UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q/A
_________________________
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2009
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 September 9, 2009, the Registrant had 57,173,508 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.
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-Accelerated filer ¨ | Smaller reporting company x |
| Item | Description | Page | |||
|---|---|---|---|---|---|
PART I - FINANCIAL INFORMATION | |||||
ITEM 1. | 3 | ||||
ITEM 2. | 3 | ||||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 6 | |||
ITEM 4. | 6 | ||||
PART II - OTHER INFORMATION | |||||
ITEM 1. | 6 | ||||
| ITEM 1A. | RISK FACTORS | 6 | |||
ITEM 2. | 6 | ||||
ITEM 3. | 6 | ||||
ITEM 4. | 6 | ||||
ITEM 5. | 6 | ||||
| ITEM 6. | EXHIBITS. | 6 | |||
PART I - FINANCIAL INFORMATION
ITEM 1. Back to Table of Contents
The Registrant's financial statements for the three and six-month periods ended May 31, 2009 and 2008 are attached to this quarterly report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS Back to Table of Contents
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.
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. All forward-looking statements, whether written or oral, and whether made by or on behalf of the Company, are expressly qualified by the cautionary statements and any other cautionary statements which may accompany the forward-looking statements, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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.
Forward-Looking Statements Concerning the Slovak Telecom Transaction
In response to the solicitation of bids for DVBT ("Digital Video Broadcast Terrestrial") network technology by the Slovak Telecom Service, which provides broadcast service throughout Slovakia, Valtech has submitted a proposal for the license to install and operate the telecommunications service throughout Slovakia. A requirement of the license is to cover at least 90% of the 1.7 million Slovak households by December 31, 2012. The winner of the tender will be granted an exclusive renewable twenty-year operating license.
We have agreed with AZD ("Automatizacia Zeleznienej Dopravy, A.S.") which has extensive experience in the installation and maintenance of electronic equipment throughout Slovakia, to install the equipment for the telecommunications network, provided that we are awarded the contract. In addition, we have agreed with ZSR ("Zeleznice Slovenskej Republiky") , the Slovak national railroad company, to utilize its extensive fiber optic network along its rail beds. Adding AZD and ZSR as participants, together with LM Ericsson Telephone Company and Harris Corporation, we believe will strengthen our bid and enhance our potential for being awarded the contract.
To date there has been no update from the Slovak Telecom Service and there can be no assurance that we will be successful in our bid.
Overview
In June 2007, 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 service of Digital Phone, Digital Voice, High-Speed Internet and Digital TV backed by fast, friendly and live customer service(“Telecommunication Services”). We have expanded 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.
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).
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.
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 three months or less, to be cash equivalents. On May 31, 2009, the Company had cash of $19,644.
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 an allowance for doubtful accounts at May 31, 2009 of $14,041. The Company had accounts receivable at May 31, 2009 and November 30, 2008 of $32,101 and $64,971, respectively.
Deferred Costs. The Company's deferred development costs were $237,771 at May 31, 2009 and $246,420 at November 30, 2008. The Company recorded $39,385 amortization expense for the six-month period ended May 31, 2009 and $35,886 for the six-month period ended May 31, 2008 reflecting increased volume of installation costs. 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. The Company had $14,926 of equipment at May 31, 2009 and $15,824 at the year ended November 30, 2008. This decrease represents the depreciation of existing equipment.
Results of Operations For the Three Months Ended May 31, 2009 and 2008
Revenues: Revenue for the three-month period ended May 31, 2009 was $20,826 compared to $106,355 for three months ended May 31, 2008. The Company's revenues decrease was $85,529 which represents a 80% decrease from the same period in the prior year. The Company's decrease in revenue is principally due to the generally deteriorating economic conditions and that the Company did not start new installations of its Telecommunication Services during the period ended February 28, 2009.
Cost of Sales: Cost of Sales for the three months ended May 31, 2009 was $62,663 compared to $186,135 for the three months ended May 31, 2008. The Company's cost of sales decrease was $123,472 which represents a 66% decrease from the same period in the prior year and was due to lower costs associated with the decrease in revenues and the costs of wiring and installation as well as equipment, such as set top boxes.
Depreciation and Amortization: For the three-month period ended May 31, 2009 we recorded $22,530 in depreciation and amortization expenses compared to $20,774 during the three months ended May 31, 2008.
General and Administrative Expenses: General and Administrative Expenses for the three-month period ended May 31, 2009 was $100,381 compared to $487,075 for the three months ended May 31, 2008. The Company's general and administrative expenses decrease was $386,694 which represents a 79% decrease from the same period in the prior year and was mainly due to higher costs related to non-cash compensation expenses.
Interest Income: Interest income for the three months ended May 31, 2009 was $354 compared to no interest income during the three months ended May 31, 2008. The interest income was due to cash held in our bank accounts.
Interest Expense: The Company's interest expense for the three month period was $10,578 compared to $13,987 for the three months ended May 31, 2008. This increase was the direct result of utilizing our line of credit and interest paid on loans from shareholders.
Results of Operations For the Six Months Ended May 31, 2009 and 2008
Revenues: Revenue for the six-month period ended May 31, 2009 was $83,010 compared to $173,530 for six months ended May 31, 2008. The Company's revenues decrease was $90,520 which represents a 52% decrease from the same period in the prior year. The Company's decrease in revenue is principally due to the generally deteriorating economic conditions and that the Company did not start new installations of its Telecommunication Services during the period ended February 28, 2009.
Cost of Sales: Cost of Sales for the six months ended May 31, 2009 was $102,241 compared to $241,006 for the six months ended May 31, 2008. The Company's cost of sales decrease was $138,765 which represents a 58% decrease from the same period in the prior year and was due to lower costs associated with the decrease in revenues and the costs of wiring and installation as well as equipment, such as set top boxes.
Depreciation and Amortization: For the six-month period ended May 31, 2009 we recorded $42,217 in depreciation and amortization expenses compared to $39,047 during the six months ended May 31, 2008.
General and Administrative Expenses: General and Administrative Expenses for the six-month period ended May 31, 2009 was $302,893 compared to $581,647 for the six months ended May 31, 2008. The Company's general and administrative expenses decrease was $278,754 which represents a 48% decrease from the same period in the prior year and was mainly due to higher costs related to non-cash compensation expenses.
Interest Income: Interest Income for the six months ended May 31, 2009 was $2,394 compared to no interest income during the six months ended May 31, 2008. The interest income was due to cash held in our bank accounts.
Interest Expense: The Company's interest expense for the six month period was $18,953 compared to $13,987 for the six months ended May 31, 2008. This increase was the direct result of utilizing our line of credit and interest paid on loans from shareholders.
Liquidity and Capital Resources
During the six months ended May 31, 2009, we had a net increase in cash of $19,625. Total cash resources as of May 31, 2009 was $19,644. During the six months ended May 31, 2009 and 2008, net cash used in operating activities was $127,825 and $427,537, 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.
Net cash used in investing activities for the six month ended May 31, 2009 was $0 compared to $41,269 net cash used in investing activities for the six months ended May 31, 2008. The net cash used in investing activities for the six months ended May 31, 2008 was related to deferred development costs. The decrease in deferred development costs is directly related to the installation of equipment needed to provide our services.
Net cash provided by financing activities was $185,097 for the six months ended May 31, 2009 compared to $356,725 in net cash provided by financing activities for the six months ended May 31, 2008. During the six months ended May 31, 2009, the Company repaid bank loans of $41,783 and received loans from shareholders of $226,880. The net cash proceeds from financing activities for the period ended May 31, 2008 resulted from a bank loan of $165,963 and proceeds of $190,762 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 $1,498,653 through May 31, 2009. 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 2009 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Back to Table of Contents
We have not entered into, and do not expect to enter into, financial instruments for trading or hedging purposes.
ITEM 4. CONTROLS AND PROCEDURES Back to Table of Contents
Evaluation of disclosure controls and procedures. As of May 31, 2009, 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 and as a result of a SEC comment letter, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
Remediation Plan for Certain Weaknesses in the Company’s Disclosure Controls and Procedures
Specifically, the Company has streamlined its closing process on a monthly basis to ensure that the amounts and disclosures are reviewed timely and that the information is correctly stated in the Company’s financial statements disclosure documents. These changes were completed during the Company’s third quarter of the fiscal year 2009. Management believes that these steps are sufficient to remediate the certain weakness in our disclosure controls and procedures.
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.
Changes in Internal Control Over Financial Reporting Subsequent to the Period Covered by This Report
737:We have made changes to our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 subsequent to the year ended November 30, 2008 to enhance our internal control over financial reporting. Specifically, replacing its previous part-time CFO and on June 2, 2009, the Company has hired a full-time Chief Financial Officer, who has been directed to implement adequate internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS Back to Table of Contents
The Company filed a complaint on January 29, 2009 against Florida Atlantic Stock Transfer, Inc., its transfer agent and Thomas Klein and Arshad Shah, two former consultants in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. Each consultant was issued 300,000 shares or restricted common stock and options to purchase an additional 500,000 shares of restricted common stock exercisable immediately and 700,000 options exercisable in tranches. Each consultant exercised the options for the initial 500,000 shares but each failed to pay the aggregate exercise price of $30,000 or US$.06 per share. The Company cancelled the consulting agreements on the grounds of non-performance. The complaint demanded a stop on the transfer of shares issued, and cancellation of those shares and options to purchase additional shares, as well as payment of share subscriptions. The outcome of the litigation is undeterminable at present. The 600,000 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.
ITEM 1A. RISK FACTORS Back to Table of Contents
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/A for the year ended November 30, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K/A 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Back to Table of Contents
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Back to Table of Contents
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Back to Table of Contents
None.
ITEM 5. OTHER INFORMATION Back to Table of Contents
None.
ITEM 6. EXHIBITS Back to Table of Contents
(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. |
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: October 7, 2009 |
| Ile des Soeurs, Quebec, Canada |
| /s/ Alex Kestenbaum |
| Chief Financial Officer |
| Dated: October 7, 2009 |
| Ile des Soeurs, Quebec, Canada |
| HIPSO MULTIMEDIA, INC. AND SUBSIDIARY | ||||
| Condensed Consolidated Balance Sheets Back to Table of Contents | ||||
| May 31, 2009 (Unaudited) and November 30, 2008 | ||||
In US$ | In US$ | |||
| May 31, 2009 | November 30, 2008 | ||
| (Restated) | (Restated) | |||
ASSETS | ||||
| Current assets: | ||||
| Cash | $ | 19,644 | $ | 19 |
| Accounts receivable | 32,101 | 64,971 | ||
| Prepaid expenses and other current assets | 17,819 | 7,800 | ||
| Total current assets | 69,564 | 72,790 | ||
| Fixed assets: | ||||
| Office and computer equipment, net | 14,926 | 15,824 | ||
| Other assets: | ||||
| Deferred costs, net | 237,771 | 246,420 | ||
| Total assets | $ | 322,261 | $ | 335,034 |
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||
| Current liabilities: | ||||
| Current portion of loan payable to bank | $ | 305,725 | $ | 396,459 |
| Loan payable to shareholders | 753,341 | 464,423 | ||
| Accounts payable | 197,763 | 131,273 | ||
| Accrued expenses | 92,780 | 75,767 | ||
| Total current liabilities | 1,349,609 | 1,067,922 | ||
| Loan payable to bank, net of current portion | 101,910 | - | ||
| Total liabilities | 1,451,519 | 1,067,922 | ||
| Stockholders' deficit: | ||||
| Common stock, $0.00001 par value, 100,000,000 shares authorized; | ||||
| 55,373,508 and 52,035,008 shares issued and outstanding | ||||
| at May 31, 2009 and November 30, 2008, respectively | 554 | 549 | ||
| Additional paid-in capital | 385,723 | 271,303 | ||
| Accumulated deficit | (1,498,653) | (1,117,753) | ||
| Accumulated other comprehensive income (loss) | (16,882) | 113,013 | ||
| Total stockholders' deficit | (1,129,258) | (732,888) | ||
| Total liabilities and stockholders' deficit | $ | 322,261 | $ | 335,034 |
| See accompanying notes to condensed consolidated financial statements. | ||||
| HIPSO MULTIMEDIA, INC. AND SUBSIDIARY | ||||||||
| Condensed Consolidated Statements of Operations and Comprehensive Income (loss) Back to Table of Contents | ||||||||
| For the Six and Three Months Ended May 31, 2009 and 2008 | ||||||||
| In US$ | In US$ | In US$ | In US$ | |||||
| For the Six | For the Six | For the Three | For the Three | |||||
Months Ended | Months Ended | Months Ended | Months Ended | |||||
May 31, 2009 | May 31, 2008 | May 31, 2009 | May 31, 2008 | |||||
| (Restated) | (Restated) | (Restated) | ||||||
| Revenue | $ | 83,010 | $ | 173,530 | $ | 20,826 | $ | 106,355 |
| Costs and expenses: | ||||||||
| Cost of sales | 102,241 | 241,006 | 62,663 | 186,135 | ||||
| Depreciation and amortization | 42,217 | 39,047 | 22,530 | 20,774 | ||||
| Administrative expenses | 302,893 | 581,647 | 100,381 | 487,075 | ||||
| Total costs and expenses | 447,351 | 861,700 | 185,574 | 693,984 | ||||
| Operating loss | (364,341) | (688,170) | (164,748) | (587,629) | ||||
| Non-Operating Income (Expenses): | ||||||||
| Interest income | 2,394 | - | 354 | - | ||||
| Interest expense | (18,953) | (13,987) | (10,578) | (13,987) | ||||
| Total Non-Operating Expense | (16,559) | (13,987) | (10,578) | (13,987) | ||||
| Net loss | $ | (380,900) | $ | (702,157) | $ | (174,972) | $ | (601,616) |
| Net loss per common share (Basic and Diluted) | $ | (0.01) | $ | (0.01) | $ | (0.00) | $ | (0.01) |
| Weighted average shares outstanding | 55,274,279 | 52,806,681 | 55,373,508 | 53,578,353 | ||||
| Other Comprehensive Income (Loss): | ||||||||
| Comprehensive income (loss) - beginning of period | $ | (380,900) | $ | (702,157) | $ | (174,972) | $ | (601,616) |
| Cumulative translation adjustments | (129,895) | 62,545 | (118,101) | 53,749 | ||||
| Comprehensive income (loss) - end of period | $ | (510,795) | $ | (639,612) | $ | (293,073) | $ | (547,867) |
| See accompanying notes to condensed consolidated financial statements. | ||||||||
| HIPSO MULTIMEDIA, INC. AND SUBSIDIARY | ||||
| (A Development Stage Company) | ||||
| Condensed Consolidated Statements of Cash Flows Back to Table of Contents | ||||
| For the Six Months Ended May 31, 2009 and 2008 | ||||
| in US$ | in US$ | |||
| For the Six | For the Six | |||
| Months Ended | Months Ended | |||
May 31, 2009 | May 31, 2008 | |||
(Restated) | ||||
| $ | (380,900) | $ | (702,157) |
| ||||
| ||||
| Depreciation and amortization | 42,217 | 39,047 | ||
| Stock based compensation | 93,996 | 149,233 | ||
| Contributed expenses by management | 20,430 | 20,430 | ||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | 41,571 | 45,897 | ||
| Prepaid expenses and other current assets | (6,579) | 26,954 | ||
| Accounts payable and accrued expenses | 61,440 | (6,941) | ||
| Net cash used in operating activities | (127,825) | (427,537) | ||
| Cash flow from investing activities: | ||||
| Deferred development | - | (41,269) | ||
| Net cash (used in) provided by investing activities | - | (41,269) | ||
| Cash flows from financing activities: | ||||
| Loan payable to bank | (41,783) | 165,963 | ||
| Loan payable to shareholder | 226,880 | 190,762 | ||
| Net cash provided by financing activities | 185,097 | 356,725 | ||
| Effect of exchange rate on cash | (37,647) | 84,752 | ||
| Increase (decrease) in cash | 19,625 | (27,329) | ||
| Cash - beginning of year | 19 | 27,329 | ||
| Cash - end of the year | $ | 19,644 | $ | - |
| Supplemental disclosure of cash flow information: | ||||
| Cash paid for interest | 4,577 | 14,584 | ||
| See accompanying notes to condensed consolidated financial statements. | ||||
HIPSO MULTIMEDIA, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS Back to Table of Contents
FOR THE SIX MONTHS ENDED MAY 31, 2009 AND 2008 (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, 2008 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.
Going Concern
As shown in the accompanying condensed consolidated financial statements the Company has incurred net losses of $380,900 and $702,157 for the six months ended May 31, 2009 and 2008, and has a working capital deficiency of $1,280,045 as of May 31, 2009.
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 condensed 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 Statement of Financial Accounting Standards No, 130, “Reporting Comprehensive Income,” (SFAS No. 130). SFAS No. 130 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.
Fair Value of Financial Instruments
The carrying amounts reported in the condensed 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 $14,041 at May 31, 2009.
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.
Advertising Costs
The Company expenses the costs associated with advertising as incurred. Advertising expenses for the six months ended May 31, 2009 and 2008 are included in selling and promotion expenses in the condensed 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.
The following is a reconciliation of the computation for basic and diluted EPS:
| May 31, 2009 | May 31, 2008 | |||
| Net loss | $ | (380,900) | $ | (702,157) |
| Weighted-average common shares outstanding (basic) | 55,274,279 | 52,806,681 | ||
| Weighted-average common stock equivalents | ||||
| Stock options | 1,450,000 | 1,400,000 | ||
| Warrants | - | - | ||
| Weighted-average common shares outstanding (diluted) | 56,724,279 | 54,206,681 |
Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) published Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R, as amended, are effective for small business issuers beginning as of the next fiscal year after December 15, 2005. The Company has adopted the provisions of SFAS 123R. The adoption of this principle had no effect on the Company’s operations.
On January 1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based Payment” (“FAS 123R”) which requires recognition of stock-based compensation expense for all share-based payments based on fair value. Prior to January 1, 2006, the Company measured compensation expense for all of its share-based compensation using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. The Company has provided pro forma disclosure amounts in accordance with FAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No. 123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to its stock-based compensation.
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 estimated in accordance with the original provisions of FAS 123. Stock-based compensation expense for all awards granted after January 1, 2006 is based on the grant-date fair values estimated in accordance with the provisions of FAS 123R. 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.
The Company measures compensation expense for its non-employee stock-based compensation under the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (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”. 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 compensation expense and additional paid-in capital.
Segment Information
The Company follows the provisions of SFAS No. 131, “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, 2009 and for the six months ended May 31, 2009 and 2008, 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, 2008 to conform with the May 31, 2009 presentation. These reclassifications had no effect on the net loss for the six months ended May 31, 2008.
Uncertainty in Income Taxes
In July 2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes.” This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Management has adopted FIN 48 for 2008, and they evaluate their tax positions on an annual basis, and has determined that as of May 31, 2009, 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, the FASB issued SFAS 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. In particular, disclosures are required to provide information on the extent to which fair value is used to measure assets and liabilities; the inputs used to develop measurements; and the effect of certain of the measurements on earnings (or changes in net assets). This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 on December 1, 2007 did not have a material impact on the consolidated financial statements.
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”, (“FAS 159”) 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. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted this standard on December 1, 2007 and the adoption did not have a material impact on the consolidated financial statements.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No 51” (SFAS 160). SFAS 160 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. SFAS 160 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. The adoption of SFAS No. 160 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”), which replaces FASB SFAS 141, Business Combinations. This Statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R 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. SFAS 141R 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. SFAS 141R 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. This compares to the cost allocation method previously required by SFAS No. 141. SFAS 141R 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, SFAS 141R will require an entity to recognize contingent consideration at the date of acquisition, based on the fair value at that date. This Statement will be effective for business combinations completed on or after the first annual reporting period beginning on or after December 15, 2008. Early adoption of this standard is not permitted and the standards are to be applied prospectively only. Upon adoption of this standard, there would be no impact to the Company’s results of operations and financial condition for acquisitions previously completed. The adoption of SFAS No. 141R is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expenses the current view of the staff that it will accept a company’s election to use the simplified method discussed in Staff Accounting Bulletin No. 107, “Share Based Payment”, (“SAB 107”), for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. SAB 110 became effective for the Company on December 1, 2007. The adoption of SAB 110 did not have a material impact on the Company’s financial position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 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 under SFAS 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not believe that SFAS 161 will have an impact on their results of operations or financial position.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 makes the hierarchy of generally accepted accounting principles explicitly and directly applicable to preparers of financial statements, a step that recognizes preparers’ responsibilities for selecting the accounting principles for their financial statements. The effective date for SFAS 162 is 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board’s related amendments to remove the GAAP hierarchy from auditing standards, where it has resided for some time. The adoption of SFAS 162 will not have an impact on the Company’s results of operations or financial position.
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of SFAS No. 60” (SFAS 163). SFAS 163 prescribes accounting for insures of financial obligations, bringing consistency to recognizing and recording premiums and to loss recognition. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. Except for some disclosures, SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS 163 will not have an impact on the Company’s results of operations or financial position.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company was required to adopt FSP 142-3 on October 1, 2008. The guidance in FSP 142-3 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 FSP 142-3 will materially impact their financial position, results of operations or cash flows.
In May 2008, the FASB issued FSP Accounting Principles Board 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 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. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company does not believe that the adoption of FSP APB 14-1 will have a material effect on its financial position, results of operations or cash flows.
In June 2008, the Emerging Issues Task Force issued EITF No. 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-05”), which supersedes the definition in EITF 06-01 for periods beginning after December 15, 2008. The objective of EITF 07-05 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 FSAB 133, for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception in paragraph 11(a) of SFAS 133 (“the Paragraph 11(a) Exception”). EITF 07-05 also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the instrument is within the scope of EITF 00-19. The Company is determining what impact, if any, EITF 07-05 will have on its financial position, results of operations and cash flows.
In June 2008, the Emerging Issues Task Force issued EITF 08-04, “Transition Guidance for Conforming Changes to EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF 08-04”). EITF 08-04 is effective for years ending after December 15, 2008. The overall objective of EITF 08-04 is to conform the requirements of EITF 00-27 and FASB 150 with EITF 98-5 to provide for consistency in application of the standard. The Company has computed and recorded a beneficial conversion feature in connection with certain of their prior financing arrangements and does not believe that EITF 08-04 will have a material effect on that accounting.
In May 2009, the FASB published SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 requires the Company to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. SFAS 165 is effective for financial periods ending after June 15, 2009. Management has adopted SFAS 165 and has evaluated subsequent events through September 30, 2009, the date the financial statements were issued.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption.
NOTE 3 - FIXED ASSETS
Fixed assets as of May 31, 2009 and November 30, 2008 were as follows:
Estimated Useful | (Unaudited) | ||||
Lives (Years) | May 31 2009 | November 30, 2008 | |||
Computer and office equipment | 5 | $ | 29,896 | $ | 26,373 |
Less: accumulated depreciation | 14,970 | 10,549 | |||
Property and equipment, net | $ | 14,926 | $ | 15,824 |
There was $2,832 and $3,161 charged to operations for depreciation expense for the six months ended May 31, 2009 and 2008, respectively.
NOTE 4 - DEFERRED COSTS
Deferred costs as of May 31, 2009 and November 30, 2008 were as follows:
May 31, 2009 | November 30, 2008 | |||
Deferred Costs | $ | 421,673 | $ | 371,983 |
Less: accumulated depreciation | 183,902 | 125,563 | ||
Property and equipment, net | $ | 237,771 | $ | 246,420 |
There was $39,385 and $35,886 charged to operations for amortization expense for the six months ended May 31, 2009 and 2008, respectively.
NOTE 5 - RELATED PARTY LOANS
As of May 31, 2009, the four principal shareholders of the Company had advanced $753,341 to the Company for working capital purposes. These loans bear interest at an annual rate of 10% for individual amounts exceeding $150,000 (CDN$) (US$137,577). The loans have no specific terms of repayment and are unsecured. Interest expense for the six months ended May 31, 2009 and 2008 were $9,611 and $0, respectively. Accrued interest on these loans as of May 31, 2009 was $12,339.
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, 2009, the Company has $407,635 outstanding ($101,910 of which is long-term) 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, 2009 and 2008 were $9,342 and $13,987, respectively. There was no accrued interest outstanding as of May 31, 2009.
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, 2009.
Operating Lease
The Company leases a vehicle for the Chief Executive Officer. The lease is a 36-month lease that expires October 31, 2009. The monthly payment is $617 per month, and the Company has approximately $3,085 in its remaining commitment.
Office Space
The Company occupies approximately 2,500 square feet of office space owned by a company that is owned by a stockholder. 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.
Litigation
The Company filed a complaint on January 29, 2009 against Florida Atlantic Stock Transfer, Inc., its transfer agent and Thomas Klein and Arshad Shah two former consultants in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. Each consultant was issued 300,000 shares of restricted common stock and options to purchase an additional 500,000 shares of restricted common stock exercisable immediately and 700,000 options exercisable in tranches. Each consultant exercised the options for the initial 500,000 shares, but each failed to pay the aggregate exercise price of $30,000 or $0.06 per share. The Company cancelled the consulting agreements on the grounds of non-performance. The complaint demanded a stop on the transfer of shares issued, and cancellation of those shares and options to purchase additional shares, as well as payment of share subscriptions. The outcome of the litigation is undeterminable at present. The 600,000 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, 2009, the Company has 100,000,000 shares of common stock authorized with a par value of $.00001.
The Company has 55,373,508 and 54,888,508 shares issued and outstanding as of May 31, 2009 and November 30, 2008.
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.
During the year ended November 30, 2008:
On March 12, 2008, a change in control occurred with respect to Physicians Remote Solutions, Inc. and on June 2, 2008, Physicians Remote Solutions, Inc. was reverse merged into Valtech Communications, Inc., a Canadian company and the Company’s name was changed to HIPSO Multimedia, Inc. In connection with the reverse merger, 40,000,000 restricted shares of the public company common stock was exchanged fro Valtech Communications’ common stock. The shares were issued at par.
On March 13, 2008, the Company issued 583,500 restricted shares of its common stock in connection with a legal services contract commencing March 18, 2008 for one year. Stock based compensation in the amount of $25,225 was recorded as compensation expense for the year ended November 30, 2008, with the remaining $9,785 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 March 13, 2008, the Company entered into consulting contracts with two individuals to prepare a formal evaluation of the Company’s business including the creation of a marketing, sales, information management, and customer service plan. The agreements require the issuance of 600,000 restricted common shares valued at $0.06 per share, the current market price at the date of issuance, and the issuance of 2,400,000 stock options exercisable at $0.06 per share. 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.
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 under SFAS 123R. SFAS 123R 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 years ended November 30, 2008 and 2007, stock based compensation was $231,226 and $0, respectively.
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. Expected term is estimated based on the simplified method allowed under Staff Accounting Bulletins 110 and 107 issued by the United States Securities and Exchange Commission, for options valued using the Black-Scholes valuation method.
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.
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. 100,000 options valued at $9,000 were unvested as of November 30, 2008.
The following is a summary of the outstanding stock options for the six months ended May 31, 2009:
Options | Weighted Average Exercise Price | Weighted Average Exercise Life | Aggregate Intrinsic Value | ||||
| Outstanding, November 30, 2007 | 1,500,000 | $ | 0.06 | 4.87 | $ | 121,000 | |
| Granted | 250,000 | 0.05 | 3.00 | ||||
| Exercised | (300,000) | (0.05) | 0.00 | ||||
| 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 |
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, 2009, deferred tax assets consist of the following:
| Net operating losses | $ | 509,542 |
| Valuation allowance | (509,542) | |
| $ | - |
At May 31, 2009, the Company had a net operating loss carryforward in the approximate amount of $1,498,653, available to offset future taxable income through 2029. 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.
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, 2009 and 2008 is summarized as follows:
2009 | 2008 | ||
| 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 SFAS 157. SFAS 157 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. SFAS 157’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. SFAS 157 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.
The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of May 31, 2009:
| Level 1 | Level 2 | Level 3 | Total | |
| Cash | 19,644 | - | - | 19,644 |
| Total assets | 19,644 | - | - | 19,644 |
| Loans payable | - | - | - | - |
| Total liabilities | - | - | - | - |
NOTE 11 - CONCENTRATION OF CREDIT RISK
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.
On May 31, 2008, $42,277, or 54% of the Company’s accounts receivable were with three customers. Of this amount, $18,187, or 24%, was with a customer related to a significant shareholder of the Company. In addition, 33% of the revenue for the six months ended May 31, 2008 was generated by one customer.
NOTE 12 - SUBSEQUENT EVENTS
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 Groupe Canvar, Inc. to their server for these services. All pricing is at the same terms as those for Valtech Communications, Inc. other customers. The agreement will expire July 2010.
NOTE 13 - RESTATEMENT OF PRIOR FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements for the year ended November 30, 2008 to account for the correction of errors related to adjustments made to (i) the allowance for doubtful accounts; (ii) the write-off of certain receivables; (iii) an incorrect posting of an inter-company receivable; (iv) under accrual of accrued interest on the loans – shareholders; (v) related adjustments on translation of foreign currencies; and (vi) reclassifications on cash flows from investing and financing activities as well as reclassifications to conform with the 2007 presentation that had no effect on the total changes in cash flows. The net effect of the adjustments on the accumulated deficit as of November 30, 2008 was $3,853 increase in the net loss and the accumulated deficit.
The Company has restated its condensed consolidated financial statements for the six months ended May 31, 2009 to account for the correction of errors related to adjustments made to (i) changes of the beginning balances as a result of the November 30, 2008 re-audit adjustments; (ii) under accrual of accrued interest on the loans – shareholders; and (iii) related adjustments on translation of foreign currencies. The net effect of the adjustments on the accumulated deficit as of May 31, 2009 was $5,832 decrease in the accumulated deficit and a decrease in the net loss of $9,685 and $27,485 for the six and three months ended May 31, 2009, respectively.
The following charts reflect the changes of the individual line items changed in the consolidated financial statements for November 30, 2008 and the condensed consolidated financial statements for the six months ended May 31, 2009.
| Previously Reported | Restated | Change | |||||
| Statement of Operations | |||||||
| Revenues | $ | 383,381 | $ | 372,638 | $ | (10,743) | (1) |
| Administrative expenses | 605,709 | 596,532 | (9,177) | (2)(4)(5) | |||
| Interest expense | 26,982 | 29,268 | 2,286 | (3) | |||
| Net loss | (833,324) | (837,176) | (3,852) | (1)(3)(4) | |||
| Balance Sheet | |||||||
| Accounts receivable | 85,592 | 64,971 | (20,621) | (1)(2) | |||
| Accrued expenses | 95,432 | 75,767 | (19,665) | (3)(4) | |||
| Accumulated defict | (1,113,901) | (1,117,753) | (3,852) | (1)(3)(4) | |||
| Accumulated other comprehensive income | 110,117 | 113,013 | 2,896 | (5) | |||
| Statement of Changes in Stockholders' (Deficit) | |||||||
| Accumulated deficit | (1,113,901) | (1,117,753) | (3,852) | (1)(3)(4) | |||
| Accumulated other comprehensive income | 110,117 | 113,013 | 2,896 | (5) | |||
| Net loss | (833,324) | (837,176) | (3,852) | (1)(3)(4) | |||
| Statement of Cash Flow | |||||||
| Net loss | (833,324) | (837,176) | (3,852) | (1)(3)(4) | |||
| Change in accounts receivable | (11,119) | (20,120) | (9,001) | (7) | |||
| Change in prepaid expenses and other current assets | (16,455) | (22,732) | (6,277) | (7) | |||
| Change in accounts payable and accrued expenses | - | 30,252 | 30,252 | (6) | |||
| Change in accounts payable | 8,436 | - | (8,436) | (6) | |||
| Change in accrued expenses | 40,361 | - | (40,361) | (6) | |||
| Change in operating activities | (454,316) | (491,992) | (37,676) | (7) | |||
| Deferred development costs | (31,712) | (14,372) | 17,340 | (6) | |||
| Change in investment activities | 397,740 | (14,372) | (412,112) | (6) | |||
| Loan payable to bank | 163,910 | 163,438 | (472) | (7) | |||
| Change in financing activities | (31,712) | 397,268 | 428,980 | (6) | |||
| Effect of exchange rate on cash | 78,925 | 99,733 | 20,808 | (7) | |||
| Balance Sheet | Operations | ||||||
| (1) Write-off of certain receivables | (9,102) | (10,743) | |||||
| (2) Increase in the allowance for doubtful accounts | (11,519) | 11,000 | |||||
| (3) Under accrual of interest on loans - shareholders | 1,937 | 2,286 | |||||
| (4) Incorrect posting of inter-company receivables | 17,728 | (16,928) | |||||
| (5) Foreign currency translation adjustments | 2,896 | (3,249) | |||||
| (6) Represent reclassification adjustments | |||||||
| (7) Represent changes based on adjustments (1) through (5) |
Note – there is a $1 difference in the charts as opposed to the net effect of the restatement adjustments on the net loss due to rounding in the originally filed consolidated financial statements.
Changes to the financial statements for the three months ended May 31, 2009:
| Previously Reported | Restated | Change | |||||
| Statement of Operations - 6 months | |||||||
| Depreciation and amortization | $ | 39,385 | $ | 42,217 | $ | 2,832 | (2)(3) |
| Administrative expenses | 325,021 | 302,893 | (22,128) | (2)(3) | |||
| Interest expense | 9,342 | 18,953 | 9,611 | (1) | |||
| Net loss | 390,585 | 380,900 | (9,685) | (4) | |||
| Statement of Operations - 3 months | |||||||
| Depreciation and amortization | 21,019 | 22,530 | 1,511 | (2)(3) | |||
| Administrative expenses | 135,190 | 100,381 | (34,809) | (2)(3) | |||
| Interest expense | 4,765 | 10,578 | 5,813 | (1) | |||
| Net loss | 202,457 | 174,972 | (27,485) | (4) | |||
| Balance Sheet | |||||||
| Officer and computer equipment | 15,646 | 14,926 | (720) | (2)(3) | |||
| Deferred costs | 252,021 | 237,771 | (14,250) | (2)(3) | |||
| Accrued expenses | 80,441 | 92,780 | 12,339 | (1) | |||
| Accumulated defict | (1,504,485) | (1,498,653) | 5,832 | see note | |||
| Accumulated other comprehensive income | 16,259 | (16,882) | (33,141) | (2) | |||
| Statement of Cash Flow | |||||||
| Net loss | (390,585) | (380,900) | 9,685 | (4) | |||
| Depreciation and amortization | 39,385 | 42,217 | 2,832 | (2)(3) | |||
| Change in accounts receivable | 64,924 | 41,571 | (23,353) | (4) | |||
| Change in prepaid expenses and other current assets | (19,364) | (6,579) | 12,785 | (4) | |||
| Change in accounts payable and accrued expenses | 38,401 | 61,440 | 23,039 | (4) | |||
| Change in operating activities | (152,813) | (127,825) | 24,988 | (4) | |||
| Effect of exchange rate on cash | (12,659) | (37,647) | (24,988) | (2)(4) | |||
| Balance Sheet | 6 Months Operations | 3 Months Operations | |||||
| (1) Under accrual of interest on loans - shareholders | 12,339 | 9,611 | 5,813 | ||||
| (2) Foreign currency translation adjustments | 33,141 | - | - | ||||
| (3) Represent reclassification adjustments | |||||||
| (4) Represent changes based on adjustments (1) through (2) |
Note – there is a $1 difference in the charts as opposed to the net effect of the restatement adjustments on the change in accumulated deficit due to rounding in the originally filed condensed consolidated financial statements.