UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2010
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 333-131599
HIPSO MULTIMEDIA, INC.
(Exact Name Of Registrant As Specified In Its Charter)
| Florida | 22-3914075 |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
| 550 Chemin du Golf, Suite 202, Ile de Soeurs, Quebec, Canada | H3E 1A8 |
| (Address of Principal Executive Offices) | (ZIP Code) |
Registrant's Telephone Number, Including Area Code: (514) 380-5353
Securities Registered Pursuant to Section 12(g) of The Act: Common Stock, $0.00001
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
On May 31, 2010, the Registrant had 58,643,504 shares of common stock, par value $0.00001 outstanding.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Item | Description | Page | ||
| PART I - FINANCIAL INFORMATION | ||||
| ITEM 1. | FINANCIAL STATEMENTS. | 3 | ||
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. | 24 | ||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 26 | ||
| ITEM 4. | CONTROLS AND PROCEDURES. | 26 | ||
| PART II - OTHER INFORMATION | ||||
| ITEM 1. | LEGAL PROCEEDINGS. | 26 | ||
| ITEM 1A. | RISK FACTORS | 27 | ||
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 27 | ||
| ITEM 3. | DEFAULT UPON SENIOR SECURITIES. | 27 | ||
| ITEM 4. | SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS. | 27 | ||
| ITEM 5. | OTHER INFORMATION. | 27 | ||
| ITEM 6. | EXHIBITS. | 27 | ||
2
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Condensed Consolidated Balance Sheets as of May 31, 2010 (Unaudited) and | |
| November 30, 2009 | 4 |
| Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | |
| for the Six and Three Months Ended May 31, 2010 and 2009 (Unaudited) | 5 |
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended | |
| May 31, 2010 and 2009 (Unaudited) | 6 |
| Notes to Condensed Consolidated Financial Statements | 7 |
3
CONSOLIDATED BALANCE SHEETS
MAY 31, 2010 (UNAUDITED) AND NOVEMBER 30, 2009
| IN US$ | ||||||||
| May 31, | November 30, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 15,638 | $ | - | ||||
| Accounts receivable | 30,739 | 33,391 | ||||||
| Prepaid expenses and other current assets | 3,815 | 3,781 | ||||||
| Total Current Assets | 50,192 | 37,172 | ||||||
| FIXED ASSETS | ||||||||
| Office and computer equipment, net | 9,311 | 12,309 | ||||||
| OTHER ASSETS | ||||||||
| Deferred costs, net | 162,253 | 202,985 | ||||||
| Total Assets | $ | 221,756 | $ | 252,466 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Current portion of loan payable to bank | $ | 106,052 | $ | 262,722 | ||||
| Loan payable to shareholders | 1,503,155 | 1,139,375 | ||||||
| Cash overdraft | - | 361 | ||||||
| Liability for stock to be issued | 87,500 | 40,000 | ||||||
| Accounts payable | 279,010 | 223,234 | ||||||
| Accrued expenses | 134,170 | 117,587 | ||||||
| Total Current Liabilities | 2,109,887 | 1,783,279 | ||||||
| TOTAL LIABILITIES | 2,109,887 | 1,783,279 | ||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Common stock, par value $0.00001, 100,000,000 shares authorized, 58,643,508 and 57,203,508 issued and outstanding at May 31, 2010 and November 30, 2009, respectively | 586 | 572 | ||||||
| Additional paid-in capital | 803,308 | 668,292 | ||||||
| Accumulated deficit | (2,621,307 | ) | (2,138,376 | ) | ||||
| Accumulated other comprehensive income (loss) | (70,718 | ) | (61,301 | ) | ||||
| Total Stockholders' Deficit | (1,888,131 | ) | (1,530,813 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 221,756 | $ | 252,466 | ||||
See accompanying notes to condensed consolidated financial statements.
4
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX AND THREE MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| IN US$ | ||||||||||||||||
| For the six months ended | For the three months ended | |||||||||||||||
| May 31, | May 31, | May 31, | May 31, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| REVENUE | $ | 101,017 | $ | 83,010 | $ | 53,638 | $ | 20,826 | ||||||||
| COSTS AND EXPENSES | ||||||||||||||||
| Cost of sales | 153,563 | 102,241 | 78,640 | 62,663 | ||||||||||||
| Depreciation and amortization | 46,088 | 42,217 | 23,421 | 22,530 | ||||||||||||
| Administrative expenses | 336,293 | 302,893 | 197,368 | 100,381 | ||||||||||||
| Total Costs and Expenses | 535,944 | 447,351 | 299,429 | 185,574 | ||||||||||||
| OPERATING LOSS | (434,927 | ) | (364,341 | ) | (245,791 | ) | (164,748 | ) | ||||||||
| NON-OPERATING INCOME (EXPENSE) | ||||||||||||||||
| Interest income | - | 2,394 | - | 354 | ||||||||||||
| Interest expense | (48,004 | ) | (18,953 | ) | (26,408 | ) | (10,578 | ) | ||||||||
| Total Non-Operating Expense | (48,004 | ) | (16,559 | ) | (26,408 | ) | (10,224 | ) | ||||||||
| NET LOSS | $ | (482,931 | ) | $ | (380,900 | ) | $ | (272,199 | ) | $ | (174,972 | ) | ||||
| Net loss per common share (Basic and Diluted) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Weighted average shares outstanding | 57,849,167 | 55,274,279 | 58,396,551 | 55,373,508 | ||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Comprehensive income (loss) - beginning of period | $ | (482,931 | ) | $ | (380,900 | ) | $ | (272,199 | ) | $ | (174,972 | ) | ||||
| Cumulative translation adjustments | (9,417 | ) | (129,895 | ) | (869 | ) | (118,101 | ) | ||||||||
| Comprehensive income (loss) - end of period | $ | (492,348 | ) | $ | (510,795 | ) | $ | (273,068 | ) | $ | (293,073 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
5
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| IN US$ | ||||||||
| For the six months ended | ||||||||
| May 31, | May 31, | |||||||
| 2010 | 2009 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (482,931 | ) | $ | (380,900 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 46,088 | 42,217 | ||||||
| Stock based compensation and consulting services for stock | 65,600 | 93,996 | ||||||
| Contributed expenses by management | 20,430 | 20,430 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,489 | 41,571 | ||||||
| Prepaid expenses and other current assets | (5,202 | ) | (6,579 | ) | ||||
| Accounts payable and accrued expenses | 104,268 | 61,440 | ||||||
| Net cash used in operating activities | (248,258 | ) | (127,825 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| (Decrease) in cash overdraft | (361 | ) | - | |||||
| Cash received for common stock | 49,000 | - | ||||||
| Loan payable to bank | (159,084 | ) | (41,783 | ) | ||||
| Loan payable to shareholders | 371,194 | 226,880 | ||||||
| Net cash provided by financing activities | 260,749 | 185,097 | ||||||
| EFFECT OF EXCHANGE RATE ON CASH | 3,147 | (37,647 | ) | |||||
| INCREASE IN CASH | 15,638 | 19,625 | ||||||
| CASH, BEGINNING OF YEAR | - | 19 | ||||||
| CASH, END OF PERIOD | $ | 15,638 | $ | 19,644 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | 6,218 | 4,577 | ||||||
See accompanying notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 1- | ORGANIZATION AND BASIS OF PRESENTATION |
The unaudited condensed consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual consolidated statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the November 30, 2009 audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.
These condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated operations and cash flows for the periods presented.
HIPSO Multimedia, Inc. (the “Company”) formerly Physicians Remote Solutions, Inc., a Florida Corporation incorporated in April 2005, operates a “triple play” network providing digital TV, voice over internet protocol (VoIP) and a high speed internet access all via fiber optic cable. The Company targets the multi-dwelling unit market in Montreal and eventually throughout the Canadian market. The Company offers its retail customer base a bundled package including IP telephony, internet bandwidth in 5 and 10 megabytes per second (Mbps) increments and 83 television channels. The Company also targets hotels, hospitals and retirement homes by offering bulk long-term agreements to their connected customers.
On June 2, 2008, the Company entered into a share exchange agreement with Valtech Communications, Inc. (“Valtech”) and issued 40,000,000 shares of its common stock to acquire Valtech. In connection with the share exchange agreement, Valtech became a wholly owned subsidiary of the Company and the Valtech officers and directors became the officers and directors of the Company. Prior to the merger, the Company had not generated any revenues. As a result of the transaction (the “reverse merger”) and for accounting purposes, the reverse merger has been treated as an acquisition of the Company by Valtech and a recapitalization of the Company. The historical financial statements are those of Valtech. Since the reverse merger is a recapitalization and not a business combination, pro-forma information is not presented.
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Positions or Emerging Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
7
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
NOTE 1-ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Going Concern
As shown in the accompanying consolidated financial statements the Company has incurred net losses of $482,931 and $380,900 for the six months ended May 31, 2010 and 2009, and has a working capital deficiency of $2,059,695 as of May 31, 2010.
Management’s plans include the raising of capital through the equity markets to fund future operations and generating adequate revenues through its business. Even if the Company does not raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurance that the revenue will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. However, the accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to investment tax credits, bad debts, income taxes and contingencies. The Company bases its 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 value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents.
Comprehensive Income
The Company adopted ASC 220-10, “Reporting Comprehensive Income,” (formerly SFAS No. 130). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of information that historically has not been recognized in the calculation of net income.
8
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
| The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. For the loans payable, the carrying amount reported is based upon the incremental borrowing rates otherwise available to the Company for similar borrowings. |
Currency Translation
For subsidiaries outside the United States that prepare financial statements in currencies other than the U.S. dollar, the Company translates income and expense amounts at average exchange rates for the year, translates assets and liabilities at year-end exchange rates and equity at historical rates. The Company’s functional currency is the Canadian dollar, while the Company reports its currency in the US dollar. The Company records these translation adjustments as accumulated other comprehensive income (loss). Gains and losses from foreign currency transactions are included in other income (expense) in the results of operations.
Revenue Recognition
The Company receives revenue from subscribers to its triple play network in which it provides digital TV, voice over internet protocol (VoIP), and high speed internet access, all via fiber optic cable. The Company bills its subscribers on a monthly basis and recognizes the monthly revenue based upon the specific plan selected by the subscriber. The Company additionally provides contracted services to wire commercial buildings with fiber optic cable in order to provide for similar services.
Accounts Receivable
The Company conducts business and extends credit based on an evaluation of the customers’ financial condition, generally without requiring collateral.
Exposure to losses on receivables is expected to vary by customer due to the financial condition of each customer. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. The Company has an allowance for doubtful accounts of $20,341 at May 31, 2010.
Accounts receivable are generally due within 30 days and collateral is not required. Unbilled accounts receivable represents amounts due from customers for which billing statements have not been generated and sent to the customers.
Income Taxes
The Company accounts for income taxes utilizing the liability method of accounting. Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
9
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
| The Company expenses the costs associated with advertising as incurred. Advertising expenses for the six months ended May 31, 2010 and 2009 are included in selling and promotion expenses in the consolidated statements of operations. |
Fixed Assets
| Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets; office and computer equipment – 5 years. |
| When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments. |
Impairment of Long-Lived Assets
Long-lived assets, primarily fixed assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.
Loss Per Share of Common Stock
Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) includes additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for periods presented.
10
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Loss Per Share of Common Stock (Continued)
The following is a reconciliation of the computation for basic and diluted EPS:
| May 31, | May 31, | |||||||
| 2010 | 2009 | |||||||
| Net (loss) | $ | (482,931 | ) | $ | (380,900 | ) | ||
| Weighted-average common shares Outstanding (Basic) | 57,849,167 | 55,274,279 | ||||||
| Weighted-average common stock Equivalents | ||||||||
| Stock options | 2,140,000 | 1,450,000 | ||||||
| Warrants | - | - | ||||||
| Weighted-average common shares Outstanding (Diluted) | 59,989,167 | 56,724,279 | ||||||
Stock-Based Compensation
In 2006, the Company adopted the provisions of ASC 718-10 “Share Based Payments” for its year ended November 30, 2008. The adoption of this principle had no effect on the Company’s operations.
The Company has elected to use the modified–prospective approach method. Under that transition method, the calculated expense in 2006 is equivalent to compensation expense for all awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair values. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
11
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Stock-Based Compensation (Continued)
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to expense and additional paid-in capital.
Segment Information
The Company follows the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. As of May 31, 2010 and for the six months ended May 31, 2010 and 2009, the Company operates in only one segment and in only one geographical location.
Reclassifications
The Company has reclassified certain amounts in their condensed consolidated statement of operations for the six months ended May 31, 2009 to conform with the May 31, 2010 presentation. These reclassifications had no effect on the net loss for the six months ended May 31, 2009.
Uncertainty in Income Taxes
The Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”). This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 for 2009, and they evaluate their tax positions on an annual basis, and has determined that as of May 31, 2010, no additional accrual for income taxes other than the federal and state provisions and related interest and estimated penalty accruals is not considered necessary.
Fair Value Measurements
In September 2006, ASC issued 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is encouraged. The adoption of ASC 820 is not expected to have a material impact on the financial statements.
12
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Fair Value Measurements (Continued)
In February 2007, ASC issued 825-10, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of ASC 320-10, (“ASC 825-10”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. ASC 825-10 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Recent Accounting Pronouncements
In December 2007, the ASC issued ASC 810-10-65, Noncontrolling Interests in Consolidated Financial Statements. ASC 810-10-65 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment. ASC 810-10-65 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Management is determining the impact that the adoption of ASC 810-10-65 will have on the Company’s financial position, results of operations or cash flows.
In December 2007, the Company adopted ASC 805, Business Combinations (“ASC 805”). ASC 805 retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC 805 will require an entity to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition. ASC 805 will require an entity to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date.
ASC 805 will require an entity to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met. Finally, ASC 805 will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. This will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted and the ASC is to be applied prospectively only. Upon adoption of this ASC, there would be no impact to the Company’s results of operations and financial condition for acquisitions previously completed. The adoption of ASC 805 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In March 2008, ASC issued ASC 815, Disclosures about Derivative Instruments and Hedging Activities”, (“ASC 815”). ASC 815 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not believe that ASC 815 will have an impact on their results of operations or financial position.
13
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Recent Accounting Pronouncements (Continued)
In April 2008, ASC 350-30 was issued, “Determination of the Useful Life of Intangible Assets”. The Company was required to adopt ASC 350-30 on December 1, 2008. The guidance in ASC 350-30 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company does not believe ASC 350-30 will materially impact their financial position, results of operations or cash flows.
In May 2008, ASC 470-20 was issued, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“ASC 470-20”). ASC 470-20 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe that the adoption of ASC 470-20 will have a material effect on its financial position, results of operations or cash flows.
In June 2008, ASC 815-40 was issued, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“ASC 815-40”), which supersedes the definition in ASC 605-50 for periods beginning after December 15, 2008. The objective of ASC 815-40 is to provide guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock and it applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative in accordance with ASC 815-20.
ASC 815-40 also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock. The Company believes that ASC 815-40, will not have a material impact on their financial position, results of operations and cash flows.
In June 2008, ASC 470-20-65 was issued, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“ASC 470-20-65”). ASC 470-20-65 is effective for years ending after December 15, 2008. The overall objective of ASC 470-20-65 is to provide for consistency in application of all the standards issued for convertible securities. The Company has computed and recorded a beneficial conversion feature in connection with certain of their prior financing arrangements and does not believe that ASC 470-20-65 will have a material effect on that accounting.
14
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 2- | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Recent Accounting Pronouncements (Continued)
Effective April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date – that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Adoption of ASC 855 did not have a material impact on the Company’s results of operations or financial condition. The Company has evaluated subsequent events through July 16, 2010, the date the financial statements were issued.
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurement and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted market price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required for Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.
In January 2010, the Company adopted FASB ASU No. 2010-06, Fair Value Measurement and Disclosures (Topic 820)- Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). These standards require new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require new disclosures of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standard also clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. These new disclosures are effective beginning with the first interim filing in 2010. The disclosures about the rollforward of information in Level 3 are required for the Company with its first interim filing in 2011. The Company does not believe this standard will impact their financial statements.
Other ASU’s that have been issued or proposed by the FASB ASC that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption.
15
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 3- | FIXED ASSETS |
Fixed assets as of May 31, 2010 (Unaudited) and November 30, 2009 were as follows:
Estimated Useful | (Unaudited) | ||||||||||
| Lives (Years) | May 31, | November 30, | |||||||||
| 2010 | 2009 | ||||||||||
| Computer and office equipment | 5 | $ | 31,111 | $ | 30,829 | ||||||
| Less: accumulated depreciation | 21,800 | 18,520 | |||||||||
| Property and equipment, net | $ | 9,311 | $ | 12,309 | |||||||
There was $3,137 and $2,832 charged to operations for depreciation expense for the six months ended May 31, 2010 and 2009, respectively.
| NOTE 4- | DEFERRED COSTS |
Deferred costs as of May 31, 2010 (Unaudited) and November 30, 2009 were as follows:
(Unaudited) | ||||||||
| May 31, | November 30, | |||||||
| 2010 | 2009 | |||||||
| Deferred Costs | $ | 438,818 | $ | 434,831 | ||||
| Less: accumulated amortization | 276,565 | 231,846 | ||||||
| Property and equipment, net | $ | 162,253 | $ | 202,985 | ||||
There was $42,951 and $39,385 charged to operations for amortization expense for the six months ended May 31, 2010 and 2009, respectively.
16
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 5- | RELATED PARTY LOANS |
As of May 31, 2010, the four principal shareholders of the Company had advanced $1,503,155 to the Company for working capital purposes. These loans bear interest at an annual rate of 10% for individual amounts exceeding $150,000 (CDN$) ($143,171 (US$)). The loans have no specific terms of repayment and are unsecured. Interest expense for the six months ended May 31, 2010 and 2009 were $41,787 and $9,611, respectively. Accrued interest on these loans as of May 31, 2010 was $76,265.
| NOTE 6- | LOAN PAYABLE - BANK |
The Company had an overdraft facility with a Canadian bank for $500,000 (CDN$)) and converted this facility to an Operating Loan in April 2009. The loan is payable in monthly installments of $27,778 (CD$) through September 2010. In addition, interest will be charged at 4% over the bank’s prime lending rate and the Company will be charged monthly fees of approximately $150 per month. At May 31, 2010, the Company has $106,052 outstanding and is current on all of the interest due. The loan is personally guaranteed by three principal shareholders.
Interest expense on the loan payable / line of credit for the six months ended May 31, 2010 and 2009 were $6,218 and $9,342, respectively. There was no accrued interest outstanding as of May 31, 2010.
| NOTE 7- | COMMITMENTS |
Employment Agreement
The Company’s subsidiary, Valtech has an employment agreement with its Chief Executive Officer. The agreement commenced October 1, 2006 and terminated September 30, 2007. The agreement is renewable upon mutual agreement of the Company and its Chief Executive Officer. The original agreement provided for a salary of $80,000 plus benefits. The agreement has been renewed through September 30, 2010.
Operating Lease
The Company leased a vehicle for the Chief Executive Officer. The lease was a 36-month lease that expired October 31, 2009. The monthly payment was $617 per month. There is no current lease for an automobile for the Chief Executive Officer.
Office Space
The Company occupies approximately 2,500 square feet of office space owned by a company that is owned by a shareholder of the Company. The occupancy is on a month-to-month basis, without a lease and without payment of rent. The Company has occupied the space since February 1, 2008. Accordingly, a rent expense was recorded at the fair value of the applicable rent and with an offset to additional paid-in capital.
Consulting Agreements
The Company has entered into consulting agreements for a period of no more than 6 months with various consultants. These agreements require the Company to pay for the consulting services and issue shares of common stock and stock options over the period of the agreements.
Service Agreement
In July 2009, the Company’s subsidiary, Valtech Communications, Inc. entered into a written agreement with Groupe Canvar Inc. (a related party through common ownership). The agreement provides for Groupe Canvar, Inc. to provide brochures, price lists, contact information and other literature relating to Valtech Communications, Inc. services to the tenants leasing the apartments or office space in the buildings owned by Groupe Canvar, Inc. In addition, the agreement provides for Valtech Communications, Inc. to install wiring in new and refurbished buildings owned by Canvar Group, Inc. to their server for these services. All pricing is at the same terms as those for other Valtech Communications, Inc. customers. The agreement will expire July 2010.
17
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
NOTE 7- COMMITMENTS (CONTINUED)
Litigation
The Company has initiated litigation against two former consultants in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. In 2008, the Company entered into a consulting contract with two individuals to prepare a formal valuation of the Company’s business including marketing, sales, information management, and a customer service plan. The consulting agreement provides for the issuance of 600,000 restricted common shares and the issuance of 2,400,000 stock options of which 1,000,000 options were exercised.
Management is of the opinion that these individuals did not perform their services according to the contract and is attempting to block the removal of the restriction on the 600,000 common shares issued, and cancel the unexercised stock options. The outcome of the litigation is undeterminable at the present time. The 600,000 common shares are reflected as outstanding in the accompanying consolidated financial statements and stock based compensation of $36,000 was recorded. Additionally, the fair value of the options have been recorded aggregating $22,820 and a provision for $60,000 has been recorded for the amount due for the option exercise price since the consultants have not paid the option price to date.
| NOTE 8- | STOCKHOLDERS’ DEFICIT |
Common Stock
As of May 31, 2010, the Company has 100,000,000 shares of common stock authorized with a par value of $.00001.
The Company has 58,643,508 shares issued and outstanding as of May 31, 2010.
During the quarter ended May 31, 2010, the Company issued:
The Company will issue shares under a private placement memorandum dated April 5, 2010 to various individuals totaling 380,000 shares of common stock at a price of $0.125 per share ($47,500) for funds rece4ived during the quarter. These are reflected in the liability for stock to be issued. The individuals also will be issued 380,000 warrants that expire in 3 years at an exercise price of $0.20 per share. In addition, the Company issued common stock for the quarter ended May 31, 2010 at $0.14 per share for a total value of $14,000 to consultants for services rendered per their agreements; and 90,000 in the exercise of stock options for $12,600. The Company reduced an invoice for the payment of $12,600 associated with 90,000 of these options. The Company also received $24,000 for the issuance of 500,000 shares of common stock.
During the quarter ended May 31, 2010, the Company occupied office space owned by a principal shareholder, and recorded $10,215 of rent expense as contributed capital for the space.
During the quarter ended February 28, 2010, the Company issued:
160,000 shares of common stock issued for the quarter ended February 28, 2010 at $0.06 per share for a total value of $9,600 to consultants for services rendered per their agreements; and 590,000 in the exercise of stock options for $30,400. Of the $30,400, the Company reduced an invoice for the payment of $5,400 associated with 90,000 of these options, and the remaining $25,000 is reflected as a subscription receivable for the exercise of 500,000 options. The Company also recorded $6,000 in stock based compensation for the value of an additional 100,000 options that vested in February 2010.
During the quarter ended February 28, 2010, the Company occupied office space owned by a principal shareholder, and recorded $10,215 of rent expense as contributed capital for the space.
18
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 8- | STOCKHOLDERS’ DEFICIT (CONTINUED) |
Common Stock (Continued)
During the quarter ended November 30, 2009, the Company issued:
480,000 shares of common stock to various consultants for services rendered. These shares were valued at their market prices of $0.105 and $0.16 per share, or $66,900, at the date of issue. In addition, 250,000 shares were issued for $25,000 cash received in August 2009.
During the quarter ended November 30, 2009, the Company occupied office space owned by a principal shareholder, and recorded $10,215 of rent expense as contributed capital for the space.
During the quarter ended August 31, 2009, the Company issued:
1,100,000 shares of common stock to various consultants including attorneys for services rendered. These shares were valued at their market prices of $0.15 and $0.16 per share, or $167,000, at the date of issue.
During the quarter ended August 31, 2009, the Company occupied office space owned by a principal shareholder, and recorded $10,215 of rent expense as contributed capital for the space.
$3,257 in stock based compensation was recognized for services performed for which shares were issued in the prior year.
During the quarter ended May 31, 2009, the Company occupied office space owned by a principal shareholder, and recorded $10,215 of rent expense as contributed capital for the space.
$1,890 in stock based compensation was recognized for services performed for which shares were issued in the prior year.
During the quarter ended February 28, 2009, the Company issued:
100,000 shares of common stock to the President and CEO for services. These shares were valued at their market price of $0.21 per share, or $21,000, at the date of issue.
85,000 shares of common stock for legal services. These shares were valued at their market price of $0.17 per share, or $14,450, at the date of issue.
300,000 shares of common stock to exercise stock options. The Company did not receive the required option payment of $15,000 from the consultant and thus included these amounts as administrative expenses.
During the quarter ended February 28, 2009, the Company occupied office space owned by a principal shareholder, and recorded $10,215 of rent expense as contributed capital for the space.
$12,156 in stock based compensation was recognized for services performed for which shares were issued in the prior year.
Of the 2,400,000 stock options, 1,000,000 options vested immediately and were exercised, 400,000 options vested on May 1, 2008, and the balance vest 200,000 per month commencing June 1, 2008. Subsequent to entering into this agreement, the Company initiated litigation against these individuals as a result of their failure to perform in accordance with the agreement and is attempting to block the removal of the restriction on the 600,000 shares issued, and cancel the unexercised options. The outcome of the litigation is undeterminable at this time. The Company has reflected a $36,000 charge for the value of the restricted shares, and $22,820 for the fair value of the stock options. In addition, the $60,000 has been recorded for the amount due for the option exercise price the consultants have not paid.
19
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 8- | STOCKHOLDERS’ DEFICIT (CONTINUED) |
Common Stock (Continued)
On March 31, 2008, the Company issued 120,000 restricted shares of its common stock in connection with internal accounting services commencing March 18, 2008 for one year. Stock based compensation in the amount of $5,188 was recorded as compensation expense for the year ended November 30, 2008, with the remaining $2,012 to be expensed in the year ending November 30, 2009. The shares were valued at $0.06 per share, the current market value on the date of issuance.
On August 25, 2008, the Company issued 50,000 restricted shares of its common stock in connection with an agreement for investor relations services commencing August 25, 2008 for one year. Stock based compensation in the amount of $1,993 was recorded as compensation expense for the year ended November 30, 2008, with the remaining $5,507 to be expensed in the year ending November 30, 2009. The shares were valued at $0.15 per share, the current market value on the date of issuance.
On August 25, 2008, the Company issued 250,000 free-trading shares of its common stock in connection with the exercise of stock options.
On November 4, 2008, the Company issued 250,000 free-trading shares of its common stock in connection with the exercise of stock options.
Stock Options
The Company accounts for stock-based compensation using the fair value method. The fair value method requires the cost of employee services received for awards of equity instruments, such as stock options and restricted stock, to be recorded at the fair value on the date of the grant. The value of restricted stock awards, based upon market prices, is amortized over the requisite service period. The estimated fair value of stock options and warrants on the grant date is amortized on a straight line basis over the requisite service period. During the six months ended May 31, 2010 and 2009, stock based compensation was $24,000 and $0, respectively.
In February 2010, the Company entered into a few option agreements for the issuance of options relating to various consulting agreements. The Company is obligated to issue to consultants in one agreement 270,000 options that vest evenly over a 3-month period of time at a $0.06 exercise price. The Company who is receiving the options has agreed to reduce their invoices by the cash required to exercise the options. These options expire in February 2011.
In another agreement entered into in February 2010, the Company is obligated to issue 600,000 options evenly over a 6-month period of time at a $0.06 exercise price. The Company expensed the fair value of these options ($24,000) as of May 31, 2010 to this consultant. These options also expire February 2011.
In February 2010, the Company issued 500,000 options to an individual at $0.05. The options were exercised. The Company received $25,000 for this exercise.
On March 13, 2008, in connection with consulting contracts, 2,400,000 stock options were issued and they have a five-year life, exercisable at $0.06, as follows: 1,000,000 options vested immediately, 400,000 options vested on May 1, 2008, and the balance vest 200,000 per month commencing June 1, 2008 through October 1, 2008.
These options were valued using the Black-Scholes Pricing Model with the following assumptions: volatility - 25%; risk free interest rate – 2.53%; expected life – 5 years; and dividend yield – 0%.
Due to the lack of sufficient historical trading information with respect to its own shares, the Company estimates expected volatility based on a company believed to have market and economic characteristics similar to its own.
Of the 2,400,000 options issued to the two consultants, 1,000,000 of the options that vested immediately, were exercised upon issuance, however, the Company has not received the required option payment of $60,000 from the two consultants. As noted, the Company is in litigation to recover this amount. As a result, and due to the uncertainty of the recovery of the $60,000, the Company has expensed the entire amount. The remaining 1,400,000 vested but unexercised options were valued at $22,820 ($0.0163 per option) based upon the assumptions herein.
20
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 8- | STOCKHOLDERS’ DEFICIT (CONTINUED) |
Stock Options (Continued)
On August 25, 2008 and October 30, 2008, the Company issued a total of 600,000 stock options to two consultants. Of these options, 500,000 vested upon issuance and the remaining options vest March 4, 2009. These options have a three-year life and are exercisable at $0.05. These options were issued in the money as the market value of the underlying shares was $0.18 and $0.14, respectively.
The fair value of these options were determined to be the intrinsic value at the date of issuance, or $32,500 ($0.13 per share) and $22,500 ($0.09 per share) on August 25, 2008 and October 30, 2008, respectively. Additionally, the Company did not receive the total required option payments of $25,000 (500,000 options at $0.05).
The Company has expensed the entire amount due to the uncertainty of the collectability of this amount. Of the 600,000 options, 50,000 options remain unexercised as of May 31, 2010.
On December 16, 2008, the Company issued 250,000 options at $0.05 ($25,000), which were expensed, and these options were exercised immediately.
The following is a summary of the outstanding stock options for the six months ended May 31, 2010 and 2009:
| Options | Weighted Average Exercise Price | Weighted Average Exercise Life | Aggregate Intrinsic Value | |||||||||||||
| Outstanding, November 30, 2009 | 1,450,000 | $ | 0.06 | 4.10 | $ | 86,500 | ||||||||||
| Granted | 1,370,000 | 0.056 | 1.00 | 77,200 | ||||||||||||
| Exercised | (680,000 | ) | 0.06 | 1.00 | (36,000 | ) | ||||||||||
| Cancelled | - | - | - | |||||||||||||
| Outstanding, May 31, 2010 | 2,140,000 | $ | 0.06 | 3.015 | $ | 127,700 | ||||||||||
| Exercisable, May 31, 2010 | 1,940,000 | $ | 0.06 | 3.015 | $ | 115,700 | ||||||||||
| Options | Weighted Average Exercise Price | Weighted Average Exercise Life | Aggregate Intrinsic Value | |||||||||||||
| Outstanding, November 30, 2008 | 1,500,000 | $ | 0.06 | 4.87 | $ | 121,000 | ||||||||||
| Granted | 250,000 | 0.05 | 3.00 | |||||||||||||
| Exercised | (300,000 | ) | (0.05 | ) | 0.00 | |||||||||||
21
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 8- | STOCKHOLDERS’ DEFICIT (CONTINUED) |
Stock Options (Continued)
| Cancelled | - | - | - | |||||||||||||
| Outstanding, May 31, 2009 | 1,450,000 | $ | 0.06 | 4.10 | $ | 58,500 | ||||||||||
| Exercisable, May 31, 2009 | 1,400,000 | $ | 0.06 | 4.10 | $ | 56,000 | ||||||||||
Warrants
The Company entered into private placement agreements with various individuals in May 2010 for the issuance of 380,000 shares of common stock along with 380,000 warrants. The Company received the proceeds of $47,500 for these units. The warrants expire 3 years from issuance, at an exercise price of $0.20 per share. The warrants were valued using the black-scholes method and were recorded as additional paid in capital – warrants of $21,993. The criteria established for the valuation of these warrants were as follows: risk free interest rate – 1.25%; dividend yield – 0%; volatility – 185%. The warrants will be issued in the third quarter along with the private placements closed subsequent to May 31, 2010.
| NOTE 9- | PROVISION FOR INCOME TAXES |
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
At May 31, 2010, deferred tax assets consist of the following:
| Net operating losses | $ | 891,244 | ||
| Valuation allowance | (891,244 | ) | ||
| $ | - | |||
At May 31, 2010, the Company had a net operating loss carryforward in the approximate amount of $2,621,307, available to offset future taxable income through 2030. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
22
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MAY 31, 2010 AND 2009 (UNAUDITED)
| NOTE 9- | PROVISION FOR INCOME TAXES |
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the periods ended May 31, 2010 and 2009 is summarized as follows:
| 2010 | 2009 | |||||||
| Federal statutory rate | (34.0 | )% | (34.0 | )% | ||||
| State income taxes, net of federal benefits | 3.3 | 3.3 | ||||||
| Valuation allowance | 30.7 | 30.7 | ||||||
| 0 | % | 0 | % | |||||
| NOTE 10- | FAIR VALUE MEASUREMENTS |
On January 1, 2008, the Company adopted ASC 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
| NOTE 11- | CONCENTRATION OF CREDIT RISK |
On May 31, 2010, $17,718, or 35% of the Company’s accounts receivable were with two customers. This amount was with customers related to a significant shareholder of the Company. One of these two customers represented approximately 50% of the revenue for the six months ended May 31, 2010. This customer is considered a major customer of the Company.
On May 31, 2009, $19,491, or 43% of the Company’s accounts receivable were with three customers. Of this amount, $5,451, or 12%, was with a customer related to a significant shareholder of the Company. In addition, 12% of the revenue for the six months ended May 31, 2009 was generated by one customer. This customer is considered a major customer of the Company. A major customer is a customer that represents more than 10% of the total.
| NOTE 12- | SUBSEQUENT EVENTS |
The Company subsequent to May 31, 2010, closed on additional private placements for the issuance of 894,256 units consisting of 894,256 shares of common stock and 894,256 warrants. The Company raised $111,782 (at $0.125 per unit) in these agreements.
On June 15, 2010, the Company entered into an Engagement Agreement with DME Securities LLC (“DME”) to raise $10,000,000 in debt or equity financing on a best efforts basis. The Engagement Agreement terminates on May 31, 2011 and the Company is responsible to pay a 10% success fee upon the successful completion of the Placement of funds. DME is also to receive Placement Agent Warrants upon the Placement.
23
Forward-Looking Statements
The following discussion contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use of words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. From time to time, we also may provide forward-looking statements in other materials we release to the public.
The following discussion should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report. The following discussion contains forward-looking statements reflecting our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this report. For risk factors related to our business and our common stock please read section entitled "Risk Factors" of our Form 10-K for the year ended November 30, 2009 as filed with the SEC.
To the extent that statements in the report are not strictly historical, including statements as to revenue projections, business strategy, outlook, objectives, future milestones, plans, intentions, goals, future financial conditions, future collaboration agreements, the success of the Company's development, events conditioned on stockholder or other approval, or otherwise as to future events, such statements are forward-looking. The forward-looking statements contained in this annual report are subject to certain risks and uncertainties that could cause actual results to differ materially from the statements made. Other important factors that could cause actual results to differ materially include the following: business conditions and the amount of growth in the Company's industry and general economy; competitive factors; ability to attract and retain personnel; the price of the Company's stock; and the risk factors set forth from time to time in the Company's SEC reports, including but not limited to its annual report on Form 10-K; its quarterly reports on Forms 10-Q; and any reports on Form 8-K.
Overview
In June 2008, we acquired our wholly-owned subsidiary, Valtech Communications Inc. ("Valtech") in a reverse merger transaction, issuing 40 million restricted shares to the Valtech shareholders.
Valtech offers low-cost, highly reliable triple-play service of Digital Phone, Digital Voice, High-Speed Internet and Digital TV backed by fast, friendly and live customer service (“Telecommunication Services”). Our present plan is to expand our bundled services by providing an end-to-end IPTV solution consisting of IPTV middleware, video on demand, network based PVR, IPTV head ends, content protection, IPTV infrastructure, system integration and IPTV applications such as games. In order to expand our services to include end-to-end IPTV service, the Company is dependent upon its ability to raise sufficient capital to fund its agreement with Ericsson. To date, the Company has been unable to meet its obligations under the Ericsson agreement and at present no agreement with Ericsson has been negotiated and no negotiations with Ericsson are on-going.
We intend to use our limited resources to market our services to new residential and commercial building complexes and existing hotel chains. Further, we intend to market our bundled Telecommunication Services in industry publications and intend to develop our website and promote its presence in order to increase web traffic and possible sales to new clients (www.valtech.ca).
As of May 31, 2010, the Company had 485 customers. During the six-month period ended May 31, 2010, approximately 50% of our revenues were generated by one customer and this customer is considered a major customer of the Company.
Provided the Company can secure additional funding, our plan to increase our marketing activities throughout Canada, pay industry compatible salaries to our executives and staff, hire additional salespersons, who among other activities, would engage in direct solicitations. At present, we have not received commitments for capital from third parties and there can be no assurance that we will be able to acquire additional capital on terms acceptable to the Company, if at all.
We believe that the our negative cash flow from operations will decrease steadily as our subscriber base increases. While we have a commitment from a principal shareholder to provide funding until we achieve positive cash flow from operations, if our affiliated control shareholders cease provided short-term interim funding through loans to expand our business, the Company may experience reduced growth in its revenues.
Regardless of the amount of funds available to us for marketing, we intend to continue to pursue strategic alliances with complementary businesses in an effort to enter and expand our Telecommunication Services. The complementary businesses we intend to solicit are those that have developed and maintain marketing channels to our potential customers.
At present, we use proceeds from shareholder loans to purchase telecommunication hardware, cables and equipment. It is our intention to secure alternative debt and/or equity funding sources in order to reduce depends from our current funding sources.
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Our management believes that the trend in our business is toward greater convergence to high speed Internet and high definition television. We believe that our bundled Telecommunication Services are competitive in terms of reliability and pricing as compared to the services offered by incumbent operators. Since we have no patent protection, it is possible that a well-funded company could enter the field and diminish our prospective business growth. We face uncertainties regarding our future growth because we must compete on price and quality of service with traditional communications companies with far longer operating histories, more established customer relationships, greater financial, technical and marketing resources, larger customer bases and greater brand or name recognition. Furthermore, companies that may seek to enter our markets may expose us to severe price competition and future technological developments could make us less competitive.
Cash and Cash Equivalents. The Company considers all highly liquid fixed income investments with maturities of six months or less, to be cash equivalents. On May 31, 2010, the Company had $15,638 in cash.
Accounts Receivable. Management periodically reviews the current status of existing receivables and management's evaluation of periodic aging of accounts. The Company charges off accounts receivable to expense when deemed uncollectible. The Company had no bad debt expenses at the end of May 31, 2010. The Company accounts receivable on May 31, 2010 was $30,739 compared to $33,391 on November 30, 2009.
Deferred Costs. The Company's deferred development costs were $438,818 at May 31, 2010 and $434,831 at November 30, 2009. The Company recorded $276,565 amortization expense as of May 31, 2010 and $231,846 as of November 30, 2009. The Company's deferred development costs are amortized over five (5) years. The level of development costs is directly related to the level of business development which we cannot predict with certainty, although Valtech is actively marketing its telecommunications services.
Revenue Recognition. The Company's wholly owned subsidiary, Valtech Communications, Inc. owns and operates a triple play (telephone, internet and TV channels distribution) network in Canada via fiber to individual customers, hotels and retirement homes. The Company bills its subscribers on a monthly basis and recognizes the monthly revenue based upon the specific plan selected by the subscriber. The Company also provides contract services to wire commercial buildings with fiber optic cable in order to provide for similar services.
Property and Equipment. Property and equipment are stated at cost and are depreciated using the straight line method over their estimated useful lives 5 - 7 years for equipment. The Company does not own real estate. As of May 31, 2010, the Company had $9,311 of equipment and $12,309 as of November 30, 2009. This decrease represents the depreciation of existing equipment.
Results of Operations For the Six Months Ended May 31, 2010 and May 31, 2009
Revenues: Revenue for the six-month period ended May 31, 2010 was $101,017 compared to $83,010 for six months ended May 31, 2009. The Company's revenues increased by $18,007 which represents a 21.7% increase from the same period in the prior year. The Company's increase in revenue is principally due to the installation of its triple-play services to additional customers. The Company started new installations of its Telecommunication Services during the period ended May 31, 2010.
Cost of Sales: Cost of Sales for the six months ended May 31, 2010 was $153,563 compared to $102,241 for the six months ended May 31, 2009. The Company's cost of sales increase was $51,322 which represents a 50.2% increase from the same period in the prior year and was due to higher costs associated with increased revenues and marketing and sales expense.
Depreciation and Amortization: For the six-month period ended May 31, 2010 we recorded $46,088 in depreciation and amortization expenses compared to $42,217 during the six months ended May 31, 2009.
General and Administrative Expenses: General and Administrative Expenses for the six-month period ended May 31, 2010 was $336,293 compared to $302,893 for the six months ended May 31, 2009. The Company's general and administrative expenses increase was $33,400, which represents a 11% increase from the same period in the prior year and was mainly due to lower costs related to non-cash compensation expenses.
Interest Income: Interest Income for the six months ended May 31, 2010 was zero compared to $2,394 interest income during the six months ended May 31, 2009. The interest income was due to loans received from shareholders during the six-month period ended May 31, 2009.
Interest Expense: The Company's interest expense for the six month period was $48,004 compared to $18,953 interest expense during the same period in the prior year. This increase was the direct result of an increase in loans payable to shareholders from $1,139,375 at May 31, 2009 to $1,503,155 at May 31, 2010.
Liquidity and Capital Resources
As of May 31, 2010, we had total cash resources of $15,638 compared to -0- at May 31, 2009. During the six months ended May 31, 2010 and May 31, 2009, net cash used in operating activities was $248,258 and $127,825, respectively. This cash was used to fund our operations for the respective periods, adjusted for non-cash expenses and changes in operating assets and liabilities.
During the six-month periods ended May 31, 2010 and 2009, we had no investing activities.
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Net cash provided by financing activities was $260,749 for the six months ended May 31, 2010 compared to $185,097 in net cash provided by financing activities for the six months ended May 31, 2009. During the six months ended May 31, 2010, the Company used $159,084 to repay bank loans and received loans from shareholders in the amount of $371,194. The net cash proceeds from financing activities for the period ended May 31, 2009 resulted from $41,783 in bank loan payments and proceeds of $226,880 from affiliated shareholders.
Our continued operations will depend on whether we are able to raise additional funds through third parties, such as equity and debt financing, as well as additional loans from our affiliated shareholders. However, there can be no assurance that such additional funds will be available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give no assurances that any additional capital that we are able to obtain will be sufficient to fully fund our growth plan.
Current and Future Financing Needs
We have incurred an accumulated deficit of $2,621,307 through May 31, 2010. We have incurred negative cash flow from operations since we started our Telecommunication Services business. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including equipment related to our Telecommunications Services. Based on our current plans, we believe that our cash will not be sufficient to enable us to meet our planned operating needs, including our plan for expansion, at least for the next 18 months. Our cash requirements for fiscal year 2010 are estimated to be $600,000 based on our present revenues. We have short-term funding commitments of $500,000 from one of our controlling shareholders until such time the Company generates positive cash flow from operations or is able to secure alternative long-term funding through the issuance of debt and/or equity. We expect to be able to meet our current debt obligations provided that our current customer base does not decrease. At present, the Company is unable to meet its obligations under the Ericsson agreement unless it raises additional funding, and no negotiations are on-going with Ericsson at present .
However, the actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
- the progress of our revenue growth under the current uncertain business environment;
- the number and additional subscriber to out bundled Telecommunications Services;
- our ability to retain our current subscriber base and licensing arrangements;
- our ability to achieve secure equipment financing;
- the costs involved in marketing our Telecommunication Services; and
- the costs involved being a public company.
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our shares or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.
We have not entered into, and do not expect to enter into, financial instruments for trading or hedging purposes.
Evaluation of disclosure controls and procedures. As of May 31, 2010, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in internal controls. During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
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Management is of the opinion that these individuals did not perform their services according to the contract and is attempting to block the removal of the restriction on the 600,000 common shares issued, and cancel the unexercised stock options. The outcome of the litigation is undeterminable at the present time. The 600,000 common shares are reflected as outstanding in the accompanying consolidated financial statements and stock based compensation of $36,000 was recorded. Additionally, the fair value of the options have been recorded aggregating $22,820 and a provision for $60,000 has been recorded for the amount due for the option exercise price since the consultants have not paid the option price to date.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1. Description of Business, subheading Risk Factors” in our Annual Report on Form 10-K for the year ended November 30, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The Company will issue shares under a private placement memorandum dated April 5, 2010 to various individuals totaling 380,000 shares of common stock at a price of $0.125 per share ($47,500) for funds received during the quarter. These are reflected in the liability for stock to be issued. The individuals also will be issued 380,000 warrants that expire in 3 years at an exercise price of $0.20 per share. In addition, the Company issued common stock for the quarter ended May 31, 2010 at $0.14 per share for a total value of $14,000 to consultants for services rendered per their agreements; and 90,000 in the exercise of stock options for $12,600. The Company reduced an invoice for the payment of $12,600 associated with 90,000 of these options. The Company also received $24,000 for the issuance of 500,000 shares of common stock. The use of proceeds from these transactions was for working capital.
None.
None.
None.
(a) The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein.
| Exhibit No. | Description |
| 31.1 | Certification of CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| /s/ Rene Arbic |
| Chief Executive Officer |
| Dated: July 20, 2010 |
| Ile des Soeurs, Quebec, Canada |
| /s/ Alex Kestenbaum |
| Chief Financial Officer |
| Dated: July 20, 2010 |
| Ile des Soeurs, Quebec, Canada |
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