Inc., as the President and a director of Alimor Ventures Inc. since 2000, as the President and a director of Alimor Consulting, Inc. since 2000, as the President and a director of Savers Plus Canada, Inc. since 2003, as a director of Poynt Corporation from 2011 to June 2012 and as a director of Silverbirch, Inc. from 2007 through 2008.  Mr. Lucatch was selected to serve on the board of directors due to his extensive experience with social media, his perspective as the creator of the Yappn concept and his perspective as the Chief Executive Officer and a director of our largest controlling stockholder.  Throughout his business career Mr. Lucatch has been an active supporter of a number of not for profit organizations and has been recognized internationally for his service and support.  Mr. Lucatch graduated in 1985 from the University of Toronto.  Mr. Lucatch continues to mentor at the University of Toronto and the Management Economics Student Association programs and various leadership programs.  In 2010 Mr. Lucatch was a recipient of an Arbour Award from the University of Toronto, recognizing his continued activities and contributions to the University of Toronto.  Mr. Lucatch is a member of the College of Electors of the University of Toronto and of the Ontario Securities Commission SME Committee.

 

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Craig McCannell, Chief Financial Officer. Mr. McCannell, 38, has been the Chief Financial Officer of Intertainment Media, Inc. since July 3, 2013 and the Director of Finance of Intertainment Media, Inc. from January 2012 to July 2013.  Mr. McCannell served as an account executive for Robert Half Management Resources from April 2011 to September 2011 and the Senior Manager of Assurance for Ernst & Young LLP from September 1999 to August 2010. 

 

David Bercovitch, Chief Operating Officer. Mr. Bercovitch, 47, was appointed as Chief Operating Officer of Yappn on February 18, 2014. From May, 2012 to May, 2013, Mr. David Bercovitch was Vice President and co-General Manager Canadian Operations of EPAM Systems. From September 1997 to May 2012, he was the Co-CEO and CFO of Thoughtcorp, a successful Computer Consulting business. Thoughtcorp, prior to its acquisition, was a highly profitable enterprise achieving an average annual growth rate of approximately 15% with over 120 staff members and annual sales of approximately $17M and offered a range of professional services, including custom application development, business intelligence, data warehousing, and Agile consulting. Prior to his positions at Thoughtcorp, Mr. Bercovitch had sales and management positions at Cognos, the Business Intelligence company acquired by IBM in 2008 and ACNielsen, spending 5 years selling and servicing, custom built data analytics tools to the Consumer Packaged Goods industry. Mr. Bercovitch holds a Bachelor of Commerce degree from McGill University where he graduated with distinction, and a Master of Business Administration from York University where he graduated with honors.

 

Marc Saltzman, Director.  Mr. Saltzman, 44, has reported on the technology industry since 1996 as a freelance journalist, author, lecturer, consultant, and radio and TV personality.  Along with his weekly syndicated columns with Gannett, the United States’ largest newspaper group, Mr. Saltzman currently contributes to USA Today, USA Today.com, Yahoo! (U.S. and Canada), CNN.com, MSN and AARP – The Magazine.  Mr. Saltzman writes and hosts “Gear Guide,” a technology-focused video that runs nationally across Canada at movie theaters before the film trailers start.  Mr. Saltzman was selected to serve on the board of directors due to his extensive knowledge of the technology industry, interactive entertainment and online/social media trends.

 

Neil Stiles, Director. Mr. Stiles, 57, served as the President and publisher of Variety, Inc. from 2008 through 2012. In these positions, Mr. Stiles was responsible for the global business operations of the Variety franchise including Variety, Daily Variety, Daily Variety Gotham and Variety.com.  Additionally, he oversaw the publications Video Business, Tradeshow Week and 411 Publishing, and played a leading role in the management of MarketCast, a leading provider of marketing research for the film and television industries.  In late 2012 he executed the sale of the Variety Group.  Mr. Stiles has also served on the boards of directors of Randian LLC since 2011 and 2020 Capital LLC since 2011. Mr. Stiles has more than 30 years of experience in the magazine industry, beginning as a music industry journalist in the mid-1970s and moving into sales management positions throughout the 1980s.  Before joining the Variety team in 2008, Mr. Stiles played a large role in the management of sister company Reed Business Information-UK (“RBI”) as its board director.  As a director of RBI he oversaw a number of online initiatives including the acquisition of eMedia. Following the acquisition, Mr. Stiles served as the Chief Executive Officer of eMedia.   Mr. Stiles has served on the board of directors of LA’s BEST, one of the United States’ largest after school programs, and on the boards of BritWeek and BAFTA LA, and has served as the Chairman of BAFTA LA since 2011.  Mr. Stiles was selected to serve on the board of directors due to his extensive business experience and knowledge of the entertainment industry.

 

Herb Willer, Chairman. Mr. Willer, 61, has served as the Chairman of Intertainment Media, Inc. since 2012 and as a Director and Committee Chair since 2006.  He has served on the board of directors of Mill Street Brewery since 2003, Pitchpoint Solutions Inc. since 2007, and Healthcare 365 Inc. since 2010. Mr. Willer has served on the advisory board for the TSX Venture Exchange since 2012, as Chairman of the pension committee of the Princess Margaret Hospital in Toronto since 2008 and as a member of the investment committee of the University Health Network of Toronto.  Mr. Willer is a Canadian Chartered Accountant and is the President and founder of HMW Capital Inc., a Canadian Limited Market Dealer primarily focused on private equity investments. He has served as the President of HMW Capital Inc. since 2005. From 2003 to 2006, Mr. Willer was a partner of Kingsdale Capital, a brokerage firm, and prior to 2002 Mr. Willer was a global partner with Arthur Andersen and headed its entrepreneurial practice group in Ontario. Mr. Willer was selected to serve on the board of directors due to his extensive experience with emerging and growth companies and his perspective as the Chairman of our largest controlling stockholder.

 

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Steven Wayne Parsons, Director. Mr. Parsons, 53, has 24 years of experience in the investment business and founded Parsons Financial Consulting, a consulting company focused on the technology and mining sectors, in 2010 and has served as its president since its inception.  Mr. Parsons served as President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer of the Company from March 19, 2013 to March 28, 2013. Mr. Parsons has served on the board of directors of American Paramount Gold Corp., a company listed on the OTC Pink, since 2010 and also served as its President, Chief Executive Officer, Chief Financial Officer, Treasurer and Secretary in 2010.  Prior to joining American Paramount Gold Corp., Mr. Parsons was a senior investment manager at National Bank Financial from 2003 through 2009.  Mr. Parsons was selected as our director because of his experience in the financial and technology industries.

 

Family Relationships

 

There are currently no family relationships between any of the members of our board of directors or our executive officers.

 

Conflicts of Interest

 

Members of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. Although the officers and directors are engaged in other business activities, we anticipate they will devote an important amount of time to our affairs.

 

We acquired the certain rights under a Services Agreement dated March 21, 2013 between Intertainment Media, Inc. (“IMI”), its subsidiaries, and the Company upon the closing of an asset purchase agreement among the parties. Mr. Lucatch, our Chief Executive Officer and a director, and Mr. Willer, our Chairman, are board members and the Chief Executive Officer and Chairman, respectively, of IMI, Ortsbo's controlling stockholder, which may cause a conflict of interest.  Furthermore, Mr. McCannell, who became our Chief Financial Officer on July 22, 2013, is the Chief Financial Officer of IMI.

 

Our officers and directors are now and may in the future become shareholders, officers or directors of other companies, which may be formed for the purpose of engaging in business activities similar to ours. Accordingly, additional direct conflicts of interest may arise in the future with respect to such individuals acting on behalf of us or other entities. Moreover, additional conflicts of interest may arise with respect to opportunities which come to the attention of such individuals in the performance of their duties or otherwise. Currently, we do not have a right of first refusal pertaining to opportunities that come to their attention and may relate to our business operations.

 

Our officers and directors are, so long as they are our officers or directors, subject to the restriction that all opportunities contemplated by our plan of operation which come to their attention, either in the performance of their duties or in any other manner, will be considered opportunities of, and be made available to us and the companies that they are affiliated with on an equal basis. A breach of this requirement will be a breach of the fiduciary duties of the officer or director. If we or the companies with which the officers and directors are affiliated both desire to take advantage of an opportunity, then said officers and directors would abstain from negotiating and voting upon the opportunity. However, all directors may still individually take advantage of opportunities if we should decline to do so. Except as set forth above, we have not adopted any other conflict of interest policy with respect to such transactions.

 

Involvement in Certain Legal Proceedings

 

None of the following events have occurred during the past ten years and are material to an evaluation of the ability or integrity of any director or officer of the Company:

 

  1. A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

 

34
 

 

  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.

 

35
 

 

Meetings and Committees of the Board of Directors

 

Our Board of Directors held 3 formal meetings during the year ended May 31, 2015.

 

The Board of Directors has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of our Audit Committee are Steven Wayne Parsons, who serves as Chairperson of the Audit Committee, Herb Willer and Neil Stiles. Our Board of Directors has determined that Mr. Willer qualifies as a “financial expert” as that term is defined in the rules of the SEC implementing requirements of the SARBANES-OXLEY Act of 2002. The Audit Committee meets four (4) times per year. 

 

The Board of Directors has a separately designated Compensation Committee.

 

The members of our Compensation Committee are Steven Wayne Parsons, who serves as Chairperson of the Compensation Committee, Neil Stiles and Marc Saltzman.

 

The Board of Directors is responsible for all other committee activity, outside the Audit Committee and Compensation Committee.

 

We believe that the Board of Directors through its meetings can perform all of the duties and responsibilities which might be contemplated by additional committees.  As our business expands we anticipate forming other committees.

 

Board Leadership Structure and Role in Risk Oversight

  

Our Board of Directors is primarily responsible for overseeing our risk management processes.  The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our company are consistent with the Board’s appetite for risk. While the Board oversees our company, our company’s management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.

 

Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors

 

Except as may be provided in our bylaws, we do not have in place any procedures by which security holders may recommend nominees to the Board of Directors.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors, executive officers, and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership of our common stock with the SEC.  Based on the information available to us during the year ended May 31, 2015, 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.

 

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Item 11. Executive Compensation.

 

Summary Compensation

 

Since our incorporation on November 3, 2010 until May 31, 2014, we did not paid any compensation to our executive officers in consideration for their services rendered to us in their capacity as such.

 

 

Summary Compensation Table

 

The following table sets forth certain compensation information for: (i) the person who served as the Chief Executive Officer of Yappn Corp during the year ended May 31, 2015, regardless of the compensation level, and (ii) each of our other executive officers, serving as an executive officer at any time during 2015. The foregoing persons are collectively referred to in this prospectus as the “Named Executive Officers.” Compensation information is shown for the year ended May 31, 2015:

 

Name and Principal
Position
  Year   Salary
($)
  Bonus
($)
  Stock
Awards
($)
  Option
Awards
($)
  Non-
Equity
Incentive
Plan
Comp
($)
  Non-
Qualified
Deferred
Comp
Earnings
($)
  All
Other
Comp
($)
  Totals
($)
David Lucatch,     2015       190,000       0       0       247,569       0     0     12,000     449,569
CEO     2014       0       0       0       0       0     0     0     0
                                                                 
Craig McCannell,     2015       120,000       0       0       66,518       0     0     9,000     195,518
CFO     2014       0       0       0       0       0     0     0     0
                                                                 
David Bercovitch,     2015       0       0       0       115,283       0     0     0     115,283
COO     2014       0       0       0       0       0     0     0     0

 

Employment Agreements

 

On June 1, 2014, we entered into an employment agreement with David Lucatch, our CEO, which has an indefinite term. Under the terms of this agreement, Mr. Lucatch will continue to serve as our Chief Executive Officer. Mr. Lucatch will receive a base salary of $190,000 per year in the first year of the agreement, subject to future increases in base salary as well as options that vest over time. Mr. Lucatch will be entitled to certain bonus payments based on the revenue of the Company and standard expense reimbursements and benefits.

 

On October 31, 2014, we entered into a consulting agreement with Maranden Holdings, Inc., an entity controlled by David Bercovtich, memorializing the agreement by which David Bercovtich would act as our Chief Operating Officer. Under the terms of this agreement, Mr. Bercovtich will continue to serve as our Chief Operating Officer. Maranden Holdings, Inc received one million, five hundred thousand (1,500,000) common stock purchase warrants as compensation in lieu of cash salary, such common stock purchase warrants vesting over two years. Maranden Holdings, Inc, is entitled to certain bonus payments and payment of expenses.

 

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.

 

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Outstanding Equity Awards as of May 31, 2015

Outstanding stock options granted to Named Executive Officers (“NEO’s”) and Directors as at May 31, 2015 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
David Lucatch   1,000,000    2,000,000   $0.10   August 14,2019
David Lucatch   500,000    1,000,000   $0.10   March 2, 2020
David Bercovitch   500,000    1,000,000   $0.10   August 14, 2019
David Bercovitch   133,333    266,667   $0.10   March 2, 2020
Craig McCannell   200,000    400,000   $0.10   August 14, 2019
Craig McCannell   333,333    666,667   $0.10   March 2, 2020
Herb Willer   500,000    0   $0.10   August 14, 2019
Herb Willer   500,000    0   $0.10   March 2, 2020
Marc Saltzman   500,000    0   $0.10   August 14, 2019
Marc Saltzman   250,000    0   $0.10   March 2, 2020
Neil Stiles   500,000    0   $0.10   August 14, 2019
Neil Stiles   250,000    0   $0.10   March 2, 2020
Wayne Parsons   500,000    0   $0.10   August 14, 2019
Wayne Parsons   250,000    0   $0.10   March 2, 2020

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, 2015.

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
Comp-ensation
($)
  

Total (1)

($)

 
Herb Willer   0    0    72,150    0    0    0    72,150 
Marc Saltzman   0    0    58,900    0    0    0    58,900 
Neil Stiles   0    0    58,900    0    0    0    58,900 
Wayne Parsons   0    0    58,900    0    0    0    58,900 

 

(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.

38
 

 

Directors are permitted to receive fixed fees and other compensation for their services as Directors. The Board of Directors has the authority to fix the compensation of Directors. No amounts have been paid to, or accrued to, Directors in such capacity.

 

Since our incorporation on November 3, 2010 until May 31, 2015, 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 as 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 August 26, 2015 regarding the beneficial ownership of our common stock, based on 134,228,139 shares of common stock issued and outstanding by (i) each executive officer and director; (ii) all of our executive officers and directors as a group; and (iii) each person or entity who, to our knowledge, owns more than 5% of our common stock.

 

Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days. Except as otherwise indicated, all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.

 

Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o Yappn Corp., 1001 Avenue of the Americas, 11th Floor, New York, NY 10018.

 

 

Name of Beneficial Owner

  Number of Shares Beneficially Owned
(1)
   Percentage
Beneficially Owned
(1)
 
5% Owners        
Intertainment Media, Inc. (2)(3)   70,000,000    52.15%
Ortsbo (2)   15,000,000    11.18%
           
Officers and Directors          
David Lucatch (2)(3)   190,000    0.14%
Craig McCannell (3)   0    0 
David Bercovitch (3)   185,000    0.14%
Steven Wayne Parsons (3)   0    0 
Marc Saltzman (3)   0    0 
Neil Stiles (3)   0    0 
Herb Willer (3)   0    0 
All executive officers and directors as a group (seven persons)(2)(3)   85,375,000    63.60%

 

(1) Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assumes the exercise of all options, warrants and other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of August 26, 2015.  In computing the number of shares beneficially owned and the percentage ownership, shares of common stock that may be acquired within 60 days of August 26, 2015 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.

 

39
 

  

(2) David Lucatch is the Chief Executive Officer of Intertainment Media, Inc., and, as such, has sole voting and investment power over the 70,000,000 shares of common stock held by Intertainment Media, Inc.  Mr. Lucatch is also a Director of Ortsbo, Inc.  Mr. Lucatch disclaims beneficial ownership and voting control over such 15,000,000 shares of our common stock held by Ortsbo, Inc.
   
(3) c/o Yappn Corp. 1001 Avenue of the Americas, 11th Floor, New York, NY 10018.

 

Description of Securities

 

In March 2013, we filed an amended and restated certificate of incorporation to increase our authorized capital stock to 200,000,000 shares of common stock, par value $0.0001 per share and 50,000,000 shares of preferred stock, par value $0.0001 per share

 

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 August 26, 2015, 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.

 

40
 

 

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.

  

On March 28, 2013, we purchased the Yappn assets from IMI in consideration for 70,000,000 shares of our common stock, pursuant to the Purchase Agreement, as further discussed herein.  David Lucatch, our Chief Executive Officer and a director, is the Chief Executive Officer of IMI and Herb Willer, our director, is a director of IMI.

  

From inception until March 28, 2013, Gavriel Bolotin, our former President, Chief Executive Officer, Chief Financial Officer, Treasurer and director provided office space to us and other office administrative resources to us at no cost.

 

In April and May 2013, the Company paid for general development and managerial services performed by Intertainment Media, Inc., and prepaid for such services for the subsequent months.   Services provided by Intertainment Media, Inc. personnel are invoiced on a per hour basis at a market rate per hour as determined by the type of activity and the skill set provided.  Costs incurred by Intertainment Media, Inc. for third party purchases are invoiced at cost.  

 

For the year ended May 31, 2014, the Company paid for general development and managerial services performed by Intertainment Media, Inc. Related party fees incurred and paid or accrued under this arrangement totaled $1,668,930 for the year ended May 31, 2014 and a remaining related party liability balance totaling $145,316 existed as of May 31, 2014.

 

41
 

 

For the year ended May 31, 2015, related party fees incurred and paid for general development and managerial services performed by Intertainment Media, Inc. and its subsidiary totaled $794,085. As of May 31, 2015 the related party liability balance totaled $348,158.

 

We presently utilize office space in New York, New York on a month to month basis and any fees are nominal.

 

On October 23, 2013, we entered into an amendment to the Services Agreement dated March 21, 2013 for an exclusive license to use the Ortsbo property in exchange for 1,666,667 shares of our restricted common stock. On April 28, 2014 we exercised its right to purchase a copy of the source code for the Ortsbo property in exchange for 13,333,333 shares of restricted common stock. Ortsbo is a wholly owned subsidiary of Intertainment Media, Inc. and David Lucatch, our CEO, is a Director of Ortsbo.

 

On July 6, 2015 Yappn 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 US $17 Million, which will be paid by the assumption of US $1 Million in debt and the issuance of US $16 Million worth of Yappn restricted common shares (320 Million shares at US $0.05 per share). The transaction is subject to closing conditions including each party obtaining all necessary approvals, including stock exchange approval and shareholder approval, if required. Upon the completion of the transaction the amended Services Agreement will be terminated.

 

Review, approval or ratification of transactions with related persons

 

Our Board of Directors is responsible to approve all related party transactions. We have not adopted written policies and procedures specifically for related person transactions.

 

Director Independence

 

Mr. Marc Saltzman and Mr. Neil Stiles were each deemed to be an “independent director”, as that term is defined by the listing standards of the national exchanges and SEC rules.   

 

Item 14. Principal Accounting Fees and Services.

 

Fees paid to the Company’s current principal accountant, MNP, LLP, were as follows:

 

     Year Ended   Year Ended 
      May 31,   May 31, 
      2015   2014 
Audit fees (1)    $53,500   $48,150 
Audit related fees (2)    $51,146   $39,987 
Tax fees (3)     $17,530   $- 
All other fees (4)    $-   $- 

 

  (1) Audit Fees

The aggregate fees billed by our principal accountant, MNP, LLP, for the May 31, 2015 and May 31, 2014 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, 2015 and May 31, 2014.

 

42
 

 

  (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, 2015 and May 31, 2014.

  

  (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, 2015 and May 31, 2014.

 

  (4) All Other Fees

The aggregate fees billed for products and services provided by our principal accountants for the fiscal years ended May 31, 2015 and May 31, 2014, 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.

 

43
 

 

PART IV

 

Item 15. Exhibits, Consolidated Financial Statement Schedules.

 

Consolidated Financial Statements

 

YAPPN CORP.

FORM 10-K

YEAR ENDED MAY 31, 2015

 

TABLE OF CONTENTS

 

      Page
  PART I    
Item 1. Consolidated Financial Statements    
  Report of Independent Registered Public Accounting Firm   F-2
  Consolidated Balance Sheets as of May 31, 2015 and 2014   F-3
  Consolidated Statements of Operations and Comprehensive Loss for the years ended May 31, 2015 and 2014   F-4
  Consolidated Statements of Stockholders’ Deficit for the years ended May 31, 2015 and 2014   F-5
  Consolidated Statements of Cash Flows for the years ended May 31, 2015 and 2014   F-6
       
  Notes to the Consolidated Financial Statements   F-7

 

F-1
 

 

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board or Directors and Stockholders of Yappn Corp.

 

We have audited the accompanying consolidated balance sheets of Yappn Corp. (the "Company") as of May 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, stockholders' deficit, and cash flows for the years then ended. Yappn Corp.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Yappn Corp.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yappn Corp. as of May 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's experience of negative cash flows from operations and its dependency upon future financing raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

          

 

  Chartered Professional Accountants
Licensed Public Accountants

 

 

Mississauga,

Ontario
August 25, 2015
 
   

 

F-2
 

 

YAPPN CORP.

CONSOLIDATED BALANCE SHEETS

 

   Note  As of
May 31,
2015
  

As of
May 31,
2014

 
Assets             
Current assets:             
Cash     $19,496   $988,692 
Accounts receivable      1,444,009    - 
Prepaid expenses      6,068    3,310 
Total current assets      1,469,573    992,002 
              
Equipment, net      1,250    - 
              
Total Assets     $1,470,823   $992,002 
              
Liabilities and Stockholders' Deficit             
Current liabilities:             
Accounts payable     $340,041   $444,041 
Accrued expenses      543,535    141,176 
Accrued development and related expenses - related party  11   468,766    145,316 
Short term loans  4   791,928    477,311 
Line of credit  5   2,167,025    800,000 
Deferred revenue      12,500    - 
Convertible promissory notes and debentures  6   3,477,825    100,846 
Total current liabilities      7,801,620    2,108,690 
              
Other liabilities:             
Derivative warrant liability  9   -    2,531,282 
Convertible promissory notes and debentures  6   312,486    2,406,329 
Total Liabilities      8,114,106    7,046,301 
              
Stockholders' Deficit             
Preferred stock, par value $.0001 per share, 50,000,000 shares authorized:             
Series 'A' Convertible, 10,000,000 shares authorized; nil and 2,010,000 shares issued and outstanding  8   -    201 
Common stock, par value $.0001 per share, 400,000,000 shares authorized  (200,000,000 May 31, 2014): 134,228,139 issued and outstanding (125,855,794 May 31, 2014) 7 13,423
12,586
Common stock, par value $.0001 per share, 993,444 and nil shares subscribed not issued, respectively      124,567    - 
Additional paid-in capital      7,981,579    4,071,022 
Deficit      (14,762,852)   (10,138,108)
Total Stockholders' Deficit      (6,643,283)   (6,054,299)
Total Liabilities And Stockholders' Deficit     $1,470,823   $992,002 

  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3
 

 

YAPPN CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

      For the year ended
May 31
 
   Note  2015   2014 
            
Revenues     $1,521,984   $37,135 
              
Cost of revenue      316,907    9,443 
              
Gross profit      1,205,077    27,692 
              
Operating expenses:             
Marketing  11   1,099,054    633,272 
Research and development expenses  11   671,312    1,375,112 
General and administrative expenses  11   1,394,474    1,348,712 
Professional fees      293,373    355,518 
Consulting      745,719    394,933 
Depreciation      231    - 
Stock-based compensation      982,624    - 
Total operating expenses      5,186,787    4,107,547 
              
Loss from operations      (3,981,710)   (4,079,855)
              
Other (income) expense:             
Interest expense      367,895    110,611 
Financing expense on issuance of convertible promissory notes and common stock      1,128,257    4,737,726 
Change in fair value of derivative liabilities and convertible promissory notes      (691,743)   (6,318,613)
Miscellaneous (income) expense      (161,375)   31,894 
Total other (income) expense      643,034    (1,438,382)
              
Net loss before taxes      (4,624,744)   (2,641,473)
              
Provision for income taxes  12   -    - 
              
Net loss and comprehensive loss     $(4,624,744)  $(2,641,473)
              
Net loss per weighted-average shares of common stock – basic     $(0.04)  $(0.03)
              
Net loss per weighted-average shares of common stock – diluted     $(0.04)  $(0.03)
              
Weighted-average number of shares of common stock issued and outstanding – basic      129,504,379    102,414,173 
              
Weighted-average number of shares of common stock issued and outstanding – diluted      129,504,379    102,414,173 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

YAPPN CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

For the year ended May 31, 2015 and 2014

 

   Common   Preferred   Additional         
   Shares Outstanding   Amount   Subscribed Shares   Subscribed Amounts   Shares Outstanding   Amount   Paid-in
Capital
   Accumulated Deficit   Total 
Balance - May 31, 2013   100,000,000   $10,000   $-    -    7,710,000   $-   $64,997   $(7,496,635)  $(7,421,638)
                                              
Issuance of common stock for consulting services   1,900,000    190    -    -    -    -    215,521    -    215,711 
Issuance of Series A Convertible preferred stock at par value ($0.0001) and warrants   -    -    -    -    1,650,000    -    -    -    - 
Issuance of common stock for licensing rights   1,666,667    167    -    -    -    -    133,166    -    133,333 
Issuance of common stock for technology   13,333,333    1,333    -    -    -    -    (1,333)   -    - 
Issuance of warrants classified as equity   -    -    -    -    -    -    2,609,256    -    2,609,256 
Imputed interest on short term loan   -    -    -    -    -    -    27,799    -    27,799 
Issuance of common stock on conversion of Series A Preferred stock   7,350,000    735    -    -    (7,350,000)   -    734,265    -    735,000 
Issuance of common shares on conversion of convertible debt   1,605,794    161    -    -    -    -    86,552    -    86,713 
Reclassification of preferred stock from derivative liability   -    -    -    -    -    201    200,799    -    201,000 
Net loss for the year ended May 31, 2014   -    -    -    -    -    -    -    (2,641,473)   (2,641,473)
Balance - May 31, 2014   125,855,794    12,586    -    -    2,010,000    201    4,071,022    (10,138,108)   (6,054,299)
                                              
Reclassification of warrant liabilities to equity   -    -    -    -    -    -    1,851,089    -    1,851,089 
Issuance of warrants classified as equity   -    -    -    -    -    -    41,060    -    41,060 
Stock options issued   -    -    -    -    -    -    982,624    -    982,624 
Stock to be issued under prior obligations   -    -    993,444    124,567    -    -    -    -    124,567 
Beneficial conversion feature   -    -    -    -    -    -    622,636    -    622,636 
Stock issued to consultants and vendors   3,290,000    329    -    -    -    -    307,638    -    307,967 
Issuance of common stock on conversion of Series A Preferred stock   2,010,000    201    -    -    (2,010,000)   (201)   -    -    - 
Issuance of common stock on conversion of convertible debt   3,072,345    307    -    -    -    -    105,510    -    105,817 
Net loss for the year ended May 31, 2015   -    -    -    -    -    -    -    (4,624,744)   (4,624,744)
                                              
Balance - May 31, 2015   134,228,139    13,423    993,444    124,567    -    -    7,981,579    (14,762,852)   (6,643,283)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5
 

 

YAPPN CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the year ended
May 31,
2015
   For the year
ended
May 31,
2014
 
Cash Flows From Operating Activities:        
Net loss and comprehensive loss  $(4,624,744)  $(2,641,473)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation   231    - 
Stock-based compensation   982,624    - 
Change in fair value of derivative liabilities and convertible promissory notes   (691,743)   (6,318,613)
Financing expense on issuance of convertible promissory notes, and common stock   1,128,257    4,876,118 
Stock issuance for consulting services and licensing rights   307,967    349,044 
Imputed interest expense on loan   -    27,799 
Changes in operating assets and liabilities:          
Accounts receivable   (1,444,009)   - 
Prepaid development and related expenses - related party   -    80,518 
Prepaid expenses   (2,758)   6,730 
Accounts payable and accrued liabilities   298,359    386,124 
Accrued development and related expense - related party   323,450    145,316 
Deferred Revenue   12,500    - 
Net Cash Used in Operating Activities   (3,709,866)   (3,088,437)
           
Cash Flows From Investing Activities:          
Capital expenditures   (1,593)   - 
Net Cash Used in Investing Activities   (1,593)   - 
           
Cash Flows From Financing Activities:          
Proceeds from convertible promissory notes and debentures   1,135,857    3,695,092 
Proceeds from line of credit, net   1,367,025    - 
Repayments of short term loans   (373,678)   - 
Proceeds from short term loans   817,152    - 
Repayment of convertible promissory notes and debentures   (204,093)   - 
Proceeds from the issuance of preferred stock and warrants   -    165,000 
Net Cash Provided by Financing Activities   2,742,263    3,860,092 
           
Net decrease in cash   (969,196)   (771,655)
Cash, beginning of year   988,692    217,037 
Cash, end of year  $19,496   $988,692 
           
Supplemental Disclosure of Cash Flow Information          
           
Non Cash Investing and Financing Activities Information:             
Common stock issued on conversion of convertible debt     $-   $86,713 
Common stock issued on conversion of preferred stock     $-   $735,000 
Reclassifications of derivative liabilities to additional paid in capital     $1,851,089   $1,118,087 
Common stock issued for consulting services     $307,967   $349,044 
Common stock issued for prior obligations     $124,567   $- 
Conversion of short term loan     $100,000   $- 
Cash paid during the year for interest     $188,994   $20,532 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6
 

 

YAPPN CORP.

Notes to Consolidated Financial Statements

May 31, 2015

 

All references to “dollars”, “$” or “US$” are to United States dollars and all references to “Canadian” are to Canadian dollars. United States dollar equivalents of Canadian dollar figures are based on the exchange rate as reported by the Bank of Canada on the applicable date.

 

1. Summary of Significant Accounting Policies

 

Basis of Presentation and Organization

 

Yappn Corp., formerly “Plesk Corp.”, (the “Company”) was incorporated under the laws of the State of Delaware on November 3, 2010. The business plan of the Company is to provide effective unique and proprietary tools and services that create dynamic solutions that enhance a brand’s messaging, media, e-commerce and support platforms. The Company has offices in the United States and Canada. In March 2013, the Company acquired a concept and technology license from Intertainment Media Inc., a Canadian publicly listed company, in exchange for 70,000,000 shares of common stock of the Company. As a result of this exchange, Intertainment Media Inc. acquired, at that time, a 70 percent ownership of the Company. The accompanying 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.

 

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 and recognized as revenue as services are rendered at the time of billing which is typically a biweekly or monthly basis.

 

F-7
 

 

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 $1,099,054 and $633,272 for the years ended May 31, 2015 and May 31, 2014.

 

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, 2015, the Company had outstanding five year warrants to purchase an additional 55,226,666 shares of common stock (note 8) at a per share exercise price ranging from $0.054 to $0.22, 9,445,000 stock options (note 10) that have vested with an exercise price of $0.10, and convertible notes and debentures that are convertible into 21,856,666 shares of common stock at the option of the holder based on the value of the debt host at the time of conversion with exercise prices ranging from $0.10 to $0.15. All of these issuances have a dilutive effect on earnings per share when the Company has net income for the period.

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

The Company accounts for income taxes under the provisions of ASC 740, “Accounting for Income Tax”. It prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. The guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities. The Company is subject to taxation in the United States. All of the Company’s tax years since inception remain subject to examination by Federal and state jurisdictions.

 

The Company classifies penalties and interest related to unrecognized tax benefits as income tax expense in the 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 year ended May 31, 2015 and May 31, 2014.

 

Fair Value of Financial Instruments

 

The Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the Company could realize in a current market exchange.

 

The Company follows FASB (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. US GAAP establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy are described below:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities;

 

F-8
 

 

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

 

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The warrants (Notes 8 and 9) and the convertible promissory notes and debentures (Note 6) are classified as Level 2 financial liabilities.

 

As of May 31, 2015 and May 31, 2014, the carrying value of accounts receivable, accounts payable, accrued expenses, short term loans, accrued development and related expenses and line of credit approximated fair value due to the short-term nature of these instruments.

 

Fair Value of Derivative Instruments, Preferred Stock and Warrants

 

The Company entered into subscription agreements whereby it sold Units consisting of one share of Series A Convertible Preferred Stock and one warrant to purchase one share of the Company’s common stock. Both the preferred stock and the warrant initially had price protection provisions and when such provisions are present, the instruments are treated as liabilities rather than as equity instruments resulting from the variability caused by the favorable terms to the holders. The Series A Preferred Stock and the five year warrants provided the holder with full anti-dilution ratchet provisions that provide the holder with a potential increase in the amount of common stock exchanged or a reduction in the exercise price of the instruments should the Company subsequently issue stock or securities convertible into common stock at a price lower than the stated exercise price. The Company also issued other five year warrants as part of subscription agreements that included convertible promissory notes, debentures and line of credit, some of which have similar price protection provisions that expired after twelve months. Upon expiration of the price protection, the instruments were treated as equity instruments. The Series A Preferred Stock ratchet provisions ended after twelve months and as such any unconverted preferred shares were no longer treated as a liability, but as an equity instrument.

 

In the event the Company has exceeded its authorized number of common stock issuable on a diluted basis, the Company applies the earliest issuance date sequencing approach to determine which derivatives recorded in additional paid in capital, require reclassification to financial liabilities. Under the earliest issuance date sequencing approach, the financial instruments recorded in equity that have stock issuable in 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 derivative liabilities. Both unrealized and realized gains and losses related to the derivatives are recorded based on the changes in the fair values and are reflected as a financing expenses on the consolidated statements of operations and comprehensive loss.

 

Hybrid Financial Instruments

 

The Company elected to apply the fair value option to account for its hybrid financial instruments. The Company made an irrevocable election to measure such hybrid financial instruments at fair value in their entirety, with changes in fair value recognized in earnings at each balance sheet date. The election may be made on an instrument by instrument basis.

 

F-9
 

 

Fair Value of Convertible Promissory Notes and Debentures

 

The Company has issued convertible promissory notes and debentures that are convertible into common stock, at the option of the holder, at conversion prices based on the trading price per share over a period of time. As a result of the variability in the amount of common stock to be issued, these instruments are reflected at fair value. These instruments are measured at the greater of the present value of the note discounted at market rates or using a binomial lattice valuation methodology and are included in the consolidated balance sheets under the caption “convertible promissory notes and debentures”. Any unrealized and realized gains and losses related to the convertible promissory notes are recorded based on the changes in the fair values and are reflected as change in fair value of derivatives and convertible notes on the consolidated statements of operations and comprehensive loss.


Estimates

 

The consolidated financial statements are prepared on the basis of accounting principles generally accepted in the United States. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements.

 

The Company’s significant estimates include the fair value of financial instruments including the underlying assumptions to estimate the fair value of derivative financial instruments and convertible promissory notes and the valuation allowance of deferred tax assets.

 

Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, if deemed appropriate, those estimates are adjusted accordingly.

 

These significant accounting estimates bear the risk of change due to the fact that there are uncertainties attached to those estimates and certain estimates are difficult to measure or value.

 

Reclassifications

 

Certain amounts in the prior 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: 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.

 

“Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements” (“ASU 2014-10”) issued in June 2014, ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statement of operations, cash flows and stockholder’s equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. The Company has adopted ASU 2014-10 for its financial statements for the year ended May 31, 2015 beginning with the quarter ended August 31, 2014.

 

F-10
 

 

On August 27, 2014 the FASB issued a new financial accounting standard on going concern, Update 2014-15, “Presentation of Financial Statements – Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern. The amendments in this update apply to all companies. They become effective in the annual period ending after December 15, 2016, with early application permitted. The Company is currently evaluating the impact of this accounting standard.

 

In November 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The ASU clarifies how current guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivatives feature being evaluated for bifurcation, in evaluating the nature of a host contract. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The Company is currently assessing the impact, if any, of implementing this guidance on its consolidated financial position and results of operations.

 

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 $14,762,852 through May 31, 2015.

 

As of May 31, 2015, the Company had a working capital deficit of $6,332,047. During the year ended May 31, 2015, net cash used in operating activities was $3,709,866. 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 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 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, short term debt arrangements, convertible debt arrangements, common share equity financings, either through a private placement or through the public markets and has engaged a number of investment brokers to assist management in achieving its financing objectives. During the year ended May 31, 2015, the Company raised $2,742,263 through various financial instruments, net of repayments. Subsequent to the year ended May 31, 2015, the Company raised $2.3 million in cash proceeds as part of a secured debenture financing.

 

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

 

F-11
 

 

3. Concentration of Credit Risk

 

All of the Company’s revenues are attributed to a small number of customers. One customer comprises 90% of the accounts receivable as at May 31, 2015 and 90% of the revenue recorded for the year ended May 31, 2015.

 

4. Short Term Loans

 

On April 1, 2014, the Company entered into a short term loan for $219,480 (Canadian $240,000) with a private investor. The Company previously converted a portion of a previous loan from this lender (Canadian $350,000), from a prior fiscal year, into a convertible debenture. The loan had a maturity of July 10, 2014 with an interest rate of 1% per month. The Company repaid $46,025 (Canadian $50,000) of this loan on June 13, 2014 leaving $175,330 ($190,000 Canadian) outstanding. As at May 31, 2015, the loan had a value of $152,545 ($190,000 Canadian).

 

On January 7, 2014, the Company borrowed $253,200 (Canadian $280,000) from a private investor. The loan had a term of three months and had an interest rate of 12% per annum payable at the maturity date. A preparation fee of 10% or $25,300 (Canadian $28,000) was paid at inception. The loan was extended past its due date of April 7, 2014 and is accruing interest without penalty until payment. On June 12, 2014, the Company repaid $142,056 (Canadian $152,000) against the loan and on June 27, 2014 $90,777 (Canadian $100,000) was retired and contributed to a subscription agreement for Units that included an unsecured 6% convertible debenture, $1,000 par value, convertible into shares of the Company’s common stock and 1,666,667 issuable shares of common stock (Series C warrants) at a purchase price of $0.22 per share (Note 6). As at May 31, 2015 an amount of $10,788 ($13,418 Canadian) remains outstanding.

 

On January 9, 2014, the Company borrowed $271,200 (Canadian $300,000) from a private investor. The loan had an initial term of six weeks and had an interest rate of 12% per annum payable at the maturity date. A preparation fee of 5% or $13,500 (Canadian $15,000) was paid at inception. The loan was extended past its due date of February 24, 2014. The loan was fully repaid on May 8, 2014 including interest of $7,426.

 

On July 17, 2014 the Company borrowed $100,915 (Canadian $110,000) from a private investor in the form of a short term loan due on December 31, 2014. This loan carries a 1% arrangement fee and an interest rate of 1% per month. During the year $ 90,145 (Canadian $105,000) was repaid on this note. As of May 31, 2015, the value of the loan was $4,020 (Canadian $5,000).

 

On July 23, 2014, the Company borrowed $50,234 (Canadian $53,750) from a private investor in the form of a bridge loan with combined loan and interest fees of $5,841 (Canadian $6,250). This loan and the fees were repaid in full on August 5, 2014.

 

On August 4, 2014, the Company borrowed $93,458 (Canadian $100,000) in the form of a bridge loan from a private investor, with combined origination fees and interest of $3,210 (Canadian $3,500), due on August 14, 2014. The Company repaid $22,768 (Canadian $25,000) of this loan on August 25, 2014. As of May 31, 2015, the value of the remaining balance of the loan was $60,308 (Canadian $75,000).

 

During August 2014, the Company received a total of $125,000 from intended subscribers for convertible debentures, which closed on September 2, 2014. The Company treated these as short term loans where interest is accrued at 6% (same rate as the convertible debenture) for each lender from the date of the loan to the date of the subscription for the convertible debenture.

 

On January 23, 2015, the Company borrowed $16,098 ($20,000 Canadian) in the form of a bridge loan from a private investor with a financing fee of $1,610 ($2,000 Canadian). This loan was paid back on January 26, 2015.

 

On March 30, 2015, the Company borrowed $250,000 ($317,000 Canadian) in the form of a bridge loan from a private investor with a financing fee of $10,000 ($12,680 Canadian). This loan was paid back on April 21, 2015.

 

F-12
 

 

On May 6, 2015, the Company borrowed $150,000 ($180,000 Canadian) in the form of a bridge loan from a private investor with a financing fee of $6,000 ($7,200 Canadian). As of May 31, 2015, the value of the remaining balance of the loan was $144,729 (Canadian $180,000). This loan was paid back on June 30, 2015.

 

On May 11, 2015, the Company received $419,463 ($500,000 Canadian) from an intended subscriber for secured debentures, which closed subsequent to year end, on July 15, 2015. As of May 31, 2015, the value of the remaining balance of the loan was $402,026 (Canadian $500,000). The Company treated these as a short term loan where interest is accrued at 12% (same rate as the secured debenture) for each lender from the date of the loan to the date of the subscription for the convertible debenture.

 

The following is a summary of Short Term Loans:

 

Principal amounts  April 1,
2014
Term Loan
   January 7,
2014
Term Loan
   Other Loans   Total 
Borrowing on July 10, 2013  $336,000   $-   $-   $336,000 
Borrowing on January 7, 2014   -    253,200    -    253,200 
Borrowing on January 9, 2014   -    -    271,200    271,200 
Total   336,000    253,200    271,200    860,400 
Fair value adjustments and accrued interest   (15,841)   3,952    -    (11,889)
Repayments   -    -    (271,200)   (271,200)
Conversions   (100,000)   -    -    (100,000)
Fair value at May 31, 2014   220,159    257,152    -    477,311 
Borrowing on July 17, 2014   -    -    100,915    100,915 
Borrowing on July 23, 2014   -    -    50,234    50,234 
Borrowing on August 4, 2014   -    -    93,458    93,458 
Borrowings in August 2014 (multiple dates)   -    -    125,000    125,000 
Borrowing on January 23, 2015   -    -    16,098    16,098 
Borrowing on March 30, 2015             250,000    250,000 
Borrowing on May 6, 2015   -    -    144,729    144,729 
Borrowing on May 11, 2015   -    -    419,463    419,463 
Total   -    -    1,199,897    1,199,897 
Fair value adjustments   (21,589)   (13,081)   (10,168)   (44,838)
Repayments   (46,025)   (142,506)   (436,134)   (624,665)
Conversions   -    (90,777)   (125,000)   (215,777)
Fair value at May 31, 2015  $152,545   $10,788   $628,595   $791,928 

 

5. Line of Credit - Loan Agreement and Promissory Note

 

On March 26, 2014, the Company received an advance in the amount of $150,000 on a loan agreement and promissory note, finalized on April 7, 2014, whereby the Company can borrow up to $3,000,000 from a third party lender. The loan agreement is for an initial two year term subject to the lender’s right to demand repayment of the outstanding balance. It carried a one-time arrangement fee of $60,000 recognized as a financing expense at origination, carries an interest rate of 12% per annum and a 1% draw down fee on each draw. Pursuant to the loan agreement, the Company issued the lender warrants to purchase up to 8,000,000 shares of the Company’s common stock at an exercise price of $0.10. Upon the Company’s first draw down of $200,000 from the line of credit, 2,000,000 five year warrants vest. For each subsequent $100,000 the Company draws, 1,000,000 five year warrants will vest until the 8,000,000 warrants are vested. The Company’s common stock that are issuable on the exercise of warrants were granted registration rights, allowing the shares to be sold. In addition, the Company entered into a general security agreement with the lender to which it granted the lender a first position security interest in all of its assets and in the event of default under the security agreement or the promissory note, the lender may foreclose on the assets of the Company.

 

During the year ended May 31, 2014, the Company borrowed $800,000 from the lender without any repayments and the 8,000,000 warrants issued to the lender on April 7, 2014 became fully vested. The warrants were valued at $1,495,200 and were reflected as a financing expense and reported on the Company’s consolidated statements of operations and comprehensive loss below operating income as an “other expense” for the year ended May 31, 2014.

 

From June 1, 2014 to May 31, 2015, the Company borrowed $1,900,155 against the line of credit and repaid $533,130 resulting in a net additional amount drawn down against the line of credit of $1,367,025 resulting in an outstanding obligation of $2,167,025 at May 31, 2015.

 

F-13
 

6. Convertible Promissory Notes and Debentures

 

The Company has issued various convertible notes and debentures with various terms. As a result of the variability in the amount of shares of common stock to be issued in accordance with variable pricing terms or conversion price protection clauses, the Company has recorded these instruments as liabilities at fair value. The Company has determined the convertible notes and debentures to be Level 2 fair value measurement and has used the binominal lattice pricing model to calculate the fair value as of May 31, 2015, May 31, 2014, and the commitment date.

 

The following is a summary of the convertible promissory notes and debentures as of May 31, 2015:

 

Principal amounts:  JMJ
Financial
Notes
   Convertible
Debentures
   Other
Notes
   Total 
Borrowing on October 9, 2013  $-   $-   $78,500   $78,500 
Borrowing on November 15, 2013   65,000    -    -    65,000 
Borrowing on December 12, 2013   -    -    42,500    42,500 
Borrowing on February 21, 2014   40,000    -    -    40,000 
Borrowing on December 17, 2013   -    -    50,000    50,000 
Borrowing on January 29, 2014   -    395,000    -    395,000 
Borrowing on February 27, 2014   -    305,000    -    305,000 
Borrowing on April 1, 2014   -    469,000    -    469,000 
Borrowing on April 16, 2014   40,000    -    -    40,000 
Borrowing on April 23, 2014   -    50,000    -    50,000 
Borrowing on May 30, 2014   -    1,000,000    -    1,000,000 
Conversions   (65,000)   -    -    (65,000)
Repayments   -    -    (78,500)   (78,500)
Total Borrowings at May 31, 2014   80,000    2,219,000    92,500    2,391,500 
Borrowing on June 27, 2014   -    250,000    -    250,000 
Borrowing on September 2, 2014   -    125,000    -    125,000 
Borrowing on September 3, 2014   50,000    -    -    50,000 
Borrowing on October 6, 2014   -    50,000    -    50,000 
Borrowing on October 22, 2014   40,000    -    -    40,000 
Borrowing on October 27, 2014   -    50,000    -    50,000 
Borrowing on December 24, 2014   -    -    75,000    75,000 
Borrowing on December 24, 2014   -    -    100,000    100,000 
Borrowing on December 29, 2014   -    -    50,000    50,000 
Borrowing on February 4, 2015   -    -    115,000    115,000 
Borrowing on February 9, 2015   -    -    90,750    90,750 
Borrowing on March 30, 2015   -    -    92,000    92,000 
Borrowing on April 15, 2015   -    -    69,000    69,000 
Borrowing on April 20, 2015   -    -    50,000    50,000 
Borrowing on April 23, 2015   -    -    60,500    60,500 
Borrowing on April 23, 2015   -    -    25,000    25,000 
Conversions   (80,000)   -    -    (80,000)
Repayments   (90,000)   -    (92,500)   (182,500)
Total Borrowings at May 31, 2015  $-   $2,694,000   $727,250   $3,421,250 
                     
Convertible notes and debt at fair value at commitment date  $295,111   $2,086,720   $191,226   $2,573,057 
Change in fair value   (100,968)   177,420    (25,777)   50,675 
Repayments   -    -    (64,603)   (64,603)
Conversions to common stock   (51,954)   -    -    (51,954)
Convertible notes and debt at fair value at May 31, 2014   142,189    2,264,140    100,846    2,507,175 
                     
Convertible notes and debt at fair value at the commitment date   137,071    436,887    1,020,110    1,594,068 
Change in fair value (from May 31, 2014 or Fiscal 2015 commitment date)   (70,223)   (755,194)   858,573    33,156
Repayments (cash)   (103,220)   -    (135,051)   (238,271)
Conversions to common stock   (105,817)   -    -    (105,817)
Convertible notes and debt at fair value at
May 31, 2015
  $-   $1,945,833   $1,844,478   $3,790,311 
                     
Balance at May 31, 2014                    
Current  $-   $-   $100,846   $100,846 
Long term   142,189    2,264,140    -    2,406,329 
   $142,189   $2,264,140   $100,846   $2,507,175 
Balance at May 31, 2015                    
Current  $-   $1,633,347   $1,844,478   $3,477,825 
Long term   -    312,486    -    312,486 
   $-   $1,945,833   $1,844,478   $3,790,311 

F-14
 

 

Asher Enterprises, Inc.

 

On October 9, 2013, the Company sold an 8% Convertible Note to Asher Enterprises, Inc. in the principal amount of $78,500 pursuant to a Securities Purchase Agreement, which was executed on October 9, 2013. The Convertible Note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date from issuance. The conversion price is 61% of the average of the lowest three closing bid prices of the Company’s shares of common stock for the ten trading days immediately prior to the conversion date. The Convertible Note has a stated maturity date of July 2, 2014 and had an interest rate of 8% per annum until it becomes due. On March 28, 2014, the Company paid approximately $109,000 to settle in full the outstanding balance of $78,500, a prepayment fee and related interest on the Convertible Note.

 

On December 12, 2013, the Company sold an 8% Convertible Note to Asher Enterprises, Inc. in the principal amount of $42,500 pursuant to a Securities Purchase Agreement which was executed on December 4, 2013. The Convertible Note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date from issuance. The conversion price is 61% of the average of the lowest three closing bid prices of the Company’s shares of common stock for the ten trading days immediately prior to the conversion date. The Convertible Note matures on September 6, 2014 and has an interest rate of 8% per annum until it becomes due. Any amount of principal or interest which is not paid when due, shall bear interest at the rate of 22% per annum from the due date thereof. On June 10, 2014, the Company paid $59,051 to settle in full the outstanding balance of $42,500, prepayment fee and related interest on the Convertible Note.

 

JMJ Financial

 

On November 15, 2013, the Company executed and issued a Convertible Promissory Note agreement with JMJ Financial in the principal amount of $500,000, with a $50,000 original issue discount that shall be ratably applied towards payments made by the investor and forms part of the amount qualifying for conversion. On November 15, 2013, the Company borrowed $65,000 against the Note. The agreement was amended on February 21, 2014 and applies retroactively to the date of issuance. The Convertible Promissory Note is due two years from the effective date of each payment. It is interest free if repaid within 90 days and if not paid within 90 days, it bears a one-time interest charge of 12%, which is in addition to the original issue discount. The Company agreed to pay a closing and due diligence fee of 8% of each payment made by the investor which shall be applied to the principal amount of the Convertible Promissory Note. After 90 days from the effective date and until the maturity date the Company may not make further payments on the note without written approval. After 180 days from issuance, the principal and any accrued interest are convertible into the Company’s common stock at the lower of $0.10 per share or 60% of the lowest trade price in the 25 days prior to conversion. The note has piggyback registration rights with respect to the shares into which the note is convertible. On February 21, 2014 the Company borrowed an additional $40,000 against the Note and on April 16, 2014 the Company borrowed an additional $40,000 against the Note. During May of 2014, JMJ Financial elected to convert the $65,000 principal, original issue discount, due diligence fees and interest accrued in exchange for 1,605,794 common shares (Note 7). On September 3, 2014 the Company borrowed an additional $50,000 against the Note and on October 22, 2014 the Company borrowed an additional $40,000 against the Note. During September of 2014, JMJ Financial elected to convert $40,000 in principal, original issue discount, due diligence fees and interest accrued in exchange for 1,111,704 common shares (Note 7). During the same quarter of 2014, JMJ Financial elected to convert an additional $40,000 in principal, original issue discount, due diligence fees and interest accrued in exchange for 1,960,641 common shares (Note 7). On December 12, 2014 the Company repaid $50,000 plus original issue discount from the September 3, 2014 borrowings. On January 23, 2015 the Company repaid $40,000 plus original issue discount from the October 27, 2014 borrowing. On February 10, 2015 the note and associated share reserve was cancelled.

 

Other Notes Fiscal 2014

 

On December 17, 2013, the Company sold two 8% convertible promissory notes in the amount of $25,000 each to independent accredited investors for a total of $50,000. After deductions for banking fees of $2,500 and legal expenses of $1,500 for each note, the Company received $21,000 for each note for a total of $42,000. The notes would have matured on September 13, 2014. Each note may be converted into common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 55% of the average prices of the lowest two closing prices on the 10 days prior to conversion pursuant to the requirements of the note. Any amount of principal or interest which is not paid when due, shall bear interest at the rate of 24% per annum.

 

On June 13, 2014, the Company separately paid $76,000, including prepayment fees and related interest, to settle in full the outstanding balance of the two $25,000 8% convertible promissory notes.

 

JSJ Investments Inc.

 

On December 24, 2014, the Company sold a Convertible Note in the principal amount of $100,000 to JSJ Investments Inc. The Convertible Note matures on June 23, 2015 and has an interest rate of 15% per annum payable at maturity. The note may be converted into common stock of the Company on or after the maturity date at a conversion price of 50% of the lowest 15 days prior to conversion or 10 cents. Early payback penalties are 140% from 120-150 days and 150% up to the maturity date of the note. Subsequent to May 31, 2015 this Convertible Note was repaid.

 

F-15
 

 

LG Capital Funding, LLC

 

On December 24, 2014, the Company sold a Convertible Note in the principal amount of $75,000. The Convertible Note matures on December 24, 2015 and has an interest rate of 8% per annum. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 55% of the average of 2 lowest closing bid prices from the 10 days prior to conversion. Early payback penalties are 150% and payback is eligible up to 180 days from the inception of the note. Subsequent to May 31, 2015 this Convertible Note was repaid.

 

Vista Capital Investments, LLC

 

On December 29, 2014, the Company sold a Convertible Note in the principal amount of $110,000, 10% original issuance discount and advanced $50,000 on closing. The Convertible Note matures on December 29, 2015 and has a one-time interest charge of 12%. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 60% of the lowest trading price from the 25 days prior to conversion or 10 cents. Early payback penalties are 125% up to 90 days and 145% after 90 days. On April 23, 2015, Company borrowed an additional $25,000 against this Convertible Note. Subsequent to May 31, 2015, the $50,000 drawn on December 29, 2014 was repaid.

 

Typenex Co-Investments, LLC

 

On February 4, 2015, the Company sold a Convertible Note in the principal amount of $115,000 carrying a 10% original issuance discount (“OID”). The Convertible Note matures on January 4, 2016 and has an interest rate of 10% per annum. The note may be converted into common stock at an exercise price of 10 cents per share six months after the sale of the Note. The Company can repay the Note within the first six months at a penalty of 125% of principal amount. After six months, repayments can be made on an installment basis, either in cash (plus OID), or in shares of common stock. If installment payments are made in the form of common stock, the effective price for the stock issuance is at 70% of the average of the three lowest closing bid prices over a ten day look back period from the date the installment is due. The installments must be made on a monthly schedule if the lender does not convert at their option at the exercise price of 10 cent per share. At the funding date the Company issued 700,000 fixed price warrants at an exercise price of 10 cents per share with no price protection. The warrants were recorded at a value of $37,100 in additional paid-in capital (Note 8).

 

Iconic Holdings, LLC

 

On February 9, 2015, the Company sold a Convertible Note with a face value of $220,000, carrying a 10% original issuance discount. $90,750 was advanced to the Company on closing of the Note. The Convertible Note matures on February 9, 2016 and has an interest rate on the principal balance of 10%. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 60% of the lowest average daily trading price from the 25 days prior to conversion or 10 cents, whichever is lower. The Note carries early payback penalties on principal repayment which are 115% from 1-60 days, 125% between 61 and 120 days, 130% between 121 and 180 days, and may not be paid back after 180 days without consent from the Holder.

 

Group 10 Holdings LLC

 

On March 30, 2015, the Company sold a debenture for the principal amount of $92,000 with a 10% original issue discount. The convertible debenture matures on March 30, 2016 and has an interest rate of 12% per annum. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 55% of the average of the two lowest closing bid prices with a twenty day look back period as of the date a notice of conversion is given. The debenture may be paid back any time before maturity with a prepayment penalty of 123%.

 

F-16
 

 

Vis Vires Group, Inc.

 

On April 15, 2015, the Company sold a Convertible Note for the principal amount of $69,000. The convertible note matures on January 6, 2016 and has an interest rate of 8% per annum. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 58% of the average of the three lowest trading prices from previous ten trading days including the date notice is given. The Note may be paid back any time before maturity with a prepayment penalty of 110% if paid back within the first 30 days, 115% if paid back between 31 and 60 days, 120% if paid between 61 and 90 days, 125% if paid between 91 and 120 days, 130% if paid between 121 and 150 days, and 135% if paid back between 151 and 180 days after which it cannot be repaid.

 

Adar Bays, LLC

 

On April 20, 2015, the Company sold a Convertible Note for the principal amount of $50,000. The convertible note matures on April 20, 2016 and has an interest rate of 8% per annum. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 60% of the average of the three lowest trading prices from previous fifteen trading days. The Note may be paid back any time before maturity with a prepayment penalty of 140%.

 

Auctus Private Equity Fund, LLC

 

On April 23, 2015, the Company sold a Convertible Note for the principal amount of $60,500. The convertible note matures on January 21, 2016 and has an interest rate of 10% per annum. The note may be converted into shares of common stock of the Company at any time beginning on the 180th day of the date of the note at a conversion price of 60% of the average of the two lowest trading prices from previous twenty trading days. The Note may be paid back any time before maturity with a prepayment penalty of 130%.

 

The following table summarizes the fair values by fiscal quarter for issued convertible variable notes and the inputs to determine fair value at commitment date and year end dates: 

 

Accounting allocation of initial proceeds:  Second Quarter Fiscal 2014   Third Quarter Fiscal 2014   Fourth Quarter Fiscal 2014   Second Quarter Fiscal 2015   Third Quarter Fiscal 2015   Fourth Quarter Fiscal 2015 
Gross proceeds  $65,000   $40,000   $40,000   $90,000   $430,750   $296,500 
Fair value of promissory notes   (142,812)   (54,286)   (98,014)   (137,071)   (656,507)  $(363,604)
Fair value of equity warrant   -    -    -    -    (37,100)   - 
Financing expense on the issuance of promissory notes  $77,812   $14,286   $58,014   $47,071   $262,857   $67,104 
                               
Key inputs to determine the fair value at the commitment date:                              
Stock price  $0.07   $0.05   $0.14   $0.04-0.12   $0.05-0.07  $0.05-0.06 
Current exercise price  $0.05   $0.03   $0.05   $0.04-0.06   $0.02-0.10   $0.03 
                               
Time to expiration – days   730    632    578     389-436    181-365    250-366 
Risk free interest rate   .11%   .08%   .37%    .1-.11%    .14-.26%     0.09-0.27%
Estimated volatility   150%   150%   150%   150%   150%   150%
Dividend   -    -    -    -    -    - 
                               
Key inputs to determine the fair value at May 31, 2014:                              
Stock price  $  N/A   $0.16   $0.16   $N/A   $N/A   $N/A 
Current exercise price  $N/A   $0.08   $0.08   $N/A   $N/A   $N/A 
Time to expiration – days   N/A    533    533    N/A     N/A    N/A 
Risk free interest rate   N/A   .37%   .37%   N/A%    N/A%   N/A%
Estimated volatility   N/A   150%   150%   N/A%    N/A%   N/A%
Dividend   -    -    -    N/A     N/A    N/A 
                               
Key inputs to determine the fair value at May 31, 2015:                              
Stock price  $N/A   $N/A   $N/A   $N/A   $0.05   $0.06 
Current exercise price  $N/A   $N/A   $N/A   $N/A   $0.03-0.10   $0.03 
Time to expiration – days   N/A    N/A    N/A      N/A     115-346    212-325 
Risk free interest rate   N/A%   N/A%   N/A%     N/A%    .07-.22%   .06-0.26% 
Estimated volatility   N/A%   N/A%   N/A%     N/A%   150%   150%
Dividend   N/A      N/A    N/A      N/A      N/A    N/A 

  

F-17
 

 

Convertible Debentures with Series A and B Warrants

 

On January 29, 2014, February 27, 2014, and April 1, 2014, the Company issued 395, 305, and 469 Units for $395,000, $305,000, and $469,000 respectively, to accredited investors under subscription agreements. The Units, as defined in the subscription agreements, consist of (i) one unsecured 6% convertible promissory note, $1,000 par value, convertible into shares of the Company’s common stock; (ii) a warrant entitling the holder thereof to purchase 10,000 shares of common stock (individually Series A Warrant) at an exercise price of $0.15; and, (iii) a warrant entitling the holder thereof to purchase 10,000 shares of common stock (individually Series B Warrant) at an exercise price of $0.20. The purchase price for each Unit was $1,000 and resulted in a funding total of $1,069,000 in cash and the retirement of $100,000 debt obligation to a private investor (Note 4).

 

The Notes mature 24 months from the issuance date and have an interest rate of 6% per annum payable in arrears on the earlier of a default date or the maturity date. The Notes may be converted at any time after the original issuance date at the election of their holders to convert all or part of the outstanding and unpaid principal amount and accrued interest at a conversion price of $0.10 per share. Under the subscription agreement, the Company has granted price protection provisions that provide the holder of Series A warrants with a potential increase in the amount of common stock exchanged or a reduction in the exercise price of the instruments should the Company subsequently issue stock or securities convertible into common stock at a price lower than the stated exercise price of $0.15 for a period of twelve months from issuance. The Company determined the warrants issued to the Line of Credit lenders (Note 5) qualified as a breach of this covenant, therefore all Series A warrants were revalued to a $0.10 exercise price with the adjustment reflected as a change in the fair value. Any amount of principal or interest which is not paid when due, shall bear interest at the rate of 16% per annum from the date it is due.

 

As some of the instruments are considered derivatives and the assigned fair values were greater than the net cash proceeds from the transaction, the excess was treated as a financing expense on issuance of derivative instruments for accounting purposes and reported on the Company’s consolidated statements of operations and comprehensive loss below the operating income as an “other expense”.

 

F-18
 

 

The following table summarizes the fair values of Convertible Debentures with Series A and B Warrants and the respective inputs to determine fair values at the commitment date and the year end dates. 

 

Accounting allocation of initial proceeds:  January 29,
2014
   February 27,
2014
   April 1,
2014
 
Gross proceeds  $395,000   $305,000   $469,000 
Fair value of the convertible promissory notes   (320,787)   (247,696)   (665,511)
Derivative warrant liability fair value – Series A (Note 9)   (161,950)   (125,050)   (776,664)
Financing expense on the issuance of instruments  $87,737   $67,746   $973,175 
                
Key inputs to determine the fair value at the commitment date:               
Stock price  $0.05   $0.05   $0.18 
Current exercise price – promissory notes  $0.10   $0.10   $0.10 
Current exercise price – Series A warrants  $0.15   $0.15   $0.15 
Time to expiration – days (promissory notes)   732    731    731 
Time to expiration – days (warrants)   1,826    1,826    1,826 
Risk free interest rate (promissory notes)   .32%   .32%   .32%
Risk free interest rate (warrants)   1.52%   1.51%   1.74%
Estimated volatility   150%   150%   150%
Dividend   -    -    - 
Market interest rate for the Company   18%   18%   18%
                
Key inputs to determine the fair value of the promissory notes at May 31, 2014:               
Stock price  $0.16   $0.16   $0.16 
Current exercise price  $0.10   $0.10   $0.10 
Time to expiration – days   610    638    671 
Risk free interest rate   .37%   .37%   .37%
Estimated volatility   150%   150%   150%
Dividend   -    -    - 
                
Key inputs to determine the fair value of the promissory notes at May 31, 2015:               
Stock price  $N/A   $N/A   $N/A 
Current exercise price  $N/A   $N/A   $N/A 
Time to expiration – days   243    272    306 
Risk free interest rate     N/A%     N/A%     N/A%
Estimated volatility     N/A%     N/A%     N/A%
Dividend   -    -    - 

 

Convertible Debentures with Series C or Series D Warrants

 

On April 23, 2014, the Company authorized and issued 50 Units for $50,000 to a private investor. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15 per share with a price protection clause on any conversion feature issued after the issuance date that mature on April 23, 2016; and (ii) a warrant entitling the holder thereof to purchase 333,333 shares of common stock (Series C Warrant) at a purchase price of $0.22 per share that expires on April 23, 2019.

 

On May 30, 2014, the Company authorized and issued 1,000 Units for $1,000,000 to Array Capital Corporation. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15 per share with a price protection clause on any conversion feature issued after the issuance date that matures on May 30, 2016; and (ii) a warrant entitling the holder thereof to purchase 6,666,667 shares of common stock (Series C Warrant) at a purchase price of $0.22 per share that expires on May 30, 2019.

 

On June 27, 2014, the Company authorized and issued two separate issues of 125 Units. This total authorized and issuance of 250 Units, at a value of $250,000, was to two independent accredited investors in exchange for $150,000 in cash and release of $90,777 (Canadian $100,000) in the loan originated on January 7, 2014 as described in Note 4. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15 per share with a price protection clause on any conversion feature issued after the issuance date that matures on June 27, 2016; and (ii) a warrant entitling the holder thereof to purchase 1,666,667 shares of common stock (Series C Warrant) at a purchase price of $0.22 per share that expires on June 27, 2019. 

 

F-19
 

 

On September 2, 2014, the Company authorized and issued three separate issues of 25, 75, and 25 Units. This total authorized and issuance of 125 Units, at a value of $125,000, was to three independent accredited investors in exchange for $125,000 in cash proceeds (see note 4). The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15 per share with a price protection clause on any conversion feature issued after the issuance date that matures on September 2, 2016; and (ii) a warrant entitling the holder thereof to purchase 833,334 shares of common stock (Series C Warrant) at a purchase price of $0.22 per share that expires on September 2, 2019.

   

On October 6, 2014, the Company authorized and issued 50 Units for $50,000 to Subtle Disruption in exchange for the settlement of $50,000 in trade payables. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15 with a price protection clause on any conversion feature issued after the issuance date that matures on October 6, 2016; and (ii) a warrant entitling the holder thereof to purchase 333,333 shares of common stock (Series D Warrant) at a purchase price of $0.22 per share that expires on October 6, 2019.

 

On October 27, 2014, the Company authorized and issued 50 Units for $50,000 to IBEC Holdings Inc. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $1,000 par value convertible into shares of the Company’s common stock at a conversion price of $0.15 with a price protection clause on any conversion feature issued after the issuance date that matures on October 6, 2016; and (ii) a warrant entitling the holder thereof to purchase 333,333 shares of common stock (Series D Warrant) at a purchase price of $0.22 per share that expires on October 27, 2019.

 

The debentures mature 24 months from the issuance date and have an interest rate of 6% per annum payable in arrears on the earlier of a default date or the maturity date. The notes may be converted at any time after the original issuance date at the election of their holders to convert all or part of the outstanding and unpaid principal amount and accrued interest at a conversion price of $0.15 per share. The warrants may be exercised in whole or in part.

 

Due to the Company’s breach of the authorization limit of common stock on a diluted basis on August 14, 2014, the Company initially classified the above noted warrants issued since this date as financial liabilities, which would otherwise be recorded as equity instruments and classified as part of additional paid in capital. All derivatives other than stock options issuable into common stock were to be classified and accounted for as financial liabilities (see note 1 for applicable accounting policies) until the breach of the Company’s authorization limit of common stock on a diluted basis was rectified. On December 31, 2014 the Company increased its authorized share issuance limit to 400,000,000 which rectified the breach. The accounting impact of the August 14, 2014, breach only occurred under the earliest issue date sequencing approach at the date of the next issued applicable derivative, which was September 2, 2014. On December 31, 2014 all derivatives impacted by the Company’s breach of its authorized share limit were reclassified to equity from liabilities.

 

F-20
 

 

The following table summarizes the fair values of Convertible Debentures with Series C or Series D Warrants and the respective inputs to determine fair values at the commitment date and the year end dates. 

 

Accounting allocation of initial proceeds:   Fourth
Quarter
Fiscal 2014
    First
Quarter
Fiscal 2015
    Second
Quarter
Fiscal 2015
 
Gross proceeds   $ 1,050,000     $ 250,000     $ 225,000  
Fair value of the convertible debentures     (852,726 )     (254,167 )     (182,720 )
Fair value of liability warrants     -       -       (152,951
Fair value of equity warrants     (197,274 )     -       -  
Financing expense on the issuance of derivative instruments   $ -     $ 4,167     $ 110,671  
                         
Key inputs to determine the fair value at the commitment date:                        
Stock price   $ 0.15-0.16     $ 0.20     $ N/A  
Current exercise price   $ 0.15     $ 0.15     $ N/A  
Time to expiration – days     731       731       N/A  
Risk free interest rate     .37 %     .45 %     N/A %
Estimated volatility     150 %     150 %     N/A %
Dividend     -       -       -  
Market interest rate for the Company     18 %     18 %     N/A %
                         
Key inputs to determine the fair value of the convertible debentures at May 31, 2014:                        
Stock price   $ 0.16     $ N/A     $ N/A  
Current exercise price   $ 0.15     $ N/A     $ N/A  
Time to expiration – days     693-730       N/A       N/A  
Risk free interest rate     .37 %     N/A %     N/A %
Estimated volatility     150 %     N/A %     N/A %
Dividend     -       -       -  
Market interest rate for the Company     18 %     N/A %     N/A %
                         
Key inputs to determine the fair value of the convertible debentures at May 31, 2015:                        
Stock price   $ N/A     $ N/A     $ N/A  
Current exercise price   $ N/A     $ N/A     $ N/A  
Time to expiration – days     328-365       393       460-515  
Risk free interest rate     N/A %     N/A %     N/A %
Estimated volatility     N/A %     N/A %     N/A %
Dividend     N/A       N/A       N/A  
Market interest rate for the Company     N/A %     N/A %     N/A %

 

7. Common Stock

 

The Company issued 600,000 shares of common stock, valued at $75,000; in exchange for business consulting services over the year ended May 31, 2014.

 

On May 9, 2014, the Company issued 700,000 shares of common stock, with a value of $101,711 to a provider of consulting services for past consulting obligations and in consideration of arrangements entered into for Intertainment Media, Inc. for prior and future obligations; and 600,000 in additional shares of common stock, valued at $39,000 as compensation for consulting services.

 

On May 9, 2014 the Company issued 1,666,667 shares of common stock, valued at $133,333, to Ortsbo for amending the Services Agreement dated March 21, 2013 for an exclusive license to use the Ortsbo property and to issue the Company the right to purchase a copy of the source code for $2,000,000. On April 28, 2014, the Company exercised its right to purchase a copy of the source code for the Ortsbo property in exchange for 13,333,333 shares of common stock. Although the common shares had a fair value of $2,000,000 at the date of the exchange, the transaction was ascribed a value of $nil as described in Note 11. To complete the transactions 15,000,000 shares of common stock were issued on May 9, 2014.

 

F-21
 

 

On May 16, 2014 and May 19, 2014, the Company issued 400,000 and 1,205,794 shares to JMJ Financial as a result of the settlement and conversion of the convertible note with a principal amount of $65,000 dated November 15, 2013 (Note 6).

 

On September 3, 2014, and September 16, 2014, the Company issued 270,000 and 841,704 shares to JMJ Financial as a result of the settlement and conversion of the convertible note with a principal amount of $40,000 dated November 15, 2013 (Note 6).

  

On October 23, 2014, November 5, 2014 and November 20, 2014, the Company issued 450,000, 700,000 and 810,641 shares respectively to JMJ Financial as a result of the settlement and conversion of $40,000 of principal amount, representing a portion of the convertible note dated November 15, 2013 (Note 6).

 

On December 31, 2014, the Company’s authorized number of common shares was increased to 400,000,000.

 

During the Company’s second quarter of Fiscal 2015, the Company issued 950,000 shares of common stock to consultants at a value of $95,000. During the Company’s third quarter of Fiscal 2015, the Company issued 800,000 shares of common stock to consultants at a value of $80,000. During the Company’s fourth quarter of Fiscal 2015, the Company issued 540,000 shares of common stock to consultants at a value of $52,500.

 

On May 25, 2015, the Company issued 1,000,000 shares of common stock with a value of $80,000 in partial settlement of an amount owing to a vendor of the Company.

  

Registration Statement

 

The Company filed a Registration Statement on Form S-1 (File No. 333-199569) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) for up to 75,926,665 shares of Yappn Corp.’s $0.0001 par value per share common stock (the "Common Stock") issuable to certain selling stockholders upon conversion of promissory notes and/or warrants currently held by those selling stockholders, specifically (i) 18,440,000 shares of Common Stock issuable to them upon exercise of promissory notes and (ii) 45,880,000 shares of Common Stock issuable to them upon exercise of warrants. The warrants have an exercise prices varying from $0.10 to $0.22 per share (subject to adjustment). The Registration Statement covering the Shares above noted shares was declared effective under the Securities Act of 1933 on November 17, 2014.

 

As part of the contractual rights of certain existing convertible debenture holders, the Company finalized its calculation of shares to be issued in association with the timing of filing its Registration Statement noted above. This resulted in a value of shares to be issued in the amount of $124,567.

 

From April 9, 2014 through February 3, 2015, various holders of convertible preferred stock exercised their right to convert to common stock. A total of 9,360,000 shares of convertible preferred stock were converted into common stock (Note 8).

 

8. Preferred Stock and Warrants

 

Series A Preferred Stock

 

The Company has an authorized limit of 50,000,000 shares of preferred stock, par value $0.0001.

 

Subscription Agreement with Series A Preferred Shares and warrants

 

On March 28, 2013, May 31, 2013 and June 7, 2013, the Company sold an aggregate of 9,360,000 Units at a per unit price of $0.10 on a private placement basis to certain investors for an aggregate $936,000 in proceeds. Each Unit consisted of (i) one share of the Series A Convertible Preferred Stock, par value $0.0001 per share, convertible into one share of common stock; and (ii) a five year warrant to purchase an additional share of the Company’s common stock at a per share exercise price of $0.10. Due to the issuance of common stock to JMJ Financial (Note 6) the May 31, 2013 and June 7, 2013 warrants were revalued using an exercise price of $0.054. The March 28, 2013 warrants were not revalued because the one year price protection provision expired before the issuance of the common shares to JMJ Financial.

 

F-22
 

 

Accounting allocation of initial proceeds: (Only Fiscal 2014 )  June 7,
2013
 
Gross proceeds  $165,000 
Derivative preferred stock liability fair value   (1,025,475)
Derivative warrant liability fair value   (1,146,915)
Financing expense on the issuance of derivative instruments  $2,007,390 
      
The key inputs used in the determination of fair value of the Series A Preferred Stock and warrants at the commitment date:     
Stock price  $0.72 
Current exercise price  $0.10 
Time to expiration – days (preferred stock)   365 
Time to expiration – days (warrants)   1,826 
Risk free interest rate   1.48%
Estimated volatility (preferred stock)   100%
Estimated volatility (warrants)   150%
Dividend   - 

 

The following table reflects the preferred stock activity for the year ended May 31, 2014 and the year ended May 31, 2015:

 

   Preferred Stock 
Outstanding as of June 1, 2013   7,710,000 
Issued on June 7, 2013   1,650,000 
Conversion of preferred stock into common stock   (7,350,000)
Total – as of May 31, 2014   2,010,000 
Conversion of preferred stock into common stock   (2,010,000)
Total – as of May 31, 2015   - 

 

As of May 31, 2014, 7,350,000 shares of Series A Preferred Stock were exchanged for 7,350,000 shares of common stock, at a conversion value of $735,000. As a result of the price protection being removed after one year, the remaining 2,010,000 preferred shares were reclassified on the consolidated balance sheet from a derivative preferred share liability to stockholders’ equity at a value of $201,000 (Note 9). The 2,010,000 preferred shares were exchanged into common shares on February 3, 2015.

 

As a result of the twelve month price protection provisions in the subscription agreement, the Company recognized its preferred stock in its consolidated balance sheet as a derivative liability prior to the expiration of the price protection provisions. The calculation methodologies for the fair values of the derivative preferred stock liability for the year ended May 31, 2015 are described in Note 9 – Derivative Preferred Stock and Warrant Liabilities.