U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal quarter ended February 29, 2016

 

☐   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from _______ to _______

 

YAPPN CORP.

(Exact name of small business issuer as specified in its charter)

 

Delaware		000-55082		27-3848069
(State of Incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

1001 Avenue of the Americas, 11th Floor

New York, NY 10018

(Address of principal executive offices) (Zip code)

 

888-859-4441

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act:

None

 

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.0001 par value per share

(Title of Class)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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	☒

 

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

 

There were 26,433,163 shares outstanding of registrant’s common stock, par value $0.0001 per share, as of April 14, 2016.

 

Transitional Small Business Disclosure Format Yes ☐   No ☒

 

 

 

TABLE OF CONTENTS

 

PART I
Item 1.	Financial Statements	3
	Interim Condensed Consolidated Balance Sheets as of February 29, 2016 (unaudited) and May 31, 2015	4
	Interim Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended February 29, 2016 and February 28, 2015 (unaudited)	5
	Interim Condensed Consolidated Statement of Stockholders’ Deficit for the nine months ended February 29, 2016 (unaudited) and year end May 31, 2015	6
	Interim Condensed Consolidated Statements of Cash Flows for the nine months ended February 29, 2016 and February 28, 2015 (unaudited)	7
	Notes to Interim Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
SIGNATURES		45

 

 

PART I

 

Item 1.

 

Interim Financial Statements and Notes to Interim Financial Statements

 

General

 

The accompanying reviewed interim financial unaudited statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the Company's annual report on Form 10-K for the year ended May 31, 2015. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three and nine months ended February 29, 2016 are not necessarily indicative of the results that can be expected for the year ending May 31, 2016.

 

All references to “dollars”, “$” or “US$” are to United States dollars and all references to “CAD$” 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.

 

 

YAPPN CORP.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		Note		As of February 29, 2016				(audited) As of May 31, 2015
Assets
Current assets:
Cash				$	16,623			$	19,496
Accounts receivable		3			1,431,489				1,444,009
Subscription receivable		8			46,000				-
Prepaid expenses					65,609				6,068
Total current assets					1,559,721				1,469,573
Equipment, net					1,349				1,250
Intangible assets		4			4,953,105				-
Total Assets				$	6,514,175			$	1,470,823
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable				$	472,820			$	340,041
Accrued expenses					1,241,162				543,535
Accrued development and related expenses - related party		13			66,787				468,766
Short term loans		5			376,639				791,928
Line of credit		6			-				2,167,025
Deferred revenue					-				12,500
Convertible promissory notes and debentures		7			2,495,841				3,477,825
Total current liabilities					4,653,249				7,801,620
Other liabilities:
Long term secured debentures		6			4,550,388				-
Convertible secured debentures		8			69,687				-
Convertible promissory notes and debentures		7			-				312,486
Total Liabilities					9,273,324				8,114,106
Stockholders' Deficit
Preferred stock, par value $.0001 per share, 50,000,000 shares authorized: Series 'A' Convertible, 10,000,000 shares authorized; nil shares issued and outstanding		10			-				-
Common stock, par value $.0001 per share, 400,000,000 shares authorized 26,433,163 issued and outstanding (May 31, 2015 – 13,422,814)		9			14,735				13,423
Common stock, par value $.0001 per share, 19,087,662 shares subscribed not issued (May 31, 2015 – 99,344)		9			2,763,638				124,567
Additional paid-in capital					12,893,924				7,981,579
Deficit					(18,431,446	)			(14,762,852	)
Total Stockholders' Deficit					(2,759,149	)			(6,643,283	)
Total Liabilities And Stockholders' Deficit				$	6,514,175			$	1,470,823

 

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

 

 

YAPPN CORP.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

LOSS (Unaudited)

 

				Three Months Ended February 29/28								Nine Months Ended February 29/28
		Note		2016				2015				2016				2015
Revenues		3		$	101,537			$	528,846			$	911,918			$	606,821
Cost of revenue					9,134				140,183				146,068				140,389
Gross profit					92,403				388,663				765,850				466,432
Operating expenses:
Marketing		13			26,152				104,383				224,900				996,107
Research and development expenses		13			109,203				100,759				301,168				597,490
General and administrative expenses		13			497,826				300,435				1,272,484				1,020,468
Professional fees					241,025				74,282				401,048				173,520
Consulting					92,590				199,064				295,665				524,059
Depreciation					102				57				300				176
Amortization					263,940				-				483,890				-
Stock based compensation		12			64,772				70,378				478,289				679,179
Total operating expenses					1,295,610				849,358				3,457,744				3,990,999
Loss from operations					(1,203,207	)			(460,695	)			(2,691,894	)			(3,524,567	)
Other (income) expense:
Interest expense					268,222				105,007				616,609				253,973
Financing expense on issuance of convertible notes and common stock					-				362,069				632,250				942,574
Change in fair value of derivative liabilities and convertible notes					289,881				485,051				(550,456	)			(1,647,824	)
Prepayment fees on variable notes					29,350				10,000				306,140				50,984
Miscellaneous income					(11,077	)			(67,224	)			(27,843	)			(143,780	)
Total other (income) expense					576,376				894,903				976,700				(544,073	)
Net loss before taxes					(1,779,583	)			(1,355,598	)			(3,668,594	)			(2,980,494	)
Provision for income taxes					-				-				-				-
Net loss and comprehensive loss				$	(1,779,583	)		$	(1,355,598	)		$	(3,668,594	)		$	(2,980,494	)
Net loss per weighted-average shares of common stock - basic				$	(0.07	)		$	(0.10	)		$	(0.19	)		$	(0.23	)
Net loss per weighted-average shares of common stock - diluted				$	(0.07	)		$	(0.10	)		$	(0.19	)		$	(0.23	)
Weighted-average number of shares of common stock issued and outstanding - basic					26,433,163				13,105,881				19,269,659				12,825,886
Weighted-average number of shares of common stock issued and outstanding - diluted					26,433,163				13,105,881				19,269,659				12,825,886

 

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

 

 

YAPPN CORP.

INTERIM CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED)

For the nine months ended February, 29 2016 and year ended May 31, 2015

 

		Common																Preferred
		Shares Outstanding				Amount				Subscribed Shares				Subscribed Amounts				Shares Outstanding				Amount				Additional Paid-in Capital				Accumulated Deficit				Total
Balance - May 31, 2014			12,585,579				12,586				-				-				201,000				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			-				-				99,344				124,567				-				-				-				-				124,567
Beneficial conversion feature			-				-				-				-				-				-				622,636				-				622,636
Stock issued to consultants and vendors			329,000				329				-				-				-				-				307,638				-				307,967
Issuance of common stock on conversion of Series A Preferred stock			201,000				201				-				-				(201,000	)			(201	)			-				-				-
Issuance of common stock on conversion of convertible debt			307,235				307				-				-				-				-				105,510				-				105,817
Net loss for the year ended May 31, 2015			-				-				-				-				-				-				-				(4,624,744	)			(4,624,744	)
Balance -  May 31, 2015			13,422,814				13,423				99,344				124,567				-				-				7,981,579				(14,762,852	)			(6,643,283	)
Stock-based compensation			-				-				-				-				-								478,289				-				478,289
Stock issued  on exercise of warrants			11,667				12				-				-				-				-				(12	)			-				-
Issuance of Common Stock for purchase technology			12,998,682				1,300				-				-				-				-				1,805,308				-				1,806,608
Stock to be Issued for purchase of technology			-				-				18,988,318				2,639,071				-				-				-				-				2,639,071
Issuance of  warrants classified as equity			-				-				-				-				-				-				542,760				-				542,760
Warrants associated  with a secured convertible debenture			-				-				-				-				-				-				1,616,630								1,616,630
Beneficial conversion feature			-				-				-				-				-				-				469,370								469,370
Net loss for the nine months ended February 29, 2016			-				-				-				-				-				-				-				(3,668,594	)			(3,668,594	)
Balance - February 29, 2016			26,433,163				14,735				19,087,662				2,763,638				-				-				12,893,924				(18,431,446	)			(2,759,149	)

   

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

 

 

YAPPN CORP.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the nine months ended February 29/28
		2016				2015
Cash Flows From Operating Activities:
Net and comprehensive  loss		$	(3,668,594	)		$	(2,980,494	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation			300				176
Amortization			483,890				-
Stock based compensation			478,289				679,179
Change in fair value of derivative liabilities and convertible notes			(550,456	)			(1,647,824	)
Financing expense on issuance of convertible promissory notes, and common stock			632,250				942,574
Stock issuance for consulting services and licensing rights			-				175,000
Changes in operating assets and liabilities:
Accounts receivable			12,520				(601,821	)
Prepaid expenses			(59,541	)			(23,010	)
Accounts payable and accrued liabilities			830,406				346,550
Accrued development and related expenses - related party			(401,979	)			115,527
Deferred revenue			(12,500	)			-
Net Cash Used in Operating Activities			(2,255,415	)			(2,994,143	)
Cash Flows From Investing Activities:
Expenditures on patents			(15,927	)			-
Capital expenditures			(377	)			(1,593	)
Net Cash Used in Investing Activities			(16,304	)			(1,593	)
Cash Flows From Financing Activities:
Proceeds from convertible promissory notes and debentures			90,750				840,339
(Repayments)/proceeds from line of credit, net			(1,092,025	)			1,475,000
Proceeds from secured debentures			2,096,653				-
Proceeds from secured convertible debentures			2,040,000				-
Repayments of short term loans			(151,791	)			(358,678	)
Proceeds from short term loans			168,823				264,607
Repayment of convertible promissory notes and debentures			(883,564	)			(204,093	)
Net Cash Provided by Financing Activities			2,268,846				2,017,175
Net decrease in cash			(2,873	)			(978,561	)
Cash, beginning of period			19,496				988,692
Cash, end of period		$	16,623			$	10,131
Supplemental Disclosure of Cash Flow Information
Non Cash Investing and Financing Activities Information:
Common stock issued for consulting services		$	-			$	175,000
Common stock issued on exercise of warrants		$	37,100			$	-
Common stock to be issued for consulting and other obligations		$	-			$	124,567
Common stock issuance from conversions of convertible debt		$	-			$	105,817
Reclassification of derivative liabilities to additional paid in capital		$	-			$	1,653,222
Conversion of short term loan and  line of credit into secured debentures		$	419,305			$	100,000
Common stock issued for acquisition of technology		$	1,806,608			$	-
Common stock to be issued for acquisition of technology		$	2,639,071			$	-
Cash paid for interest during the nine month period		$	67,941			$	127,626

 

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

 

 

YAPPN CORP.

Notes to Interim Condensed Consolidated Financial Statements

February 29, 2016

(Unaudited)

 

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 company, in exchange for 7,000,000 shares of common stock of the Company. As a result of this exchange, Intertainment Media Inc. acquired, at that time, a seventy percent (70%) ownership of the Company. On September 15, 2015, the Company closed the acquisition of Ortsbo Inc.’s intellectual property. As a result of the acquisition, Intertainment Media Inc.’s ownership was reduced to 37%. The accompanying interim condensed consolidated financial statements of the Company were prepared from the accounts of the Company under the accrual basis of accounting.

 

Unaudited Interim Condensed Consolidated Financial Statements

 

The interim condensed consolidated financial statements (“interim financial statements”) of the Company as of February 29, 2016, and for the three and nine month periods ended February 29, 2016 and February 28, 2015, are unaudited. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position as of February 29, 2016, and the results of its operations and its cash flows for the three and nine month periods ended February 29, 2016 and February 28, 2015. These results are not necessarily indicative of the results expected for the fiscal year ending May 31, 2016. The accompanying interim financial statements and notes thereto do not reflect all disclosures required under accounting principles generally accepted in the United States. Refer to the Company’s audited consolidated financial statements as of May 31, 2015 filed with the Securities and Exchange Commission, for additional information including significant accounting policies.

 

Principles of Consolidation

 

The interim 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.

 

Intangible Assets

 

Intangible assets consist of acquired technology, and patents, acquired from a related party and are accordingly recorded at the cost as recorded in the records of the related party (Note 4). The Company amortizes acquired technology over its estimated useful life considered to be 5 years, on a straight-line basis. Patents are amortized commencing at the receipt of approval of the patents or acquisition of patents. Should the patent process be unsuccessful, the entire amount relating to the patent is expensed in the period this is determined. The Company continually evaluates the remaining estimated useful life of its intangible assets being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 which was amended in August 2015 by Update No 2015-14: Revenue from Contracts with Customers. The standard outlines a five-step model for revenue recognition with the core principle being that a company should recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Companies can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. Under the modified approach, financial statements will be prepared for the year of adoption using the new standard but prior periods presented will not be adjusted. Instead, companies will recognize a cumulative catch-up adjustment to the opening balance of retained earnings. This new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has not yet made a determination as to the method of application (full retrospective or modified retrospective). It is too early to assess whether the impact of the adoption of this new guidance will have a material impact on the Company's results of operations or financial position.

 

 

On August 27, 2014 the FASB issued a new financial accounting standard on going concern, Update 2014-15, “Presentation of Financial Statements – Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern. The amendments in this update apply to all companies. They become effective in the annual period ending after December 15, 2016, with early application permitted. 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 interim 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 $18,431,446 through February 29, 2016.

 

As of February 29, 2016, the Company had a working capital deficit of $3,093,528. During the nine months ended February 29, 2016, net cash used in operating activities was $2,255,415. 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 interim 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. During the nine months ended February 29, 2016, the Company raised $2,268,846 through various financial instruments, net of repayments.

 

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

 

3. Concentration of Credit Risk

 

All of the Company’s revenues are attributed to a small number of customers. One customer comprises 100% of the accounts receivable as at February 29, 2016 and 55% and 89% of the revenue recorded for the three and nine months ended February 29, 2016. The Company billed its largest customer $233,860 and $1,615,125 for the three month and nine month period ended February 29, 2016, $178,432 and $802,592 has not been recorded as accounts receivable or revenue in the Company’s financial statements as, due to the long period without payment, the Company has determined the revenue recognition criteria starting at the beginning of the Company’s second quarter has not been met. The Company and the customer continue to work together in ways to enable full and complete payment of the total billings incurred, both recognized and unrecognized as at February 29, 2016.

 

Effective February 29, 2016, Digital Widget Factory (Belize) (“DWF”) sold the technology platform, partially developed by Yappn in conjunction with DWF’s principals, to Intelligent Content Enterprises (“ICE”) in exchange for shares of ICE. As part of the transaction, DWF has ownership and rights to 24 million common shares of ICE for a large minority shareholder position of ICE. The Company is in final negotiations with DWF and anticipates executing on a final promissory note from DWF, for the value of the billings of $2,125,000 million (of which $1,431,489 is currently recorded as a receivable). The promissory note is to be secured by DWF’s ICE stock holdings in the amount of 4,250,000 shares, which at the current market value of ICE shares, significantly exceeds to the value of the promissory note.

 

  

4. Acquisition of Intellectual Property (and Reverse Split)

 

On September 15, 2015, the Company finalized its purchase of Intellectual property assets of Ortsbo, Inc. (“Ortsbo”) pursuant to an Asset Purchase Agreement executed and closed on July 15, 2015. With this closing, the Company had an obligation to issue 31,987,000 shares of common stock of Yappn. During the second quarter of fiscal 2016 from the share issuance obligations from the purchase of the Ortsbo intellectual property assets 12,998,682 shares were issued comprising 8,312,500 to Ortsbo and 4,686,182 to the former debt and minority shareholders of Ortsbo, which were valued at $1,806,608 leaving 18,988,318 shares to be issued as of February 29, 2016. As of the filing date, these aforementioned shares remain to be issued. Yappn also assumed $975,388 of debt as part of the transaction. This assumed debt was immediately subscribed as part of the secured debenture in Yappn (Note 6). The fair value for the agreed upon consideration for the acquisition of intellectual property from Ortsbo was $16,968,888, however, due to the common control of Ortsbo Inc. and the Company , the value of the intangible assets acquired from Ortsbo was recorded at the carrying value in the financial records of Ortsbo Inc. This value was $5,421,068 on September 15, 2015.

 

In connection with the terms of the Asset Purchase Agreement related to the purchase of intellectual property assets of Ortsbo, the Company committed to complete a share consolidation. On September 9, 2015, the Company amended its Certificate of Incorporation to implement a reverse stock split in the ratio of 1 share for every 10 shares of common stock. This amendment was approved and filed with the Delaware Secretary of State on September 9, 2015. FINRA declared the Company’s 1-for-10 reverse stock split ex-dividend date effective as of October 2, 2015. The reverse stock split reduced the Company’s common stock outstanding from approximately 134,344,806 shares to approximately 13,434,481 shares. The effect of this reverse stock split has been reflected in these interim financial statements.

 

5. 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 $118,454 (Canadian $160,280) in fiscal 2015 and $8,446 during the nine months period ended February 29, 2016 (Canadian $13,405). As at February 29, 2016, the loan had a value of $130,304 ($176,315 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, $100 par value, convertible into shares of the Company’s common stock and 166,667 issuable shares of common stock (Series C warrants) at a purchase price of $2.20 per share (Note 7). As at February 29, 2016 an amount of $20,693 ($28,000 Canadian) remains outstanding.

 

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 fiscal 2015 $90,145 (Canadian $105,000) was repaid on this note. The remaining balance was repaid during the nine months ended February 29, 2016.

 

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 February 29, 2016, the value of the remaining balance of the loan was $55,428 (Canadian $75,000).

 

On May 6, 2015, the Company borrowed $150,000 ($187,000 Canadian) in the form of a bridge loan from a private investor with a financing fee of $6,000 ($7,200 Canadian). 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 on July 15, 2015. The Company treated this 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 (Note 6). 

 

On June 19, 2015, the Company received $78,265 ($96,000 Canadian) from an intended subscriber for secured debentures, which closed on July 15, 2015. The Company treated this 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 (Note 6).

 

On July 10, 2015, the Company borrowed $250,000 in the form of a bridge loan from a private investor. This loan was paid back on July 16, 2015.

 

During the second quarter of fiscal 2016, the Company received $1,201,000 from intended subscribers of a secured debenture financing closed on December 30, 2015. The Company treated this 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 (Note 6).

 

During the third quarter of fiscal 2016, the Company received $175,000 ($120,000 from a director) from intended subscribers in anticipation of a second closing of the convertible secured debenture financing that closed on December 30, 2015. The Company is treating this as a short term loan where interest is accrued at 12% (same rate as the previously issued secured 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
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	)			(1,356	)			(21,893	)			(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			$	22,513			$	616,870			$	791,928
Borrowing on June 19, 2015			-				-				78,265				78,265
Borrowing on July 10, 2015			-				-				250,000				250,000
Borrowing during the second quarter			-				-				1,201,000				1,201,000
Borrowing during the third quarter			-				-				175,000				175,000
Fair value adjustments			(13,795	)			(1,820	)			(29,388	)			(45,003	)
Conversions			-				-				(1,662,300	)			(1,662,300	)
Repayments			(8,446	)			-				(403,805	)			(412,251	)
Fair value at February 29, 2016		$	130,304			$	20,693			$	225,642			$	376,639

 

6. Line of Credit Arrangement and Secured Debentures

 

On April 7, 2014, the Company finalized its line of credit arrangement 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 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 800,000 shares of the Company’s common stock at an exercise price of $1.00. Upon the Company’s first draw down of $200,000 from the line of credit, 200,000 five year warrants vest. For each subsequent $100,000 the Company draws, 100,000 five year warrants will vest until the 800,000 warrants are vested. The Company’s shares of 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 fiscal 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 and an outstanding obligation of $2,167,025 at May 31, 2015. During fiscal 2016, the Company borrowed $150,000 against the line of credit, repaid and released a total of $1,242,025 (immediately after conversion of $2 million into a secured debenture (see below)) and converted $1,075,000 to secured debentures. The outstanding obligation was $nil at February 29, 2016.

 

Yappn closed the first tranche in the amount of $4.5 million of secured debentures. The secured debentures carry an annual interest rate of 12% payable at maturity. Maturity was initially the earlier of the date proceeds are available from a public offering or December 31, 2015. During the third fiscal quarter, the holders of the Secured Debentures (the “Holders”) agreed to extend the maturity date of the Secured Debentures from December 31, 2015 to July 15, 2020, and were provided with the right to amend the Secured Debenture such that a Holder shall have the right, at any time after the earlier of (i) six (6) months from the date of first issuance of any subsequent Debentures; and (ii) June 30, 2016, to require the Company to satisfy the outstanding obligations underlying the Secured Debenture; provided, however, that at least two thirds (66.67%) of the Holders of the principal amount of the Secured Debentures consent to a put of their Secured Debentures to the Company. This financing is supported by Yappn's secured line of credit holders through their participation as described above. Yappn executed a non-binding letter of intent with Winterberry Investments Inc. ("Winterberry"), a private company led by Mr. David Berry, pursuant to which Winterberry will facilitate and manage the financing transaction as well as to advise on Yappn's future capital programs. The Company received $2.5 million of this financing in the form of cash and cash commitments, including conversion of the short term loans obtained on May 11, 2015 and June 19, 2015 as described in Note 5. $2,000,000 of the $4.5 million financing is conversion of a portion of the Company’s existing debt that remained in the secured debenture. $925,000 was repaid out of the secured debenture, in the form of cash in the amount of $465,000 with the remainder in the form of the release of secured deposit that was applied against accounts receivable. On September 15, 2015, the Company closed the acquisition of intellectual property from Ortsbo, and as part of this closing, assumed debt and non-controlling equity interests from Ortsbo in the amount of $975,338 that was immediately subscribed to the first tranche of secured debentures. The secured debentures balance as at February 29, 2016, was $4,550,388.

 

 

7. Convertible Promissory Notes and Debentures

 

The Company has issued various convertible notes and debentures with various terms. As a result of the variability in the amount of shares of common stock to be issued in accordance with variable pricing terms or conversion price protection clauses, the Company recorded these instruments as liabilities at fair value until the point in time when price protection clauses expired. The Company has determined the convertible notes and debentures to be Level 2 fair value measurement and where applicable has used the binominal lattice pricing model to calculate the fair value as of February 29, 2016, May 31, 2015, and the commitment dates.

 

The following is a summary of the convertible promissory notes and debentures as of February 29, 2016:

 

Principal amounts:		JMJ Financial Notes				Convertible Debentures				Other Notes				Total
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
Borrowings on June 24, 2015			-				-				45,375				45,375
Borrowings on June 29, 2015			-				-				45,375				45,375
Repayments			-				-				(818,000	)			(818,000	)
Total Borrowings at February 29, 2016		$	-			$	2,694,000			$	-			$	2,694,000
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, issued during 2015			137,071				436,887				1,020,110				1,594,068
Change in fair value (from 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
Convertible notes and debt at fair value at the commitment date issued during 2016			-				-				171,990				171,990
Change in fair value			-				550,008				(1,132,904	)			(582,896	)
Repayments (cash)			-				-				(883,564	)			(883,564	)
Convertible notes and debt at fair value at February 29, 2016		$	-			$	2,495,841			$	-			$	2,495,841
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
Balance at February 29, 2016
Current			-				2,495,841				-				2,495,841
		$	-			$	2,495,841			$	-			$	2,495,841

 

 

 

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 $1.00. Early payback penalties are 140% from 120-150 days and 150% up to the maturity date of the note. This Convertible Note was repaid on June 24, 2015.

 

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. This Convertible Note was repaid on June 24, 2015.

 

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 $1.00. 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. The $50,000 drawn on December 29, 2014 was repaid on June 26, 2015. The $25,000 drawn on April 23, 2015 against this Convertible Note was repaid on October 20, 2015. There is no further balance outstanding on this note.

 

 

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 $1.00 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 $1.00 per share. At the funding date the Company issued 70,000 fixed price warrants at an exercise price of $1.00 per share with no price protection. The warrants were recorded at a value of $37,100 in additional paid-in capital (Note 10). The Company elected not to prepay the Typenex Co-Investment, LLC Convertible Note, and made all installment payments in the form of cash totaling $123,383 from August to January 2016 comprising principal and interest. On January 5, 2016, the Company repaid this Convertible Note in full.

 

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. During August 2015, the Company prepaid the portion of the Convertible Note advanced in February 2015 in the principal amount of $90,750. On June 24, 2015 and June 29, 2015, Iconic Holdings LLC, provided funding of $90,750 (two advances of $45,375) to the Company under the existing Convertible Note.  On January 5, 2016, the Company repaid this Convertible Note in full.

 

Group 10 Holdings LLC

 

On March 30, 2015, the Company sold a Convertible Note for the principal amount of $92,000 with a 10% original issue discount. The Convertible Note 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%. On October 6, 2015, the Company repaid this Convertible Note in full.

 

 

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. On October 13, 2015, the Company repaid this note in full.

 

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%. On October 20, 2015, the Company repaid this Note in full.

 

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%. On October 20, 2015 the Company repaid this note in full.

 

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 quarter end dates.

 

Accounting allocation of initial proceeds:		Second Quarter Fiscal 2015				Third Quarter Fiscal 2015				Fourth Quarter Fiscal 2015				First Quarter Fiscal 2016
Gross proceeds		$	90,000			$	430,750			$	296,500			$	90,750
Fair value of promissory notes			(137,071	)			(656,507	)			(363,604	)			(171,990	)
Fair value of equity warrant			-				(37,100	)			-				-
Financing expense on the issuance of promissory notes		$	47,071			$	262,857			$	67,104			$	81,240
Key inputs to determine the fair value at the commitment date:
Stock price		$	0.40-1.20			$	0.50-0.70			$	0.50-0.60			$	0.60
Current exercise price		$	0.40-0.60			$	0.20-1.00			$	0.30			$	0.20
Time to expiration – days			389-436				181-365				250-366				225-230
Risk free interest rate			.1-.11	%			.14-.26	%			.09-.27	%			.30-.27	%
Estimated volatility			150	%			150	%			150	%			150	%
Dividend			-				-				-				-
Key inputs to determine the fair value at May 31, 2015:
Stock price		$	N/A			$	0.50			$	0.60			$	N/A
Current exercise price		$	N/A			$	0.30-1.00			$	0.30			$	N/A
Time to expiration – days			N/A				115-346				212-325				N/A
Risk free interest rate			N/A	%			.07-.22	%			.06-.26	%			N/A
Estimated volatility			N/A	%			150	%			150	%			N/A	%
Dividend			N/A				N/A				N/A				N/A

 

 

Convertible Debentures with Series A and B Warrants

 

On January 29, 2014, February 27, 2014, and April 1, 2014, the Company issued 395, 305, and 469 Units for $395,000, $305,000, and $469,000 respectively, to accredited investors under subscription agreements. The Units, as defined in the subscription agreements, consist of (i) one unsecured 6% convertible promissory note, $100 par value, convertible into shares of the Company’s common stock; (ii) a warrant entitling the holder thereof to purchase 1,000 shares of common stock (individually Series A Warrant) at an exercise price of $1.50; and, (iii) a warrant entitling the holder thereof to purchase 1,000 shares of common stock (individually Series B Warrant) at an exercise price of $2.00. 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 5).

 

The notes mature 24 months from the issuance date and have an interest rate of 6% per annum payable in arrears on the earlier of a default date or the maturity date. The notes may be converted at any time after the original issuance date at the election of their holders to convert all or part of the outstanding and unpaid principal amount and accrued interest at a conversion price of $1.00 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 $1.50 for a period of twelve months from issuance. The Company determined the warrants issued to the Line of Credit lenders (Note 6) qualified as a breach of this covenant, therefore all Series A warrants were revalued to a $1.00 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 loss as an “other expense”.

 

The convertible debentures due on January 29, and February 27, 2016 were not repaid or converted into common shares of the Company by the maturity dates. Non-repayment of the debentures triggered a penalty interest rate whereby the stated interest rate goes up to 16% from the original 6%. The Company management is diligently working with the debenture holders on amending terms. Certain debenture holders have agreed to accept an offer for additional investment and agreement to convert their debt into common shares and a repricing to previously issued warrants (Note 14).

 

 

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 quarter 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 11)			(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		$	0.50			$	0.50			$	1.80
Current exercise price – promissory notes		$	1.00			$	1.00			$	1.00
Current exercise price – Series A warrants		$	1.50			$	1.50			$	1.50
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			N/A				N/A				N/A
Market interest rate for the Company			18	%			18	%			18	%
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			N/A				N/A				N/A
Key inputs to determine the fair value of the promissory notes at February 29, 2016:
Stock price		$	N/A			$	N/A			$	N/A
Current exercise price		$	N/A			$	N/A			$	N/A
Time to expiration – days			-				-				32
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

 

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, $100 par value convertible into shares of the Company’s common stock at a conversion price of $1.50 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 33,333 shares of common stock (Series C Warrant) at a purchase price of $2.20 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, $100 par value convertible into shares of the Company’s common stock at a conversion price of $1.50 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 666,667 shares of common stock (Series C Warrant) at a purchase price of $2.20 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 5. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $100 par value convertible into shares of the Company’s common stock at a conversion price of $1.50 per share 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 166,667 shares of common stock (Series C Warrant) at a purchase price of $2.20 per share that expires on June 27, 2019.

 

 

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 (Note 5). The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $100 par value convertible into shares of the Company’s common stock at a conversion price of $1.50 per share 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 83,333 shares of common stock (Series C Warrant) at a purchase price of $2.20 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, $100 par value convertible into shares of the Company’s common stock at a conversion price of $1.50 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 33,333 shares of common stock (Series D Warrant) at a purchase price of $2.20 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, $100 par value convertible into shares of the Company’s common stock at a conversion price of $1.50 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 33,333 shares of common stock (Series D Warrant) at a purchase price of $2.20 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 $1.50 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 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.

 

 

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 quarter 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		$	1.50-1.60			$	2.00			$	N/A
Current exercise price		$	1.50			$	1.50			$	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, 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	%
Key inputs to determine the fair value of the convertible debentures at February 29, 2016:
Stock price		$	N/A			$	N/A			$	N/A
Current exercise price		$	N/A			$	N/A			$	N/A
Time to expiration – days			54-91				119				186-241
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	%

 

 

8. Convertible Secured Debentures

 

On December 30, 2015, the Company completed a secured debenture and warrant financing of $2,086,000 ($1,075,00 from directors of the Company) through the offering of units by way of private placement, with each unit consisting of (i) a 12% secured convertible debenture with a maturity date of five years from issuance convertible at $0.25 per common stock and (ii) ten (10) five year common share purchase warrants, vesting in 1/3 increments with 1/3 vested immediately, 1/3 to be vested in one year and 1/3 to be vested in two years and having an exercise price of $0.01 per share. The units were sold at $1.00 per unit. This closing includes conversion of $1,201,000 in short term loans advanced during the quarter prior to the closing of this secured debenture. Additionally, this includes $46,000 that the Company is yet to receive in cash and is currently recorded as subscription receivable. 

 

Values were allocated for this private placement between the debt, equity warrants, and the beneficial conversion feature. The valuation approach involved determining a fair value for the debt and warrants and then using the relative fair value method to allocate value to these components. Based on relative fair values, the present value method was used to determine the fair values of the debt and the binomial tree option pricing model was used to determine the fair value of the warrants. The value of the interest and principal payments of the debentures resulted in a value of $469,370 for the debentures and the binomial model resulted in a value for warrants for $1,616,630. The assumptions used for the binomial model are: Volatility 314%, expected life of five years, risk free interest rate of 1.80%, and dividend rate of 0%. Additionally, this convertible secured debenture instrument includes a beneficial conversion feature as the effective conversion price is less than the Company’s market price of common stock on the commitment date. The value of this beneficial conversion feature is $469,370. The resulting fair value of the debt is $nil, with $1,616,630 allocated to equity warrants and $469,370 to the beneficial conversion feature, both which are recorded as components of additional paid in capital.

 

The difference between the fair value and face value of the debentures is to be accreted up to face value over the term to maturity using the effective interest method. The carrying value of the debenture liability as at February 29, 2016 is $69,687, which is the amount of accretion recorded during the three month period ended February 29, 2016 included as change in fair value.

 

The following table summarizes the fair values of the components of the convertible secured debentures, including the debt, warrants, and the beneficial conversion feature.

 

Accounting allocation of initial proceeds:		December 30, 2015
Gross proceeds		$	2,086,000
Fair value of the convertible secured debt			-
Fair value of equity warrants (Note 10)			(1,616,630	)
Beneficial conversion feature			(469,370	)

 

Convertible secured debt at fair value at the commitment date, issued during 2016		$	-
Change in fair value (from commitment date)			69,687
Repayments (cash)			-
Convertible secured debenture at fair value at February 29, 2016		$	69,687

 

 

9. Common Stock

 

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 95,000 shares of common stock to consultants at a value of $95,000. During the Company’s third quarter of Fiscal 2015, the Company issued 80,000 shares of common stock to consultants at a value of $80,000. During the Company’s fourth quarter of Fiscal 2015, the Company issued 54,000 shares of common stock to consultants at a value of $52,500.

 

On May 25, 2015, the Company issued 100,000 shares of common stock with a value of $80,000 in partial settlement of an amount owing to a vendor of the Company.

 

On August 31, 2015 the Company issued 11,667 shares of common stock in the form of a cashless exercise with a previous allocation to equity of $37,100 in full settlement of warrants issued to Typenex (Note 7).

 

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 936,000 shares of convertible preferred stock were converted into common stock (Note 10).

 

On September 15, 2015, the Company closed an agreement with Ortsbo Inc. to acquire all of its intellectual property assets. The purchased assets include US Patent No. 8,983,850 B2, US Patent No. 8,917,631 B2, US Patent No. 9,053,097 B2, and other intellectual property including Ecommerce and Customer Care know-how for a total purchase price of $16,968,888, which was paid by the assumption of $975,388 in debt and the issuance of $15,993,500 worth of Yappn restricted common shares (32 Million shares at $0.50 per share). During the second quarter, 12,998,682 shares were issued with obligations incurred to issue the remaining 18,988,318 shares when signed registration forms are all obtained by the Company. As at the filing date, the 18,988,318 remain reserved but not issued (Note 4).

 

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 7,592,667 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) 1,844,000 shares of Common Stock issuable to them upon exercise of promissory notes and (ii) 4,588,000 shares of Common Stock issuable to them upon exercise of warrants. The warrants have an exercise price varying from $1.00 to $2.20 per share (subject to adjustment). The Registration Statement covering the above noted shares was declared effective under the Securities Act of 1933 on November 17, 2014. On October 5, 2015, the Company filed a continuing registration statement in part to update to this S-1 filing, and subsequently filed an amendment to this filing.

 

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. These shares have not been issued as of February 29, 2016.

 

 

10. 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.

 

The following table reflects the preferred stock activity for the year ended May 31, 2015 and the three and nine month periods ended February 29, 2016:

 

		Preferred Stock
Total – as of May 31, 2014			201,000
Conversion of preferred stock into common stock			(201,000	)
Total – as of May 31, 2015 and  February 29, 2016			-

  

The 201,000 preferred shares were exchanged into common shares on February 3, 2015 at a conversion value of $201,000. 

  

Warrants

 

Subscription Agreement with Series A Preferred Shares

 

On March 28, 2013, May 31, 2013 and June 7, 2013, the Company issued a total of 936,000 five year warrants as part of a Unit under subscription agreements that included Series A preferred shares with full ratchet anti-dilution protection provisions. The price protection provisions were effective for twelve months from date of issuance.

 

 

On November 15, 2013, the Company issued 12,000 warrants under the same full ratchet anti-dilution provisions as the other warrants, to a broker as compensation for a portion of the private placement made on May 31, 2013 for these Units.

 

Series A, B, C and D Warrants

 

On January 29, 2014, February 27, 2014, and April 1, 2014, the Company issued 395 Series A and Series B warrants, 305 Series A and Series B warrants, and 469 Series A and Series B warrants, respectively, with unsecured 6% convertible promissory notes (Note 7), as part of the defined offered Unit under the subscription agreements on those respective dates. Each Series A warrant entitles the holder thereof to purchase 1,000 shares of common stock for a purchase price of $1.00 per share after the re-pricing of the instruments took place. Each Series B warrant entitles the holder thereof to purchase 1,000 shares of common stock for a purchase price of $2.20 per share.

 

The Series A and Series B warrants permit cashless exercise beginning with the effective date unless and until a registration statement covering the resale of the shares underlying the warrants is effective with the Securities and Exchange Commission. The Series A warrants, for a period of twelve months from the original date of issuance, provide full ratchet price protection provisions and as such are treated as a derivative liability at the commitment date and until such provisions expire being January 29, 2015 February 27, 2015 and April 1, 2015, respectively. The Series B warrants do not provide any price protection provisions and therefore are treated as equity instruments at the commitment date and thereafter. Both the Series A and Series B warrants have a five year life.

 

During the fourth quarter of fiscal 2014, the Company authorized and issued Series C warrants to acquire 33,333 and 666,667 shares of common stock on April 23, 2014 and May 30, 2014, respectively, to accredited investors with unsecured 6% convertible debenture, $100 par value, convertible into shares of the Company’s common stock at a conversion price of $1.50 per share, with a one year price protection clause on any conversion feature issued after the issuance date, that matures on April 23, 2016 and May 30, 2016 respectively. The Series C warrants entitle the holder thereof to purchase shares of common stock at a purchase price of $2.20 per share and have a five year life. The Series C warrants do not provide any price protection provisions and therefore are treated as equity instruments at the commitment date and thereafter.

 

During the first quarter of fiscal 2015, the Company authorized and issued two separate issues of 125 Units on June 27, 2014. This total authorized and issuance of 250 Units, at a value of $250,000, was to two independent accredited investors in exchange for $150,000 in cash and release of $100,000 in the loan originated on January 7, 2014 as described in Note 6. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $100 par value convertible into shares of the Company’s at a common stock conversion price of $1.50 per share, with a one year 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 166,667 shares of common stock (Series C Warrant) at a purchase price of $2.20 per share that expires on June 27, 2019.

 

During the second quarter of fiscal 2015, the Company authorized and issued Series C warrants to acquire 83,333 shares of common stock on September 2, 2014 and issued Series D warrants to acquire 33,333 and 33,333 shares of common stock on October 6, 2014, and October 27, 2014 respectively, to accredited investors. The Units, as defined in the subscription agreement, consist of (i) one unsecured 6% convertible debenture, $100 par value convertible into shares of the Company’s common stock at a conversion price of $1.50 per share, with a one year price protection clause on any conversion feature issued after the issuance date, that matures on September 2, 2016, October 6, 2016, and October 27, 2016 respectively; and (ii) a warrant entitling the holder thereof to purchase 166,667 shares of common stock (Series D Warrant) at a purchase price of $2.20 per share that expires on September 2, 2016, October 6, 2016, and October 27, 2016 respectively. The Series D warrants do not provide any price protection provisions and therefore should be treated as equity instruments at the commitment date and thereafter; however these warrants were originally recorded as liabilities as the Company breached its authorized share limit on a diluted basis, which required any additional warrants that otherwise would have been recorded as equity instruments to be recorded as liability instruments. On December 31, 2014, the Company rectified its breach of authorized share limit and the warrants were reclassified to equity.

 

 

Line of Credit Arrangement

 

Pursuant to the loan agreement and promissory note entered on April 7, 2014 (Note 6), the Company issued the lender warrants to purchase up to 800,000 shares of the Company’s common stock at an exercise price of $1.00 per share.

 

The following is a summary of warrants issued, exercised and expired through February 29, 2016:

 

		Shares Issuable Under Warrants				Exercise Price				Expiration
Outstanding as of May 31, 2012			-				-			-
Issued on March 28, 2013			401,000			$	1.00			March 28, 2018
Issued on May 31, 2013			370,000			$	0.54			May 31, 2018
Exercised and expired			-				-			-
Total – as of May 31, 2013			771,000				-			-
Issued on June 7, 2013			165,000			$	0.54			June 7, 2018
Issued on November 15, 2013			12,000			$	1.00			November 15, 2018
Issued Series A warrants on January 29, 2014			395,000			$	1.00			January 29, 2019
Issued Series B warrants on January 29, 2014			395,000			$	2.00			January 29, 2019
Issued Series A warrants on February 27, 2014			305,000			$	1.00			February 27, 2019
Issued Series B warrants on February 27, 2014			305,000			$	2.00			February 27, 2019
Issued Series A warrants on April 1, 2014			469,000			$	1.00			April 1, 2019
Issued Series B warrants on April 1, 2014			469,000			$	2.00			April 1, 2019
Issued to Lender – Line of Credit			800,000			$	1.00			April 7, 2019
Issued Series C warrants on April 23, 2014			33,333			$	2.20			April 23, 2019
Issued Series C warrants on May 30, 2014			666,667			$	2.20			May 30, 2019
Exercised and expired			-
Total – as of May 31, 2014			4,786,000
Issued Series C warrants on June 27, 2014			166,667			$	2.20			June 27, 2019
Issued Series C warrants on September 2, 2014			83,333			$	2.20			September 2, 2019
Issued Series D warrants on October 6, 2014			33,333			$	2.20			October 6, 2019
Issued Series D warrants on October 27, 2014			33,333			$	2.20			October 27, 2019
Issued warrants – consultants			330,000			$	1.50			May 30, 2019
Issued warrants on February 4, 2015 Typenex Co-Investments, LLC			70,000			$	1.00			February 4, 2020
Issued warrants – consultant on May 31, 2015			5,000			$	1.00			May 31, 2017
Issued warrants – consultant on May 31, 2015			15,000			$	1.50			May 31, 2017
Exercised and expired			-
Total – as of May 31, 2015			5,522,666
Issued warrants on September 28, 2015 – board of directors			300,000			$	1.00			August 31, 2020
Issued to Lender – Line of Credit on November 5, 2015			1,700,000			$	1.00			April 7, 2019
Issued warrants – consultant on November 5, 2015			100,000			$	1.00			October 16, 2017
Issued warrants on December 30, 2015			20,860,000			$	0.01			December 29, 2020
Exercised Warrants Typenex Co-Investments, LLC			(70,000	)		$	1.00
Total – as of February 29, 2016			28,412,666

  

The outstanding warrants at February 29, 2016 and May 31, 2015 have a weighted average exercise price of approximately $0.35 and $1.42 respectively and have an approximate weighted average remaining life of 4.6 and 3.7 years, respectively.

 

 

The price protection provisions of those warrants issued as part of the Series A Preferred Stock subscription prior to May 31, 2013, have expired and, as such, the instruments issued on March 28, 2013 are recognized as equity instruments. The price protection provisions of the Series A warrants issued as part of the January 29, 2014 and February 28, 2014 convertible debenture financing have expired, and as such, these warrants are now recognized as equity instruments. The Series B warrants, Series C warrants, and warrants associated with the Line of Credit arrangement do not provide the holder any price protection, and as there is no variability in the determination of common stock, these warrants are also reflected as equity instruments.

 

The Company issued warrants to two separate consulting firms in the amount of 200,000 and 130,000 respectively included in consulting expense on October 6, 2014 with an exercise price of $1.50 both with expiry dates of May 30, 2019.

 

The Company issued warrants to a consultant in the amount of 5,000 on May 31, 2015 at an exercise price of $1.00 and 15,000 also on May 31, 2015 with an exercise price of $1.50, both included in consulting expense and with expiry dates of May 31, 2017.

 

The Company issued 300,000 warrants on September 28, 2015 to new Board of Directors at an exercise price of $1.00 with expiry of five years from September 1, 2015. These were expensed as stock based compensation.

 

The Company issued 1,700,000 warrants to the line of credit holder included in financing expense in contemplation of taking a pari passu security position and allowing Winterberry to act as collateral agent for the secured debenture financing. These warrants were issued November 5, 2015 have an exercise price of $1.00 with expiry date of April 7, 2019.

 

The Company issued warrants to a consultant in the amount of 100,000 included in financing expense on November 5, 2015 at an exercise price of $1.00 with expiry date of October 16, 2017.

 

On December 30, 2015, the Company issued 20,860,000 warrants with secured 12% convertible secured debentures (Note 8), as part of the subscription agreements. Each warrant entitles the holder thereof to purchase shares of common stock for a purchase price of $0.01 per share for up to a maximum of 10 shares for every $1 of subscription. These shares will vest in increments of 1/3 with the first 1/3 being vested on December 29, 2016, second increment of 1/3 on December 29, 2017, and last 1/3 on December 29, 2018.

  

The following table is a summary of those warrants that are reflected in equity as at February 29, 2016:

 

		Shares Issuable Under Warrants				Equity Value
Issued warrants on March 28, 2013			401,000			$	917,087
Issued warrants on May 31, 2013			370,000				543,530
Issued warrants on June 7, 2013			165,000				211,670
Issued warrants on November 15, 2013			12,000				3,744
Issued Series A warrants on January 29, 2014			395,000				397,895
Issued Series B warrants on January 29, 2014			395,000				-
Issued Series A warrants on February 27, 2014			305,000				224,135
Issued Series B warrants on February 27, 2014			305,000				-
Issued Series A warrants on April 1, 2014			469,000				234,969
Issued Series B warrants on April 1, 2014			469,000				-
Issued to Loan Agreement - Credit Line			800,000				1,495,200
Issued Series C warrants on April 23, 2014			33,333				9,395
Issued Series C warrants on May 30, 2014			666,667				187,574
Issued Series C warrants on June 27, 2014			166,667				-
Issued Series C warrants on September 2, 2014			83,333				38,584
Issued Series D warrants on October 6, 2014			33,333				15,567
Issued Series D warrants on October 27, 2014			33,333				15,667
Warrants issued to consultants			330,000				165,330
Issued warrants on May 31, 2015			20,000				3,960
Issued warrants on September 28, 2015			300,000				227,100
Issued warrants on November 5, 2015			1,700,000				519,520
Issued warrants on November 5, 2015			100,000				23,240
Issued warrants on December 30, 2015			20,860,000				1,616,630
Total – as of  February 29, 2016			28,412,666			$	6,850,797

  

  

11. Warrant Liabilities

 

The Company has determined derivative warrant liabilities are Level 2 fair value measurement and has used the binominal lattice pricing model to calculate the fair value as at each reporting period in fiscal 2015 and prior to expiry. The binomial lattice model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate.

 

The following is a summary of the derivative warrant liability as at February 29, 2016 and May 31, 2015:

 

		Shares Issuable Under Warrants				Derivative Warrant Value
Balance as of June 1, 2013			771,000			$	4,050,278
Warrants issued June 7, 2013			165,000				1,146,915
Warrants issued November 15, 2013			12,000				9,636
Series A warrants issued on January 29, 2014			395,000				161,950
Series A warrants issued on February 27, 2014			305,000				125,050
Series A warrants issued on April 1, 2014			469,000				776,664
Warrants reclassified to equity (price protection expiry)			(401,000	)			(917,087	)
Warrants exercised or expired			-				-
Decrease in fair value of derivative warrant liability			-				(2,822,124	)
Balance as of May 31, 2014			1,716,000				2,531,282
Warrants reclassified to equity (price protection expiry and authorized share limit increase Notes 9 and 10)			(1,716,000	)			(1,851,090	)
Warrants exercised or expired			-				-
Decrease in fair value of derivative warrant liability			-				(680,192	)
Balance as of May 31, 2015 and February 29, 2016			-			$	-

   

For the nine months ended February 29, 2016 and February 28, 2015, the revaluation of the warrants at each reporting period resulted in the recognition of a gain of $nil and $1,081,984 respectively within the Company’s consolidated statements of operations and comprehensive loss and is included under the caption “Change in fair value of derivative liabilities and convertible notes”.

   

12. Employee Benefit and Incentive Plans

 

On August 14, 2014, the Board of Directors approved the adoption of the 2014 Stock Option Plan. The Company completed its first grant of stock options immediately after the plan was approved. The Company completed a second grant of stock options on March 2, 2015. The following table outlines the options granted and related disclosures:

 

		Stock Options				Weighted- Average Exercise Price
Outstanding (Granted all in Fiscal 2015)			1,804,500			$	1.00
Exercised			-				-
Cancelled, forfeited or expired			114,500				-
Outstanding at February 29, 2016			1,690,000			$	1.00
Options exercisable at February 29, 2016			1,066,667			$	1.00
Fair value of options vested as at February 29, 2016		$	907,200				-

 

On August 21, 2015, the Company amended its 2014 Stock Option Plan to increase the number of options available to 25,000,000.

 

As at February 29, 2016, vested and exercisable options do not have any intrinsic value and have a weighted-average remaining contractual term of 2.9 years. It is expected the 623,333 unvested options will ultimately vest, and each has an exercise price of $1.00 per share and a weighted average remaining term of 1.75 years. The aggregate intrinsic value of options represents the total pre-tax intrinsic value, the difference between our closing stock price as at February 29, 2016 and the option’s exercise price, for all options that are in the money. This value was $nil as at February 29, 2016.

 

As at February 29, 2016, there is $426,756 of unearned stock based compensation cost related to stock options granted that have not yet vested (623,333 options). This cost is expected to be recognized over a remaining weighted average period of 0.2 years.

 

710,000 of the stock options granted on August 14, 2014 vest 1/3 immediately, 1/3 after one year and 1/3 after two years. 15,000 options vest contingent on revenue targets, and 15,000 options have vested on April 1, 2015. The remaining options all have immediate vesting terms. 520,000 of the stock options granted on March 2, 2015 vest 1/3 immediately, 1/3 after one year and 1/3 after two years. 50,000 vest 1/2 immediately and 1/2 after one year. The remaining options all have immediate vesting terms.

 

 

The estimated fair value of options granted on August 14, 2014 is measured using the binomial model using the following assumptions:

 

Total number of shares issued under options			1,047,000
Stock price		$	1.00
Exercise price		$	1.00
Time to expiration – days (2 year options)			730
Time to expiration – days (5 year options)			1,826
Risk free interest rate (2 year options)			.42	%
Risk free interest rate (5 year options)			1.58	%
Forfeiture rate (all options)			0	%
Estimated volatility (all options)			150	%
Weighted-average fair value of options granted			0.90
Dividend			-

  

The estimated fair value of options granted on March 2, 2015 is measured using the binomial model using the following assumptions:

 

Total number of shares issued under options			757,500
Stock price		$	0.60
Exercise price		$	1.00
Time to expiration – days (2 year options)			730
Time to expiration – days (5 year options)			1,826
Risk free interest rate (2 year options)			.66	%
Risk free interest rate (5 year options)			1.57	%
Forfeiture rate (all options)			0	%
Estimated volatility (all options)			150	%
Weighted-average fair value of options granted			0.50
Dividend			-

  

The assumptions used in the stock based compensation binomial models are consistent with the methodology used in valuing the Company’s convertible debt instruments with two year lives, and the Company’s warrants with five year lives. Due to a lack of history, the Company has assumed the expected life of the options, is the contractual life of the options.

 

13. Related Party Balances and Transactions

 

On March 28, 2013, the Company purchased the Yappn assets from Intertainment Media, Inc. in consideration for 7,000,000 shares of common stock for a controlling 70 percent interest (as of that date, 52.1% as at February 29, 2016, 32% once remaining shares are issued from acquisition of Ortsbo IP) in the Company. At that time, the Chief Executive Officer and director of the Company was David Lucatch (since resigned), who is also the Chief Executive Officer and director of Intertainment Media, Inc. and Herb Willer who was a director of the Company and is a director of Intertainment Media, Inc.

 

On March 28, 2013, as part of the assets purchased, the Company also assumed a technology services agreement with Ortsbo Inc. (“Ortsbo”), a wholly-owned subsidiary of Intertainment Media, Inc. Mr. Lucatch is also the president and a member of the Board of Directors of Ortsbo, Inc. Mr. Lucatch is also a member of the Board of Directors of Ortsbo USA, Inc. The service agreement requires the Company to pay cost plus thirty percent (30%) for actual cost incurred by Ortsbo in providing technology services. Upon closing of the acquisition of Ortsbo intellectual property on September 15, 2015, the service agreement was terminated.

 

 

On October 23, 2013, the Company and Ortsbo, entered into an amendment to the Services Agreement dated March 28, 2013 for an exclusive license to use the Ortsbo property and an option to purchase a copy of the Ortsbo source code in exchange for 166,667 shares of restricted common stock of the Company. The shares of common stock were valued at the market price on the date of the agreement for a value of $133,333. On April 28, 2014, the Company exercised its right to purchase a copy of the source code for the Ortsbo property in exchange for 1,333,333 shares of restricted common stock. Since both the Company and Ortsbo are under the common control of Intertainment Media, Inc., and as Ortsbo’s carrying value for these assets was $nil, the Company reflected the acquisition value at $nil on the consolidated balance sheet. As of February 29, 2016, Ortsbo holds 1,500,000 restricted shares of common stock of the Company.

 

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. on behalf of the Company for third party purchases are invoiced at cost.

 

On September 15, 2015, the Company closed an agreement with Ortsbo Inc. to acquire all of its intellectual property assets. The purchased assets include US Patent No. 8,983,850 B2, US Patent No. 8,917,631 B2, US Patent No. 9,053,097 B2, and other intellectual property including Ecommerce and Customer Care know. With this closing, the Company had an obligation to issue 31,987,000 shares of common stock of Yappn. During the quarter 12,998,682 shares were issued comprising of 8,312,500 to Ortsbo Inc. and 4,686,182 to the former debt and minority shareholders of Ortsbo, which were valued at $1,806,608, leaving 18,988,318 shares to be issued at February 29, 2016 comprising 17,687,500 to Winterberry and 1,300,818 to a former holder of Ortsbo stock. As of the filing date, these aforementioned shares remain to be issued. Yappn also assumed $975,388 of debt as part of the transaction. This assumed debt was immediately subscribed as part of the secured debenture in Yappn (Note 6). The fair value for the agreed upon consideration for the acquisition of Intellectual property from Ortsbo was $16,968,888. This transaction was completed on September 15, 2015. Due to the common control of Ortsbo Inc. and Yappn Corp the value of the Intangible assets acquired from Ortsbo was recorded at the carrying value in the financial records of Ortsbo Inc. This value was $5,421,068 on September 15, 2015 (Note 4).

 

For the nine month period ended February 29, 2016, related party fees incurred and paid for general development and managerial services performed by Intertainment Media, Inc. and its subsidiary totaled $128,229 ($725,779 – nine months ending February 28, 2015). As of February 29, 2016 the related party liability balance totaled $66,787 ($468,766 – May 31, 2015).

 

Directors subscribed for $1,075,000 of the $2,086,000 convertible secured debentures issued on December 30, 2015 (note 8). A director also advanced $120,000 to the Company on a second closing of the same convertible secured debenture financing closed on December 30, 2015 (note 5).

 

14. Subsequent Events

 

The Company granted 8,775,000 stock options to employees and consultants at an exercise price of $0.25 per share, with a 5 year life vesting over three years. The Company also re-priced 1,230,000 options previously issued to employees to $0.25 per share from their original pricing of $1.00 per share.

 

The Company granted future rights to issue stock of up to 4,000,000 shares in total to Board of Directors on achievement of revenue milestones.

 

The Company received advances of $250,000 towards a tranche to be closed at a future date in a private placement of units consistent of one common stock at $0.25 per share and one common stock purchase warrant with an exercise price of $0.25 per share.

 

 

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

 

Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to “we,” “Yappn,” “us,” and “our” are to Yappn Corp., unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited Interim Condensed interim financial statements and the accompanying related notes included in this quarterly report and our audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended May 31, 2015 filed with the Securities and Exchange Commission.

 

Forward Looking Statements

 

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

 

Management’s Discussion and Analysis of Results of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our financial statements included herein. Further, this quarterly report on Form 10-Q should be read in conjunction with our Financial Statements and Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended May 31, 2015, filed with the Securities and Exchange Commission on August 26, 2015. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks including, but not limited to, those set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K.

 

Business History

 

We were originally incorporated under the laws of the State of Delaware on November 3, 2010 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 7,000,000 shares of our common stock, pursuant to an asset purchase agreement (the “Purchase Agreement” and the transaction, the “Asset Purchase”) by and among IMI, us, and our newly formed wholly owned subsidiary, Yappn Acquisition Sub., Inc., a Delaware corporation (“Yappn Sub”).  Mr. David Lucatch, our prior Chief Executive Officer and a current 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. On July 6, 2015, Yappn entered into a definitive agreement to acquire all of the intellectual property assets of Ortsbo (see below).

  

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 11,250,000 shares of our common stock held by such persons.

 

On July 15, 2015, after the approval of the Board of Directors of each company, Intertainment Media and 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 $17 Million, which will be paid by the assumption of $1 Million in debt and the issuance of $16 Million worth of our restricted common shares (32 Million shares at $0.50 per share). 

 

Intertainment Media received Toronto Stock Venture Exchange final approval on September 14, 2015 to proceed with the transaction. On September 14, 2015, the acquisition of Ortsbo Intellectual property by our company was closed.

 

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

 

 

Our Business

 

Our company 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 our real-time multilingual amplification platform, we eliminate 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.

 

Our offerings engage through all phases of Ecommerce, online events, and content programming. Through our recently launched Windrose Global Ecommerce framework (“WGE”), we provide 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.

 

Our cloud-based platform is built from the ground up upon our company’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.

 

Our 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, we 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.

 

We derive our revenue from a percentage of each sale and/or through professional services fees, when applicable, depending on the application and installation of its offerings. We redefine 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 our business rollout will likely require additional debt or equity financing and there can be no assurance that additional financing can be obtained on acceptable terms. We are in the early stage of commercialization, and management believes that we have insufficient revenues to cover our operating costs. As such, we have incurred an operating loss since inception. This and other factors raise substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent on our ability to meet our obligations, to obtain additional financing as may be required, and ultimately to attain profitability. Our independent auditors have included an explanatory paragraph, in their audit report on our financial statements for the fiscal year ended May 31, 2015 regarding concerns about our ability to continue as a going concern. Footnote 2 to the Notes to this Form 10-Q Report also discusses concerns about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Our Strategy

 

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.

 

 

●

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, our 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.

 

 

Management 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

 

We have executed a three-year Master Services Agreement (MSA) and Statement of Work (SOW) with Digital Widget Factory (Belize) (“DWF”) to develop and manage a minimum of 200 multilingual Ecommerce sites which will include multilingual online marketing through traditional online services and social engagement. Contract terms allowed for pre-paid fees in association with the project of a minimum of $700,000 plus ongoing professional fees and 40% 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.

 

We 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 in nine month period ended February 29, 2016 from this program totaled $812,533, which were from ongoing development, programs. Starting at the beginning of the second quarter new billings have not been recorded as revenue in our financial statements. We received acknowledgment and acceptance of the services performed during the three and nine month period ended February 29, 2016, however due to the long period without payment, our management has determined the revenue recognition criteria starting in the second quarter has not been met for new billings. Our company and DWF continue to work together in ways to enable full and complete payment of the total billings incurred, both recognized and unrecognized as at February 29, 2016 (see below). 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. 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.

 

Effective February 29, 2016, DWF sold the technology platform, partially developed by us in conjunction with DWF’s principals to Intelligent Content Enterprises (“ICE”) in an all stock based transaction. As part of the transaction, DWF has ownership and rights to 24 million common shares of ICE for a large minority shareholder position of ICE. We have a draft promissory note from DWF, for the value of the billings of $2,125,000 ($1,431,489 is recorded as a receivable as at February 29, 2016), which is to be paid out over time, with the final payment expected by August 31, 2016. The promissory note is expected to be secured by DWF’s ICE holdings in the amount of 4,250,000 ICE shares, which at the current market value of ICE shares, as of this filing significantly exceeds to the value of the promissory note. Prior to the signing of the note on February 29, 2016, we received $55,428 and we have received another $208,200 subsequent to this quarter end. These amounts are recorded as recognized revenue of the oldest invoices not previously recognized as revenue, which only recognizes revenue on a basis of cash being received by us. With additional payment history and with additional elapsed time for the trading history of ICE, we believe we may be in a position to fully recognize previously unrecognized revenue prior to cash collection, as typically a secured note would provide sufficient assurances of payment to meet the collectability standard, but due to the payment history and limited trading time of ICE shares since the acquisition, management may make that assessment as part of its May 31, 2016 financial reporting.

 

The Services Agreement

 

We acquired the rights to use technology and management and development support services under the Services Agreement, dated March 21, 2013 and amended October 2013, between Intertainment Media, Inc. (“IMI”), and IMI’s wholly owned Ortsbo subsidiaries. Pursuant to the terms of the Services Agreement, Ortsbo made available to us its representational state transfer application programming interface (the “Ortsbo API”), which provides multi-language real-time translation as a cloud service. The Services Agreement also provides that Ortsbo makes its “Live and Global” product offering, which enables a cross language experience for a live, video streaming production, available to us as a service for marketing and promoting the Yappn product in the marketplace (the “Services”).  The Services 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. Subsequently, on July 6, 2015, we entered into a definitive agreement to acquire all of the intellectual property assets of Ortsbo which closed on September 15, 2015. Upon the completion of the transaction on September 15, 2015 the amended Services Agreement was terminated.

  

 

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 $1.50 per share. As part of the enhancement agreement, we issued Ortsbo 166,667 shares of our restricted common stock. On April 28, 2014, we exercised our right to purchase a copy of the source code for the Ortsbo property in exchange for 1,333,333 shares of restricted common stock for a value of $2,000,000.

 

On July 6, 2015, we entered into a definitive agreement to acquire all of the intellectual property assets of Ortsbo which closed on September 15, 2015. The purchased assets include US Patent No. 8,983,850 B2, US Patent No. 8,917,631 B2, US Patent No. 9,053,097 B2, and other intellectual property including Ecommerce and Customer Care know-how for a total purchase price of 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 our restricted common shares (32 Million shares at US $0.50 per share). Upon the completion of the transaction on September 15, 2015 the amended Services Agreement was terminated.

 

Competition

 

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

 

 

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, we became the exclusive owner of copyright in the literary works or other works of authorship delivered by Ortsbo to us as part of the Services provided under the Services Agreement (the “Deliverables”).  All such rights shall not be subject to rescission upon termination of the Services Agreement.  Also as set forth in the Services Agreement, we shall grant to Ortsbo (i) a non-exclusive (subject to certain limitations) license to use the Deliverables for the sole purpose of developing its technology, (ii) a non-exclusive license to use, solely in connection with the provision of the Services, any intellectual property owned or developed by us or on our behalf and necessary to enable Ortsbo to provide the Services and (iii) a license to use intellectual property obtained by us from third parties and necessary to enable Ortsbo to provide the Services.  All such licenses shall expire upon termination of the Services Agreement.

 

On April 28, 2014, we purchased a copy of the source code for the Ortsbo property and all the rights associated with it.

 

On July 16, 2015, we entered into a definitive agreement to acquire all of the intellectual property assets of Ortsbo which closed on September 15, 2015. The purchased assets include US No. 8,983,850 B2, US Patent No. 8,917,631 B2, US Patent No. 9,053,097 B2, and other intellectual property including Ecommerce and Customer Care know-how (Proprietary lexicons and linguistic databases that integrate into our language services platform).

 

We continue to engage in activities to maintain and further build differentiated technologies that increase our intellectual properties.

 

Government Regulation

 

We are subject to a number of U.S. federal and state, and foreign laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and being tested in courts, and could be interpreted in ways that could harm our business. These may involve user privacy, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and online payment services. In particular, we are subject to federal, state, and foreign laws regarding privacy and protection of user data. Foreign data protection, privacy, and other laws and regulations are often more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly-evolving industry in which we operate. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies, and foreign governments concerning data protection which could affect us.  For example, a revision to the 1995 European Union Data Protection Directive is currently being considered by legislative bodies that may include more stringent operational requirements for data processors and significant penalties for non-compliance.

 

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 7,592,667 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) 1,844,000 shares of Common Stock issuable to them upon exercise of promissory notes and (ii) 4,588,000 shares of Common Stock issuable to them upon exercise of warrants. The warrants have an exercise prices varying from $1.00 to $2.20 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. On October 5, 2015, the Company filed a continuing registration statement in part to update to this S-1 filing and subsequent to the quarter end on December 2, 2015 filed an amendment to this S-1 filing, which is not, as of the date of this filing, been declared effective (Note 9 of the financial statements).

 

RESULTS OF OPERATIONS

 

Three months ended February 29, 2016 and February 28, 2015

 

Revenues

 

We are in the process of commercialization of our multi-language e-commerce and marketing businesses.  We had revenues of $101,537 and $528,846 for the three months ended February 29, 2016 and February 28, 2015, respectively. The Company billed its largest customer $233,860 for the three month period ended February 29, 2016. Our company has received acknowledgment and acceptance of the services performed, however due to the long period without payment, our management has determined the revenue recognition criteria for the has not been met for new billings. Our company and DWF are working through final discussions to complete a secured promissory note to enable full and complete payment of the total billings incurred, both recognized and unrecognized as at February 29, 2016. We did recognize $55,428 in revenue in the third quarter from DWF based on a payment received against the outstanding billings. The DWF assets were acquired by ICE effective February 29, 2016 and thus no further billings will be made to DWF. Future billings as part of consulting and language services for the program will be through ICE, and initially are expected to be lower than the average billings to DWF. 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 $9,134 and $140,183, for the three months ended February 29, 2016 and February 28, 2015, respectively. These costs were directly attributable to the revenues generated in the applicable periods and resulted in a gross profit of $92,403 and $388,663, for the three months ended February 29, 2016 and February 28, 2015, respectively.

 

Total operating expenses

 

During the three months ended February 29, 2016 and February 28, 2015, our total operating expenses were $1,295,610 and $849,358, respectively.

 

For the three months ended February 29, 2016, the operating expenses consisted of marketing expense of $26,152, research and development expenses of $109,203, general and administrative expenses of $497,826, professional fees of $241,025, consulting fees of $92,590, amortization of $263,940, depreciation of $102 and stock based compensation of $64,772. For the three months ended February 28, 2015, the operating expenses consisted of marketing expense of $104,383, research and development expenses of $100,759, general and administrative expenses of $300,435, professional fees of $74,282, consulting fees of $199,064, depreciation of $57 and stock based compensation of $70,378. 

 

Our research and development costs are partially for fees to technology consultants from Intertainment Media and Ortsbo, in the prior year, with higher weighting on our own employees and third party consultants in the latter half of fiscal 2015. In the three months ended February 29, 2016 there were no research and development costs from Intertainment Media and Ortsbo. 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. During the third quarter of fiscal 2015, there were additional marketing expenses incurred on promotion of FotoYapp. A similar event did not incur in the three months ended February 29, 2016, which is the primary reason for the decrease in marketing expenses for the three months ended February 29, 2016.

 

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

 

Professional fees were incurred primarily for use of legal counsel related to financing arrangements for convertible secured promissory notes 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 period over period. 

 

 

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 in the prior period were paid with shares of common stock. Consultants were used to a lesser extent in the three months ended February 29, 2016 compared to the three months ended February 28, 2015. 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.

 

Amortization for the three month period ended February 29, 2016 relates to technology acquired from Ortsbo on September 15, 2015. The technology is amortized over 5 years. There is no amortization recorded in the prior period as the acquisition only relates to fiscal 2016.

 

Stock based compensation during the three months ended February 29, 2016 relates to our two previous grants of stock options. 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 which results in a higher proportion of expense recorded earlier in the vesting term than later. The current period includes the vesting impact of two grants, whereas the prior period only included the first grant. Due to the higher weighting of expense recognition in earlier years the stock based compensation impact was greater in the prior period than the current period.

 

Total other income and expenses

 

Other (income) expenses totaled $576,376 and $894,903 for the three months ended February 29, 2016 and February 28, 2015, respectively. The change of $(318,527) 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 current quarter, the biggest impact was due to accretion on existing notes rather than fair value changes based on common stock price fluctuations. Accretion expense is a result of the fair value process required when financial instruments are issued and recorded in the financial statements. Over the maturity period of the underlying financial instrument, interest is accreted into the statement of operations to reflect the “time value of money”.

 

During the three months ended February 29, 2016, total other expense consisted of interest expense of $268,222, a loss resulting from the change in fair value of the derivative liabilities and convertible notes of $289,881, prepayment fees on variable Notes of $29,350 and other miscellaneous income of $(11,077).

 

During the three months ended February 28, 2015, total other expense consisted of interest expense of $105,007, financing expenses related to convertible debentures, warrants and contractual obligations totaling $362,069, an expense resulting from the change in fair value of the derivative liabilities and convertible notes of $485,051, prepayment fees on variable notes of $10,000 and other miscellaneous income of $67,224.

 

The financing expense associated with the capital raises were $nil and $362,069 for the three months ended February 29, 2016 and February 28, 2015, respectively. There were no dilutive financings raised in the period ending February 29, 2016 from convertible notes vs the comparative period in fiscal 2016 we primarily relied on secured debenture, bridge loans for financing during the three months ended February 29, 2016. The financing expenses related primarily to the raising of convertible notes with exercise prices tied to a discount to market rates for the three month period ended February 28, 2015. For accounting purposes, since certain financial instruments had convertible provisions, 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 three months ended February 28, 2015. 

 

The accretion in convertible notes resulted in a loss of $289,881 for the three months ended February 29, 2016 in contrast to a larger loss of $485,051 for the three months ended February 28, 2015, a change of $(195,170). As of February 28, 2015, we record the fair value change of the derivatives instruments related to the sale of warrants and debentures previously issued. This reduction was based on both a slight increase in our share price as the market price of the common shares increased from a May 31, 2014 share price of $1.58 to a February 28, 2015 share price of $0.55 as well as an element due to elapsed time.

 

 

Net loss and comprehensive loss

 

During the three months ended February 29, 2016 and February 28, 2015, we had net and comprehensive loss of $1,779,583 and $1,355,598 respectively.

 

Nine Months ended February 29, 2016 and February 28, 2015

 

Revenues

 

We are in the process of commercialization of our multi-language platform. We had revenues of $911,918 and $606,821 for the nine months ended February 29, 2016 and February 28, 2015, respectively. $812,533 of revenue for the nine month period ended related to DWF professional services. We billed DWF $802,592 for the nine month period ended February 29, 2016, that has not been recorded as revenue in our financial statements. Our company has received acknowledgment and acceptance of the services performed during the nine month period ended February 29, 2016, however due to the long period without payment, management has determined the revenue recognition criteria has not been met since the beginning of the second quarter of fiscal 2016. Our company and DWF are working through final discussions to complete a secured promissory note to enable full and complete payment of the total billings incurred, both recognized and unrecognized as at February 29, 2016. We did recognize $55,428 in revenue in the third quarter from DWF based on a payment received against the outstanding billings. Comparative period revenues resulted from the startup of the professional services related to the DWF program. The DWF assets were acquired by ICE effective February 29, 2016 and thus no further billings will be made to DWF. Future billings as part of consulting and language services for the program will be through ICE, and initially are expected to be lower than the average billings to DWF. Our management has focused on developing relationships with large commercial partners and influencers, which has delayed revenue realization from e-commerce in recent quarters.

 

Cost of revenue

 

We incurred costs of revenue of $146,068 and $140,389, for the nine months ended February 29, 2016 and February 28, 2015, respectively. These costs were directly attributable to the revenues generated in the comparative period and resulted in a gross profit of $765,850 and $466,432, for the nine months ended February 29, 2016 and February 28, 2015, respectively.

 

Total operating expenses

 

During the nine months ended February 29, 2016 and February 28, 2015, total operating expenses were $3,457,744 and $3,990,999, respectively.

 

For the nine months ended February 29, 2016, the operating expenses consisted of marketing expense of $224,900, research and development expenses of $301,168, general and administrative expenses of $1,272,484, professional fees of $401,048, consulting fees of $295,665, amortization of $483,890, depreciation of $300 and stock based compensation of $478,289. For the comparable nine months ended February 28, 2015, the operating expenses consisted of marketing expense of $996,107, research and development expenses of $597,490, general and administrative expenses of $1,020,468, professional fees of $173,520, consulting fees of $524,059, depreciation of $176 and stock based compensation of $679,179. 

 

 

Our research and development costs are partially for fees to technology consultants from Intertainment Media and Ortsbo, in the prior year, with higher weighting on our own employees and third party consultants in the latter half of fiscal 2015. During the latter part of the current nine month period ended February 29, 2016, there were no research and development costs from Intertainment Media and Ortsbo. 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.

 

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

 

Total other income and expenses

 

Other (income) expenses totaled $976,700 and $(544,073), for the nine months ended February 29, 2016 and February 28, 2015, respectively. The change of $1,520,773 is primarily due to the change in the fair value of derivative financial instruments. Many of our financing instruments are either convertible into our common stock or have provisions that provide an option to convert into our common stock. For accounting purposes we are required to value such instruments at fair value which can fluctuate as the market price of our common stock fluctuates. During the current nine month period, however, the biggest impact was due to accretion on existing notes rather than fair value change. Accretion expense is a result of the fair value process required when financial instruments are issued and recorded in the financial statements. Over the maturity period of the underlying financial instrument, interest is accreted into the statement of operations to reflect the “time value of money”.

 

During the nine months ended February 29, 2016, total other (income)/expense consisted of interest expense of $616,609, financing expenses related to convertible debentures, and expense warrants issued to line of credit holders and consultants totaling $632,250, a gain resulting from the change in fair value of the derivative liabilities and convertible notes of $(550,456), prepayment fees on variable notes of $306,140 and other miscellaneous income of $(27,843).

 

During the nine months ended February 28, 2015, total other (income)/expense consisted of interest expense of $253,973, financing expenses related to convertible debentures, and warrants that are considered derivative liabilities totaling $942,574, a gain resulting from the change in fair value of the derivative liabilities and convertible notes of $(1,647,824), prepayment fees on variable notes of $50,984 and other miscellaneous income of $(143,780).

 

During the nine month period ended February 29, 2016 and year ended May 31, 2015, we raised $2,268,846 and $2,742,263, respectively, in net cash from short term notes payable, line of credit, convertible notes and debentures through normal channels and private placements. For accounting purposes, since certain financial instruments had convertible provisions they are treated as derivatives liabilities and are valued using a binomial lattice fair value model upon inception and adjusted accordingly to market at the close of the period.  The financing expense associated with the capital raises and prior obligations were $632,250 and $942,574 for the nine month period ended February 29, 2016 and February 28, 2015, respectively. There was less financing raised in the nine months ending February 29, 2016 from convertible notes vs. the comparative period, instead we made more use of secured debenture financing and bridge loans.

 

For the nine month period ended February 29, 2016, the gain from fair value adjustment largely relates to accretion on various convertible notes as well as fair value change on variable notes which are a product of stock price and days to maturity. In the comparative period, there was a significant decline in the market price compared to those prices that were in effect at the time of the original issuance of these convertible instruments. The changes in market value of our common stock coupled with the other parameters used in the binomial lattice model for all instruments marked to market, resulted in a gain of $550,456 for the nine month period ended February 29, 2016 in contrast to a larger gain of $1,647,824 for the nine month period ended February 28, 2015, a change of $1,097,368.

 

Net and comprehensive loss

 

During the nine months ended February 29, 2016 and February 28, 2015, we had net and comprehensive loss of $3,668,894 and $2,980,494 respectively. 

 

Liquidity and Capital Resources

 

As of February 29, 2016, we had a cash balance of $16,623, which is a decrease of $2,873 from the ending cash balance of $19,496 as of May 31, 2015. 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 secured debentures, short term notes, and convertible debt instruments for gross cash receipts of $2,268,846 and $2,742,263 for the nine months ended February 29, 2016 and the year ended May 31, 2015, 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, we entered into a definitive agreement to acquire all of the intellectual property assets of Ortsbo, which closed on September 15, 2015. The purchased assets include US Patent No. 8,983,850 B2, US Patent No. 8,917,631 B2, US Patent No. 9,053,097 B2, and other intellectual property including Ecommerce and Customer Care know-how for a total purchase price of $17 Million, which will be paid by the assumption of $1 Million in debt and the issuance of $16 Million worth of our restricted common shares (32 Million shares at $0.50 per share).

 

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 were automatically converted into 1 share of Common Stock.  To avoid the issuance of fractional shares of Common Stock, we issued an additional share to all holders of fractional shares. FINRA declared our company’s 1-for-10 reverse stock split ex-dividend date effective as of October 2, 2015.

 

On July 15, 2015, we completed a secured debt financing of $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 includes conversion of previously existing debt of the Company as well as assumption of debt on close at September 15, 2015 of the acquisition of Ortsbo IP. Subsequent to the end of the second fiscal quarter, the holders of the Secured Debentures (the “Holders”) agreed to extend the maturity date of the Secured Debentures from December 31, 2015 to July 15, 2020, and were provided with the right to amend the Secured Debenture such that a Holder shall have the right, at any time after the earlier of (i) six (6) months from the date of first issuance of any subsequent Debentures; and (ii) June 30, 2016, to require the Company to satisfy the outstanding obligations underlying the Secured Debenture; provided, however, that at least two thirds (66.67%) of the Holders of the principal amount of the Secured Debentures consent to a put of their Secured Debentures to our company.

 

The Company received $2.5 million of this financing in the form of cash and cash commitments, including conversion of the short term loans obtained on May 11, 2015 and June 19, 2015 as described in Note 5. $1,075,000 of the $4.5 million financing is conversion of a portion of our existing debt that remained in the secured debenture. $925,000 was repaid out of the secured debenture, in the form of cash in the amount of $465,000 with the remainder in the form of the release of secured deposit that was applied against accounts receivable. On September 15, 2015, we closed the acquisition of intellectual property from Ortsbo Inc., and as part of this closing, assumed debt and non-controlling equity interests from Ortsbo that was immediately subscribed to a second tranche of secured debentures. The secured debentures balance as at February 29, was $4,550,388.

 

On December 30, 2015, we completed a secured debenture and warrant financing of $2,086,000 through the offering of units by way of private placement, with each unit consisting of (i) a 12% secured convertible debenture with a maturity date of five years from issuance and (ii) ten (10) five year common share purchase warrants, vesting in 1/3 increments and having an exercise price of $0.01 per share. The units were sold at $1.00 per unit. This closing includes conversion of $1,201,000 in short term loans advanced during the quarter prior to the closing of this secured debenture. Additionally, this includes $46,000 that our company has yet to receive in cash. This is currently recorded as subscription receivable.

 

Going Concern Consideration

 

We incurred net losses and comprehensive losses resulting in a deficit of $18,431,446 through February 29, 2016. At February 29, 2016, we had total liabilities totaling $9,273,324 and a working capital deficit of $3,093,528. 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 insufficient 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.

 

Critical Accounting Policies

 

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 4. 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 February 29,2016 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.

 

(b) Changes In Internal Control Over Financial Reporting

 

During the three and nine months ended February 29, 2016, 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.

 

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. As of February 29, 2016, we were not a party to any material litigation, claim or suit whose outcome could have a material effect on our unaudited consolidated financial statements.

 

ITEM 1A. RISK FACTORS

 

Not required under Regulation S-K for “smaller reporting companies”.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

There were no defaults upon senior securities during the three and nine month period ended February 29, 2016.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

There is no information with respect to which information is not otherwise called for by this form.

 

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 (Information contained on our website is not part of this report on Form 10-Q).

 

 

ITEM 6. EXHIBITS

 

Index to Exhibits

 

Exhibit No.		Description
2.1		Asset Purchase Agreement by and among Yappn Corp., Yappn Acquisition Sub., Inc. and Intertainment Media, Inc., dated March 28, 2013 (2)
2.2		Asset Purchase Agreement between the Company, Ortsbo Inc., Intertainment Media, Inc., and Winterberry Investments Inc. dated July 6, 2015 (17)
3.1		Amended and Restated Certificate of Incorporation filed on March 14, 2013. (1)
3.2		Amended and Restated Bylaws. (1)
3.3		Amended and Restated Certificate of Designation and Preferences of Series A Convertible Preferred Stock, filed with the Secretary of State of Delaware on May 31, 2013 (3)
3.4		Amended Certificate of Incorporation filed on December 31, 2014 (18)
3.5		Amended Certificate of Incorporation filed on September 9, 2015 (18)
4.1		Convertible Promissory Note (4)
4.2		Convertible Promissory Note Issued in Favor of JMJ Financial (6)
4.3		8% Convertible Note (7)
4.4		Form of 8% Convertible Note (8)
4.5		Form of 6% Convertible Promissory Note (9) (10) (12)
4.6		Form of Promissory Note (13)
4.7		Common Stock Purchase Warrant (13)
10.1		Lock-Up Agreement by and between Yappn Corp. and Intertainment Media, Inc. (2)
10.2		Form of Warrant (2)
10.3		Form of Subscription Agreement (2)
10.4		Form of Registration Rights Agreement (2)
10.5		Form of Note Purchase Agreement (2)
10.6		Form of Note (2)
10.7		Form of First Amendment to Note Purchase Agreement (2)
10.8		Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (2)
10.9		Stock Purchase Agreement (2)
10.10		2013 Equity Incentive Plan (2)
10.11		Bill of Sale dated March 28, 2013 (2)
10.12		Services Agreement by and between Ortsbo, Inc., Ortsbo USA, Inc. and Intertainment Media, Inc. dated March 21, 2013 (2)
10.13		Form of Indemnification Agreement (2)
10.14		Securities Purchase Agreement (4)
10.15		Amendment to Services Agreement (5)
10.16		Amendment Agreement to Convertible Promissory Note Issued in Favor of JMJ Financial (6)
10.17		Securities Purchase Agreement (7)
10.18		Securities Purchase Agreement between Yappn Corp. and GEL Properties LLC (8)
10.19		Securities Purchase Agreement between Yappn Corp. and LG Capital Funding LLC (8)
10.20		Form of Securities Purchase Agreement (9) (10) (12)
10.21		Form of Registration Rights Agreement (9) (10) (12)
10.22		Form of Series A Warrant (9) (10) (12)
10.23		Form of Series B Warrant (9) (10) (12)

 

 

Exhibit  No.		Description
10.24		Amendment Agreement to Convertible Promissory Note issued in favor of JMJ Financial (11)
10.25		Loan Agreement (13)
10.26		General Security Agreement between Yappn Corp. and Toronto Tree Top Holdings Ltd. (13)
10.27		General Security Agreement (Yappn Canada Inc.) (13)
10.28		General Security Agreement (Intertainment Media Inc.) (13)
10.29		Guaranty and Indemnity (Yappn Canada Inc.) (13)
10.30		Guaranty and Indemnity (Intertainment Media Inc.) (13)
10.31		Assignment of Monies and Debt Due Arrangement (13)
10.32		Employment Agreement between Yappn Corp. and Mr. David Lucatch dated June 1, 2014. (14)
10.33		Form of Series C Warrant (15)
10.34		Form of Series D Warrant (15)
10.35		Amendment to the Employment Agreement between Yappn Corp. and Mr. David Lucatch dated September 2, 2014. (16)
10.36		Form of Master Services Agreement between Yappn Corp. and Digital Widget Factory, dated November 6, 2014. (16)
10.37		Form of 12% Secured Debentures(17)
10.38		Form of Security Agreement, dated July 15, 2015 (17).
10.39		Yappn Corp 2014 Stock Option Plan Amendment One*
10.40		Form of 12% Secured Debenture (19)
10.41		Form of Common Stock Purchase Warrant (19)
14.1		Code of Ethics and Conduct (14)
31.1		Rule 13a-14(a) / 15d-14(a) Certification of Principal Executive Officer.*
31.2		Rule 13a-14(a) / 15d-14(a) Certification of Principal Financial Officer.*
32.1		Section 1350 Certifications of Principal Executive Officer *
32.2		Section 1350 Certifications of Principal Financial Officer *
101.INS		XBRL Instance Document *
101.SCH		XBRL Taxonomy Extension Schema Document *
101.CAL		XBRL Taxonomy Extension Calculation Linkbase *
101.DEF		XBRL Taxonomy Extension Definition Linkbase *
101.LAB		XBRL Taxonomy Extension Labels Linkbase *
101.PRE		XBRL Taxonomy Extension Presentation Linkbase *

 

(1) Incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the SEC on March 18, 2013. 

(2) Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the SEC on April 3, 2013. 

(3) Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the SEC on June 3, 2013. 

(4) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on October 15, 2013. 

(5) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on October 29, 2013. 

(6) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on November 21, 2013. 

(7) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on December 18, 2013.  

(8) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on December 20, 2013. 

(9) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on January 30, 2014. 

(10) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on February 27, 2014. 

(11) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on March 4, 2014. 

(12) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on April 1, 2014. 

(13) Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on April 11, 2014. 

(14) Incorporated by reference to the Company’s Annual Report on Form 10-K, filed with the SEC on August 29, 2014. 

(15) Incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the SEC on October 24, 2014. 

(16)  Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on January 13, 2015. 

(17)  Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on July 6, 2015. 

(18)  Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on October 15, 2015. 

(19)  Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on January 6, 2016.

 

*   Filed herewith.

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 14th day of April 2016.

 

	YAPPN CORP.
	By:	/s/ Ed Karthaus
		Ed Kaurthaus
		Chief Executive Officer
	By:	/s/ Craig McCannell
		Craig McCannell
		Chief Financial Officer
		(Principal Financial Officer)

 

 

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