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
and Exchange Act of 1934 For the quarterly period ended February 28, 2010
or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 000-50480
EN2GO INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Nevada 98-0389557
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2921 W. Olive Ave, Burbank, California, 91505
(Address of principal executive offices)
(818) 433-7191
(Issuer's telephone number)
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 ( )
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes [ ] No [ ]
Large accelerated filer ( ) Accelerated filer ( )
Non-accelerated filer ( ) Smaller reporting company ( X )
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
YES ( ) NO ( X )
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 24,215,542 shares of
$0.00001 par value common stock issued and outstanding as of May 19, 2010.
EN2GO INTERNATIONAL, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of February 28, 2010 (Unaudited)
and August 31, 2009 (Unaudited) 1
Consolidated Statements of Operations For the Three and Six
Months Ended February 28, 2010 and 2009 (Unaudited) 2
Consolidated Statements of Cash Flows For the Six Months Ended
February 28, 2010 and 2009 (Unaudited) 3
Notes to the Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 29
Signatures 30
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EN2GO INTERNATIONAL, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheets
February 28, August 31,
2010 2009
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 8,004 $ 3,132
Prepaid expenses 20,336 20,336
__________________________
TOTAL CURRENT ASSETS 28,340 23,468
PROPERTY AND EQUIPMENT, net 79,025 109,289
SOFTWARE DEVELOPMENT COSTS, net 1,109,417 967,917
__________________________
TOTAL ASSETS $ 1,216,782 $ 1,100,674
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,115,067 $ 1,072,638
Accrued expense 60,586 35,836
Due to related party 416,598 274,498
Notes payable 344,167 915,246
__________________________
TOTAL CURRENT LIABILITIES 1,936,418 2,298,218
__________________________
TOTAL LIABILITIES 1,936,418 2,298,218
__________________________
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT):
Common stock, $.00001 par value, 90,000,000
shares authorized, and 24,215,542 and
5,513,540 shares issued and outstanding at
February 28, 2010 and August 31, 2009,
respectively 242 55
Capital in excess of par value 12,414,798 10,218,782
(Deficit) accumulated during the
development stage (13,134,676) (11,416,381)
___________________________
Total stockholders' (deficit) (719,636) (1,197,544)
___________________________
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) $ 1,216,782 $ 1,100,674
___________________________
See Notes to Unaudited Consolidated Financial Statements.
1
EN2GO INTERNATIONAL INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
(Unaudited)
From Inception
On Jan 31,
For the 3 Months For the 6 Months 2007 through
ended Feb 28, ended Feb 28, Feb 28,
2010 2009 2010 2009 2010
REVENUES $ - $ - $ - $ - $ -
COST OF GOODS SOLD - - - - -
_________________________________________________________
GROSS PROFIT - - - - -
OPERATING EXPENSES
General and
administrative
expenses 278,004 965,355 500,231 1,548,434 3,595,278
Stock issued
for services - 87,356 - 159,791 1,762,617
Non-Cash
Compensation - - - - 3,515,447
Salaries, wages
and consulting 9,724 20,930 14,394 36,750 2,511,137
__________________________________________________________
Total operating
expenses 287,728 1,073,641 514,625 1,744,975 11,384,479
__________________________________________________________
LOSS FROM
OPERATIONS (287,728) (1,073,641) (514,625) (1,744,975) (11,384,479)
OTHER INCOME
(EXPENSE):
Other income - 50 - 5,649 29,820
Interest expense (12,375) (143,084) (24,750) (219,484) (180,722)
Interest expense
on amortization of
discount notes (8,750) - (1,178,920) - (1,599,295)
__________________________________________________________
Total other
income (expense) (21,125) (143,034)(1,203,670) (213,835) (1,750,197)
LOSS BEFORE
PROVISION FOR
INCOME TAXES (308,853) (1,216,675)(1,718,295) (1,958,810) (13,134,676)
Provision for
income taxes - - - - -
__________________________________________________________
NET LOSS APPLICABLE
TO COMMON
STOCKHOLDERS $ (308,853) (1,216,675)(1,718,295) (1,958,810) (13,134,676)
NET LOSS PER SHARE
OF COMMON STOCK-
Basic and
diluted $ (0.01) $ (0.20) $ (0.08) $ (0.40)
WEIGHTED AVERAGE
SHARES OUTSTANDING
- -Basic and
diluted 24,119,209 5,411,100 21,286,449 5,357,251
See Notes to Unaudited Consolidated Financial Statements.
2
EN2GO INTERNATIONAL INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
(Unaudited)
Period from
inception
Jan 27, 2007
For the 6 Months Ended through
Feb 28, Feb 28,
2010 2009 2010
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (1,718,295) $ (1,958,810) $ (13,134,676)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Debt financing costs 1,178,920 159,791 1,901,096
Depreciation expense 30,112 22,316 103,324
Options, warrants and
common stock issued for
services rendered - 102,871 5,746,909
Changes in operating assets
and liabilities:
Prepaid expense (20,336) (25,936)
Accounts payable 138,634 475,530 1,223,271
Accrued expense 24,750 (136,926) 60,586
Due to related party 142,100 - 416,598
__________________________________________
Net cash used in
operating activities (203,779) (1,056,414) (3,708,828)
__________________________________________
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property
and equipment 151 (85,431) (182,350)
Software development (141,500) - (1,109,417)
__________________________________________
Net cash used in investing
activities (141,349) (85,431) (1,291,767)
__________________________________________
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance
of notes payable - 1,300,000 2,500,000
Repayment of notes payable - (55,000) (500,000)
Proceeds from issuance of
common stock, net of
offering costs 350,000 150,000 3,008,599
__________________________________________
Net cash provided by
financing activities 350,000 1,395,000 5,008,599
__________________________________________
NET (DECREASE) INCREASE IN CASH 4,872 253,155 8,004
CASH Beginning of period 3,132 9,074 -
__________________________________________
CASH End of period $ 8,004 $ 262,229 $ 8,004
__________________________________________
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ - $ -
Income taxes - - -
See Notes to Unaudited Consolidated Financial Statements.
3
Supplemental Schedule of Noncash Investing and Financing
Activities:
In August 2008, we entered into a promissory note with NSC Investments
Ltd. ("NSC") for a sum of $250,000. Under this promissory note,
interest is to be prepaid at the commencement of each quarter by us
issuing 1,600 shares of our common stock.
The unpaid principal balance of the promissory note was originally due
and payable in full on the sale of any assets of the Company or November
1, 2008. Further consideration for the loan shall consist of 15,000
shares of our common stock at the funding, 5,000 shares of our common
stock at the beginning of the next month, and 10,000 shares at the
beginning of the next month. This promissory note was extended until
February 1, 2009. We agreed to pay 3,900 shares of our common stock as
interest and an additional issuance of 10,000 shares of our common stock
in lieu of the extension of the note. The promissory note was further
extended to May 1, 2009 and we agreed to issue 3,000 shares of our
common stock as interest and additional issuance of 20,040 shares of our
common stock for additional compensation. The remaining $100,000 plus
accrued interest shall be convertible at NSC's option at $2.00 per share
on or before May 1, 2010.
In October 2008, we entered into an agreement with Euro Trend Trader,
Inc. ("ETT") to provide investor relations and public relations. We
agreed to pay ETT $5,000 start up fees and $3,000 per month
thereafter. Additionally, we paid ETT 20,000 shares of our common
stock for coverage of the Company by a registered market maker and
10,000 shares related to investor relations.
During the year ended August 31, 2009, we issued an aggregate of
$1,750,000 in Convertible Debentures. At the holder's sole discretion,
the holder was entitled to convert the Debenture, in whole or in part
into common shares of the Company at a conversion price of $0.10 per
share. As additional compensation, in conjunction with the issuance of
the Debentures, the Company issued 17,500,000 share purchase warrant
certificates with each warrant exercisable into one common share at
$0.15 per share for a period of three years commencing from the date of
the issuance of the warrant certificate. On September 25, 2009 all of
the $1,750,000 of debentures were converted into 17,500,000 common shares
and 17,500,000 share purchase warrants exercisable at $0.15 per share
remained outstanding.
On November 9, 2009, we issued 32,000 common shares to Weintraub
Genshlea Chediak in lieu of outstanding legal services provided to the
Company. The shares were valued at $11,200 based on the fair market
value of the stock on the date that the shares were issued.
On January 20, 2010 we issued 170,000 common shares to Howard Family
Trust in lieu of outstanding rent, property taxes and insurance. The
shares were valued at $85,000 reflective of the fair market value of the
stock on the date the shares were issued.
See Notes to Unaudited Consolidated Financial Statements
4
EN2GO INTERNATIONAL, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements represent the accounts
of En2Go International, Inc. ("Parent"), incorporated in the State of
Nevada on August 23, 2002 (formerly Medusa Style Corporation) and En2Go,
Inc. ("Subsidiary"), incorporated in the State of Nevada on January 31,
2007, collectively ("the Company").
On July 17, 2007, Parent completed an exchange agreement with Subsidiary
wherein Parent issued 2,780,000 shares of its common stock in exchange for
all the issued and outstanding common stock of Subsidiary. The
Acquisition was accounted for as
a recapitalization of Subsidiary in a manner similar to a reverse
purchase as the former shareholders of Subsidiary controlled the combined
Company after the acquisition. Following the acquisition, and the
transfer of an additional 1,075,000 shares from the shareholders of parent
to the former shareholders of the subsidiary, the former shareholders of
subsidiary control approximately 77% of the total outstanding stock of the
combined entity. There was no adjustment to the carrying values of the
assets or the liabilities of Parent or Subsidiary as a result of the
recapitalization.
The operations of Parent are included only from the date of
recapitalization. Accordingly, the previous operations and retained
deficits of Parent prior to the date of recapitalization have been
eliminated. The financial history prior to the recapitalization is that
of the subsidiary.
We are a start-up company that plans to become a full service
entertainment and technology company that will create and develop a
variety of media and entertainment related programs and applications
including cutting edge media delivery software, Internet video
applications and high-end, innovative desktop applications. In addition
to programming progress, we are currently attempting to establish a
technical infrastructure, which we call "En2ools." En2ools is an ever-
expanding library of code modules and techniques designed for the rapid
production or modification of software. En2ools is the foundation that
enables the software applications to be fast, efficient, reliable, and
user-friendly. Our primary software application is called Flyxo, which is
an application that delivers high-quality video to a user's computer
desktop. Flyxo is designed to watch movies online and can eliminate the
user's frustration of long download times or waiting for buffering. It is
a global Internet broadcast platform that can facilitate online television
channels, movie channels, radio stations, online gaming, slide shows, 3-D
objects, high-resolution graphics, interactive advertising, social media
and more.
We will also offer the Channel Builder making it simple for individuals or
organizations to create their own high-quality Internet media channels.
Once the clients' videos or other media is uploaded, using drag and drop
functionality, the clients can create their own global HD Internet
broadcast channel in a matter of minutes. This simplicity and convenience
combined with the ability to distribute high-quality media to a worldwide
audience opens a wide range of possibilities in terms of potential
clients. Other software applications include eMaculate; a search engine
that is designed to search, download and share digital images on the Web
at very high speeds, VideoBlox; a custom media player that is specifically
designed for the entertainment industry. It plays numerous file formats
including mp4, mp3, Quicktime and Windows Media. It is designed so that
the artist will be able to use their own branded player to distribute
their music videos and keep in constant contact with their fans. Another
unique aspect of this media player is the ability to provide a customized
look and feel to its interface. Kandictionary is a downloadable
personalized dictionary and translator and the En2go jukebox is a custom
stand-alone media player designed to play music from social networking
sites. After downloading the media player, a user does not have to be on
an artist's page to hear the artist's music. A user can add favorite
songs to the media player and listen to the artist's music while doing
other things or visiting other sites. Furthermore, the user can create a
custom playlist by adding songs to the player from different artists.
Basis of Presentation and Going Concern Uncertainty
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, we have sustained losses and
as of February 28, 2010, we have no business operations and have a net
working capital deficiency and a negative cash flow from operations.
These conditions, among others, give rise to substantial doubt about our
ability to continue as a going concern. Management is continuing to seek
additional equity capital. Until such time, we anticipate our working
capital needs will be funded with proceeds from equity and debt financing.
Management believes these steps will provide us with adequate funds to
sustain our continued existence. There is, however, no assurance that the
steps taken by management will meet all of our needs or that we will
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
5
Development Stage Activities
Since inception the Company has not yet generated significant revenues and
has been defining its business operations and raising capital. All of our
operating results and cash flows reported in the accompanying consolidated
financial statements from January 31, 2007 through February 28, 2010 are
considered to be those related to development stage activities and
represent the cumulative from inception amounts from our development stage
activities required to be reported pursuant to the Accounting Standards
Codification ("ASC") topic 915, "Development Stage Entities"(formerly
SFAS No. 7, "Development Stage Enterprises").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of Parent and
Parent's wholly-owned Subsidiary. All intercompany balances and
transactions have been eliminated in consolidation.
Fiscal year end
The Company's fiscal year end is August 31.
Cash Concentration and Cash Equivalents
We consider all short-term securities purchased with a maturity of three
months or less to be cash equivalents. The Company maintains its cash in
bank deposit accounts, which, at times, may exceed federally insured
limits. Management does not believe the Company is exposed to significant
credit risk. Management, as well, does not believe the Company is exposed
to significant interest rate and foreign currency fluctuation risks during
the period presented in these consolidated financial statements. As of
February 28, 2010, there are no amounts that exceed the federally insured
limits.
Property and Equipment
Property and equipment are stated as cost less accumulated
depreciation. Depreciation is provided on a straight line basis over the
estimated useful lives of the assets from one to five years. Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized. Gains or losses on sales or retirements are recognized in
income.
Revenue Recognition
Through the period from inception through February 28, 2010, the Company
had not yet generated any revenues. However, the Company plans to
recognize its revenue according to the provisions of ASC topic 605,
"Revenue Recognition" (formerly Staff Accounting Bulletin 104), which
takes into account the completion of the transaction, delivery of the
product, a final fixed or determinable price, and that collectability is
reasonably assured.
Loss per Share
The Company computes loss per share in accordance with ASC topic 260,
"Earnings Per Share" (formerly SFAS No. 128, "Earnings per Share"), which
requires the Company to present basic and dilutive loss per share when the
effect is dilutive.
6
Impairment of Long-Lived Assets
The Company has adopted the provisions of ASC topic 360, "Property,
Plant and Equipment" (formerly SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets to be Disposed of"). ASC topic 360
establishes procedures for review of recoverability, and measurement of
impairment whenever events of changes in circumstances indicated that
the carrying amount of long-lived assets may not be recoverable. ASC
topic 360 also requires that long-lived assets to be disposed of other
than by sale shall continue to be classified as held and used until
disposal. Further, ASC topic 360 specifies the criteria for classifying
long-lived assets as "held for sale" and requires that long-lived assets
to be disposed of by sale be reported at the lower of carrying amount or
fair value less estimated selling costs. Management believes that there
has not been any impairment of the Company's long-lived assets at
February 28, 2010 and 2009.
Advertising Costs
Advertising costs are charged to operations in the period
incurred. During the years ended February 28, 2010 and 2009, the
Company incurred $5,000 and $1,356 in advertising costs, respectively.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted ASC topic 820, "Fair Value
Measurements and Disclosures" (formerly SFAS No. 157, "Fair Value
Measurements"). ASC topic 820 defines fair value, establishes a three-
level valuation hierarchy for disclosures of fair value measurement and
enhances disclosure requirements for fair value measures. The three
levels are defined as follows:
- - Level 1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
- - Level 2 inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument.
- - Level 3 inputs to valuation methodology are unobservable and
significant to the fair measurement.
The fair value of the Company's cash and cash equivalents, receivables,
accounts payable and accrued liabilities approximate carrying value
based on their effective interest rates compared to current market
prices.
The Company's financial instruments consist of cash, receivables,
payables, and notes payable. The carrying amount of cash, receivables
and payables approximates fair value because of the short-term nature of
these items. The carrying amount of the notes payable approximates fair
value as the individual borrowings bear interest at market interest
rates.
Income Taxes
We account for income taxes in accordance with ASC topic 740, "Income
Taxes" (formerly SFAS 109 and FIN48). Under this standard, deferred tax
liabilities and assets are determined based on the difference between
the financial statement and tax bases of assets and liabilities using
the enacted tax rates in effect for the year in which the differences
are expected to reverse. Deferred tax assets are reduced by a valuation
allowance when we cannot make the determination that it is more likely
than not that some portion or all of the related tax asset will be
realized.
Stock-Based Compensation
In December 2004, the FASB issued ASC topic 718, "Compensation - Stock
Compensation" (formerly SFAS No. 123R," Share-Based Payment", amending
SFAS No. 123) to require companies to record as expense the fair value
of equity-based compensation, including stock options and warrants, over
the applicable vesting period. ASC topic 718 also requires more
extensive disclosures concerning stock options than required under
previous standards. The new standard applies to option grants made
after adoption, as well as options that have not vested at the date of
adoption.
7
Software Development Costs
We capitalize software development costs in accordance with generally
accepted accounting principles, under which certain software development
costs incurred subsequent to the establishment of technological
feasibility, may be capitalized before the product is available for
general release to customers, in accordance with ASC topic 985-20, "Costs
of Software to Be Sold, Leased Or Marketed" (formerly SFAS 86). We
determine technological feasibility to be established upon completion of
(1) a detailed program design, (2) completion of working model.
Capitalized software development costs consist of costs for internally
developed software to be sold publicly upon completion of development.
Capitalized costs consist primarily of direct salaries and the cost of
specific external consultants, where such costs qualify for capitalization
under generally accepted accounting principles. Amortization shall not
start until the product is available for general release to customers. On
an annual basis, the Company will determine whether or not there has been
impairment in value of the intangible assists and if necessary, records
impairment charged to write down the assts to their estimated fair value.
Comparative Financial Statements
Certain amounts in the comparative financial statements have been
reclassified from financial statements previously presented to conform to
the 2010 consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2008, the Company adopted ASC topic 815, "Derivatives and
Hedging" (formerly SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities", which amends SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities"), and expands disclosures to include
information about the fair value of derivatives, related credit risks and
a company's strategies and objectives for using derivatives. ASC topic
815 is effective for fiscal periods beginning on or after November 15,
2008. Based on current conditions, we do not expect the adoption of ASC
topic 815 to have a significant impact on our results of operations or
financial position.
In April 2008, the Company adopted ASC topic 350-30, "Intangibles Other
Than Goodwill" (formerly FSP 142-3, "Determination of the Useful Life of
Intangible Assets"). ASC topic 350-30 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 ASC topic
350 - Goodwill (formerly SFAS No. 142, "Goodwill and Other Intangible
Assets"). ASC topic 350-30 is effective for fiscal years beginning after
December 15, 2008. We do not expect ASC topic 350-30 to have a
significant impact on our results of operations or financial position.
In June 2008, the Company adopted ASC topic 260, "Earnings Per Share"
(formerly FSP EITF 03-6-1, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities"). ASC
topic 260 clarifies that all outstanding unvested share-based payment
awards that contain rights to nonforfeitable dividends participate in
undistributed earnings with common shareholders. Awards of this nature are
considered participating securities and the two-class method of computing
basic and diluted earnings per share must be applied. ASC topic 260 is
effective for fiscal years beginning after December 15, 2008. We are
currently assessing the impact of ASC topic 260 on our financial position
and results of operations.
In June 2008, the Company adopted ASC topic 815-40, "Contracts In Entity's
Own Equity" (formerly EITF Issue No. 07-5, "Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock").
ASC topic 815-40 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the
instrument's contingent exercise and settlement provisions. It also
clarifies on the impact of foreign currency denominated strike prices and
market-based employee stock option valuation instruments on the
evaluation. ASC topic 815-40 is effective for fiscal years beginning after
December 15, 2008. We are currently assessing the impact of ASC topic 815-
40 on our financial position and results of operations.
In June 2008, the FASB ratified ASC topic 840, "Leases" (formerly EITF
Issue No. 08-3, "Accounting for Lessees for Maintenance Deposits Under
Lease Arrangements"). ASC topic 840 provides guidance for accounting for
nonrefundable maintenance deposits. It also provides revenue recognition
accounting guidance for the lessor. ASC topic 840 is effective for fiscal
years beginning after December 15, 2008. We are currently assessing the
impact of ASC topic 840 on our financial position and results of
operations.
In October 2008, the Company adopted ASC topic 820, "Fair Value
Measurement When the Markets Are Not Active" (formerly FSP FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active"), which addresses the application of ASC topic 820 -
Fair Value Measurements (formerly SFAS No.157 for illiquid financial
instruments). ASC topic 820 clarifies that approaches to determining fair
value other than the market approach may be appropriate when the market
for a financial asset is not active. The Company does not expect the
adoption of ASC topic 820 to have a material effect on the Company's
financial statements.
8
In April 2009, the Company adopted ASC topic 825, "Financial Instruments"
(formerly FASB Staff Position ("FSP") SFAS No. 107-1) and ASC topic 270,
"Interim Reporting" (formerly Accounting Principles Board ("APB") Opinion
No. 28-1 ("APB No. 28-1"), "Interim Disclosures about Fair Value of
Financial Instruments", which amends SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments"), and requires disclosures about the fair
value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. ASC topic 825
and ASC topic 270 also amends APB Opinion No. 28, "Interim Financial
Reporting", (codified as ASC topic 270) to require those disclosures in
summarized financial information for interim reporting periods. ASC topic
825 and ASC topic 270 is effective for interim reporting periods ending
after June 15, 2009. The Company is in the process of evaluating the
impact of ASC topic 825 and ASC topic 270 on our financial position and
results of operations.
In June 2009, the Company adopted ASC topic 860-20, "Sale of Financial
Assets" (formerly SFAS 166, "Accounting for Transfers of Financial Assets
- - an Amendment of FASB Statement No. 140"). ASC topic 860-20 eliminates
the concept of a qualifying special-purpose entity, creates more stringent
conditions for reporting a transfer of a portion of a financial asset as a
sale, clarifies other sale-accounting criteria, and changes the initial
measurement of a transferor's interest in transferred financial assets.
ASC topic 860-20 will be effective January 1, 2010. The adoption of this
pronouncement is not expected to have a material impact on the Company's
consolidated financial position and results of consolidated operations.
In June 2009, the Company adopted ASC topic 810, "Consolidation" (formerly
SFAS 167, "Amendments to FASB Interpretation No. 46(R)" (SFAS 167)). ASC
topic 810 eliminates Interpretation 46(R)'s exceptions to consolidating
qualifying special-purpose entities, contains new criteria for determining
the primary beneficiary, and increases the frequency of required
reassessments to determine whether a company is the primary beneficiary of
a variable interest entity. ASC topic 810 also contains a new requirement
that any term, transaction, or arrangement that does not have a
substantive effect on an entity's status as a variable interest entity, a
company's power over a variable interest entity, or a company's obligation
to absorb losses or its right to receive benefits of an entity must be
disregarded in applying Interpretation 46(R)'s provisions. The elimination
of the qualifying special-purpose entity concept and its consolidation
exceptions means more entities will be subject to consolidation
assessments and reassessments. ASC topic 810 will be effective January 1,
2010. The adoption of this pronouncement is not expected to have a
material impact on the Company's financial position and results of
operations.
In June 2009, the Company adopted ASC topic 105, "Generally Accepted
Accounting Principals" (formerly SFAS No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles"). ASC topic 105 will become the single source of
authoritative nongovernmental U.S. generally accepted accounting
principles ("GAAP"),superseding existing FASB, American Institute of
Certified Public Accountants("AICPA"), EITF, and related accounting
literature. ASC topic 105 reorganizes the thousand of GAAP
pronouncements into roughly 90 accounting topics and displays them using
a consistent structure. Also included is relevant Securities and
Exchange Commission guidance organized using the same topical structure in
separate sections. ASC topic 105 will be effective for financial
statements issued for reporting periods that end after September
15, 2009. The Company began using the new guidelines and numbering
system prescribed by the Codification when referring to GAAP in the
Company's quarterly report of Form 10-Q for the period ending November 30,
2009. As the codification was not intended to change or alter existing
U.S. GAAP, it will not have any impact on our financial position, results
of operations and cash flows.
In September 2009, the Emerging Issues Task Force ("EITF") reached final
consensus on a new revenue recognition standard; ASC topic 605-25,
"Revenue Recognition-Multiple Element Arrangements" (formerly EITF Issue
No. 08-1, "Revenue Arrangements with Multiple Deliverable"). ASC topic
605-25 addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting, and how
the arrangement consideration should be allocated among the separate units
of accounting. This Issue is effective for fiscal years beginning after
June 15, 2010 and may be applied retrospectively or prospectively for new
or materially modified arrangements. In addition, early adoption is
permitted. The Company is currently evaluating the potential impact of ASC
topic 605-25 on its financial position and results of operations.
In September 2009, the Company adopted a new accounting standard, as
codified in ASC topic 985-605, "Software Revenue Recognition" (formerly
EITF 09-3, "Applicability of AICPA Statement of Position 97-2 to Certain
Arrangements That Contain Software Elements"). ASC topic 985-605 amends
the scope of AICPA Statement of Position 97-2, Software Revenue
Recognition to exclude tangible products that include software and non-
software components that function together to deliver the
product's essential functionality. This Issue shall be applied on a
prospective basis for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Earlier
application is permitted as of the beginning of a company's fiscal year
provided the company has not previously issued financial statements for
any period within that year. An entity shall not elect early application
of this Issue unless it also elects early application of ASC topic 605-25
(formerly EITF 08-1). The Company is currently evaluating the potential
impact of ASC topic 985-605 on its financial position and results of
operations.
9
In January 2010, the FASB issued Accounting Standards Update ("ASU")
No. 2010-06, which requires additional fair value disclosures. This
guidance requires reporting entities to disclose transfers in and out of
Levels 1 and 2 and requires gross presentation of purchases, sales,
issuances and settlements in the Level 3 reconciliation of the three-tier
fair value hierarchy. This guidance is effective for interim and annual
reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements related to
Level 3 activity. Those disclosures are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those
fiscal years. The guidance on transfers between Levels 1 and 2 is
effective for the Company as of its second fiscal quarter ended February
28, 2010. The guidance on Level 3 activity is effective for the Company's
fiscal year beginning September 1, 2011. The Company is currently
evaluating the impact the adoption will have on its financial position and
results of operations.
In February 2010, the FASB issued Accounting Standards Update ("ASU")
No. 2010-09 regarding subsequent events disclosure. This guidance updates
ASC topic 855, "Subsequent Events" (formerly SFAS No. 165, "Subsequent
Events") and clarifies that an entity that is a Securities and Exchange
Commission filer is not required to disclose the date through which
subsequent events have been evaluated. This guidance was effective upon
issuance, and the Company adopted the provisions effective with the
preparation of its condensed consolidated financial statements for the six
months ended February 28, 2010.
Convertible Debt, Note Discounts and Beneficial Conversion Features
The convertible debentures were issued in accordance with ASC topic 470-
20, "Debt With Conversion and Other Options" (formerly EITF 98-5 -
"Accounting for Convertible Securities with Beneficial Conversion Features
of Contingently Adjustable"), we calculated the value of the beneficial
conversion feature embedded in the Convertible Notes. In accordance with
ASC topic 470-20, convertible notes are split into two components: a debt
component and a component representing the embedded derivatives in the
debt. The debt component represents the Company's liability for future
interest coupon payments and the redemption amount. The embedded
derivatives represent the value of the option that debtholders have to
convert into ordinary shares of the Company. The debt component of the
convertible note is measured at amortized cost and therefore increases as
the present value of the interest coupon payments and redemption amount
increases, with a corresponding charge to finance cost - other than
interest. The debt component decreases by the cash interest coupon
payments made. The embedded derivatives are measured at fair value at each
balance sheet date, and the change in the fair value is recognized in the
income statement.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
February 28 August 31
2010 2009
Computer Equipment $ 26,171 $ 23,897
Other Equipment 156,179 158,604
________________________
Total 182,350 182,501
Accumulated Depreciation (103,324) (73,212)
_______________________
Total Property and Equipment (net) $ 79,025 $ 109,289
Depreciation expense was $30,112 and $22,316 for the quarters ended
February 28, 2010 and 2009.
10
NOTE 4 - SOFTWARE DEVELOPMENT COSTS
Software development costs comprise of costs for internally developed
production software to be sold publicly upon completion of
development. Capitalized software development costs, amounted to
$141,500 and $0 at February 28, 2010 and 2009, respectively. These costs
were not amortized since the product is not available for general
release to customers. Revenue generating activities have not yet
commenced.
NOTE 5 - RELATED PARTY TRANSACTIONS
As at February 28, 2010, a Director of the Company is owed $416,598 ($0
- - February 28, 2009) for cash advanced to the Company. No arrangement
has been made for repayment of the loan and none have been made by the
Company as of February 28, 2010. The advance is non-interest bearing
and due upon demand. There are no other related party transactions.
NOTE 6 - NOTES PAYABLE
February 28 August 31
2010 2009
The Company converted
$1,750,000 of Convertible
Debentures into 17,500,000
common shares at $0.10 per
share during the six month
period ended February 28,
2010 and issued notes
payable of $1,750,000 for
August 31, 2009. $ 350,000 $ 2,100,000
Discount on note payable net
of amortization (5,833) (1,184,754)
_______________________
Total $ 344,167 $ 915,246
_______________________
Interest expense for the six months ended February 28, 2010 and 2009 was
$24,750 and $219,484 respectively.
In August 2008, we entered into a promissory note with NSC Investments
Ltd. ("NSC") for a sum of $250,000. Under this promissory note,
interest is to be prepaid at the commencement of each quarter by us
issuing 1,600 shares of our common stock.
The unpaid principal balance of the promissory note was originally due
and payable in full on the sale of any assets of the Company or November
1, 2008. Further consideration for the loan shall consist of 15,000
shares of our common stock at the funding, 5,000 shares of our common
stock at the beginning of the next month, and 10,000 shares at the
beginning of the next month. This promissory note was extended until
February 1, 2009. We agreed to pay 3,900 shares of our common stock as
interest and additional issuance of 10,000 shares of our common stock
for additional compensation.
The promissory note was further extended to May 1, 2009 and we agreed to
make payments on the principal of $50,000 by February 15, 2009; repay a
further $100,000 by May 1, 2009; issue 3,000 shares of our common stock
as interest and additional issuance of 20,040 shares of our common stock
for additional compensation. All the terms of the amended agreement
have been complied with. The remaining $100,000 plus accrued interest
is convertible at NSC's option at $2.00 per share on or before May 1,
2010. Pursuant to EITF 06-6, the modification of the Note agreement was
not treated as an extinguishment but rather reduced the carrying amount
of the debt through an adjustment to the note discounts, with a
corresponding increase in APIC.
11
On January 15, 2009 we entered into an agreement with Genovese whereby
Genovese and/or his affiliates (collectively "Genovese") advanced to the
Company $250,000 for a convertible debenture ("Debenture") for the
aggregate principle amount of $250,000. The Debenture was non-interest
bearing and had a maturity date of December 5, 2010. At the holder's
sole discretion, the holder may elect to convert the Debenture, in whole
or in part into common shares of the Company at a conversion price of
$0.10 per share. As additional compensation, Genovese was issued a
share purchase warrant certificate for 2,500,000 warrants with each
warrant exercisable into one common share at $0.15 per share for a
period of three years commencing from the date of the issuance of the
warrant certificate. The Company and Genovese further agreed to
establish five (5) mutually agreed upon milestones to be attained no
later than September 2009 with each milestone generally occurring
approximately every forty five (45) days. In conjunction with the
attainment of each individual milestone, Genovese agreed to advance to
the Company an additional $250,000. In connection with each $250,000
advance, Genovese was issued an additional $250,000 Convertible
Debenture. The Debenture was non interest bearing and had a maturity
date of two years from the date of issuance of each subsequent debenture
("Subsequent Debentures").
The convertible debentures were issued in accordance with ASC topic 470-
20, "Debt With Conversion and Other Options" (formerly EITF 98-5 -
"Accounting for Convertible Securities with Beneficial Conversion
Features of Contingently Adjustable"), we calculated the value of the
beneficial conversion feature embedded in the Convertible Notes. In
accordance with ASC topic 470-20, convertible notes are split into two
components: a debt component and a component representing the embedded
derivatives in the debt. The debt component represents the Company's
liability for future interest coupon payments and the redemption amount.
The embedded derivatives represent the value of the option that
debtholders have to convert into ordinary shares of the Company. The
debt component of the convertible note is measured at amortized cost and
therefore increases as the present value of the interest coupon payments
and redemption amount increases, with a corresponding charge to finance
cost - other than interest. The debt component decreases by the cash
interest coupon payments made. The embedded derivatives are measured at
fair value at each balance sheet date, and the change in the fair value
is recognized in the income statement.
At the Holders' sole discretion, the Holder may elect to convert the
Subsequent Debentures, in whole or in part, at any time prior to
maturity, into common shares of the Company at a conversion price of
$0.10 per share. As additional compensation, Genovese was issued a share
purchase warrant certificate for 2,500,000 warrants with each warrant
exercisable into one common share at $0.15 per share for a period of
three years commencing from the date of the issuance of the warrant
certificate for each Subsequent Debenture issued. We further agreed that
(1) Genovese would be granted the right of first refusal/ right of
participation in connection with any additional financing of the Company
for two (2) years, (2) Genovese would be entitled to two board seats, (3)
we would obtain directors and officers insurance, and (4) the parties
would work together commencing December 2008 to address other matters. We
offered the convertible notes and warrants in reliance on Section 506 of
Regulation D and/or Regulation S of the Securities Act, and comparable
exemptions for sales to "accredited" investors under state securities
laws. The Debenture was subsequently amended for an aggregate principle
amount of $545,000.
Additional Debentures for $455,000, $250,000, and $50,000 and $195,000
were issued during the year ended August 31, 2009. In April 2009, the
amount of convertible debentures available to be issued was increased by
$255,000 for an aggregate of $1,750,000.
As of August 31, 2009 a total of $1,750,000 had been issued as
Debentures. The amount of the Debentures outstanding at August 31, 2009
was classified as "permanent equity" as capital in excess of par value and
a corresponding amount was recorded as a discount against the note
payable. This discount will be amortized over 24 months on a straight-
line basis as interest expense. On September 25, 2009, all issued
debentures were converted into 17,500,000 shares of common stock.
In April 2009, we entered into a loan agreement with Janst Limited for
$250,000. The loan bears interest at 15% per annum and matures on May 1,
2010 (the "Maturity Date"). The principal and accrued interest is
convertible into common stock at the conversion rate of $0.35 per share.
From November 1, 2009 to Maturity Date, should the average closing prices
for the five trading days ending on the day prior to the conversion
notice not exceed $0.35 the conversion rate shall be 80% of the average
closing prices for the five trading days ending on the day prior to the
conversion notice.
NOTE 7 - COMMON STOCK
The Company has authorized 90,000,000 shares of common stock with a par
value of $.00001. At February 28, 2010 and 2009, the Company had
24,215,542 and 5,423,500 shares of common stock issued and outstanding,
respectively.
On April 10, 2007, the Company completed a forward stock split by issuing
two additional shares of common stock for every one share previously
issued.
On July 17, 2007, in connection with its Exchange Agreement with
Subsidiary, Parent issued 2,780,000 shares of its previously authorized
but unissued common stock in exchange for all the issued and outstanding
common stock of Subsidiary. The 2,780,000 shares have been reflected as
though they were issued at the inception of the Subsidiary, with a
reverse merger adjustment that represents the shareholders of the public
shell at the time of the recapitalization.
During July, 2007, in connection with its Exchange Agreement with
Subsidiary, Parent issued 100,000 shares of common stock to private
placement subscribers at $10.00 per share.
12
On October 31, 2007 the Board of Directors approved the issuance of a
private placement memorandum for 135,000 shares of common stock at $10.00
per share. On January 22, 2008, we completed a private placement of
135,000 shares of our common stock at a purchase price of $10.00 per
share to persons who were not "U.S. Persons" within the meaning of
Regulation S ("Regulation S") promulgated under the Securities Act of
1933, as amended (the "Securities Act"). Also, stock offering costs of
$91,401 have been recorded against capital in excess of par value.
During November 2007, the Board of Directors authorized the granting of
options to purchase 200,000 shares of common stock at $10.00 per share.
The fair value of each option granted is estimated on the date granted
using the Black-Scholes option pricing model with the following weighted-
average assumptions; risk-free interest rates of 4.4%, expected dividend
yields of zero, expected life of 10 years, and expected volatility of
147.95%. The options vested immediately and were valued in total at
$2,366,186. Options granted under the Plan are subject to the Plan being
approved by the stockholders of the Company within one year from the date
the Plan was adopted.
On January 22, 2008, the Company completed a private placement of 135,000
shares of its common stock at a purchase price of $10.00 per share to
persons who were not "U.S. Persons" within the meaning of Regulation S
("Regulation S") promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). The Company received gross proceeds from the
placement of $1,350,000 and net proceeds of approximately $1,258,600
after deducting $30,000 in placement fees paid to registered investment
dealers in Canada and other offering costs. The foregoing sales of common
stock were made in reliance on the exemption from registration provided
by Regulation S. Each of the purchasers signed a subscription agreement
containing the representations required by Regulation S and the
certificates for the shares will be stamped with restricted stock legends
indicating the shares have not been registered under the Securities Act,
have been issued in reliance on the exemption from registration provided
by Regulation S, and may not be reoffered or sold except in accordance
with the provisions of Regulation S, pursuant to registration under the
Securities Act or an available exemption from registration under the
Securities Act.
In August 2008, we entered into a promissory note with NSC Investments
Ltd. ("NSC") for a sum of $250,000. Under this promissory note, interest
is to be prepaid at the commencement of each quarter by us issuing 1,600
shares of our common stock.
The unpaid principal balance of the promissory note is due and payable in
full on the sale of any assets of the Company or November 1, 2008.
Further consideration for the loan shall consist of 15,000 shares of our
common stock at the funding, 5,000 shares of our common stock at the
beginning of the next month, and 10,000 shares at the beginning of the
next month. This promissory note was extended until February 1, 2009. We
agreed to pay 3,900 shares of our common stock as interest and an
additional issuance of 10,000 shares of our common stock in lieu of the
extension of the note. The promissory note was further extended to May
1, 2009 and we agreed to issue 3,000 shares of our common stock as
interest and additional issuance of 20,040 shares of our common stock for
additional compensation. The remaining $100,000 plus accrued interest
shall be convertible at NSC's option at $2.00 per share on or before May
1, 2010.
During August 2008, the Company issued 45,000 warrants valued at
approximately $338,000 to purchase stock for services rendered. The
warrants vest over various terms. During the year ended August 31, 2009,
the Company recognized compensation expense of $216,479. The fair value
of each warrant granted is estimated on the date granted using the Black-
Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 3.74% to 3.97%, expected
dividend yields of zero, expected life of 10 years and expected
volatility of 136.94% to 140.60%.
During the fiscal year ended August 31, 2008, the Company authorized the
issuance of 100,000 shares of common stock to Mr. Steve Wozniak. The
shares were valued at $1,850,000 based on the fair market value of the
stock on the date the shares were issued.
In September 2008, we entered into a subscription agreement with Richard
Genovese and/or his affiliates (collectively "Genovese") whereby Genovese
purchased 100,000 shares or our common stock and 100,000 warrants with an
exercise price of $1.50 for $150,000.
In October 2008, we entered into an agreement with Euro Trend Trader,
Inc. ("ETT") to provide investor relations and public relations. We
agreed to pay ETT $5,000 start up fees and $3,000 per month thereafter.
Additionally, we paid ETT 20,000 shares of our common stock for coverage
of the Company by a registered market maker and an additional 10,000 for
investor relations services.
In November 2008, we borrowed $5,000 from a consultant to the Company
which was payable by December 6, 2008. The lender was to receive 200
shares of our common stock per month as interest and an additional
consideration of 25,000 warrants with an exercise price of $0.25. In
February 2009 we repaid the principal and interest in full and did not
issue any shares or warrants.
13
In November 2008 we issued 5,000 shares of our common stock to Howard
Family Trust as a bonus in consideration of the Company's failure to pay
rent on a timely basis. The shares were valued at $14,000 based on the
fair market value of the stock on the date the shares were issued.
In May 2009, we entered into a subscription agreement with Robert Kolson;
whereby Mr. Kolson purchased 75,000 shares of our common stock and 37,500
warrants with an exercise price of $3.00 for $150,000.
On September 15, 2009, the Company completed a reverse stock split on a
1:10 basis, whereby each shareholder holds one new share for every ten
shares previously issued. The Company's share transactions disclosed in
the financial statements have been restated retroactively to reflect the
reverse stock split for all periods presented.
During the year ended August 31, 2009, the Company issued an aggregate of
$1,750,000 in Convertible Debentures. At the holder's sole discretion,
the holder was entitled to convert the Debenture, in whole or in part
into common shares of the Company at a conversion price of $0.10 per
share. As additional compensation, in conjunction with the issuance of
the Debentures, the Company issued 17,500,000 share purchase warrant
certificates with each warrant exercisable into one common share at $0.15
per share for a period of three years commencing from the date of the
issuance of the warrant certificate. On September 25, 2009 all of the
$1,750,000 of debentures were converted into 17,500,000 common shares and
17,500,000 share purchase warrants exercisable at $0.15 per share remained
outstanding.
On October 30, 2009 we entered into a subscription agreement with Janspec
Holdings Limited ("Janspec"); whereby Janspec purchased 428,572 common
shares and 428,572 warrants with an exercise price of $0.60 for $150,000.
On November 7, 2009 we entered into a subscription agreement with
Peninsula Merchant Syndications Corp. ("Peninsula") where Peninsula
purchased 285,715 shares of our common stock and 285,715 warrants with an
exercise price of $0.60 for $100,000.
On November 9, 2009, we issued 32,000 common shares to Weintraub Genshlea
Chediak in lieu of outstanding legal services provided to the Company.
The shares were valued at $11,200 based on the fair market value of the
stock on the date that the shares were issued.
On November 13, 2009 we entered into a subscription agreement with Robert
Kolson; whereby Mr. Kolson purchased 285,715 shares of our common stock
and 285,715 warrants with an exercise price of $0.60 for $100,000.
On January 20, 2010 we issued 170,000 common shares to Howard Family
Trust in lieu of outstanding rent, property taxes and insurance. The
shares were valued at $85,000 reflective of the fair market value of the
stock on the date the shares were issued.
NOTE 8 - OPTIONS AND WARRANTS
Stock Options
During November 2007 the Board of Directors of the Company adopted and
the stockholders at that time approved the 2007 Stock Plan ("the
Plan"). The Plan provides both for the direct award or sale of shares
and for the granting of options to purchase shares. Options granted
under the plan may include qualified and non-qualified stock
options. The aggregate number of shares that may be issued under the
plan shall not exceed 750,000 shares of common stock, and are issuable to
directors, officers, and employees of the Company. Awards under the plan
will be granted as determined by Committees of the Board of Directors or
by the Board of Directors. The options will expire after 10 years or 5
years if the option holder owns at least 10% of the common stock of the
Company. The exercise price of a non-qualified option must be at least
85% of the market price on the date of issue. The exercise price of a
qualified option must be at least equal to the market price or 110% of
the market price on the date of issue if the option holder owns at least
10% of the common stock of the Company.
In November 2007, 200,000 stock options were granted with an exercise
price equal to fair value at the date of grant. The term of the options
granted under the Plan could not exceed 10 years and the stock options
granted were vested immediately.
On August 1, 2008, we agreed to issue 30,000 stock options to certain
board members for their services to the board.
On September 1, 2008 we granted 15,000 stock options to a certain officer
and board member for his services performed as Chair of the Audit
Committee and Chair of the Compensation Committee.
14
The estimated value of the compensatory common stock purchase options
granted to non-employees in exchange for services and financing expenses
was determined using the Black-Scholes pricing model and the following
assumptions: expected term of 10 years, a risk free interest rate of
3.97% to 4.40%, a dividend yield of 0% and volatility of 136.94% to
147.95%. During the six month period ended February 28, 2010 and 2009,
the amount of the expense charged to operations for compensatory options
granted in exchange for services was $96,200 and $60,870 respectively.
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to
employees and non-employees of the Company. These options were granted in
lieu of cash compensation for services performed.
Shares Weighted Average
Exercise Price
_________________________________
Outstanding, beginning of
the year ended August 31,
2007 - -
Granted 230,000 $9.70
Expired / Cancelled - -
Exercised - -
_________________________________
Outstanding, end of the
year ended August 31, 2008 230,000 $9.70
_________________________________
Exercisable at August 31,
2008 230,000 $9.70
Granted 15,000 $7.10
Expired/Cancelled - -
Exercised - -
_________________________________
Outstanding, end of the
year ended
August 31, 2009 245,000 $9.50
_________________________________
Exercisable at August 31,
2009 245,000 $9.50
Granted - -
Expired/Cancelled - -
Exercised - -
_________________________________
Outstanding, end of the
period ended
February 28, 2010 245,000 $9.50
_________________________________
Exercisable at February
28, 2010 245,000 $9.50
15
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to non-
employees of the Company. These options were granted in lieu of cash
compensation for services performed or financing expenses. The number of
options stated in the table below are retroactively restated due to the
reverse stock split.
Options Outstanding Options Exercisable
_________________________ ____________________________________________
Weighted
Number Average Weighted
shares Contractual Life Number Average Exercise
Year Exercise Price outstanding (Years) Exercisable Price
______________________________________________________________________________
2007 $ 10.00 200,000 7.68 200,000 $ 10.00
2008 $ 6.00 - 9.00 30,000 8.44 30,000 $ 6.00 - 9.00
2008 7.10 15,000 8.51 15,000 7.10
_________ ________
Total 245,000 245,000
_________ ________
Stock Warrants
In September 2008, we entered into a subscription agreement with Richard
Genovese and/or his affiliates (collectively "Genovese") whereby Genovese
purchased 100,000 shares of our common stock and 100,000 warrants with an
exercise price of $2.00 for $150,000.
In November 2008, we borrowed $5,000 from a consultant to the Company
which was payable by December 6, 2008. The lender was to receive 200
shares of our common stock per month as interest and an additional
consideration of 25,000 warrants with an exercise price of $0.25. In
February 2009 we repaid the principal and interest in full and no shares
or warrants were issued.
On January 15, 2009 we entered into an agreement with Genovese whereby
Genovese and/or his affiliates (collectively "Genovese") advanced to the
Company $250,000 for a convertible debenture ("Debenture") for the
aggregate principle amount of $250,000. The Debenture was non-interest
bearing and had a maturity date of December 5, 2010. At the holder's
sole discretion, the holder may elect to convert the Debenture, in whole
or in part into common shares of the Company at a conversion price of
$0.10 per share. As additional compensation, Genovese was issued a share
purchase warrant certificate for 2,500,000 warrants with each warrant
exercisable into one common share at $0.15 per share for a period of
three years commencing from the date of the issuance of the warrant
certificate. The Company and Genovese further agreed to establish five
(5) mutually agreed upon milestones to be attained no later than
September 2009 with each milestone generally occurring approximately
every forty five (45) days. In conjunction with the attainment of each
individual milestone, Genovese agreed to advance to the Company an
additional $250,000. In connection with each $250,000 advance, Genovese
was issued an additional $250,000 Convertible Debenture. The Debenture
was non interest bearing and had a maturity date of two years from the
date of issuance of each subsequent debenture ("Subsequent Debentures").
At the Holders' sole discretion, the Holder may elect to convert the
Subsequent Debentures, in whole or in part, at any time prior to
maturity, into common shares of the Company at a conversion price of
$0.10 per share. As additional compensation, Genovese was issued a share
purchase warrant certificate for 2,500,000 warrants with each warrant
exercisable into one common share at $0.15 per share for a period of
three years commencing from the date of the issuance of the warrant
certificate for each Subsequent Debenture issued. We would further agreed
that (1) Genovese would be granted the right of first refusal/ right of
participation in connection with any additional financing of the Company
for two (2) years, (2) Genovese would be entitled to two board seats, (3)
we would obtain directors and officers insurance, and (4) the parties
would work together commencing December 2008 to address other matters. We
offered the convertible notes and warrants in reliance on Section 506 of
Regulation D and/or Regulation S of the Securities Act, and comparable
exemptions for sales to "accredited" investors under state securities
laws. The Debenture was subsequently amended for an aggregate principle
amount of $545,000.
Additional Debentures for $455,000, $250,000, and $50,000 and $195,000
were issued during the year ended August 31, 2009. In April 2009, the
amount of convertible debentures available to be issued was increased by
$255,000 for an aggregate of $1,750,000. As of August 31, 2009 a total
of $1,750,000 had been issued as Debentures. On September 25, 2009 all of
the $1,750,000 of debentures were converted into 17,500,000 common shares
and 17,500,000 share purchase warrants exercisable at $0.15 per share
remained outstanding.
16
In May 2009, we entered into a subscription agreement with Robert Kolson;
whereby Mr. Kolson purchased 75,000 shares of our common stock and 37,500
warrants with an exercise price of $3.00 for $150,000.
On October 30, 2009 we entered into a subscription agreement with Janspec
Holdings Limited ("Janspec"); whereby Janspec purchased 428,572 common
shares and 428,572 warrants with an exercise price of $0.60 for $150,000.
On November 7, 2009 we entered into a subscription agreement with
Peninsula Merchant Syndications Corp. ("Peninsula") where Peninsula
purchased 285,715 shares of our common stock and 285,715 warrants with an
exercise price of $0.60 for $100,000.
On November 13, 2009 we entered into a subscription agreement with Robert
Kolson; whereby Mr. Kolson purchased 285,715 shares of our common stock
and 285,715 warrants with an exercise price of $0.60 for $100,000.
The Company has determined the estimated value of the compensatory
warrants granted to non-employees in exchange for services and financing
expenses using the Black-Scholes pricing model and the following
assumptions: expected term of 1year, a risk free interest rate of 1.79%, a
dividend yield of 0% and volatility of 193.92% in 2010.
Warrants Weighted Average
Exercise Price
___________________________________
Outstanding, beginning of
the year ended August 31,
2008 - -
Granted 100,000 $2.00
Expired / Cancelled - -
Exercised - -
___________________________________
Outstanding, end of the
year ended August 31, 2008 100,000 $2.00
___________________________________
Exercisable at August 31,
2008 100,000 $2.00
Granted 17,500,000 $0.15
Expired/Cancelled - -
Exercised - -
Granted 37,500 $3.00
Outstanding, end of the
period ended August
31, 2009 17,637,500
___________________________________
Exercisable at August 31,
2009 17,637,500
Granted 1,000,002 $0.60
Expired/Cancelled - -
Exercised - -
__________________________________
Outstanding, end of the
period ended February 28,
2010 18,637,502 $0.60
__________________________________
Exercisable at February
28, 2010 18,637,502 $0.60
The following table summarizes the changes in warrants outstanding and
the related prices for the shares of the Company's common stock issued
to non-employees of the Company.
Warrants Outstanding Warrants Exercisable
_____________________________________________________________________________
Weighted
Number of Weighted Average Average
Exercise Warrants Contractual Life Number Exercise
Year Price Outstanding (Years) Exercisable Price
_____________________________________________________________________________
2008 $ 2.00 100,000 3.66 100,000 2.00
2009 0.15 *10,000,000 1.92 10,000,000 0.15
2009 0.15 *2,500,000 1.97 2,500,000 0.15
2009 0.15 *500,000 2.00 500,000 0.15
2009 0.15 *1,700,000 2.15 1,700,000 0.15
2009 0.15 *150,000 2.17 150,000 0.15
2009 0.15 *50,000 2.18 50,000 0.15
2009 0.15 *50,000 2.21 50,000 0.15
2009 3.00 37,500 0.21 37,500 3.00
2009 0.15 *500,000 2.48 500,000 0.15
2009 0.15 *2,050,000 2.48 2,050,000 0.15
2009 0.60 428,572 1.67 428,572 0.60
2009 0.60 285,715 1.69 285,715 0.60
2009 0.60 285,715 1.71 285,715 0.60
____________________________________________________________________________
Total 18,637,502 18,637,502
____________________________________________________________________________
As at February 28, 2010 none of the Company's outstanding warrants have
been exercised or cancelled.
* Pursuant to the terms of the debentures issued under the Genovese
Agreement, the warrants contain an anti-dilusion provision that states it
is specifically agreed that in the event that the Company shall reduce the
number of outstanding shares of Common Stock by combining such shares into
a smaller number of shares, then, in such case, the then applicable
Exercise Price per Warrant Share purchasable pursuant to the Warrant
Certificate in effect at the time of such action will not be changed.
NOTE 9 - EARNINGS PER SHARE
Basic Loss Per Share - The computation of basic and diluted loss per
common share is based on the weighted average number of shares outstanding
during each period.
For the Six Months Ended
February 28
2010 2009
__________________________
NET LOSS $ (1,718,295) $ (1,958,810)
__________________________
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 21,286,449 5,357,251
BASIC LOSS PER COMMON SHARE $ (0.08) $ (0.40)
18
The following table sets forth common stock equivalents (potential common
stock) for the periods ended February 28, 2010 and 2009 that are not
included in the loss per share calculation above because their effect
would be anti-dilutive for the periods indicated:
For the Six Months
Ended February 28,
2010 2009
__________________
Plan Stock Options 245,000 245,000
Non-Plan Stock Options - -
Warrants 18,637,502 12,600,000
NOTE 10 - COMMITMENTS AND CONTINGENCIES
We maintain an operating lease obligation to John D. Howard Family Limited
Partnership to lease 9,678 square feet of office space at a rate of
$19,536 per month. Our lease started on May 1, 2008 and ends on April 30,
2010. To fulfill our future commitment obligation to John D. Howard
Partnership Family Trust, we are obligated to pay $39,072 for lease of our
office space until April 30, 2010. Rent expense for the periods ended
February 28, 2010 and 2009 was $108,072 and $117,216 respectively.
Future minimum lease payments on Operating leases are as follows:
Year $
2010 39,072
2011 0
2012 0
2013 0
2014 0
________
TOTAL 39,072
________
NOTE 11 - LEGAL PROCEEDINGS
Stride & Associates. We are a defendant in a suit filed September 2, 2009
by Stride & Associates, Inc. in the Superior Court of California, Los
Angeles Superior Court-North Central District, for the amount of $19,500,
plus interest, for services allegedly rendered by the plaintiff to the
Company in connection with personnel placement. The plaintiff on February
9, 2010, filed an application for judgment in this case. We intend to
settle this lawsuit.
Cypress Communications. On April 12, 2010, we were sued in the Superior
Court of California, County of Los Angeles-Central District, by Jonathan
Neil & Associates, Inc., for $206,151.77, plus interest, for
telecommunications and internet services allegedly provided by the
plaintiff's assignor, Cypress Communications, Inc. We intend to settle
this lawsuit.
Powell Enterprises. Powell Enterprises, a consulting company, has
notified the Company on April 15, 2010 of its claim that the Company owes
this firm $212,480 of consulting fees. This company has not performed any
services for the Company for a significant period of time, and the Company
believes that Powell Enterprises has no basis whatsoever to seek any
payment from the Company for the period after its services were
terminated. If we determine that any amounts are owing to Powell
Enterprises, we intend to discuss the claim and settle the matter.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains certain statements that constitute
"forward-looking statements". Such statements appear in a number of
places in this report, including, without limitation, "Management's
Discussion and Analysis of Financial Condition or Plan of Operation."
These statements are not guarantees of future performance and involve
risks, uncertainties and requirements that are difficult to predict or
are beyond our control. Our future results may differ materially from
those currently anticipated depending on a variety of factors, including
those described below under "Risks Related to Our Future Operations" and
our filings with the Securities and Exchange Commission. The following
should be read in conjunction with the unaudited Consolidated Financial
Statements and notes thereto that appear elsewhere in this report and in
conjunction with our 2009 annual report on Form 10-K.
EN2GO Overview
We are a start-up company that plans to become a full service
entertainment and technology company that will create and develop a
variety of media and entertainment related programs and applications
including cutting edge media delivery software, Internet video
applications and high-end, innovative desktop applications. In addition
to programming progress, we are currently attempting to establish a
technical infrastructure, which we call "En2ools." En2ools is an ever-
expanding library of code modules and techniques designed for the rapid
production or modification of software. En2ools is the foundation that
enables the software applications to be fast, efficient, reliable, and
user-friendly. Our primary software application is called Flyxo, which is
an application that delivers high-quality video to a user's computer
desktop. Flyxo is designed to watch movies online and can eliminate the
user's frustration of long download times or waiting for buffering. It is
a global Internet broadcast platform that can facilitate online television
channels, movie channels, radio stations, online gaming, slide shows, 3-D
objects, high-resolution graphics, interactive advertising, social media
and more.
We will also offer the Channel Builder making it simple for individuals or
organizations to create their own high-quality Internet media channels.
Once the clients' videos or other media is uploaded, using drag and drop
functionality, the clients can create their own global HD Internet
broadcast channel in a matter of minutes. This simplicity and convenience
combined with the ability to distribute high-quality media to a worldwide
audience opens a wide range of possibilities in terms of potential
clients. Other software applications include eMaculate; a search engine
that is designed to search, download and share digital images on the Web
at very high speeds, VideoBlox; a custom media player that is specifically
designed for the entertainment industry. It plays numerous file formats
including mp4, mp3, Quicktime and Windows Media. It is designed so that
the artist will be able to use their own branded player to distribute
their music videos and keep in constant contact with their fans. Another
unique aspect of this media player is the ability to provide a customized
look and feel to its interface. Kandictionary is a downloadable
personalized dictionary and translator and the En2go jukebox is a custom
stand-alone media player designed to play music from social networking
sites. After downloading the media player, a user does not have to be on
an artist's page to hear the artist's music. A user can add favorite
songs to the media player and listen to the artist's music while doing
other things or visiting other sites. Furthermore, the user can create a
custom playlist by adding songs to the player from different artists.
Management Change
Effective March 27, 2010, Robert Rosner was appointed to serve as our
interim President, Chief Executive Officer and Chief Financial Officer.
Paul Fishkin has resigned as President, Chief Financial Officer and
Chairman of the Board of Directors. Mr. Fishkin will continue to serve as
a member of the Board of Directors.
New management is reviewing the practices of former management in their
operation of the Company's business, and is also conducting a review of
the Company's current operations with a view to determine how these
operations should be directed in the development of our media and
entertainment related programs and applications.
20
Product Development
En2go has advanced its flagship software and is near-ready to take it
to the market place. En2go was able to improve its technology to better
support its core business model, modify the company's operational
structure, and gain a pipeline of prospects in various stages of
evolution. In the technology department, the company implemented a new
Engagement Tracking System complete with geoLocation and geoBlocking
features, reporting and analytics, and a custom payment solution has been
designed and is well under way. Additionally, new GUI models and menu
layouts have been added along with core animation, quartz integration,
live streaming capability, back-end reporting, an interactive scrolling
advertising ticker, a channel builder and much more.
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR60") issued by the
SEC, suggests that companies provide additional disclosure and
commentary on those accounting policies considered most critical. FRR 60
considers an accounting policy to be critical if it is important to the
Company's financial condition and results of operations, and requires
significant judgment and estimates on the part of management in its
application. For a summary of the Company's significant accounting
policies, including the critical accounting policies discussed below,
see the accompanying notes to the consolidated financial statements.
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of expenses during the
reporting period. On an ongoing basis, we evaluate our estimates which
are based on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances. The result of
these evaluations forms the basis for making judgments about the
carrying values of assets and liabilities and the reported amount of
expenses that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions. The
following accounting policies require significant management judgments
and estimates:
We account for our business acquisitions under the purchase method
of accounting in accordance with ASC topic 805, "Business Combinations"
(formerly SFAS 141, "Business Combinations"). The total cost of
acquisitions is allocated to the underlying net assets, based on their
respective estimated fair values. The excess of the purchase price over
the estimated fair value of the tangible net assets acquired is recorded
as intangibles. Determining the fair value of assets acquired and
liabilities assumed requires management's judgment and often involves
the use of significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount rates, asset
lives, and market multiples, among other items.
We assess the potential impairment of long-lived assets and
identifiable intangibles under the guidance of ASC topic 360; "Property,
Plant and Equipment", (formerly SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets"), which states that a long-lived
asset should be tested for recoverability whenever events or changes in
circumstances indicate that the carrying amount of the long-lived asset
exceeds its fair value. An impairment loss is recognized only if the
carrying amount of the long-lived asset exceeds its fair value and is
not recoverable.
We account for equity instruments issued to consultants and vendors
in exchange for goods and services in accordance with the provisions of
ASC topic 505-50, "Equity Based Payments to Non-Employees", (formerly
EITF Issue No. 96-18, "Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling
Goods or Services"), and EITF Issue No. 00-18, "Accounting Recognition
for Certain Transactions Involving Equity Instruments Granted to Other
than Employees". The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor's performance is
complete. In the case of equity instruments issued to consultants, the
fair value of the equity instrument is recognized over the term of the
consulting agreement. In accordance with EITF Issue No. 00-18, an asset
acquired in exchange for the issuance of fully vested, non-forfeitable
equity instruments should not be presented or classified as an offset to
equity on the grantor's balance sheet once the equity instrument is
granted for accounting purposes. Accordingly, the Company records the
fair value of the fully vested, non-forfeitable common stock issued for
future consulting services as prepaid expenses in its consolidated
balance sheet.
21
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent
from other sources. There is no assurance that actual results will not
differ from these estimates.
See footnotes in the accompanying financial statements regarding
recent financial accounting developments.
22
Results of Operations
For the Six Months Ended February 28, 2010 and 2009
We had a net loss of $1,718,295 for the six months ended February
28, 2010 compared to a net loss of $1,958,810 for the six months ended
February 28, 2009. The change is explained below.
Operating Expenses: Operating expenses were $514,625 and $1,744,975
for the six months ended February 28, 2010 and 2009, respectively. The
decrease of $1,230,350 was primarily due to a decrease of $1,048,203 in
General and Administrative expenses, a decrease of $159,791 in Stock
Issued for Services and a decrease in Salaries, Wages and Consulting of
$22,356.
Other income (expense): Other income (expense) was $(1,203,670) for
the six months ended February 28, 2010 compared to $(213,835) recorded
for the six months ended February 28, 2009. The increase was primarily
due to the increase in interest expense and the amortization costs of
the notes payable $(1,178,920).
As of the date of this report, we have not generated any revenues. As
a result, we have generated significant operating losses since our
formation and expect to incur substantial losses and negative operating
cash flows for the foreseeable future as we attempt to expand our
infrastructure and development activities. Our ability to continue may
prove more expensive than we currently anticipate and we may incur
significant additional costs and expenses.
We are a development stage company and are in the early stages of
developing our products and services. We have not yet successfully
developed any of our products and services to the final completion stage.
The diversity of our products, the competitive entertainment industry,
lack of liquidity and the current economic downturn, make it difficult for
us to project our near-term results of operations. These conditions could
further impact our business and have an adverse effect on our financial
position, results of operations and/or cash flows.
Liquidity and Capital Resources
Net cash used in operating activities was $203,779 and $1,056,414
for the six month period ended February 28, 2010 and 2009, respectively.
The decrease of $852,635 in cash used by operating activities was
primarily due to the decrease in accounts payable and options, warrants
and common stock issued for services rendered. Net cash used in
investing activities was $141,349 and $85,431 for the six month period
ended February 28, 2010 and 2009, respectively. Investing activities
for the six month period ended February 28, 2010 and 2009 resulted from
the purchase of computers and furniture and software development costs.
Net cash provided by financing activities was $350,000 and $1,395,000
for the six months ended February 28, 2010 and 2009, respectively.
The Company suffered recurring losses from operations and has an
accumulated deficit of $13,134,676 at February 28, 2010. Primarily as a
result of our recurring losses and our lack of liquidity, the Company
has received a report from our independent auditors that includes an
explanatory paragraph describing the uncertainty as to our ability to
continue as a going concern. We have delayed payment of a substantial
amount of accounts payable and accrued expenses and reduced our expenses
to a minimum level. Our existing cash and cash equivalents will not be
sufficient to fund our operations. Unless we receive liquidity from new
purchase orders, obtain additional capital, loans or sell or license
assets, we may be required to seek to reorganize our business or
discontinue operations and liquidate our assets. There can be no
assurance that the Company will be able to secure sufficient financing
or on terms acceptable to the Company. If additional funds are raised
through the issuance of equity securities, the percentage ownership of
our current stockholders is likely to or will be reduced.
In September 2008, we entered into a subscription agreement with
Richard Genovese and/or his affiliates (collectively "Genovese") whereby
Genovese purchased 100,000 shares of our common stock and 100,000
warrants with an exercise price of $2.00 for $150,000.
In November 2008, we borrowed $5,000 from a consultant to the
Company which was payable by December 6, 2008. The lender was to
receive 200 shares of our common stock per month as interest and an
additional consideration of 25,000 warrants with an exercise price of
$0.25. In February 2009 we repaid the principal and interest in full
and no shares or warrants were issued.
23
On January 15, 2009 we entered into an agreement with Genovese
whereby Genovese and/or his affiliates (collectively "Genovese")
advanced to the Company $250,000 for a convertible debenture
("Debenture") for the aggregate principle amount of $250,000. The
Debenture was non-interest bearing and had a maturity date of December
5, 2010. At the holder's sole discretion, the holder may elect to
convert the Debenture, in whole or in part into common shares of the
Company at a conversion price of $0.10 per share. As additional
compensation, Genovese was issued a share purchase warrant certificate
for 2,500,000 warrants with each warrant exercisable into one common
share at $0.15 per share for a period of three years commencing from the
date of the issuance of the warrant certificate for each Subsequent
Debenture issued. The Company and Genovese further agreed to establish
five (5) mutually agreed upon milestones to be attained no later than
September 2009 with each milestone generally occurring approximately
every forty five (45) days. In conjunction with the attainment of each
individual milestone, Genovese agreed to advance to the Company an
additional $250,000. In connection with each $250,000 advance, Genovese
was issued an additional $250,000 Convertible Debenture. The Debenture
was non interest bearing and had a maturity date of two years from the
date of issuance of each subsequent debenture ("Subsequent Debentures").
We further agreed that (1) Genovese would be granted the right of
first refusal/ right of participation in connection with any additional
financing of the Company for two (2) years, (2) Genovese would be entitled
to two board seats, (3) we would obtain directors and officers insurance,
and (4) the parties would work together commencing December 2008 to
address other matters. We offered the convertible notes and warrants in
reliance on Section 506 of Regulation D and/or Regulation S of the
Securities Act, and comparable exemptions for sales to "accredited"
investors under state securities laws. The Debenture was subsequently
amended for an aggregate principle amount of $545,000.
Additional Debentures for $455,000, $250,000, and $50,000 and $195,000
were issued by the Company during the year ended August 31, 2009. In April
2009, the amount of convertible debentures available to be issued was
increased by $255,000 for an aggregate of $1,750,000.
During the period ended May 31, 2009, Richard Genovese advanced
$210,000 to us for additional working capital. From June 1, 2009 to
August 31, 2009, Richard Genovese advanced a further $319,498. The
aggregate of $529,498 advanced was converted into the balance of the
convertible debentures for the amount of $255,000 and the remaining
$274,498 was applied as an advance to the Company. During the period
ended February 28, 2010, Richard Genovese advanced a further $142,100 to
the Company for working capital. No arrangement has been made for
repayment of the loan. The advance is non-interest bearing and due upon
demand.
As of August 31, 2009 a total of $1,750,000 had been issued as
Debentures. On September 25, 2009, all issued debentures were converted
into 17,500,000 shares of common shares and 17,500,000 share purchase
warrants exercisable at $0.15 per share remained outstanding.
In April 2009, we entered into a loan agreement with Janst Limited for
$250,000. The loan bears interest at 15% per annum and matures on May 1,
2010 (the "Maturity Date"). The principal and accrued interest is
convertible into common stock at the conversion rate of $0.35 per share.
From November 1, 2009 to Maturity Date, should the average closing prices
for the five trading days ending on the day prior to the conversion notice
not exceed $0.35, the conversion rate shall be 80% of the average closing
prices for the five trading days ending on the day prior to the conversion
notice.
In May 2009, we entered into a subscription agreement with Robert
Kolson; whereby Mr. Kolson purchased 75,000 shares of our common stock
and 37,500 warrants with an exercise price of $3.00 for $150,000.
On October 30, 2009 we entered into a subscription agreement with
Janspec Holdings Limited ("Janspec"); whereby Janspec purchased 428,572
common shares and 428,572 warrants with an exercise price of $0.60 for
$150,000.
On November 7, 2009 we entered into a subscription agreement with
Peninsula Merchant Syndications Corp. ("Peninsula") where Peninsula
purchased 285,715 shares of our common stock and 285,715 warrants with
an exercise price of $0.60 for $100,000.
On November 13, 2009 we entered into a subscription agreement with
Robert Kolson; whereby Mr. Kolson purchased 285,715 shares of our common
stock and 285,715 warrants with an exercise price of $0.60 for $100,000.
Going Concern Uncertainties
As of the date of this report, there is doubt regarding our ability
to continue as a going concern as we have not generated sufficient cash
flow to fund our business operations and loan commitments. Our future
success and viability, therefore, are dependent upon our ability to
generate capital financing. The failure to generate sufficient revenues
or raise additional capital may have a material and adverse effect upon
the Company and our shareholders.
24
Commitments and Contractual Obligations
The following table summarizes the future payments we are required to
make under contractual obligations as of February 28, 2010:
Payments Due by Period
__________________________________________________________________________
Less than 1 - 3 3 - 5
Total 1 year years years More than 5 years
Long term debt - - - -
Interest expense
on long term
debt - - - -
Operating leases 39,702 39,702 - - -
Other long-term
liabilities - - - - -
_________________________________________________________________________
TOTAL $ 39,702 $39,702 $ - $ - $ -
_________________________________________________________________________
Operating lease obligations refer to our commercial single-tenant
lease with John D. Howard Family Limited Partnership. We own no real
estate. We lease 9,678 square feet of office space from John D. Howard
Family Limited Partnership at a rate of $19,536 per month. Our lease
started on May 1, 2008 and ends on April 30, 2010. Our corporate offices
are located at 2921 West Olive Avenue, Burbank, California 91505.
In addition to the obligations included in the table above, we
maintain other obligations related to the employment agreements held
with our President and Chief Financial Officer; Paul Fishkin and our
Chief Technology Officer; Tolga Katas. The timing of the related payments
is not known.
Paul E. Fishkin. In connection with the En2Go Nevada acquisition, we
approved an employment agreement with Paul E. Fishkin, which was entered
into concurrently with the completion of the acquisition. The employment
agreement was effective as of July 13, 2007. Under the terms of the
agreement, Mr. Fishkin agreed to continue as EN2Go's President, Chief
Executive Officer and Director. Pursuant to the agreement, Mr. Fishkin
will receive an annual base salary of not less than $90,000 per year,
incentive compensation as determined by the Board and reimbursement of
all ordinary and reasonable out-of-pocket business expenses he
incurs. The agreement is for an initial term ending July 13, 2008 and
automatically renews each year thereafter unless terminated by either
party by written notice given at least 180 days prior to the expiration
of the agreement. We may terminate the agreement for cause (as defined in
the agreement).
Tolga F. Katas. In connection with the En2Go Nevada acquisition, we
approved an employment agreement with Tolga F. Katas, which we entered
into concurrently with the completion of the acquisition. The employment
agreement was effective as of July 13, 2007. Prior to the agreement, Mr.
Katas received no annual compensation. Pursuant to the agreement, Mr.
Katas will receive an annual base salary of not less than $90,000 per
year, incentive compensation as determined by the Board and reimbursement
of all ordinary and reasonable out-of-pocket business expenses he
incurs. The agreement is for an initial term ending July 13, 2008 and
automatically renews each year thereafter unless terminated by either
party by written notice given at least 180 days prior to the expiration
of the agreement. We may terminate the agreement for cause (as defined in
the agreement).
Off-Balance Sheet Arrangements
As of February 28, 2010, we did not have any off-balance sheet
arrangements as defined in Item 303(a)(4)(ii) of Regulation
S-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
25
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including the Principal Executive Officer and Principal Financial Officer,
we have evaluated the effectiveness of our disclosure controls and
procedures as required by Exchange Act Rule
13a-15(b) as of the end of the period covered by this report. Based on
that evaluation, the Principal Executive Officer and Principal Financial
Officer have concluded that these disclosure controls and procedures are
not effective since the following material
weaknesses exist:
(i) The Company's management is relying on external consultants for
purposes of preparing its financial reporting package; the
officers may not be able to identify errors and irregularities in
the financial reporting package before its release as a
continuous disclosure document.
(ii) The Company does not have standard procedures in place to ensure
that the financial statements agree to the underlying source
documents and accounting records, that all of its transactions
are completely reflected in the financial statements.
(iii) There are no controls in place to ensure that expenses are
recorded when incurred, as opposed to when invoices are presented
by suppliers, increasing the risk of incomplete expenses and
accrued liabilities.
The foregoing material weaknesses identified in our disclosure
controls and procedures were identified in June 2009, by our external
consultants responsible for the preparation of our financial reporting
package. The aforementioned material weaknesses did not impact our
financial reporting or result in a material misstatement of our
financial statements. As of February 28, 2010 we have not taken action
to correct the material weaknesses identified in our disclosure controls
and procedures.
Once the Company has sufficient personnel available, our Board of
Directors will nominate an audit committee and audit committee financial
expert and we will appoint additional personnel to assist with the
preparation of our financial statements; which will allow for proper
segregation of duties as well as additional manpower for proper
documentation.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
during the quarter ended February 28, 2010 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings
and, to the best of its knowledge its properties are not the subject of
any such proceedings, except as follows:
Stride & Associates. We are a defendant in a suit filed September 2, 2009
by Stride & Associates, Inc. in the Superior Court of California, Los
Angeles Superior Court-North Central District, for the amount of $19,500,
plus interest, for services allegedly rendered by the plaintiff to the
Company in connection with personnel placement. The plaintiff on February
9, 2010, filed an application for judgment in this case. We intend to
settle this lawsuit.
Cypress Communications. On April 12, 2010, we were sued in the Superior
Court of California, County of Los Angeles-Central District, by Jonathan
Neil & Associates, Inc., for $206,151.77, plus interest, for
telecommunications and internet services allegedly provided by the
plaintiff's assignor, Cypress Communications, Inc. We intend to settle
this lawsuit.
26
Powell Enterprises. Powell Enterprises, a consulting company, has
notified the Company on April 15, 2010 of its claim that the Company owes
this firm $212,480 of consulting fees. This company has not performed any
services for the Company for a significant period of time, and the Company
believes that Powell Enterprises has no basis whatsoever to seek any
payment from the Company for the period after its services were
terminated. If we determine that any amounts are owing to Powell
Enterprises, we intend to discuss the claim and settle the matter.
ITEM 1A. RISK FACTORS
Risk Factors Which May Affect Future Results
The Company wishes to caution that the following important factors,
among others, in some cases have affected and in the future could affect
the Company's actual results and could cause such results to differ
materially from those expressed in forward-looking statements made by or
on behalf of the Company.
There have been no material changes to the risk factors included in
our Annual Report on Form 10-K for the fiscal year ended August 31,
2009, other than as set forth below:
27
Risks Related To Our Business
We have incurred losses and anticipate continued losses for the
foreseeable future.
Our net loss for the six months ended February 28, 2010 was
$1,718,295. From inception at January 31, 2007 through February 28, 2010
we had an accumulated net loss of $13,134,676. We have not yet achieved
profitability and expect to continue to incur net losses until we
recognize sufficient revenues from licensing activities, customer
contracts, product sales or other sources. Because we have a limited
history upon which an evaluation of our prospects can be based, our
prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies seeking to develop new
and rapidly evolving technologies. To address these risks, we must,
among other things, respond to competitive factors, continue to attract,
retain and motivate qualified personnel and commercialize and continue
to develop our technologies. We may not be successful in addressing
these risks. We can give no assurance that we will achieve or sustain
profitability.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 20, 2010 we issued 170,000 common shares to Howard Family
Trust in lieu of outstanding rent, property taxes and insurance. The
shares were valued at $85,000 reflective of the fair market value of the
stock on the date the shares were issued.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
28
ITEM 6. EXHIBITS
(a) Exhibits
31 Certification of Chief Executive and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32 Certification of Chief Executive and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350. *
*
Filed herewith.
29
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
EN2GO INTERNATIONAL, INC.
(Registrant)
Date: May 18, 2010
By: ROBERT
ROSNER
Robert Rosner
President, Chief Executive and
Chief Financial Officer
30
Exhibit 31
CERTIFICATION
I, Robert Rosner, certify that:
1. I have reviewed this Report on Form 10-Q of EN2GO INTERNATIONAL, INC.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-
15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
my supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal
control over financial reporting to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 18, 2010
By: ROBERT ROSNER
Robert Rosner
Chief Executive and Chief
Financial Officer
Exhibit 32
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,
UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of Title 18, United States Code),
the undersigned officer of En2Go International, Inc., a Nevada corporation
(the "Company"), does hereby certify with respect to the Quarterly Report
of the Company on Form 10-Q for the quarter ended February 28, 2010 as
filed with the Securities and Exchange Commission (the "10-Q Report")
that:
(1) the 10-Q Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the 10-Q Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: May 18, 2010
By: ROBERT ROSNER
Robert Rosner
Chief Executive and Chief
Financial Officer
2
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