Item 1. Business
General
Lyynks Inc., a Nevada corporation (“Lyynks”, “we”, “us” or “the Company”), is an entertainment software technology company that is developing media and entertainment related distribution applications for the online distribution of any content, including audio and video content. Our software application under development is called Lyynks, an application that delivers any content to a user’s computer desktop television set, tablet or smart phone. Lyynks is being developed as a global internet content broadcast platform that can facilitate for its customers the online distribution of music, television, movies, graphics, interactive advertising and social media.
Our business is subject to several significant risks, any of which could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which we make forward-looking statements. (See “Risk Factors”.)
History
Lyynks was incorporated under the laws of the State of Nevada on August 23, 2002 under the name Medusa Style Corporation for the purpose of an internet distribution business. We reevaluated our business and acquired in June 2007 all of the outstanding equity securities of Lyynks Nevada, a company in the entertainment technology industry.
Business
We are developing software products for the online distribution of audio and video content. We would intend to capitalize on the worldwide growth of digital media. Our management and outside consultants determined the most effective interface to deliver the type of content that we plan to distribute. We believe our planned programs and applications will enhance the user’s experience with internet content. We plan to provide a service that end users can use to deliver their content with potentially a global reach. Additionally end users can use our social network integration to share content links to promote content or content providers.
We are focusing initially on the internet delivery of entertainment, like music and interactive content. One of the areas on which we plan to concentrate initially is the music business. We believe that our demographic for music content will be attractive to marketers and advertisers seeking interactive marketing opportunities. We intend to earn interactive marketing revenues through a variety of traditional ad units and targeted permission-based E-mail marketing, paid search marketing and affiliate marketing.
Lyynks platforms and applications have been developed for cross-platform use with Apple’s Mac OS X and iOS, Microsoft Windows and the Android operating system. Working prototypes of some of these applications have been completed, although no assurance can be given that the final versions of such applications will be successfully completed and operational. We direct and manage our product development and maintenance internally, including website development with content customer and user interfaces, and maintenance and hosting functions.
Looking forward, we plan to pursue targeted opportunities for partnerships, joint ventures and other forms of investment with industry partners.
Intellectual Property
We are proceeding with the registration in the U.S. and in certain international jurisdictions of the trademark “Lyynks” for our website and related applications. We believe that we presently have, or are capable of acquiring, ownership and control of the intellectual property rights that are necessary to conduct our operations.
Regulation
We will be subject to various federal, state and local laws that govern the conduct of our proposed business, including state and local advertising, consumer protection, credit protection, licensing, and other labor and employment regulations. Online video content, games and mobile services traffic is projected to increase substantially over the next three to four years according to an industry forecast, and the Company expects regulation of that online traffic will increase.
The Federal Communications Commission (“FCC”) on December 21, 2010, issued “net neutrality” rules which prohibit internet providers from interfering with legal Web traffic. The new rule provides that land-line broadband providers may not block legal content from websites, or “unreasonably discriminate” against companies using broadband networks to provide delivery of video content and voice services. However, broadband providers will be allowed to engage in “reasonable network management” to regulate heavy traffic on the network. Under the new rule, there is a potential for broadband providers charging consumers for how much data they consume, and phone and cable companies will be allowed to sell to internet companies faster data delivery for additional fees, which priority arrangements would have to be disclosed. Wireless providers, facing greater congestion issues, are less restricted under the FCC’s new rules and are allowed more leeway in managing their networks, including blocking access to applications for congestion reasons.
Any additional fees imposed on consumers based on Web usage or network fast-track delivery options for additional fees could adversely impact our proposed business.
Competition
The internet content distribution industry is extremely competitive and is dominated by several large companies with worldwide name brand recognition and substantial financial resources. In attempting to attract content customers to our proposed applications and products, we will be competing with online providers of audio and video entertainment, such as Netflix, Amazon, Blockbuster, Google, YouTube and Apple’s iTunes, home systems providing digital delivery of movies, web-based video channels, cable and satellite television providers, movie theaters, live theater, sporting events, and other similar businesses that compete for the general public’s entertainment dollar, as well as large software developers. In the market of internet delivery of music content, we will be competing with companies such as Spotify, TuneCore, CD Baby and ReverbNation. There can be no assurance that our technology will succeed in the marketplace in face of this competition, where technologies are rapidly changing and advancing, or that other companies will not develop technologies superior to ours. New technologies may emerge that render our technology obsolete. Many of the companies with which we will be competing have worldwide name recognition and substantially greater capital resources for program and application development and for marketing and advertising than we do.
Further, many consumers maintain simultaneous relationships with multiple in-home entertainment video providers and can easily shift spending from one provider to another. For example, consumers may subscribe to cable, rent a DVD from Redbox or Blockbuster, buy a DVD from Wal-Mart or Amazon, download a movie from Apple iTunes, watch a television show on Hulu.com, and subscribe to Netflix, or some combination thereof, all in the same month. New competitors may be able to launch new businesses at a relatively low cost. internet delivery of content represents only one of many existing and potential new technologies for viewing entertainment video.
Employees
The Company currently has 12 employees. The Company engages the services of independent consultants to assist with management, software programming and development. We plan to engage full-time employees in this area as our business develops.
Available Information
We plan to make available on our corporate website free of charge (other than an investor’s own internet access charges) through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission.
Item 1A.
Item 1A. Risk Factors
Risks related to our lack of liquidity
WE HAVE NO REVENUES AND HAVE INCURRED AND EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES. WE WILL NOT BE SUCCESSFUL UNLESS WE REVERSE THIS TREND.
Through August 31, 2012, we have not generated any revenues. As a result, we have generated significant operating losses since our formation and expect to incur substantial losses and negative operating cash flows for the foreseeable future. For the year ended August 31, 2012 our net loss was $1,687,614 and as of August 31, 2012 we had we had an accumulated deficit of $16,722,843. We anticipate that our existing cash and cash equivalents will not be sufficient to fund our business needs over the next 12 months and estimate that we will require approximately $2,000,000 in additional capital in that period to finance our software development activities. Although our major shareholders have provided financial support over the past fiscal year, there is no assurance that they will continue to make equity investments in the Company or that, if our shareholders do not continue to make equity investments in the Company, we will be able to negotiate an alternate source of capital.
GOING CONCERN
Primarily as a result of our recurring losses and our lack of liquidity in connection with our fiscal year ended August 31, 2012, we received a report from our independent auditors that includes an explanatory paragraph describing the substantial uncertainty as to our ability to continue as a going concern.
Risks related to our business
THIS IS A NEW BUSINESS CATEGORY AND MANAGEMENT HAS NO EXPERIENCE WITH THIS BUSINESS
Management has begun efforts to engage in the business of online distribution of audio and video content. We have no experience in this business category, and we have no way to determine whether it will be successful. To date, we have received no revenues from this business. We will have to obtain significant additional capital to develop our business. There is no assurance that we will be able to obtain sufficient capital for this purpose.
WE ARE IN THE EARLY STAGES OF PRODUCT DEVELOPMENT AND OUR SUCCESS IS UNCERTAIN.
We are a development stage company and are in the early stages of developing our products and services. We have not yet successfully developed any of our products and services to the final completion stage. We may fail to develop any products or services, to implement our business model and strategy successfully or to revise our business model and strategy should industry conditions and competition change. We cannot make any assurances that any of our product candidates, if successfully developed, would generate sufficient revenues to enable us to be profitable. Furthermore, we cannot make any assurances that we will be successful in addressing these risks. If we are not, our business, results of operations and financial condition will be materially adversely affected.
WE HAVE A LIMITED OPERATING HISTORY AND WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP OUR BUSINESS.
Our limited operating history makes predicting our future operating results difficult. As a software development company with a limited history, we face numerous risks and uncertainties in the competitive markets. In particular, we have not proven that we can:
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develop online audio and video distribution software in a manner that enables us to be profitable and meet strategic partner and customer requirements;
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develop and maintain relationships with key customers and strategic partners that will be necessary to optimize the market value of our products and services;
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raise sufficient capital in the public and/or private markets; or
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respond effectively to competitive pressures.
If we are unable to accomplish these goals, our business is unlikely to succeed. Even if we are able to license certain of our technology to generate revenue we will still be operating at a significant loss during the course of our software development program.
IF WE ARE UNABLE TO ESTABLISH SALES AND MARKETING CAPABILITIES OR ENTER INTO AGREEMENTS WITH THIRD PARTIES TO SELL AND MARKET PRODUCTS AND SERVICES WE DEVELOP, WE MAY NOT BE ABLE TO GENERATE PRODUCT REVENUE.
We do not currently have an organization for the sales, marketing and distribution of software products and related services. We anticipate that we will seek to enter into strategic alliances, distribution agreements or other arrangements with third parties to market any products or services we develop. If we are unable to enter into such agreements, we would have to build sales, marketing, managerial and other non-technical capabilities and develop, train and or manage a sales force, all of which would cause us to incur substantial additional expenses. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable.
OUR SOFTWARE PRODUCTS AND SERVICES ARE SUBJECT TO THE RISK OF FAILURE INHERENT IN THE DEVELOPMENT OF PRODUCTS OR SERVICES BASED ON NEW AND UNPROVED TECHNOLOGIES.
Because our software is and will be based on new technologies, it is subject to risk of failure. These risks include the possibility that:
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our new approaches will not result in any products or services that gain market acceptance;
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our software will unfavorably interact with other types of commonly used software, thus restricting the circumstances in which it may be used;
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proprietary rights of third parties will preclude us from marketing a new product; or
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third parties will market superior or more cost-effective products or services.
As a result, our activities, either directly or through corporate partners, may not result in any commercially viable products or services.
OUR SOFTWARE PRODUCTS AND RELATED SERVICES MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS. SUCH PRODUCT LIABILITY CLAIMS COULD RESULT IN EXPENSIVE AND TIME-CONSUMING LITIGATION AND PAYMENT OF SUBSTANTIAL DAMAGES.
The development, testing, marketing, sale and use of software runs a risk that product liability claims may be asserted against us if it is believed that the use or testing of our products and services have caused adverse technology problems to existing systems. We cannot make assurances that claims, suits or complaints relating to the use of our technology will not be asserted against us in the future. If a product liability claim asserted against us was successful, we may be required to limit commercialization of our technology. Regardless of merit or outcome, claims against us may result in significant diversion of our management’s time and attention, expenditure of large amounts of cash on legal fees, expenses and damages and a decreased demand for our products and services. We cannot make any assurances that we will be able to acquire or maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us.
WE DO NOT HOLD ANY PATENTS ON OUR TECHNOLOGY AND IT MAY BE DIFFICULT TO PROTECT OUR TECHNOLOGY.
We do not have any patents issued or patents pending. We do have development work or source code which we believe has the potential for patent protection. We will evaluate our business benefits in pursuing patents in the future. We protect all of our development work with confidentiality agreements with our engineers, employees and any outside contractors. However, third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property or technology or otherwise develop a product with the same functionality as our software. Policing unauthorized use of our software and intellectual property rights is difficult, and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriation of our technology or intellectual property, particularly in foreign countries where we plan to do business or where our software will be sold or used, where the laws may not protect proprietary rights as fully as do the laws of the United States or where the enforcement of such laws is not common or effective.
A DISPUTE CONCERNING THE INFRINGEMENT OR MISAPPROPRIATION OF OUR PROPRIETARY RIGHTS OR THE PROPRIETARY RIGHTS OF OTHERS COULD BE TIME CONSUMING AND COSTLY AND AN UNFAVORABLE OUTCOME COULD HARM OUR BUSINESS.
There is significant litigation in the software field regarding patents and other intellectual property rights. Recently, for example, litigation has been filed against Apple Inc., Google Inc., Facebook Inc., Yahoo Inc., Netflix Inc. and AOL Inc. alleging infringement of technology developed by the plaintiff company in the litigation. Accordingly, we may be exposed to future litigation by third parties based on claims that our software, technologies or activities infringe the intellectual property rights of others. Although we try to avoid infringement, there is the risk that we will use a patented technology owned or licensed by another person or entity and/or be sued for infringement of a patent owned by a third party. If our products are found to infringe any patents, we may have to pay significant damages or be prevented from making, using, selling, offering for sale or importing such products or services or from practicing methods that employ such products and services.
Further, third parties, including persons involved in the founding of the Company, may assert claims as to purported license rights or agreements with respect to the software that the Company has under development, and we may be required to litigate the validity of or settle any such claims.
CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF OUR TRADE SECRETS AND OTHER PROPRIETARY INFORMATION AND MAY NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY.
Our success also depends upon the skills, knowledge and experience of our technical personnel, our consultants and advisors as well as our licensors and contractors. Because we operate in a highly competitive field, we rely almost wholly on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties all confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property. However, these agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by competitors, in which case we would not be able to prevent use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and used our trade secrets could be difficult, expensive and time consuming and the outcome unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.
WE WILL RELY ON THIRD PARTIES TO PROVIDE SOFTWARE DEVELOPMENT AND MAINTENANCE, BANDWIDTH PROVIDERS, DATA CENTERS (HOSTING) AND OTHER THIRD PARTIES. INTERRUPTION OR FAILURE IN THE SERVICES AND PRODUCTS PROVIDED BY THESE THIRD PARTIES COULD SERIOUSLY HARM OUR BUSINESS, REPUTATION AND OPERATING RESULTS.
We will rely on third-party vendors, including software development and maintenance, data center (hosting) and bandwidth providers. Any disruption in the services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We expect to experience interruptions and delays in service and availability; any errors, failures, interruptions or delays experienced in connection with these third-party vendors could negatively impact our relationship with customers, could adversely affect our brand, reputation and business, could adversely harm our business, and could expose us to liabilities to third parties.
OUR BUSINESS DEPENDS ON OUR SOFTWARE AND SERVER AND NETWORK HARDWARE AS WELL AS OUR ABILITY TO SCALE OUR TECHNOLOGY INFRASTRUCTURE CAPACITY.
The performance of our software, server, and networking hardware infrastructure is critical to our business and reputation and our ability to attract users, advertisers, members and e-commerce partners. An unexpected and/or substantial increase in the use of our website(s) could strain the capacity of our systems, which could lead to slower response time or system failures. Any slowdowns or system failures could adversely affect the speed and responsiveness of our website(s) and diminish the experience for our customers and members. If the usage of our website(s) substantially increases, we may need to procure additional servers, networking equipment and bandwidth from third parties to maintain adequate data transmission speeds, the availability of which may be limited or the cost of which may be significant. Any system failure that causes an interruption in service or a decrease in the responsiveness of our website(s) could reduce traffic on our website(s) and, if sustained or repeated, could impair our reputation and the attractiveness of our brand as well as reduce revenue and negatively impact our operating results.
COMPUTER VIRUSES, COMPUTER ATTACKS AND SECURITY BREACHES COULD HARM OUR BUSINESS.
The networks are vulnerable to damaging software programs, such as computer viruses and worms. Certain of these programs have disabled the ability of computers to access the internet, requiring users to obtain technical support in order to gain access to the internet. Other programs have had the potential to damage or delete computer programs. The development and widespread dissemination of harmful programs has the potential to seriously disrupt internet usage. If internet usage is significantly disrupted for an extended period of time, or if the prevalence of these programs results in decreased residential internet usage, our proposed business could be materially and adversely impacted.
To succeed, online communications must provide a secure transmission of confidential information over public networks. Our security measures may not detect or prevent security breaches that could harm our business. An increasing number of websites have reported breaches of their security. Any compromise of our security could harm our reputation and, therefore, our business.
CHANGES IN GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES OR INCREASE THE COST OF DOING BUSINESS.
Government regulation and legal uncertainties could increase our costs and risks of doing business on the internet. There are currently few laws or regulations that specifically regulate commerce on the internet. Moreover, it may take years to determine the extent to which existing laws relating to issues such as property ownership, defamation, taxation and personal privacy are applicable to the internet. However, the application of existing laws, the adoption of new laws and regulations in the future, or increased regulatory scrutiny with respect to issues such as user privacy, pricing, taxation and the characteristics and quality of products and services, could create uncertainty in the internet marketplace.
Network neutrality is the principle that internet users should be in control of what content they view and what applications they use on the internet. The internet has operated according to this neutrality principle since its earliest days. The FCC on December 21, 2010, issued “net neutrality” rules which prohibit internet providers from interfering with legal Web traffic. The new rule provides that land-line broadband providers may not block legal content from websites, or “unreasonably discriminate” against companies using broadband networks to provide delivery of video content and voice services. However, under these rules there is the potential for networks charging consumers based on internet usage and for fast-track delivery for content providers for extra fees. Any additional fees imposed on consumers based on Web usage or network fast-track delivery options for additional fees could adversely impact our proposed business.
Our proposed business operations could be materially impacted if the FCC rules or legislation do not safeguard net neutrality as it has been in effect, and our proposed operations could be adversely affected in an environment where net neutrality was not required to be observed by telecommunications carriers in their pricing.
In addition, the FTC has issued a report that has faulted the industry for not doing enough to protect consumer online privacy and supporting a “do-not-track” system for users. Legislation is set to be introduced in 2011 to prohibit companies from tracking children on the internet without parental consent.
“Content delivery networks” that distribute video online and own the fiber-optic highways that move video traffic among networks have “peering arrangements” for moving video traffic, but in certain situations these companies are imposing fees on other networks if traffic moved for the other network or networks is out of balance with traffic moved by the network that is imposing the fee. The imposition of such fees could have an adverse effect on online distribution of video, in that costs could go up for some networks and the content providers using such networks.
The CAN-SPAM Act of 2003, a federal law that impacts the way certain commercial E-mails are sent over the internet, took effect January 1, 2004 and preempted most state commercial E-mail laws. Penalties for failure to comply with the CAN-SPAM Act include significant fines, forfeiture of property and imprisonment. This law and other laws or regulations that impact E-mail advertising could reduce our revenues.
The Children’s Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. In addition, the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Any failure on our part to comply with these laws and regulations may subject us to additional liabilities.
In our proposed business activities as an online distributor of audio and video content, the Internal Revenue Service may take the position that we are a “broker” and required to report users’ sales to the IRS, if a certain sales volume is surpassed. A requirement such as this could have adversely affect the growth of e-commerce in our network and have an adverse impact on our members and on our business.
OUR BUSINESS AND OUR USERS AND MEMBERS MAY BE SUBJECT TO SALES TAX AND OTHER TAXES.
The application of indirect taxes (such as sales and use tax, value-added tax, or VAT, goods and services tax, business tax, and gross receipt tax) to e-commerce businesses and to our users is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the internet and e-commerce. In many cases, it is not clear how existing statutes apply to the internet or electronic commerce or communications conducted over the internet. In addition, some jurisdictions have implemented or may implement laws specifically addressing the internet or some aspect of electronic commerce or communications on the internet. The application of existing, new, or future laws could have adverse effects on our business.
Several proposals have been made at the U.S. federal, state and local levels that would impose additional taxes on the sale of goods and services through the internet. These proposals, if adopted, could substantially impair the growth of e-commerce, and could diminish our opportunity to derive financial benefit from our activities.
OUR TECHNOLOGY MAY BECOME OBSOLETE OR LOSE ITS COMPETITIVE ADVANTAGE.
The software and services business is very competitive, fast moving and intense, and we expect it to be increasingly so in the future. Other companies have developed and are developing software technologies and related services that, if not similar in type to our software and services, are designed to address the same end user or customer. Therefore, there is no assurance that our products or services and any other products or services we may offer will be the best, the first to market, or the most economical to make or use. If competitors’ products or services are better than ours, for whatever reason, our sales could decrease, our margins could decrease and our products and services may become obsolete.
There are many reasons why a competitor might be more successful than we are or will be, including:
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Competitors may already have established and profitable distribution networks and customer bases for audio and video content.
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Competitors may have greater financial resources and can afford more technical and development setbacks than we can.
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Competitors may have been in the software business longer than we have. They may have greater experience than us in critical areas like testing, sales and marketing. This experience or their name recognition may give them a competitive advantage over us.
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Competitors may have a better patent position protecting their technology than we either have or will have. If we cannot prevent others from copying our technology or developing similar technology, or if we cannot obtain a critical license to another’s patent that we need to make and use our technology, we would expect our competitive position to lessen. Because the company that is “first to market” often has a significant advantage over latecomers, a second place position could result in less than anticipated sales.
Risks related to our common stock
BECAUSE CERTAIN EXISTING STOCKHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK, OTHER STOCKHOLDERS’ VOTING POWER MAY BE LIMITED.
Our controlling stockholders and directors and their affiliates beneficially own or control a majority of the outstanding shares of our Common Stock. As a result, if those stockholders act together, they will have the ability to control all matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. These stockholders may make decisions that are adverse to your interests. See our discussion under the caption in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for more information about ownership of our outstanding shares.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK.
We have never declared or paid any cash dividend on our Common Stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.
OUR STOCK PRICE MAY BE HIGHLY VOLATILE BECAUSE OF SEVERAL FACTORS, INCLUDING A LIMITED PUBLIC FLOAT.
The market price of our stock may be highly volatile because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other factors that could cause such volatility may include, among other things:
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announcements concerning our strategy;
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litigation; and
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general market conditions.
OUR COMMON STOCK IS “A PENNY STOCK” AND IS SUBJECT TO SPECIAL REGULATIONS PROMULGATED BY THE SEC.
The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share and therefore we are a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of holders of our common stock to sell their shares.
WE MAY EXPERIENCE DIFFICULTIES IN THE FUTURE IN COMPLYING WITH SECTION 404 OF THE SARBANES-OXLEY ACT.
As a public company, we are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. In this regard, we have and will continue to comply with the internal control requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business. Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations.
If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition and our ability to run our business effectively and could cause investors to lose confidence in our financial reporting.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2.
Item 2. Properties
Executive Offices
In May 2010, we entered into a month to month lease for our principal office in Burbank, California, at a monthly rental of $3,500. We anticipate that our current office space will accommodate our operations for the foreseeable future.
Item 3.
Item 3. Legal Proceedings
Stride & Associates. We are a defendant in a suit filed September 2, 2009 by Stride & Associates, Inc. in the Superior Court of California, Los Angeles Superior Court-North Central District, for the amount of $19,500, plus interest, for services allegedly rendered by the plaintiff to the Company in connection with personnel placement. The plaintiff has filed a judgment in the amount of $21,620 against us in this litigation, and the Company has accrued the full amount. We intend to settle this matter.
Item 4.
Item 4. Mine Safety Disclosures
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Public Market for Common Stock
Our common stock, par value $.00001 per share, is quoted on the Pink Sheets under the symbol “LYYN.”
The following table sets forth, for the fiscal quarters indicated, the high and low sale price for our common stock, as reported on the OTCBB and Pink Sheets. The quotations below reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
(1) Prices reflect the 1-for-10 reverse stock split effective September 14, 2009.
Shareholders
The approximate number of holders of record of our common stock as of November 29, 2012 was 101.
Dividends
We have never declared or paid a cash dividend on our common stock and do not anticipate declaring or paying cash dividends to shareholders in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
Our Amended and Restated 2007 Stock Plan (the “Plan”) was originally authorized and approved by the Company’s board of directors on November 12, 2007 and was amended and restated effective July 1, 2008. A total of 750,000 shares of the Company’s common stock have been authorized for issuance under the Plan.
At August 31, 2012, no options were outstanding under any equity compensation plans.
Item 6.
Item 6. Selected Financial Data
Not applicable
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto and the other financial information included elsewhere in this report.
Certain statements contained in this report, including, without limitation, statements containing the words “believes,” “anticipates,” “expects” and words of similar import, constitute “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including our ability to create, sustain, manage or forecast our growth; our ability to attract and retain key personnel; changes in our business strategy or development plans; competition; business disruptions; adverse publicity; and international, national and local general economic and market conditions.
LYYNKS Overview
We are developing software products for the online distribution of audio and video content. We would intend to capitalize on the worldwide growth of digital media. We believe our planned programs and applications will enhance the user’s experience with internet content. We plan to provide a service that users can use to deliver their content with a potential global reach. Additionally end users would be able to use our social network integration to share content links to promote content or content providers.
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR60") issued by the SEC, suggests that companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company's significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements.
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies require significant management judgments and estimates:
The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows expected to be generated by those assets are less than the carrying amount of those items. The Company’s cash flow estimates are based on limited operating history and have been adjusted to reflect management’s best estimate of future market and operating conditions. The net carrying values of assets deemed not recoverable are reduced to fair value. The Company’s estimates of fair value represent management’s best estimates based on industry trends.
We account for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the provisions of ASC topic 505-50, “Equity Based Payments to Non-Employees”, (formerly EITF Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services”), and ASC 470-20-25, “Debt with Conversion and Other Options (“ASC 470-20-25”). The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with ASC 470-20-25, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expenses in its consolidated balance sheet.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There is no assurance that actual results will not differ from these estimates.
See footnotes in the accompanying financial statements regarding recent financial accounting developments.
Results of Operations
For the Years Ended August 31, 2012 and 2011.
We had a net loss of $1,687,684 for the year ended August 31, 2012 compared to a net loss of $529,705 for the year ended August 31, 2011. The change is explained below.
Operating Expenses: Operating expenses were $1,687,614 and $1,034,484 for the years ended August 31, 2012 and 2011, respectively. The increase of $653,130 was primarily due to an increase of $653,130 in General and Administrative expenses.
Other income (expense): Other income (expense) was $-0- for the year ended August 31, 2012, as compared to $504,779 for the year ended August 31, 201. The decrease was primarily due to other income of $508,457 primarily from the settlement of prior liabilities in 2011, as compared with other income of $-0- in 2012. Other income in 2011 also reflected a gain on sale of equipment of $9,000 and interest expense and the amortization costs of the notes payable of approximately $12,678.
As of the date of this report, we have not generated any revenues. As a result, we have generated significant operating losses since our formation and expect to incur substantial losses and negative operating cash flows for the foreseeable future as we attempt to expand our infrastructure and development activities. Our ability to continue may prove more expensive than we currently anticipate and we may incur significant additional costs and expenses.
We are a development stage company and are in the early stages of developing our products and services. We have not yet successfully developed any of our products and services to the final completion stage.
The diversity of our products, the competitive entertainment industry, lack of liquidity and the current economic downturn, make it difficult for us to project our near-term results of operations. These conditions could further impact our business and have an adverse effect on our financial position, results of operations and/or cash flows.
Liquidity and Capital Resources
Net cash used in operating activities was $1,713,209 and $1,080,180 for the years ended August 31, 2012 and 2011, respectively. The increase of $633,029 in cash used by operating activities was primarily higher general and administrative expenses, financed by an increase in cash flows from financings from related parties of $395,500, from $630,500 in 2011 to $1,026,000 in 2012, and an increase in proceeds of issuance of common stock and warrants provided by financing activities of $415,000, from $505,000 in 2011 to $920,000 in 2012. Net cash used in investing activities was $29,274 in 2012, as compared with $35,614 in 2011. Investing activities for the years ended August 31, 2012 and 2011 resulted from the purchase of computers and furniture and software development costs. Net cash provided by financing activities was $1,946,00 in 2012, as compared with $1,144,500 for 2011.
Going Concern Uncertainties
The Company suffered recurring losses from operations and has an accumulated deficit of $16,722,843 at August 31, 2012. Our existing cash and cash equivalents will not be sufficient to fund our operations. Unless we receive liquidity from new purchase orders, obtain additional capital, loans or sell or license assets, we may be required to seek to reorganize our business or discontinue operations and liquidate our assets. There can be no assurance that the Company will be able to secure sufficient financing or on terms acceptable to the Company. If additional funds are raised through the issuance of equity securities, the percentage ownership of our current stockholders is likely to or will be reduced.
As of the date of this report, there is doubt regarding our ability to continue as a going concern as we have not generated sufficient cash flow to fund our business operations and loan commitments. Our future success and viability, therefore, are dependent upon our ability to generate capital financing. The failure to generate sufficient revenues or raise additional capital may have a material and adverse effect upon the Company and our shareholders. Primarily as a result of our recurring losses and our lack of liquidity, the Company has received a report from our independent auditors that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern.
Commitments and Contractual Obligations
We did not have any commitments or contingencies as at August 31, 2012.
Off-Balance Sheet Arrangements
As of August 31, 2012, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 7A.
Item 7A. Quantities and Qualitative Disclosures About Market Risk
Not applicable
Item 8.
Item 8. Financial Statements and Supplementary Data
LYYNKS INC. AND SUBSIDIARIES
Madsen & Associates, CPA’s Inc.
684 East Vine Street
Murray, UT 84107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Lyynks Inc. and Subsidiary
(formerly En2go International, Inc.)
Burbank, CA 91506
We have audited the accompanying consolidated balance sheet of Lyynks Inc. and Subsidiary (formerly En2go International, Inc.) (collectively, the “Company”) (a development stage company) as of August 31, 2012 and 2011, and the related statements of operations, stockholders’ deficiency and cash flows for the years then ended and for the period from January 31, 2007 (date of inception) through August 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the 2012 and 2011 financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended and for the period from January 31, 2007 (date of inception) through August 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a working capital deficiency, is dependent on financing to continue operations, has little or no operating revenue, and has suffered recurring losses to date, which raise substantial doubt for its ability to continue as a going concern. Management’s plans in regard to these factors are also described in Note 1.
These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might result from the outcome of these uncertainties.
/s/ Madsen & Associates, CPA's Inc.
Madsen & Associates, CPA's Inc.
December 5, 2012
LYYNKS INC. AND SUBSIDIARY
(Formerly En2go International, Inc. and Subsidiary)
(a development stage company)
Consolidated Balance Sheets
See notes to consolidated financial statements.
LYYNKS INC. AND SUBSIDIARY
(Formerly En2go International, Inc. and Subsidiary)
(a development stage company)
Consolidated Statements of Operations
See notes to consolidated financial statements.
LYYNKS INC. AND SUBSIDIARY
(Formerly En2go International, Inc. and Subsidiary)
(a development stage company)
Consolidated Statements of Stockholders' Deficiency
See notes to consolidated financial statements.
LYYNKS INC. AND SUBSIDIARY
(Formerly En2go International, Inc. and Subsidiary)
(a development stage company)
Consolidated Statements of Stockholders' Deficiency
(Continued)
See notes to consolidated financial statements.
LYYNKS INC. AND SUBSIDIARY
(Formerly En2go International, Inc. and Subsidiary)
(a development stage company)
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
Lyynks Inc. and Subsidiary
(formerly En2go International, Inc.)
(a development stage company)
Notes to Consolidated Financial Statements
As of and for the Year Ended August 31, 2012
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements represent the accounts of Lyynks Inc. incorporated in the State of Nevada on August 23, 2002 (formerly En2go International, Inc.) and En2Go, Inc. (“Subsidiary”), incorporated in the State of Nevada on January 31, 2007 (collectively the Parent and the Subsidiary are referred to as the “Company”, “Lyynks” “we” or “our”).
On July 17, 2007, Parent completed an exchange agreement with Subsidiary wherein Parent issued 2,780,000 shares of its common stock in exchange for all the issued and outstanding common stock of Subsidiary. The acquisition was accounted for as a recapitalization of Subsidiary in a manner similar to a reverse purchase as the former shareholders of Subsidiary controlled the combined Company after the acquisition. Following the acquisition and the transfer of an additional 1,075,000 shares from the shareholders of parent to the former shareholders of the subsidiary, the former shareholders of Subsidiary controlled approximately 77% of the total outstanding stock of the combined entity. There was no adjustment to the carrying values of the assets or the liabilities of Parent or Subsidiary as a result of the recapitalization.
The operations of Parent are included only from the date of recapitalization. Accordingly, the previous operations and retained deficits of Parent prior to the date of recapitalization have been eliminated. The financial history prior to the recapitalization is that of the Subsidiary.
On February 22, 2012 the Company filed a Certificate of Dissolution of Subsidiary En2go Inc. with the Nevada Secretary of State.
On March 8, 2012, the Company filed in Nevada Articles of Merger providing for the merger of its wholly-owned subsidiary, Lyynks, Inc., into the Company, as the surviving corporation, and in the merger changing the Company’s name to Lyynks Inc., In the merger, which was for the sole purpose of changing the Company’s name, there were no other changes to the Articles of Incorporation or any changes to the capital stock of the Company, or to its By-Laws or its officers and directors. Pursuant to FINRA approval, the name change was effective for trading purposes on May 14, 2012.
General
The Company is developing software products for the online distribution of audio and video content. The Company plans to provide a service that users can use to deliver their content over the internet with a potential global reach. Additionally end users would be able to use our social network integration to share content links to promote content or content providers.
Basis of Presentation and Going Concern
Our consolidated financial statements have been prepared assuming that we will continue as a going concern. However, we have sustained losses and as of August 31, 2012, we have no revenues and have a net working capital deficiency and a negative cash flow from operations. These conditions, among others, give rise to substantial doubt about our ability to continue as a going concern. Management is continuing to seek additional equity capital. Until such time as we are operating profitably, we anticipate our working capital needs will be funded with proceeds from equity and debt financing. Management believes these steps will provide us with adequate funds to sustain our continued existence. There is, however, no assurance that the steps taken by management will meet all of our needs or that we will continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Development Stage Activities
Since inception the Company has not yet generated significant revenues and has been defining its business operations and raising capital. All of our operating results and cash flows reported in the accompanying consolidated financial statements from January 31, 2007 through August 31, 2012 are considered to be those related to development stage activities and represent the cumulative from inception amounts from our development stage activities required to be reported pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 915, “Development Stage Enterprises”.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, valuation of long-lived assets, income taxes and litigation. The Company bases its estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. The policies discussed below are considered by management to be critical to an understanding of the Company’s financial statements. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of Parent and Parent’s wholly-owned Subsidiary. All intercompany balances and transactions have been eliminated in consolidation.
Cash Concentration and Cash Equivalents
We consider all short-term securities purchased with a maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. Management does not believe the Company is exposed to significant credit risk. Management, as well, does not believe the Company is exposed to significant interest rate and foreign currency fluctuation risks during the period presented in these consolidated financial statements. As of August 31, 2012, there are no amounts that exceed the federally insured limits.
Property and Equipment
Property and equipment are stated as cost less accumulated depreciation. Depreciation is provided on a straight line basis over the estimated useful lives of the assets from one to five years. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Gains or losses on sales or retirements are recognized in income.
Revenue Recognition
Through the period from inception through August 31, 2012, the Company had not yet generated any revenues. However, the Company plans to recognize its revenue according to the provisions of ASC 605, “Revenue Recognition”, which takes into account the completion of the transaction, delivery of the product, a final fixed or determinable price, and that collectability is reasonably assured.
Net Earnings (Loss) per common share
Basic earnings (loss) per share excludes dilution and is computed by dividing earnings (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shares in the earnings (loss) of the Company. Certain unexercised stock options and stock warrants to purchase shares of the Company’s common stock and convertible debt into the shares of the Company as of August 31, 2012 and 2011, were excluded in the computation of diluted earnings (loss) per share because the effect would be antidilutive. For the years ended August 31, 2012 and 2011, there were 54,256,627 and 33,065,627 potential common shares outstanding.
Evaluation of Long-Lived Assets
The Company reviews long-lived assets for impairment used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows expected to be generated by those assets are less than the carrying amount of those items. The Company’s cash flow estimates are based on limited operating history and have been adjusted to reflect management’s best estimate of future market and operating conditions. An impairment exists when the carrying amount of the long-lived assets is not recoverable and exceeds the fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If an impairment exists the resulting write-down would be the difference between the fair market value of the long-lived asset and the related book value. The Company’s estimates of fair value represent management’s best estimates based on industry trends.
Advertising Costs
Advertising costs are charged to operations in the period incurred. During the years ended August 31, 2012 and 2011, the Company incurred $-0- and $-0- in advertising costs, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method, in accordance with ASC 740, “Income Taxes” (“ASC740”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent that the Company believes that these assets will more-likely-than-not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results. In the event that the Company were to determine that it would be able to realize its deferred income tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the valuation allowance, which would reduce the provision for income taxes.
The principal item giving rise to deferred taxes is expenses deductible for tax purposes that are not deductible for book purposes and a net operating loss carryforward
Stock-Based Compensation
The Company records as expense the fair value of equity-based compensation, including stock options and warrants, over the applicable vesting period. The Company also provides more extensive disclosures concerning stock options than required under previous standards.
Software Development Costs
We capitalize software development costs in accordance with generally accepted accounting principles, under which certain software development costs incurred subsequent to the establishment of technological feasibility, may be capitalized before the product is available for general release to customers, in accordance with ASC 350-985, “Software”. We determine technological feasibility to be established upon completion of (1) a detailed program design, (2) Completion of working model. Capitalized software development costs consists of costs for internally developed software to be sold publicly upon completion of development. Capitalized costs consist primarily of direct salaries and the cost of specific external consultants, where such costs qualify for capitalization under generally accepted accounting principles. Amortization shall not start until the product is available for general release to customers. On an annual basis, the Company will determine whether or not there has been impairment in value of the intangible assists and if necessary, records impairment charged to write down the assts to their estimated fair value. At August 31, 2010, new management of the Company evaluated the current software under development and determined the undiscounted cash flows expected to be generated by these assets are substantially less than the carrying amount of these items. Management had determined to develop new software and no longer used the previously developed software. The Company recorded an impairment charge of $1,104,917 for the year ended August 31, 2010, reducing the software costs to $-0-.
Convertible Debt, Note Discounts and Beneficial Conversion Features
The convertible debentures were issued in accordance with ASC 470-20-25, “Debt with Conversion and Other Options” (“ASC 470-20-25”). We calculated the value of the beneficial conversion feature embedded in the Convertible Notes. The beneficial conversion feature is a discount against the debt and the value to the warrants increases additional paid-in capital.
Recently Issued Accounting Pronouncements
FASB has codified a single source of U.S. Generally Accepted Accounting Principles, the Accounting Standards Codification™. Unless needed to clarify a point to readers, we will refrain from citing specific section references when discussing application of accounting principles or addressing new or pending accounting rule changes. There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows..
NOTE 3 - SETTLEMENT OF PRIOR LIABILITIES
We have settled certain payables to reflect the acceptance by these creditors of lesser amounts. Accordingly, amounts accrued with respect to these account holders have been reduced to $-0- from $508,457, and we have recognized other income in that amount in the consolidated statement of operations for the year ended August 31, 2011, and $538,277 for the period from inception (January 31, 2007) through August 31, 2012.
NOTE 4 -FAIR VALUE MEASUREMENTS
The Company utilizes the accounting guidance for fair value measurements and disclosures for all financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis or on a nonrecurring basis during the reporting period. The fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers are defined as follows:
Level 1 - Observable inputs such as quoted market prices in active markets
Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3 - Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions
As of August 31, 2012, the Company held certain financial assets that are measured at fair value on a recurring basis. These consisted of cash and cash equivalents. The fair value of the cash and cash equivalents is determined based on quoted market prices in public markets and is categorized as Level 1. The Company does not have any financial assets measured at fair value on a recurring basis as Level 2 or Level 3.
The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets accounted for at fair value on a recurring basis as of August 31, 2012 and August 31, 2011.
The Company had no financial assets accounted for on a non-recurring basis as of August 31, 2012.
There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the year ended August 31, 2012 and the Company did not have any financial liabilities as of August31, 2012. The Company has other financial instruments, such as advances and other receivables, accounts payable and other liabilities, notes payable and other assets, which have been excluded from the table above. Due to the short-term nature of these instruments, the carrying value of advances and other receivables, accounts payable and other liabilities, notes payable and other assets approximate their fair values.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Depreciation expense for the year ended August 31, 2012 and 2011 was $20,392 and $6,124, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the year ended August 31, 2012, Richard Genovese, a Director of the Company ("Genovese" ), converted $595,000 of debt owed to him into 7,933,333 common shares at a conversion price per share of $0.075.
During the year ended August 31, 2012, Genovese made advances of $926,000 to the Company. As of August 31, 2012 and August 31, 2011, the amount due Genovese was $661,510 and $330,510, respectively. The advances are non-interest bearing.
On February 28, 2012, Clayoquot Wilderness Resort Ltd. (“Clayoquot”), a company of which Genovese is a principal, advanced $100,000 to the Company. As of August 31, 2012 and August 31, 2011, the amount due Clayoquot was $100,000 and $-0-, respectively. The advance is non-interest bearing.
NOTE 7 - CONVERTIBLE DEBT
NSC Investments
In August 2008, we issued a promissory note to NSC Investments Ltd. (“NSC”) in the principal amount of $250,000. Under the terms of this promissory note (the “NSC 2008 Note”), interest is to be prepaid at the commencement of each quarter by us issuing 1,600 shares of our common stock. The unpaid principal balance of the promissory note was due and payable in full on the sale of any assets of the Company or November 1, 2008. Further consideration for the loan consisted of 15,000 shares of our common stock at the funding, 5,000 shares of our common stock at the beginning of the next month, and 10,000 shares at the beginning of the next month. This promissory note was extended until February 1, 2009. We agreed to pay 3,900 shares of our common stock as interest and additional issuance of 10,000 shares of our common stock for additional compensation. The promissory note was further extended to May 1, 2009 and we agreed to make payments on the principal of $50,000 by February 15, 2009; repay a further $100,000 by May 1, 2009; issue 3,000 shares of our common stock as interest and additional issuance of 20,040 shares of our common stock for additional compensation. All the terms of the amended agreement were complied with. The remaining $100,000 plus accrued interest was convertible at NSC’s option at $2.00 per share on or before May 1, 2010. Pursuant to ASC 470-25-20, the modification of the Note agreement was not treated as an extinguishment but rather reduced the carrying amount of the debt through an adjustment to the note discounts, with a corresponding increase in additional paid-in capital.
In November 2010, the Company entered into an agreement with NSC Investments Ltd. to issue 585,000 units (“Units”), at a price per Unit of $.20, each Unit consisting of one share of common stock and a common stock purchase warrant to purchase one share of common stock at an exercise price of $.30 per share, to settle the remaining balance of the $100,000 of principal debt and $17,500 of accrued interest. The fair value of the warrants issued was $90,938.
2009 Convertible Debentures
On January 15, 2009 we entered into an agreement with Genovese whereby Genovese and/or his affiliates (collectively “Genovese”) advanced to the Company $250,000 for a convertible debenture or debentures (“the 2008 Genovese Convertible Debenture”) for the aggregate principal amount of $250,000. The 2008 Genovese Convertible Debenture was non-interest bearing and matured on December 5, 2010. At the holder’s sole discretion, the holder could elect to convert the 2008 Genovese Convertible Debenture, in whole or in part into common shares of the Company at a conversion price of $0.10 per share. As additional compensation, Genovese was issued a share purchase warrant certificate for 2,500,000 warrants, with each warrant exercisable into one common share at $0.15 per share for a period of three years commencing from the date of the issuance of the warrant certificate. The Company and Genovese further agreed to establish five (5) mutually agreed upon milestones to be attained no later than September 2009 with each milestone generally occurring approximately every forty five (45) days. In conjunction with the attainment of each individual milestone, Genovese agreed to advance to the Company an additional $250,000. In connection with each $250,000 advance, Genovese would be issued an additional $250,000 Debenture. The 2008 Genovese Convertible Debentures were non interest bearing and mature two years from the date of issuance of each subsequent debenture (“2009 Convertible Debentures”). At the holders’ sole discretion, the holder could elect to convert the 2009 Convertible Debentures, in whole or in part, at any time prior to maturity, into common shares of the Company at a conversion price of $0.10 per share.
As additional compensation, Genovese was issued a share purchase warrant certificate for 2,500,000 warrants with each warrant exercisable into one common share at $0.15 per share for a period of three years commencing from the date of the issuance of the warrant certificate for each Convertible Debenture issued. The 2008 Genovese Convertible Debenture was subsequently amended for an aggregate principal amount of $545,000. Additional 2008 Convertible Debentures for $455,000, $250,000, and $50,000 and $195,000 were issued during the year ended August 31, 2009. In April 2009, the amount of 2009 Convertible Debentures available to be issued was increased by $255,000 for an aggregate of $1,750,000.
As of August 31, 2009 a total of $1,750,000 principal amount of 2009 Convertible Debentures had been issued. The amount of the Debentures outstanding at August 31, 2009 was classified as “permanent equity” as capital in excess of par value and a corresponding amount was recorded as a discount against the note payable. This discount was amortized over 24 months on a straight-line basis as interest expense. On September 25, 2009, all issued 2009 Convertible Debentures were converted into 17,500,000 shares of common stock.
Janst Limited
In April 2009, we entered into a loan agreement with Janst Limited for $250,000. The terms of the loan were that the loan bears interest at 15% per annum, matured on May1, 2010, and that the principal and accrued interest is convertible into common stock at the rate of $0.35 per share.
In November 2010, the Company entered into an agreement with Janst Limited to issue 1,515,625 units (“Units”), at a price per Unit of $.20, each Unit consisting of one share of common stock and a common stock purchase warrant to purchase one share of common stock at an exercise price of $.30 per share, to settle the $250,000 of principal debt and $53,125 of accrued interest. The fair value of the warrants issued was $35,250. The fair value of the warrants was estimated using the Black-Scholes pricing method.
Interest expense for the years ended August 31, 2012 and 2011 was $-0- and $6,845, respectively.
NOTE 8 - COMMON STOCK
Effective December 7, 2011 the Company filed an amendment to its Articles of Incorporation (1) to increase our authorized Common Stock from 90,000,000 shares to 1,000,000,000 shares and (2) to authorize a new class of 10,000,000 shares of Preferred Stock with authority for our Board of Directors to issue one or more series of the preferred stock with such designations, rights, preferences, limitations and/or restrictions as it should determine by vote of a majority of such directors. As of August 31, 2012, no shares of preferred stock have been issued.
The Company has authorized 1,000,000,000 shares of common stock with a par value of $.00001. At August 31, 2012 and August 31, 2011, the Company had 54,256,627 and 38,656,627 shares of common stock issued and outstanding, respectively.
On April 10, 2007, the Company completed a forward stock split by issuing two additional shares of common stock for every one share previously issued.
On July 17, 2007, in connection with its Exchange Agreement with the Subsidiary, Parent issued 2,780,000 shares of its previously authorized but unissued common stock in exchange for all the issued and outstanding common stock of Subsidiary. The 2,780,000 shares have been reflected as though they were issued at the inception of the Subsidiary, with a reverse merger adjustment that represents the shareholders of the public shell at the time of the recapitalization.
During July, 2007, in connection with its Exchange Agreement with Subsidiary, Parent issued 100,000 shares of common stock to private placement subscribers at $10.00 per share.
On October 31, 2007 the Board of Directors approved the issuance of a private placement memorandum for 135,000 shares of common stock at $10.00 per share. On January 22, 2008, we completed a private placement of 135,000 shares of our common stock at a purchase price of $10.00 per share to persons who were not “U.S. Persons” within the meaning of Regulation S (“Regulation S”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). Also, stock offering costs of $91,401 have been recorded against capital in excess of par value.
During November 2007, the Board of Directors authorized the granting of options to purchase 200,000 shares of common stock at $10.00 per share. The fair value of each option granted is estimated on the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions; risk-free interest rates of 4.4%, expected dividend yields of zero, expected life of 10 years, and expected volatility of 147.95%. The options vested immediately and were valued in total at $2,366,186.
On January 22, 2008, the Company completed a private placement of 135,000 shares of its common stock at a purchase price of $10.00 per share to persons who were not “U.S. Persons” within the meaning of Regulation S (“Regulation S”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The Company received gross proceeds from the placement of $1,350,000 and net proceeds of approximately $1,258,600 after deducting $30,000 in placement fees paid to registered investment dealers in Canada and other offering costs.
In August 2008, we issued the NSC 2008 Note in the principal amount of $250,000. In November 2010, the Company entered into an agreement with NSC Investments Ltd. to issue 585,000 units (“Units”), at a conversion price per Unit of $.20, each Unit consisting of one share of common stock and a common stock purchase warrant to purchase one share of common stock at an exercise price of $.30 per share, to settle the remaining balance of the $100,000 of principal debt and $17,500 of accrued interest on the NSC 2008 Note.
During August 2008, the Company issued 45,000 warrants valued at approximately $338,000 to purchase stock for services rendered. The warrants vest over various terms. During the year ended August 31, 2009, the Company recognized compensation expense of $216,479. The fair value of each warrant granted is estimated on the date granted using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rates of 3.74% to 3.97%, expected dividend yields of zero, expected life of 10 years and expected volatility of 136.94% to 140.60%.
During the fiscal year ended August 31, 2008, the Company authorized the issuance of 100,000 shares of common stock to Mr. Steve Wozniak. The shares were valued at $1,850,000 based on the fair market value of the stock on the date the shares were issued.
In September 2008, we entered into a subscription agreement with Richard Genovese and/or his affiliates (collectively “Genovese”), pursuant to which Genovese purchased 100,000 shares of our common stock and 100,000 warrants with an exercise price of $1.50 for $150,000.
In October 2008, we entered into an agreement with Euro Trend Trader, Inc. (“ETT”) to provide investor relations and public relations. We agreed to pay ETT $5,000 start up fees and $3,000 per month thereafter. Additionally, we paid ETT 20,000 shares of our common stock for coverage of the Company by a registered market maker and an additional 10,000 shares for investor relations services.
In November 2008, we borrowed $5,000 from a consultant to the Company which was payable by December 6, 2008. The lender was to receive 200 shares of our common stock per month as interest and an additional consideration of 25,000 warrants with an exercise price of $0.25. In February 2009 we repaid the principal and interest in full and did not issue any shares or warrants.
In November 2008 we issued 5,000 shares of our common stock to Howard Family Trust as a bonus in consideration of the Company’s failure to pay rent on a timely basis. The shares were valued at $14,000 based on the fair market value of the stock on the date the shares were issued.
In May 2009, we entered into a subscription agreement with Robert Kolson, pursuant to which Mr. Kolson purchased 75,000 shares of our common stock and 37,500 warrants with an exercise price of $3.00 for $150,000.
During the year ended August 31, 2009, the Company issued an aggregate of $1,750,000 in 2009 Convertible Debentures. At the holder's sole discretion, the holder was entitled to convert the Debentures, in whole or in part into common shares of the Company at a conversion price of $0.10 per share. As additional compensation, in conjunction with the issuance of the 2009 Convertible Debentures, the Company issued 17,500,000 share purchase warrant certificates with each warrant exercisable into one common share at $0.15 per share for a period of three years commencing from the date of the issuance of the warrant certificate. On September 25, 2009 all of the $1,750,000 of 2009 Convertible Debentures were converted into 17,500,000 common shares and 17,500,000 share purchase warrants exercisable at $0.15 per share remained outstanding.
On September 15 2009, the Company completed a reverse stock split on a one to ten (1:10) basis, such that each shareholder following the reverse split held one new share for every ten shares previously held. The Company’s share transactions disclosed in the financial statements were restated retroactively to reflect the reverse stock split for all periods presented.
On October 30, 2009 we entered into a subscription agreement with Janspec Holdings Limited ("Janspec"), pursuant to which Janspec purchased 428,572 common shares and 428,572 warrants with an exercise price of $0.60 for $150,000.
On November 7, 2009 we entered into a subscription agreement with Peninsula Merchant Syndications Corp. ("Peninsula"), pursuant to which Peninsula purchased 285,715 shares of our common stock and 285,715 warrants with an exercise price of $0.60 for $100,000.
On November 9, 2009, we issued 32,000 common shares to Weintraub Genshlea Chediak in lieu of outstanding legal services provided to the Company. The shares were valued at $11,200 based on the fair market value of the stock on the date that the shares were issued.
On November 13, 2009 we entered into a subscription agreement with Robert Kolson, pursuant to which Mr. Kolson purchased 285,715 shares of our common stock and 285,715 warrants with an exercise price of $0.60 for $100,000.
On January 20, 2010 we issued 170,000 common shares to Howard Family Trust in lieu of outstanding rent, property taxes and insurance. The shares were valued at $85,000 reflective of the fair market value of the stock on the date the shares were issued.
On November 8, 2010, we entered into a subscription agreement with Janst Limited, pursuant to which Janst purchased 1,250,000 shares of our common stock and 1,250,000 warrants with an exercise price of $.30 for $250,000.
On November 8, 2010, we entered into a subscription agreement with NSC Investments Ltd., pursuant to which NSC purchased 250,000 shares of our common stock and 250,000 warrants with an exercise price of $.30 for $50,000.
On November 8, 2010, we entered into a subscription agreement with Richard Genovese., pursuant to which Mr. Genovese purchased 250,000 shares of our common stock and 250,000 warrants with an exercise price of $.30 for $50,000.
On December 13, 2010, we entered into a subscription agreement with Musgrave Investments Ltd., pursuant to which Musgrave purchased 500,000 shares of our common stock and 500,000 warrants with an exercise price of $.30 for $100,000.
On May 6, 2011, we entered into a subscription agreement with Richard Genovese, pursuant to which Mr. Genovese purchased 600,000 shares of our common stock and 600,000 warrants with an exercise price of $.10 for $30,000.
On July 26, 2011, we entered into a subscription agreement with a private investor. The investor purchased 500,000 shares of our common stock and 500,000 warrants with an exercise price of $.10 for $25,000.
The fair value of the warrants issued in connection with the sale of common stock during the year ended August 31, 2011 was $151,496. The fair value of the warrants was estimated using the Black Scholes pricing method.
On November 22, 2011, we entered into a subscription agreement with a private investor. The investor purchased 2,666,667 shares of our common stock for an aggregate investment in the Company of $200,000.
On December 5, 2011, the Company entered into a subscription agreement with a private investor. The investor purchased 400,000 shares of our common stock and 400,000 warrants with an exercise price of $0.25 per share for an aggregate investment in the Company of $100,000.
On May 1, 2012, we entered into a subscription agreement with a private investor. The investor purchased 100,000 shares of our common stock for an aggregate investment in the Company of $20,000.
On May 2, 2012, we entered into subscription agreements with two private investors. The investors purchased 1,500,000 shares of our common stock for an aggregate investment in the Company of $300,000.
On August 8, 2012, we entered into a subscription agreement with a private investor. The investor purchased 3,000,000 shares of our common stock for an aggregate investment in the Company of $300,000.
The fair value of the warrants issued in connection with the sale of common stock during the year ended August 31, 2012 was $64,200. The fair value of the warrants was estimated using the Black Scholes pricing method.
NOTE 9 - OPTIONS AND WARRANTS
Stock Options
During November, 2007 the Board of Directors of the Company adopted and the stockholders at that time approved the 2007 Stock Plan (“the Plan”). The Plan provides both for the direct award or sale of shares and for the granting of options to purchase shares. Options granted under the plan may include qualified and non-qualified stock options. The aggregate number of shares that may be issued under the plan shall not exceed 750,000 shares of common stock, and are issuable to directors, officers, and employees of the Company. Awards under the plan will be granted as determined by Committees of the Board of Directors or by the Board of Directors. The options will expire after 10 years or 5 years if the option holder owns at least 10% of the common stock of the Company. The exercise price of a non-qualified option must be at least 85% of the market price on the date of issue. The exercise price of a qualified option must be at least equal to the market price or 110% of the market price on the date of issue if the option holder owns at least 10% of the common stock of the Company.
In November 2007, 200,000 stock options were granted with an exercise price equal to fair value at the date of grant. The term of the options granted under the Plan could not exceed 10 years and the stock options granted were vested immediately.
On August 1, 2008, we agreed to issue 30,000 stock options to certain board members for their services to the board.
On September 1, 2008 we granted 15,000 stock options to a certain officer and board member for his services performed as Chair of the Audit Committee and Chair of the Compensation Committee. The estimated value of the compensatory common stock purchase options granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions: expected term of 10 years, a risk free interest rate of 3.97% to 4.40%, a dividend yield of 0% and volatility of 136.94% to 147.95%. On August 31, 2012, we cancelled 25,000 stock options that were issued to a certain board member.
During the years ended August 31, 2012 and 2011, the amount of the expense charged to operations for compensatory options granted in exchange for services was $-0- and $-0-, respectively.
The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees and non-employees of the Company. These options were granted in lieu of cash compensation for services performed.
Stock Warrants
In September 2008, we entered into a subscription agreement with Richard Genovese and/or his affiliates (collectively “Genovese”) whereby Genovese purchased 100,000 shares of our common stock and 100,000 warrants with an exercise price of $2.00 for $150,000.
In November 2008, we borrowed $5,000 from a consultant to the Company which was payable by December 6, 2008. The lender was to receive 200 shares of our common stock per month as interest and an additional consideration of 25,000 warrants with an exercise price of $0.25. In February 2009 we repaid the principal and interest in full and no shares or warrants were issued.
On January 15, 2009 we entered into an agreement with Genovese whereby Genovese and/or his affiliates (collectively “Genovese”) advanced to the Company $250,000 for a convertible debenture (“Debenture”) for the aggregate principal amount of $250,000. The Debenture was be non-interest bearing and matured on December 5, 2010. At the holder’s sole discretion, the holder had the right to elect to convert the Debenture, in whole or in part into common shares of the Company at a conversion price of $0.10 per share. As additional compensation, Genovese was issued a share purchase warrant certificate for 2,500,000 warrants with each warrant exercisable into one common share at $0.15 per share for a period of three years commencing from the date of the issuance of the warrant certificate. The Company and Genovese further agreed to establish five (5) mutually agreed upon milestones to be attained no later than September 2009 with each milestone generally occurring approximately every forty five (45) days. In conjunction with the attainment of each individual milestone, Genovese agreed to advance to the Company an additional $250,000. In connection with each $250,000 advance, Genovese was issued an additional $250,000 Convertible Debenture. The Debentures were non-interest bearing and matured two years from the date of issuance of each subsequent debenture (“Subsequent Debentures”).
At the Holders’ sole discretion, the Holder had the right to elect to convert the Subsequent Debentures, in whole or in part, at any time prior to maturity, into common shares of the Company at a conversion price of $0.10 per share. As additional compensation, Genovese was issued a share purchase warrant certificate for 2,500,000 warrants with each warrant exercisable into one common share at $0.15 per share for a period of three years commencing from the date of the issuance of the warrant certificate for each Subsequent Debenture issued. We further agreed that (1) Genovese would be granted the right of first refusal/ right of participation in connection with any additional financing of the Company for two (2) years, (2) Genovese would be entitled to two board seats, (3) we would obtain directors and officers insurance, and (4) the parties would work together commencing December 2008 to address other matters. The Debenture was subsequently amended for an aggregate principal amount of $545,000.
Additional Debentures for $455,000, $250,000, and $50,000 and $195,000 were issued during the year ended August 31, 2009. In April 2009, the amount of convertible debentures available to be issued was increased by $255,000 for an aggregate of $1,750,000. As of August 31, 2009 a total of $1,750,000 had been issued as Debentures. On September 25, 2009 all of the $1,750,000 of debentures were converted into 17,500,000 common shares and 17,500,000 share purchase warrants exercisable at $0.15 per share remain unexercised, respective exercise periods thereof having been extended for an additional year from the original expiration dates.
In May 2009, we entered into a subscription agreement with Robert Kolson, pursuant to which Mr. Kolson purchased 75,000 shares of our common stock and 37,500 warrants with an exercise price of $3.00 for $150,000.
On October 30, 2009 we entered into a subscription agreement with Janspec Holdings Limited ("Janspec"), pursuant to which Janspec purchased 428,572 common shares and 428,572 warrants with an exercise price of $0.60 for $150,000.
On November 7, 2009 we entered into a subscription agreement with Peninsula Merchant Syndications Corp. ("Peninsula"), pursuant to which Peninsula purchased 285,715 shares of our common stock and 285,715 warrants with an exercise price of $0.60 for $100,000.
On November 13, 2009 we entered into a subscription agreement with Robert Kolson, pursuant to which Mr. Kolson purchased 285,715 shares of our common stock and 285,715 warrants with an exercise price of $0.60 for $100,000.
During the year ended August 31, 2012, the Company issued 400,000 warrants in connection with the sales of common stock and conversion of debt into common stock. The fair value of the warrants in connection with the allocation of sale and conversion was $64,200.
As of August 31, 2012, 1,000,002 of the Company's warrants issued and outstanding as of August 31, 2011 have expired.
* The 17,500,000 warrants (“2009 Warrants”) issued in conjunction with the 2009 Convertible Debentures contain an anti-dilution provision that states it is specifically agreed that in the event that the Company shall reduce the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, then, in such case, the then applicable Exercise Price per Warrant Share purchasable pursuant to the Warrant Certificate in effect at the time of such action will not be changed. On January 30, 2012, the Company extended respective exercise dates of the 2009 Warrants for one additional year from their original expiry dates.
The following table sets forth common stock equivalents (potential common stock) for the years ended August 31, 2012 and 2011 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
NOTE 10 - INCOME TAXES
The Company followed the provisions of ASC 740, “Income Taxes” (“ASC 740”). As a result of the implementation of ASC 740, the Company recognized no adjustment in the net liability for unrecognized income tax benefits. The Company believes there are no potential uncertain tax positions and all tax returns are correct as filed. Should the Company recognize a liability for uncertain tax positions; the Company will separately recognize the liability for uncertain tax positions on its balance sheet. Included in any liability for uncertain tax positions, the Company will also record a liability for interest and penalties. The Company’s policy is to recognize interest and penalties related to uncertain tax positions as a component of the current provision for income taxes.
Substantial changes in the Company’s ownership have occurred, and therefore there is an annual limitation of the amount of Parent’s pre-acquisition net operating loss carryforward which can be utilized. Accordingly, only the post-acquisition net operating loss carryforward has been included for Parent.
The reconciliation of the provision (benefit) for income taxes computed at the U.S. federal statutory rate to the Company’s effective tax rate for the years ended August 31, 2012 and 2011 is as follows:
The Company has not made provision for income taxes in the year ended August 31, 2012 and 2011, respectively, since the Company has the benefit of net operating losses carried forward in these periods.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Consulting Agreement
Effective September 1, 2010, the Company entered into a consulting agreement with, L.A. Dreamline II, LLC, a marketing consultant (a related party), for a monthly consulting fee of $15,000. The consulting agreement is for a term of 25 months. For the year ended August 31, 2012 and 2011, the Company paid the related party $180,000 and $180,000, respectively.
Lease
Effective May 1, 2010 we have entered into a month-to-month lease, providing for a monthly rental of $3,500 for our executive office. Rent expense, including executory costs, for the years ended August 31, 2012 and 2011 was $78,820 and $48,412, respectively.
NOTE 12 - LEGAL PROCEEDINGS
We are party to the following litigation matter.
Stride & Associates. We are a defendant in a suit filed September 2, 2009 by Stride & Associates, Inc. in the Superior Court of California, Los Angeles Superior Court-North Central District, for the amount of $19,500, plus interest, for services allegedly rendered by the plaintiff to the Company in connection with personnel placement. The plaintiff has filed a judgment in the amount of $21,620 against us in this litigation, and the Company has accrued the full amount. We intend to settle this matter.
NOTE 13 - SUBSEQUENT EVENTS
On September 7, 2012 the Company issued 6,610,000 shares to Richard Genovese in conversion of $661,000 principal amount of debt held.
On October 16, 2012 the Company issued 5,714,286 shares to JANST Limited at a share purchase price of $0.07 for an investment of $400,000.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
As supervised by our board of directors and our Chief Executive Officer and Chief Financial Officer, management has established a system of disclosure controls and procedures and has evaluated the effectiveness of that system. The system and its evaluation are reported on in the below Management’s Annual Report on Internal Control over Financial Reporting. Our chief executive and financial officer has concluded that our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(e)) as of August 31, 2012, are effective.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of internal control over financial reporting as of August 31, 2012. We carried out this assessment using the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management concluded in this assessment that as of August 31, 2012, our internal control over financial reporting was effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm, pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of our 2012 fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
DIRECTORS AND EXECUTIVE OFFICERS
As of the date of this report, our executive officers and directors are as follows:
Robert Rosner, President, Chief Executive Officer, Chief Financial Officer and Director
Robert Rosner, 46, was appointed as our acting President, Chief Executive Officer and Chief Financial Officer effective March 27, 2010, and was elected to our Board of Directors on May 24, 2010. Mr. Rosner has served as the Chairman and Chief Executive Officer of Watair Inc. (OTC “WTAR”) since August 2005, and was reappointed as President in January 2008. Formerly he was President from August 2005 to April 2007. Mr. Rosner also currently serves as Corporate Secretary of Watair Inc., having been appointed to this position in March 2007. During his tenure with Watair, he was also the Vice President of Regulatory Affairs and Compliance and Corporate Secretary from August 2003 until August 2005. Watair engages in the manufacture, marketing, and distribution of commercial and home/office atmospheric water generation machines.
Mr. Rosner has held Directorships with Watair from August 2003 to the current date and he has also served as President and director of Fortuna Silver Mines Inc., a company listed on the TSX (“FVI”) and OTC BB (“FVITF”), from June 1996 to January 2005.
Bruce Schmidt, Secretary, Treasurer & Director
Bruce Schmidt brings over twenty-seven years of strategic planning and management consulting experience to the Company. With a background in physics and education from the University of British Columbia, he has acted as a consultant and has served on the Board of Directors for a variety of Canadian biotech/hightech and venture capital companies from 1992 through 2005 including: Prescient Neuropharma Inc. (TSX- “PNO”) as President, Chief Executive Officer and Director; Alda Pharmaceuticals Corp. (TSX-“APH”) as Director; Biophage Pharma Inc. (TSX-“BUG”) as Corporate Secretary and Director; Strategic Merchant Bancorp, Ltd (TSX-“SMB”) as a Director; VP Media Group Ltd. (TSX- “DVD.H”) as Director and Aitchison Capital, Inc. (TSX-“TTI”) as a Director. Mr. Schmidt has also been involved with a number of non-profit Canadian organizations including: the Canadian Networks of Centers of Excellence, the Canadian Healthcare Licensing Association, the British Columbia Biotechnology Alliance (BC Biotech), B.C. Nanotechnology Alliance, British Columbia’s Integrated Technology Initiative and the New Economy and Adoption of Technologies Group of the British Columbia Securities Commission. Since May of 1996, Mr. Schmidt has been working as a Life-Sciences Management consultant under his own consulting company, RJS Management in Vancouver, BC. RJS Management provides executive counsel to hightech/biotech companies in the areas of business strategy, marketing and strategic partnering.
Richard Genovese, Director
Mr. Genovese has been the president and sole director of Connect Capital Ltd. since the incorporation of Connect Capital in 2004. Connect Capital Ltd., a private corporation in Vancouver, British Columbia, Canada, specializes in financial and management advisory services to both public and private companies. Since 2005, Mr. Genovese has been the president of Clayoquot Wilderness Resort, Ltd., a world renowned luxurious eco-resort located in the Clayoquot Biosphere Reserve on British Columbia’s Vancouver Island.
Frank Anderson, Director
Frank Anderson has been the managing director of Connect Capital Ltd. since 2006. From 2000 to 2006, Mr. Anderson was a director, secretary and treasurer of Sporg Corporation which is an internet registration services business. From 1982 to 1999, Mr. Anderson was an investment advisor with Canaccord Capital Corp., Canada’s largest investment firm. Mr. Anderson has successfully completed the Canadian Securities Course.
Involvement in Certain Legal Proceedings
None of the following events occurred during the past five years that is material to an evaluation of the ability or integrity of any director, person nominated to become a director, executive officer, promoter or control person:
(i) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(ii) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(iii) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(iv) Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Corporate Governance
Directors are elected at the annual stockholder meeting or appointed by our Board of Directors and serve for one year or until their successors are elected and qualified. When a new director is appointed to fill a vacancy created by an increase in the number of directors, that director holds office until the next election of one or more directors by stockholders. Officers are appointed by our Board of Directors and their terms of office are at the discretion of our Board of Directors.
Committees of our Board of Directors
Audit Committee. Our Board of Directors plans to establish an Audit Committee, the members of which shall be considered as independent under the standards for independence for audit committee members established by the NYSE. The Audit Committee will operate under a written charter.
Other Committees. The Board does not have standing compensation or nominating committees. The Board does not believe a compensation or nominating committee is necessary based on the size of the Company, the current levels of compensation to corporate officers and the beneficial ownership by Richard Genovese of in excess of 50% of the Company’s outstanding common stock. The Board will consider establishing compensation and nominating committees at the appropriate time.
Stockholder Communications
The Board has not established a formal process for stockholders to send communications, including director nominations, to the Board; however, the names of all directors are available to stockholders in this report. Any stockholder may send a communication to any member of the Board of Directors, in care of the Company, at 644-1812 West Burbank Blvd., Burbank, CA 91506 (Attention: Secretary). Director nominations submitted by a stockholder will be considered by the full Board. Due to the infrequency of stockholder communications to the Board, the Board does not believe that a more formal process is necessary. However, the Board will consider, from time to time, whether adoption of a more formal process for such stockholder communications has become necessary or appropriate.
Other Information about our Board of Directors
During our fiscal year ended August 31, 2012, our Board of Directors did not meet, but acted by written consent nine times.
We do not have a formal policy on attendance at meetings of our shareholders; however, we encourage all Board members to attend shareholder meetings that are held in conjunction with a meeting of our Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of equity securities of the Company. Officers, directors, and greater than 10% stockholders are required to furnish the Company with copies of all Section 16(a) forms they file. Based on the copies of the reports and other written assurances provided to it, the Company believes that the following reports for our 2012 fiscal year were not filed timely by Richard Genovese:
Mr. Genovese filed on October 10, 2011 a report on Form 4 reporting a transaction on October 4, 2011; a transaction on October 24, 2011 was reported in a Form 4 filed on January 20, 2012; transactions on February 7, 2012 were reported in a Form 4 filed February 13, 2012; transactions taking place in the period March 28 through April 4, 2012 were reported on a Form 4 filed April 11, 2012; transactions taking place in the period April 11 through June 1, 2012 were reported on a Form 4 filed June 27, 2012; transactions taking place in the period June 6 through June 22, 2012 were reported on a Form 4 filed July 23, 2012; and transactions taking place in the period July 13 through September 7, 2012 were reported on a Form 4 filed September 14, 2012.
Code of Ethics
On March 3, 2009 the Company’s Board of Directors adopted an amended and restated Code of Ethics for the Company. A copy of the Company’s amended Code of Ethics was filed as an Exhibit to Form 8-K filed on March 4, 2009 and will be found posted on the Company’s website at www.Lyynks.com. Upon written request to the Secretary of the Company a copy will be provided to any stockholder.
Item 11.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The table below summarizes all compensation awarded to, earned by, or paid to our executive officers for all services rendered in all capacities to us during the last three completed fiscal years.
(1) Mr. Fishkin became an executive officer of the Company in July 2007 at the time of the En2Go Nevada acquisition, and resigned as an officer of the Company on March 26, 2010.
(2) Mr. Rosner was appointed Chief Executive Officer and Chief Financial Officer on March 27, 2010.
Stock Options
2007 Stock Plan
During November, 2007 the Board of Directors of the Company adopted and the stockholders at that time approved the 2007 Stock Plan (“the Plan”). The Plan provides both for the direct award or sale of shares and for the granting of options to purchase shares. Options granted under the Plan may include qualified and non-qualified stock options. The aggregate number of shares reserved for issuance under the Plan was 750,000, issuable to directors, officers, and employees of the Company. An aggregate of 750,000 shares remains available for issuance under the Plan. Awards under the Plan will be granted as determined by Committees of the Board of Directors or by the Board of Directors.
The options will expire after 10 years or 5 years if the option holder owns at least 10% of the common stock of the Company. The exercise price of a non-qualified option must be at least 85% of the market price on the date of issue. The exercise price of a qualified option must be at least equal to the market price or 110% of the market price on the date of issue if the option holder owns at least 10% of the common stock of the Company.
Stock Option Grants
As of August 31, 2012, no stock option grants were outstanding.
Option Exercises and Stock Vesting
During the fiscal year ended August 31, 2012, no options held by our executive officers and directors were exercised, and an option grant for 25,000 shares of common stock held by a director was cancelled.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table contains information relating to the beneficial ownership of Common Stock by members of the board of directors and the Company's officers as a group, as well as certain other beneficial owners as of November 29, 2012. Information as to the number of shares of Common Stock owned and the nature of ownership has been provided by these individuals or is based on Schedules 13D, or amendments thereto, received by the Company as filed with the Securities and Exchange Commission, or other information, and is not within the direct knowledge of the Company. Unless otherwise indicated, the named individuals possess sole voting and investment power with respect to the shares listed.
* Based on 66,580,913 shares outstanding on November 29, 2012.
** Less than 1%.
_______________
(1) Unless otherwise indicated, all shares are held beneficially and of record by the person indicated and the address of such person is c/o the Company, 644-1812 West Burbank Blvd., Burbank, CA 91506.
(2) In addition to 4,950,000 shares owned directly, Abeille Limited holds warrants expiring January 30, 2012, to purchase an aggregate of 4,550,000 shares of common stock at an exercise price of $.15 per share, and warrants expiring November 29, 2014, to purchase 400,000 shares of common stock at an exercise price of $.25 per share.
(3) Includes currently exercisable stock purchase warrants entitling 511919 NB Ltd. to acquire 2,500,000 shares of the Company’s common stock.
(4) In addition to 16,898,872 shares owned directly, Mr. Genovese owns 14,433,333 shares indirectly through Clayoquot Wilderness Resort Ltd., of which Mr. Genovese is a principal, and holds warrants expiring at various dates commencing January 30, 2012 through May 5, 2016, to purchase an aggregate of 16,340,000 shares of common stock at exercise prices ranging from $.10 to $.15 per share. Mr. Genovese’s address is c/o the Company, 644-1812 West Burbank Blvd., Burbank, California 91505.
(5) In addition to 9,479,911 shares owned directly, Janst Limited holds warrants expiring at various dates commencing April 22, 2012 through November 7, 2015 to purchase an aggregate of 3,765,625 shares of common stock at exercise prices ranging from $.15 to $.30 per share.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
During the year ended August 31, 2011, Richard Genovese, a Director of the Company (“Genovese”) made advances of $630,500 to the Company for additional working capital. As of August 31, 2011 and August 31, 2010 the amount due Genovese was $330,510 and $562,010 respectively.
During the year ended August 31, 2012, Genovese converted $595,000 of debt owed to him into 7,933,333 common shares at a conversion price per share of $0.075.
During the year ended August 31, 2012, Genovese made advances of $926,000 to the Company. As of August 31, 2012 and August 31, 2011, the amount due Genovese was $661,510 and $330,510, respectively.
On February 28, 2012, Clayoquot Wilderness Resort Ltd. (“Clayoquot”), a company of which Genovese is a principal, advanced $100,000 to the Company. As of August 31, 2012 and August 31, 2011, the amount due Clayoquot was $100,000 and $-0-, respectively.
On May 6, 2011, Genovese invested $30,000 into the Company, through the purchase of 600,000 units, at a purchase price per unit of $.05, each unit consisting of one share of common stock and a common stock purchase warrant to purchase one share of common stock at an exercise price of $.10 per share. The fair value of the warrants issued was $9,000.
On May 6, 2011, Genovese converted $312,000 of debt owed to him into 6,240,000 units, at a conversion price per unit of $.05, each unit consisting of one share of common stock and a common stock purchase warrant to purchase one share of common stock at an exercise price of $.10 per share. The fair value of the warrants issued was $93,600.
On November 8, 2010, Genovese invested $50,000 into the Company as additional working capital by way of the issuance of 250,000 units, at a purchase price per unit of $.20, each unit consisting of one share of common stock and a common stock purchase warrant to purchase one share of common stock at an exercise price of $.30 per share. The fair value of the warrants issued was $15,000.
On November 8, 2010, Genovese converted $550,000 of debt owed to him into 2,750,000 units, at a conversion price per unit of $.20, each unit consisting of one share of common stock and a common stock purchase warrant to purchase one share of common stock at an exercise price of $.30 per share. The fair value of the warrants issued was $165,000.
PART IV
Item 14.
Item 14. Principal Accountant Fees and Services
The Board of Directors has appointed Madsen & Associates, CPA (“Madsen”), independent auditors, as the Company’s independent registered public accounting firm for the fiscal year ending August 31, 2012. Madsen has audited our financial statements since August 31, 2009, through August 31, 2012.
Audit Fees
During the fiscal years ended August 31, 2011 and 2012, fees for services provided by were as follows:
“Audit Fees” consisted of fees billed for services rendered for the audit of the Company’s annual financial statements, review of financial statements included in the Company’s quarterly reports on Form 10-Q, and other services normally provided in connection with statutory and regulatory filings.
“Audit-Related Fees” consisted of fees billed for due diligence procedures in connection with acquisitions and divestitures and consultation regarding financial accounting and reporting matters.
“Tax Fees” consisted of fees billed for tax payment planning and tax preparation services.
“All Other Fees” consisted of fees billed for services in connection with legal matters and technical accounting research.
Tax Fees
During 2012, our principal accountant did not render services to us for tax compliance, tax advice and tax planning.
All Other Fees
During 2012, there were no fees billed for products and services provided by the principal accountant other than those set forth above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors
The Board’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the Board regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Board may also pre-approve particular services on a case-by-case basis.
The Board has determined that the rendering of the services other than audit services by CB&N is compatible with maintaining the principal accountant’s independence.
1. Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.
2. Audit-Related services are for assurance and related services that are reasonably related to the audit or review of our financial statements.
3. Tax services include all services performed by the independent auditor’s tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
4. Other Fees are those associated with products or services not captured in the other categories.
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)(3) Exhibits
*
filed previously
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
The XBRL related information in Exhibits 101 to this Annual Report on Form 10-K shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant in the capacities indicated, on December 11, 2012.
/s/ ROBERT ROSNER
Robert Rosner, President,
Chief Executive Officer
and Director
/s/ BRUCE SCHMIDT
Bruce Schmidt
Director
/s/ RICHARD GENOVESE
Richard Genovese
Director
/s/ FRANK ANDERSON
Frank Anderson
Director