UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2020.

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

 

Commission File No. 333-141875

 

IGEN Networks Corp.

(Exact name of registrant as specified in its charter)

 

Nevada		20-5879021
(State or Other Jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

28375 Rostrata Ave. Lake Elsinore, CA 92532

(Address of principal executive offices) (Zip Code)

 

1-855-912-5378

(Registrant’s telephone number including area code)

 

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 ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer:	☐	Accelerated filer:	☐
Non-accelerated filer:	☐	Smaller reporting company:	☒
(Do not check if a smaller reporting company)		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The number of shares of the registrant’s common stock issued and outstanding as of August 12, 2020 is 1,089,088,573.

 

  

TABLE OF CONTENTS

 

			Page
PART I
ITEM 1.	FINANCIAL STATEMENTS		F-1 to F-17
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		6
ITEM 4.	CONTROLS AND PROCEDURES		6
PART II
ITEM 1.	LEGAL PROCEEDINGS		7
ITEM 1A.	RISK FACTORS		7
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		7
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		7
ITEM 4.	MINE SAFETY DISCLOSURES		7
ITEM 5.	OTHER INFORMATION		7
ITEM 6.	EXHIBITS		8

 

2

  

Part I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The Company’s unaudited condensed consolidated interim financial statements for the three and six month periods ended June 30, 2020 are included herewith.

 

IGEN NETWORKS CORP.

 

Condensed Consolidated Interim Financial Statements

For the Three and Six Months Ended June 30, 2020

(Unaudited – Expressed in U.S. Dollars)

 

   

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Table of Contents

  

IGEN NETWORKS CORP.

Condensed Consolidated Interim Balance Sheets

(Expressed in U.S. dollars)

 

		June 30, 2020				December 31, 2019
		(unaudited)
Assets
Current Assets
Cash		$	-			$	-
Accounts and other receivables, net			3,508				18,136
Inventory			8,375				4,334
Prepaid expenses and deposits			-				4,013
Total Current Assets			11,883				26,483
Goodwill			505,508				505,508
Total Assets		$	517,391			$	531,991
Liabilities and Stockholders’ Deficit
Current Liabilities
Accounts payable and accrued liabilities		$	926,772			$	983,358
Current portion of deferred revenue, net of contract assets			142,621				207,566
PPP note payable			60,049				-
Convertible debentures, net of discount of $58,623 and $343,398, respectively			29,148				21,121
Derivative liabilities			539,693				92,322
Total Current Liabilities			1,698,283				1,304,367
Deferred revenue, net of current portion and contract assets			47,057				54,899
Total Liabilities			1,745,340				1,359,266
Commitment and contingencies
Redeemable convertible preferred stock – Series A:
Authorized – 9,000,000 shares with $0.001 par value, 159,800 shares and 160,600 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively, net of discount of $142,425 and $121,934, respectively, aggregate liquidation preference of $88,375 and $153,862 as of June 30, 2020 and December 31, 2019, respectively			67,305				31,927
Stockholders’ Deficit
Series B preferred stock: Authorized – 1,000,000 shares with $0.001 par value issued and outstanding – 1,000,000 and 0 shares, as of June 30, 2020 and December 31, 2019, respectively, aggregate liquidation preference of $1,000 as of June 30, 2020			1,000				-
Common stock: Authorized – 1,490,000,000 shares with $0.001 par value issued and outstanding – 1,009,665,261 and 74,242,196 shares, as of June 30, 2020 and December 31, 2019, respectively			1,009,665				74,242
Additional paid-in capital			12,516,383				10,697,216
Accumulated Deficit			(14,822,302	)			(11,630,660	)
Total Stockholders’ Deficit			(1,295,254	)			(859,202	)
Total Liabilities and Stockholders’ Deficit		$	517,391			$	531,991

 

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

  

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IGEN NETWORKS CORP.

Condensed Consolidated Interim Statements of Operations

(Unaudited - Expressed in U.S. dollars)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Revenues:
Sales, services		$	97,058			$	198,481			$	207,183			$	443,878
Sales, other			6,762				-				8,436				-
Total Revenues			103,820				198,481				215,619				443,878
Cost of goods sold			24,595				114,098				92,544				251,121
Gross Profit			79,225				84,383				123,075				192,757
Expenses:
Selling, general and administrative			136,953				138,774				212,200				308,642
Management and consulting fees			61,784				34,414				114,836				79,898
Payroll and related			34,366				100,180				72,239				189,709
Stock-based director expense			-				-				277,543				-
Total Expenses			233,103				273,368				676,818				578,249
Loss Before Other Income (Expense)			(153,878	)			(188,985	)			(553,743	)			(385,492	)
Other Income (Expense):
Accretion of discounts on convertible debentures			(33,336	)			-				(110,064	)			-
Change in fair value of derivative liabilities			(1,048,462	)			177,877				(1,347,701	)			177,877
Loss on extinguishment of debt			(195,908	)			-				(273,518	)			-
Interest expense			(191,712	)			(120,508	)			(197,443	)			(120,508	)
Total Other Expense, net			(1,469,418	)			57,369				(1,928,726	)			57,369
Net Loss			(1,623,296	)			(131,616	)			(2,482,469	)			(328,123	)
Increase in value of warrants			(370,726	)			-				(370,726	)			-
Accrued and deemed dividends on redeemable convertible preferred stock			(245,676	)			(169,709	)			(338,447	)			(169,709	)
Net loss attributable to common stockholders		$	(2,239,698	)		$	(301,325	)		$	(3,191,642	)		$	(497,832	)
Basic and Diluted Loss per Common Share		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Weighted Average Number of Common Shares Outstanding			711,546,667			$	68,214,970			$	406,173,893			$	67,680,440

 

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

 

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IGEN NETWORKS CORP.

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

(Unaudited - Expressed in U.S. dollars)

 

		Redeemable Series A																																Total
		Convertible Preferred Stock								Series B Preferred Stock								Common Stock								Additional Paid In				Accumulated				Stockholders' Equity
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance, December 31, 2019			160,600			$	31,927				-			$	-				74,242,196			$	74,242			$	10,697,216			$	(11,630,660	)		$	(859,202	)
Shares of Series A preferred stock for cash, net of costs and discounts			47,300				1,608				-				-				-				-				-				-				-
Issuance of Series B preferred stock			-				-				1,000,000				1,000				-				-				276,543				-				277,543
Conversion of Series A preferred shares to common stock			(107,700	)			(21,411	)			-				-				81,700,258				81,700				103,693				(91,029	)			94,364
Accrued dividends on Series A preferred stock			-				1,742				-				-				-				-				-				(1,742	)			(1,742	)
Shares of common stock issued for cash			-				-				-				-				26,750,000				26,750				124,500				-				151,250
Shares of common stock issued for exercise of convertible note, including fees			-				-				-				-				95,216,504				95,217				175,753				-				270,970
Stock-based compensation			-				-				-				-				-				-				14,906				-				14,906
Net loss			-				-				-				-				-				-				-				(859,173	)			(859,173	)
Balance, March 31, 2020			100,200				13,866				1,000,000				1,000				277,908,958				277,909				11,392,611				(12,582,604	)			(911,084	)
Shares of Series A preferred stock for cash, net of costs and discounts			100,100				-				-				-				-				-				-				(156,472	)			(156,472	)
Conversion of Series A preferred shares to common stock			(40,500	)			(10,115	)			-				-				117,506,731				117,507				37,230				(25,650	)			129,087
Accrued dividends on Series A preferred stock			-				63,554				-				-				-				-				-				(63,554	)			(63,554	)
Shares of common stock issued for exercise of convertible note, including fees			-				-				-				-				524,841,289				524,841				738,152				-				1,262,993
Cashless exercise of warrant			-				-				-				-				62,579,483				62,579				(62,579	)			-				-
Issuance of common stock for conversion of payables			-				-				-				-				26,828,800				26,829				40,243				-				67,072
Increase in value of warrants			-				-				-				-				-				-				370,726				(370,726	)			-
Net loss																															(1,623,296	)			(1,623,296	)
Balance, June 30, 2020			159,800			$	67,305				1,000,000			$	1,000				1,009,665,261			$	1,009,665			$	12,516,383			$	(14,822,302	)		$	(1,295,254	)

 

		Redeemable Series A																																Total
		Convertible Preferred Stock								Series B Preferred Stock								Common Stock								Additional Paid In				Accumulated				Stockholders' Equity
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance, December 31, 2018			-			$	-				-			$	-				66,714,970			$	66,715			$	10,426,245			$	(11,049,499	)		$	(556,539	)
Shares of common stock issued for cash			-				-				-				-				1,500,000				1,500				58,500				-				60,000
Net loss			-				-				-				-				-				-				-				(196,507	)			(196,507	)
Balance, March 31, 2019			-				-				-				-				68,214,970				68,215				10,484,745				(11,246,006	)			(693,046	)
Shares of Series A preferred stock issued for cash, net of costs and discounts			144,300				-				-				-				-				-				-				-				-
Accrued dividends on Series A preferred stock							1,642				-				-				-				-				-				(1,642	)			(1,642	)
Deemed dividends on Series A preferred stock			-				-				-				-				-				-				-				(168,067	)			(168,067	)
Stock-based compensation			-				-				-				-				-				-				15,000				-				15,000
Net loss			-				-				-				-				-				-				-				(131,616	)			(131,616	)
Balance, June 30, 2019			144,300			$	1,642				-			$	-				68,214,970			$	68,215			$	10,499,745			$	(11,547,331	)		$	(979,371	)

 

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

  

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IGEN NETWORKS CORP.

Condensed Consolidated Interim Statements of Cash Flows

(Unaudited - Expressed in U.S. dollars)

 

		Six Months Ended June 30,
		2020				2019
Cash Flows from Operating Activities
Net loss		$	(2,482,469	)		$	(328,123	)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of discounts on convertible debentures			110,064				120,000
Change in fair value of derivative liabilities			1,347,701				(177,877	)
Depreciation			-				-
Loss on extinguishment of debt			273,518				-
Shares issued for services			-				-
Stock-based compensation			292,449				34,500
Changes in operating assets and liabilities:
Accounts and other receivables			14,628				(2,695	)
Inventory			(4,041	)			33,460
Prepaid expenses and deposits			-				4,484
Accounts payable and accrued liabilities			165,488				162,825
Deferred revenue			(72,787	)			(115,246	)
Net Cash Used in Operating Activities			(355,449	)			(268,672	)
Cash Flows from Financing Activities
Repayment of notes payable and convertible debentures			(50,000	)			-
Proceeds from issuance of common stock			151,250				60,000
Proceeds from notes payable and convertible debentures, net			129,199				40,000
Proceeds from issuance of preferred stock, net			125,000				125,000
Net Cash Provided by Financing Activities			355,449				225,000
Change in Cash			-				(43,672	)
Cash, Beginning of Period			-				56,823
Cash, End of Period		$	-			$	13,151
Non-cash Investing and Financing Activities:
Conversion of notes payable and accrued interest:
Fair value of common shares issued		$	1,533,960			$	-
Derecognition of notes payable and accrued interest		$	(321,776	)		$	-
Derecognition of unamortized discount		$	199,710			$	-
Derecognition of derivative liabilities		$	(1,330,331	)		$	-
Conversion of preferred stock
Fair value of common shares issued		$	340,132			$	-
Derecognition of preferred stock		$	(208,839	)		$	-
Derecognition of unamortized discount		$	177,313			$	-
Derecognition of derivative liabilities		$	(182,687	)		$	-
Deemed dividend		$	(314,437	)		$	-
Discount related to issuance of preferred stock		$	131,962			$	125,000
Deemed dividends on preferred stock (excluding conversions)		$	(65,286	)		$	(169,709	)
Cashless exercise of warrants		$	62,579			$	-
Original issue discount on convertible debt		$	-			$	8,500
Increase in value of warrants		$	370,726			$	-
Conversion of accrued liabilities with issuance of common stock		$	67,073			$	-
Reclassification of security deposit to accounts payable		$	4,013			$	-

 

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

 

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IGEN NETWORKS CORP.

Notes to the Condensed Consolidated Interim Financial Statements

June 30, 2020

(Unaudited - Expressed in U.S. dollars)

 

1. Organization and Description of Business

 

IGEN Networks Corp. (“IGEN”, the “Company”, “we”, “our”) was incorporated in the State of Nevada on November 14, 2006, under the name of Nurse Solutions Inc. On September 19, 2008, the Company changed its name to Sync2 Entertainment Corporation and traded under the symbol SYTO. On September 15, 2008, the Company became a reporting issuer in British Columbia, Canada. On May 26, 2009, the Company changed its name to IGEN Networks Corp. On March 25, 2015, the Company was listed on the Canadian Securities Exchange (CSE) under the trading symbol IGN and the Company became a reporting Venture Issuer in British Columbia and Ontario, Canada.

 

The Company’s principal business is the development and marketing of software services for the automotive industry. The Company works with wireless carriers, hardware suppliers and software developers to provide direct and secure access to information on the vehicle and the driver’s behavior. The software services are delivered from the AWS Cloud to the consumer and their families over the wireless networks and accessed from any mobile or desktop device. The software services are marketed to automotive dealers, financial institutions, and direct-to-consumer through various commercial and consumer brands.

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced recurring losses from operations, has negative operating cash flows since inception, has a working capital deficit of $1,686,400 and an accumulated deficit of $14,822,302 as of June 30, 2020, and is dependent on its ability to raise capital from stockholders or other sources to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Ultimately, the Company plans to achieve profitable operations through the increase in revenue base and successfully grow its operations organically or through acquisitions. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

These consolidated financial statements and related notes include the records of the Company and the Company’s wholly-owned subsidiary, Nimbo Tracking LLC which is formed in the USA.

 

The condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited consolidated financial statements, and these unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and include all assets, liabilities, revenues and expenses of the Company and its wholly-owned subsidiary. All material intercompany transactions and balances have been eliminated. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. Certain information required by U.S. GAAP has been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The results for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2020, or for any future period.

 

Use of Estimates

 

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP 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 revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowance for doubtful accounts, valuation of inventory, the useful life and recoverability of equipment, impairment of goodwill, valuation of notes payable and convertible debentures, fair value of stock-based compensation and derivative liabilities, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

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Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less at the time of acquisition to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable are recognized and carried at the original invoice amount less an allowance for expected uncollectible amounts. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, the Company’s compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We do not charge interest on past due balances. The Company writes off trade receivables when all reasonable collection efforts have been exhausted. Bad debt expense is reflected as a component of general and administrative expenses in the consolidated statements of operations. As of June 30, 2020 and December 31, 2019, the allowance for doubtful accounts was approximately $36,000 and $21,000, respectively.

 

Inventory

 

Inventory consists of vehicle tracking and recovery devices and is comprised entirely of finished goods that can be resold. Inventory is stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out (FIFO) basis. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling costs. There was no provision for inventory impairment recorded as of June 30, 2020 and December 31, 2019.

 

Equipment

 

Office equipment, computer equipment, and software are recorded at cost. Depreciation is provided annually at rates and methods over their estimated useful lives. Management reviews the estimates of useful lives of the assets every year and adjusts them on prospective basis, if needed. All equipment was fully depreciated as of December 31, 2019. For purposes of computing depreciation, the method of depreciating equipment is as follows:

 

Computer equipment	3 years straight-line
Office equipment	5 years straight-line
Software	3 years straight-line

 

Goodwill

 

Goodwill represents the excess of the acquisition price over the fair value of identifiable net assets acquired. Goodwill is allocated at the date of the business combination. Goodwill is not amortized, but is tested for impairment annually on December 31 of each year or more frequently if events or changes in circumstances indicate the asset may be impaired. These events and circumstances may include a significant change in legal factors or in the business climate, a significant decline in the Company’s share price, an adverse action of assessment by a regulator, unanticipated competition, a loss of key personnel, significant disposal activity and the testing of recoverability for a significant asset group.

 

Goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value.

 

The Company has only one reporting unit. Therefore, all of the Company’s goodwill relates to that reporting unit, and at June 30, 2020 and December 31, 2019, the carrying value for that reporting unit is negative.

 

Impairment of Long-lived Assets

 

The Company reviews long-lived assets, such as equipment, for impairment whenever events or changes in the circumstances indicate that the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the asset, an impairment loss is recognized for the excess of the carrying value over the fair value of the asset during the year the impairment occurs.

 

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Financial Instruments

 

In accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” the Company is to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

See Note 4 for fair value measurement information related to the Company’s derivative liabilities.

 

The fair values of cash and cash equivalents, accounts and other receivables, restricted cash, and accounts payable and accrued liabilities, approximate their carrying values due to the immediate or short-term maturity of these financial instruments. Foreign currency transactions are primarily undertaken in Canadian dollars. The fair value of cash and cash equivalents is determined based on “Level 1” inputs and the fair value of derivative liabilities is determined based on “Level 3” inputs. The recorded values of notes payable, approximate their current fair values because of their nature and respective maturity dates or durations. The financial risk is the risk to the Company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility to these rates. Currently, the Company does not use derivative instruments to reduce its exposure to foreign currency risk. Financial instruments that potentially subject the Company to concentrations of credit risk consists of cash. The Company places its cash and cash equivalents in what it believes to be credit-worthy financial institutions.

 

Revenue Recognition and Deferred Revenue

 

We recognize revenue in accordance with ASC 606, “Revenue from Contracts with Customers”, using the five-step model, including (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue in accordance with U.S. GAAP. Title and risk of loss generally pass to our customers upon delivery, as we have insurance for lost shipments. In limited circumstances where either title or risk of loss pass upon destination or acceptance or when collection is not reasonably assured, we defer revenue recognition until such events occur. We derive revenues from two primary sources: products and services. Product revenue includes the shipment of product according to the agreement with our customers and only represents a small percentage of our revenues, less than 5%. Services include vehicle tracking services and customer support (technical support), installations and consulting. A contract may include both product and services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. Performance obligations include, but are not limited to, pass-thru harnesses and vehicle tracking services. Almost all of our revenues are derived from customers located in United States of America in the auto industry. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are not sold on a standalone basis. At contract inception, an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is identified for each distinct promise to transfer to the customer a good or service (or bundle of goods or services). To identify the performance obligations, the Company considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. Revenue is recognized when our performance obligation has been met. The Company considers control to have transferred upon delivery because the Company has a present right to payment at that time, the Company has transferred use of the asset, and the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. For arrangements under which the Company provides vehicle tracking services, the Company satisfies its performance obligations as those services are performed whereby the customer simultaneously receives and consumes the benefits of such services under the agreement. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

 

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The Company provides product warranties with varying lengths of time and terms. The product warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations. The Company has historically experienced a low rate of product returns under the warranty program.

 

Management assesses the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, and customer disputes to determine whether collectability is reasonably assured. If collectability is not reasonably assured at the time of sale, the Company does not recognize revenue until collection occurs.

 

Revenue relating to the sale of service fees on its vehicle tracking and recovery services is recognized over the life of the contact. The service renewal fees are offered in terms ranging from 12 to 36 months and are generally payable upon delivery of the vehicle tracking devices or in full upon renewal.

 

Deferred revenues are recorded net of contract assets and when cash payments are received from customers in advance of the Company’s performance. Deferred revenues totaled $261,447 and $405,553 as of June 30, 2020 and December 31, 2019, respectively. During the six months ended June 30, 2020, the Company recorded additions to deferred revenues of $60,194 and recognized total revenues of $204,300 through the amortization of deferred revenues. During the six months ended June 30, 2020, the Company recognized revenues of $187,766 related to deferred revenues outstanding as of December 31, 2019 as the services were performed.

 

Any revenue that has been deferred and is expected to be recognized beyond one year is classified as deferred revenue, net of current portion.

 

Deferred revenues are recorded net of contract assets. Contract assets represent the costs of the underlying hardware to enable the Company to perform on its contracts with customers. As of June 30, 2020 and December 31, 2019, the contract asset balance totaled $71,769 and $143,088, respectively, which have been recorded as reductions in deferred revenues in the accompanying condensed consolidated balance sheets.

 

Financing Costs and Debt Discount

 

Financing costs and debt discounts are recorded net of notes payable and convertible debentures in the consolidated balance sheets. Amortization of financing costs and the debt discounts is calculated using the effective interest method over the term of the debt and is recorded as interest expense in the consolidated statement of operations.

 

Income Taxes

 

Deferred income taxes are provided on the asset and liability method whereby deferred income tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Stock-based Compensation

 

The Company accounts for stock-based payments in accordance with stock-based payment accounting guidance which requires all stock-based payments to be recognized based upon their fair values. The fair value of stock-based awards is estimated at the grant date using the Black-Scholes Option Pricing Model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. The determination of fair value using the Black-Scholes Option Pricing Model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables, including expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behaviors. The Company accounts for forfeitures of unvested awards as they occur.

 

Derivative Financial Instruments

 

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC Topic 815-40 "Contracts in Entity's Own Equity." The Company classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement or settlement in shares. The Company assesses classification of its free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

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Loss Per Share

 

Basic earnings (loss) per share are computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share give effect to all dilutive potential common shares outstanding during the period including stock options and warrants, using the treasury stock method, and convertible debentures, using the if-converted method. In computing diluted earnings (loss) per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted earnings (loss) per share exclude all potentially issuable shares if their effect is anti-dilutive. Because the effect of conversion of the Company’s dilutive securities is anti-dilutive, diluted loss per share is the same as basic loss per share for the periods presented. As of June 30, 2020 and 2019, the Company has 400,697,063 and 8,089,673 potentially dilutive shares outstanding, respectively.

 

Recent Accounting Pronouncements

 

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.

 

3. Convertible Debentures and Notes Payable

 

On May 17, 2019, the Company entered into a Convertible Promissory Note (“Promissory Note”) with Crown Bridge Partners, LLC (the “Holder”) for a total principal amount of up to $150,000 with cash proceeds of up to $124,500, resulting in an original issue discount of up to $25,500. The Promissory Note bears interest at 7% per annum (with the understanding that the first 12 months of interest of each tranche will be guaranteed). The maturity date is 18 months from the effective date of each payment.

 

The Conversion Price, as defined in the agreement, is the lesser of (i) the lowest Trading Price (as defined below) during the previous 25 trading day period ending on the latest complete trading day prior to the date of this Promissory Note or (ii) the Variable Conversion Price (as defined below). The Variable Conversion Price means the lowest one Trading Price (as defined below) for the common stock during the 25 Trading Day period ending on the last complete Trading Day prior to the Conversion Date. Trading Price means, for any security as of any date, the lesser of the (i) lowest traded price and (ii) lowest closing bid price. Based on the Company’s examination of the conversion feature and the relative accounting guidance, the Company has determined that the conversion feature should be treated as a derivative liability for accounting purposes.

 

Additionally, if at any time while the Promissory Note is outstanding, the Conversion Price is equal to or lower than $0.025, then an additional $10,000 will be automatically added to the principal balance of each tranche funded under the Note. During the quarter ended June 30, 2019, $10,000 was added to the principal balance for the first tranche.

 

In connection with the Promissory Note, the Company also entered into a Securities Purchase Agreement with the Holder which states that the Company will also issue to the Holder a warrant to purchase an amount of shares of its common stock equal to 50% of the face value of each respective tranche divided by $0.10 (for illustrative purposes, the first tranche face value is equal to $50,000, which resulted in the issuance of a warrant to purchase 250,000 shares of the Company’s common stock).

 

Per the terms of the Common Stock Purchase Warrant agreement, on May 17, 2019, the Company issued a warrant to purchase 250,000 shares of common stock with an Exercise Price of $0.10 subject to adjustment (standard anti-dilution features). The agreement contains a down-round provision that automatically resets the exercise price of the warrant to a new exercise price that is equal to the per share price of common stock subsequently issued (including conversions of debt and preferred stock).  Upon the lowing of the exercise price, the number of warrants will be increased such that the total proceeds upon exercise is the same amount (see Note 7).  If the Market Price of one shares of common stock is greater than the Exercise Price, the Holder may elect to receive Warrant Shares pursuant to cashless exercise, in lieu of cash exercise, per a defined formula in the agreement.

 

During the quarter ended June 30, 2019, the Company received $40,000 in net cash proceeds, after paying $1,500 of direct funding costs. The related principal amount due for the first tranche (“First Tranche”) was $50,000. For the first tranche, using the Binomial Lattice Model, the Company computed the estimated fair value of the embedded conversion feature to be $100,000 and recorded a related derivative liability. Related to the derivative liability, the bonus interest, and the direct financing costs, the Company recorded a full debt discount of $60,000 for the Promissory Note, which will be amortized to interest expense over the term of the Promissory Note using the effective interest method and an additional $50,000 directly to interest expense.

 

On December 9, 2019, the Holder converted a portion of the Promissory Note into shares of common stock. The Holder received 300,000 shares of common stock for the conversion of principal, accrued interest, and fees totaling $7,165.

 

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During the quarter ended September 30, 2019, the Company received an aggregate of $213,250 in net cash proceeds, after paying $6,750 of direct funding costs, from three note holders under the same terms as the Promissory Note. The related principal amount due for the convertible debt instruments entered into during the quarter ended September 30, 2019 was $255,000. Using the Binomial Lattice Model, the Company computed the estimated fair value of the embedded conversion features to be approximately $354,000 and recorded the related derivative liabilities. Related to the derivative liabilities, the bonus interest, and the direct financing costs, the Company recorded full debt discounts totaling approximately $255,000 for the notes which will be amortized to interest expense over the term of the notes using the effective interest method and an additional approximately $106,000 directly to interest expense. As the Conversion Price fell below $0.025 per share, during the quarter ended September 30, 2019, $10,000 was added to the principal balance on one of the notes (per the terms of that note).

 

Related to the notes issued during the quarter ended September 30, 2019, the Company issued warrants to purchase a total of 525,000 shares of common stock with an Exercise Price of $0.10 subject to adjustment (standard anti-dilution features). If the Market Price of one shares of common stock is greater than the Exercise Price, the Holder may elect to receive Warrant Shares pursuant to cashless exercise, in lieu of cash exercise, per a defined formula in the agreement.

 

On October 1, 2019, the Company received $37,500 in net cash proceeds from a note holder under the same terms as the Promissory Note. The related principal amount due for the convertible debt instrument was $44,000. In connection with the note, the Company issued 100,000 shares of common stock, which were valued at the market price on the date of issuance of $0.05 per share. Using the Binomial Lattice Model, the Company computed the estimated fair value of the embedded conversion feature to be approximately $29,000 and recorded a related derivative liability. Related to the derivative liability, the shares issued, the bonus interest, and the direct financing costs, the Company recorded a debt discount totaling $41,000 for the note, which will be amortized to interest expense over the term of the note using the effective interest method.

 

On June 19, 2020, the Company received $19,250 in net cash proceeds from a note holder under the same terms as the Promissory Note. The related principal amount due for the convertible debt instrument was $25,000. Using the Binomial Lattice Model, the Company computed the estimated fair value of the embedded conversion feature to be approximately $142,000 and recorded a related derivative liability for that amount and a charge to interest expense of approximately $122,000. Related to the derivative liability, the shares issued, the bonus interest, and the direct financing costs, the Company recorded a debt discount totaling $25,000 for the note, which will be amortized to interest expense over the term of the note using the effective interest method.

 

During the six months ended June 30, 2020, the holders of the convertible notes converted a total of $321,776 of principal, interest and fees for a total of 620,057,793 shares of common stock. Related to these conversions during the quarter ended March 31, 2020, the Company recorded a reduction of the associated derivative liability for the conversion features of $1,138,404 and a reduction of the debt discount of $199,710 as components of the loss on settlement of debt. During the six months ended June 30, 2020, the Company recorded $110,064 of interest expense related to the amortization of the debt discounts.

   

During the three months ended March 31, 2020 the Company borrowed $50,000 from a shareholder under the terms of a note payable bearing interest of 8% per annum. The note was repaid with interest (totaling $922) during the three months ended March 31, 2020.

  

On May 4, 2020, the Company entered into a PPP Loan with a principal amount of $59,949 through a financial institution under the PPP administered by the SBA and established as part of the CARES Act. The PPP Loan bears interest at 1.0% per annum and matures on May 4, 2022 with the first six months of interest and principal payments deferred. The amount borrowed under the PPP Loan is guaranteed by the SBA and is eligible for forgiveness in an amount equal to the sum of the eligible costs, including payroll, benefits, rent and utilities, incurred by the Company during the 24-week period beginning on the date the Company received the procceds. The PPP Loan contains customary events of default, and the occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Loan.

 

4. Derivative Liabilities

 

During the six months ended June 30, 2020 and during the year ended December 31, 2019, the Company had outstanding convertible debentures with variable exercise prices based on market rates (see Note 3). During the six month ended Jun 30, 2020 and during year ended December 31, 2019, the Company also issued series A preferred stock with variable exercise prices based on market rates (see Note 6). The Company records the fair value of the conversion features with variable exercise prices based on future market rates in accordance with ASC 815. The fair value of the derivative liabilities is revalued on each balance sheet date with corresponding gains and losses recorded in the consolidated statements of operations. The Company uses a multi-nominal lattice model to fair value the derivative liabilities. The following inputs and assumptions were used to value the conversion features outstanding during the six months ended June 30, 2020, assuming no expected dividends:

 

		June 30, 2020
Expected volatility			271 – 322	%
Risk free interest rate			0.3 – 1.41	%
Expected life (in years)			0.5 – 1.5

 

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The following table presents the Company’s embedded conversion features of its convertible debt and preferred stock measured at fair value on a recurring basis as of June 30, 2020.

 

		Level 3 Carrying Value as of June 30, 2020
Derivative liabilities:
Embedded conversion feature – convertible debt		$	425,352
Embedded conversion feature – preferred stock			114,341
		$	539,693

 

The following table provides a reconciliation of the beginning and ending balances for the Company’s derivative liabilities measured at fair value using Level 3 inputs:

 

		For The Six Months Ended June 30, 2020
Embedded Conversion Features – Convertible Debt
Balances, as of the beginning of the year		$	87,571
Derivative liabilities recorded upon issuance of convertible debt			141,667
Derivative liabilities derecognized upon debt conversion			(1,138,404	)
Net changes in fair value included in net loss			1,334,518
Ending balance		$	425,352
Embedded Conversion Features – Preferred Stock
Balances, as of the beginning of the year		$	4,751
Derivative liabilities recorded upon issuance of preferred stock			288,435
Derivative liabilities removed upon preferred stock conversion			(191,927	)
Net changes in fair value included in net loss			13,082
Ending balance		$	114,341
Total ending balance		$	539,693

 

5. Related Party Transactions

 

(a)	During the six months ended June 30, 2020 and 2019, the Company incurred approximately $73,000 and $59,000, respectively, in management and consulting fees with an officer and an entity controlled by him. As of June 30, 2020 and December 31, 2019, the Company owed approximately $103,000 and $190,000, respectively, to directors and officers and a company controlled by a director, which is included in accounts payable and accrued liabilities. The amounts owed are unsecured, non-interest bearing, and due on demand.
(b)	During the six months ended June 30, 2020 and 2019, the Company incurred approximately $11,000 and $53,000, respectively, in purchases of hardware from a vendor controlled by a director of the Company. As of June 30, 2020 and December 31, 2019, the amounts owed to this related-party vendor were approximately $25,000 and $45,000 respectively.

   

(c)	During the six months ended June 30, 2020, the Company issued 26,828,800 shares of common stock for the conversion of $67,072 of accrued expenses owed to the CEO and VP of Operations.

 

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6. Redeemable Preferred Stock and Stockholders’ Deficit

 

Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share. The Company has designated 9,000,000 of these shares as Series A Convertible Preferred Stock.

 

On April 9, 2019 and separately on June 11, 2019, the Company entered into a Series A Preferred Stock Purchase Agreement with an investor. On April 9, 2019, the Company issued 86,000 shares for net proceeds of $75,000 (after deducting $3,000 of direct legal costs) and on June 11, 2019, the Company issued 58,300 shares for net proceeds of $50,000 (after $3,000 deduction of direct legal costs).

 

On September 17, 2019, the Company entered into a Series A Preferred Stock Purchase Agreement with an investor. The Company issued 58,300 shares for net proceeds of $50,000 (after $3,000 deduction of direct legal costs).

 

On February 25, 2020, the Company entered into a Series A Preferred Stock Purchase Agreement with an investor. The Company issued 47,300 shares for proceeds of $43,000.

 

During the quarter ended June 30, 2020, the Company entered into two Series A Preferred Stock Purchase Agreements with an investor. The Company issued 100,100 shares for proceeds of $91,000.

 

Rights and Privileges of the Series A Preferred Stock

 

	☐	Voting – Series A Preferred Stock holders have no voting rights
	☐	Dividends – 8% cumulative dividend, compounded daily, payable solely upon redemption, liquidation, or conversion. (increases to 22% for an event of default)
	☐	Redemption – Company has the right to redeem the shares from the issuance date through 270 days following the issuance date using the table noted in the Certificate of Designations, Preferences, Rights and Limitations of Series A Convertible Preferred Stock agreement. After 270 days, except for the Mandatory Redemption, the Company does not have the right to redeem the shares.
	☐	Mandatory Redemption – 18 months after the Issuance Date or upon the occurrence of an Event of Default, the Company is required to redeem all of the shares of Series A Preferred Stock of the Holder. The Company shall make a cash payment in an amount equal to the total number of shares of Series A Preferred Stock held by the Holder multiplied by the then current Stated Value as adjusted (including but not limited to the addition of any accrued unpaid dividends and the Default Adjustment
	☐	Conversion – At any time after 6 months following the Issuance Date, the Holder may convert all or any part of the outstanding Series A Preferred Stock into shares of Common Stock. The Variable Conversion Price is defined as 75% of the the Market Price. The Market Price is defined as the average of the 3 lowest Trading Prices for the Common Stock during the 15 day Trading Period ending on the last complete Trading Day prior to the Conversion Date.
	☐	Default Adjustments – Upon the occurrence of any Event of Default, the Stated Value will be increased between 150% and 200%, depending on the Event of Default.

 

Based on the terms of the conversion feature, the Company could be required to issue an infinite number of shares of common stock. As such, the Company has determined the conversion feature to be a derivative liability under relevant accounting guidance. The Company estimated the fair value of the conversion feature using the Binomial Lattice Model on the date of issuance, on the date of each conversion notice, and remeasures the fair value at each reporting period. During 2019, on the issuance dates of the series A preferred stock, the combined estimated fair value of the conversion features were determined to be $207,000. In connection with the fair value of the derivative liability, the Company recorded a total discount to the series A preferred stock of $161,000 and also recorded a deemed distribution of $55,000. During the three months ended March 31, 2020, the Company issued 47,300 shares of series A preferred stock for proceeds of $40,000 and $3,000 of legal costs. Related to this issuance, the Company recorded a derivative liability and discount to the preferred stock of $41,392, which will be amortized to deemed dividends over the redemption period.

 

During 2019, holders converted 42,000 shares of Series A Preferred stock into 2,977,226 shares of common stock at the Variable Conversion Price as defined above, resulting in a loss on extinguishment of $23,000.

 

During the six months ended June 30, 2020, the holder of the series A preferred stock converted 148,200 shares of series A preferred stock and accrued dividends into 199,206,989 shares of common stock. Related to these conversions during the six months ended June 30, 2020, the Company recorded a reduction of the associated derivative liability for the conversion features of $191,927 and a reduction of the preferred stock discount of $177,313 and $116,672 of deemed dividend.

 

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Rights and Privileges of the Series B Preferred Stock

 

On February 10, 2020, the Company designated and subsequently issued 1,000,000 shares of its newly formed Series B Super Voting Preferred Stock. Each share of Series B preferred stock has voting rights equal to 500 shares of common stock, is not entitled to receive dividends, is not convertible into shares of common stock. If the holder of the Series B preferred stock ceases to be a Board Member, the Company will repurchase any Series B preferred stock from the holder for a price of $0.001 per share. If the holder of the Series B preferred stock proposes to transfer any shares of Series B preferred stock, the Company will have 90 days to repurchase the shares for a price of $0.001 per share. The grant date fair value of the Series B preferred stock issued during the three months ended March 31, 2020 was $277,543 and was recorded to stock-based director compensation expense in the accompanying condensed consolidated statement of operations.

 

Common Stock

 

2020

 

During the six months ended June 30, 2020, the Company sold a total of 26,750,000 shares of common stock for proceeds of $151,250.

 

During the six months ended June 30, 2020, the Company issued a total of 819,264,782 shares of common stock for the conversion of debt, accrued interest and fees, and the conversion of series A preferred stock and accrued dividends.

 

During the six months ended June 30, 2020, the Company issued 62,579,483 shares of common stock for the cashless exercise of warrants.

 

During the six months ended June 30, 2020, the Company issued 26,828,800 shares of common stock for the conversion of accrued expenses owed to the CEO and VP of Operations.

 

2019

 

During the six months ended June 30, 2019, the Company sold a total of 1,500,000 shares of common stock for proceeds of $60,000.

 

7. Share Purchase Warrants

 

The following table summarizes the continuity schedule of the Company’s share purchase warrants:

 

		Number of warrants				Weighted average exercise price
Balance, December 31, 2019			4,527,614				0.18
Issued			-				-
Adjusted for triggered down-round provisions			315,521,528				0.00
Exercised			(63,623,768	)			0.00
Expired			(500,000	)			0.12
Balance, June 30, 2020			255,925,374			$	0.00

 

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As of June 30, 2020, the following share purchase warrants were outstanding:

 

Number of warrants outstanding				Exercise price				Expiration date
	2,222,222			$	0.23			February 23, 2022
	252,672,760			$	0.00			September 23, 2024
	980,392			$	0.15			December 2, 2021
	50,000			$	0.20			January 2, 2022
	255,925,374

 

During the six months ended June 30, 2020, the Company recognized the triggering of the down-round provisions of certain warrants associated with the convertible debt instruments issued in 2019.  As a result, reset the exercise price and increased the number of warrant shares accordingly.  As of June 30, 2020, the new exercise price for the warrants is $0.000245 per share.  Per the relevant accounting guidance, the Company valued the warrants before and after each triggering event and recorded the total increase in value as a deemed dividend to the warrant holder with an offset to additional paid in capital.  For the six months ended June 30, 2020, the increase in value of the warrants due to the triggering events totaled $370,726 and was properly included in the Company’s earnings per share amounts on the accompanying statement of operations.

 

8.Stock Options

 

The following table summarizes the Company’s stock options:

 

		Number of options				Weighted average exercise price				Aggregate intrinsic value
Balance, December 31, 2019			5,690,000			$	0.13
Granted			-				-
Exercised			-				-
Cancelled / forfeited			-				-
Balance, June 30, 2020			5,690,000			$	0.13			$	-

 

						Outstanding														Exercisable
Range of exercise prices						Number of shares				Weighted average remaining contractual life (years)				Weighted average exercise price						Number of shares				Weighted average exercise price
$			0.04				1,500,000				4.1						0.04				1,125,000						0.04
$			0.08				250,000				2.5						0.08				250,000						0.08
$			0.13				1,425,000				2.1						0.13				1,425,000						0.13
$			0.16				225,000				0.9						0.16				225,000						0.16
$			0.19				2,270,000				0.5						0.19				2,270,000						0.19
Cdn$			0.25				20,000				0.5			Cdn$			0.25				20,000			Cdn$			0.25
							5,690,000				2.4			$			0.13				5,315,000			$			0.14

 

During the six months ended June 30, 2020, the Company did not issued any options to employees. During the six months ended June 30, 2020 and 2019, the Company recorded $15,000 and $15,000, respectively, of stock-based compensation expense related to stock option grants. As of June 30, 2020, the Company had no unrecognized compensation expense.

 

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9. Segments

 

The Company has one reportable segment: vehicle tracking and recovery solutions. The Company allocates resources to and assesses the performance of each reportable segment using information about its revenue and operating income (loss). The Company does not evaluate operating segments using discrete asset information.

 

Segmentation by geographical location is not presented as all revenues are earned in U.S. Total assets by segment are not presented as that information is not used to allocate resources or assess performance at the segment level and is not reviewed by the Chief Operating Decision Maker of the Company.

 

10. Risks & Uncertainties

 

The Company extends credit to customers on an unsecured basis in the normal course of business. The Company’s policy is to perform an analysis of the recoverability of its receivables at the end of each reporting period and to establish allowances where appropriate. The Company analyzes historical bad debts and contract losses, customer concentrations, and customer credit-worthiness when evaluating the adequacy of the allowances.

 

During the six months ended June 30, 2020 and 2019, the Company had four and two customers which accounted for 82% and 67%, respectively, of total invoiced amounts, which are recorded as deferred revenues and amortized over the related service period to revenues.

 

As of June 30, 2020 and December 31, 2019, the Company had five and four customers, respectively, which accounted for 94% and 99%, respectively, of the gross accounts receivable balance.

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial condition, liquidity, and operations. Through June 30, 2020, COVID-19 has had an impact on the economy, the auto industry, and the Company’s 2020 revenue activity. Looking forward, it could continue to have a material adverse effect on the Company’s business, financial condition, liquidity, results of operations, and cash flows.

 

11. Commitments and Contingencies

 

Indemnities and Guarantees

 

We have made certain indemnities and guarantees, under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. We indemnify our officers and directors to the maximum extent permitted under the laws of the State of Nevada. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. These indemnities and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying condensed consolidated balance sheets.

 

Legal Matters

 

In the ordinary course of business, we may face various claims brought by third parties and may, from time to time, make claims or take legal actions to assert our rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject us to litigation. Management believes there are currently no claims that are likely to have a material effect on our consolidated financial position and results of operations.

   

The Company has filed a lawsuit against a distributor for breach of contract resulting in losses to the Company estimated to be in excess of $1,000,000.  Management believes the currently scheduled trial date in October 2020 will be delayed into early 2021 as a result of the backlog of cases due to COVID-19.

    

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12. Restatements

 

During 2019, we discovered that an accounting error had been made related to the Company not properly recording contract assets as required under the relevant accounting guidance for revenue recognition. (As discussed in Note 1 “Revenue Recognition and Deferred Revenue”, contract assets are netted with deferred revenues for balance sheet presentation purposes.) It was determined that the error is immaterial to the 2018 consolidated financial statements; however, correcting the error related to 2018 in 2019 would materially misstate the condensed consolidated financial statements for the three and six months ended June 30, 2019. As such, we recorded the appropriate adjustment in 2018 and also computed the appropriate amounts related to June 30, 2019 and recorded such in the accompanying condensed consolidated financial statements. See below for a summary of the corrections made for this error:

 

Account		Previously Recorded Balance				Corrected Balance				Correction Made
For the three months ended June 30, 2019:
Statement of Operations
Cost of revenues		$	85,098			$	114,098			$	29,000
Net loss		$	(102,616	)		$	(131,616	)		$	29,000
Loss per share		$	(0.00	)		$	(0.00	)		$	-
For the six months ended June 30, 2019:
Statement of Operations
Cost of revenues		$	117,121			$	251,121			$	134,000
Net loss		$	(194,123	)		$	(328,123	)		$	134,000
Loss per share		$	(0.01	)		$	(0.01	)		$	-
Statement of Cash Flows
Deferred revenues, net		$	(249,246	)		$	(115,495	)		$	(134,000	)

 

13. Subsequent Events

 

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are available to be issued. Any material events that occur between the balance sheet date and the date that the consolidated financial statements were available for issuance are disclosed as subsequent events, while the consolidated financial statements are adjusted to reflect any conditions that existed at the balance sheet date. Based upon this review, except as disclosed within the footnotes or as discussed below, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

 

In December 2019, a novel strain of coronavirus diseases (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape. The Company is currently analyzing the potential impacts to its business. Through June 30, 2020, COVID-19 has had an impact on the economy, the auto industry, and the Company’s 2020 revenue activity. Looking forward, it could continue to have a material adverse effect on the Company’s business, financial condition, liquidity, results of operations, and cash flows.

 

Subsequent to June 30, 2020, the Company issued a total of 38,964,105 shares of common stock for the conversion of debt, accrued interest and fees totaling $51,178, issued 32,459,207 shares of common stock for the cashless exercise of warrants, and issued 8,000,000 shares of common stock valued at $56,000 as a commitment fee in connection with the Equity Purchase Agreement signed with an investor.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides information for the three and six month periods ended June 30, 2020. This MD&A should be read together with our unaudited condensed consolidated interim financial statements and the accompanying notes for the three and six month periods ended June 30, 2019 (the “consolidated financial statements”). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Except where otherwise specifically indicated, all amounts in this MD&A are expressed in United States dollars.

 

Certain statements in this MD&A constitute forward-looking statements or forward-looking information within the meaning of applicable securities laws. You should carefully read the cautionary note in this MD&A regarding forward-looking statements and should not place undue reliance on any such forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements”.

 

Additional information about the Company, including our most recent consolidated financial statements and our Annual Information Form, is available on our website at www.igen-networks.com, or on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

 

Cautionary Note Regarding Forward-looking Statements

 

Certain statements and information in this MD&A may not be based on historical facts and may constitute forward-looking statements or forward-looking information within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Canadian securities laws (“forward-looking statements”), including our business outlook for the short and longer term and our strategy, plans and future operating performance. Forward-looking statements are provided to help you understand our views of our short and longer term prospects. We caution you that forward-looking statements may not be appropriate for other purposes. We will not update or revise any forward-looking statements unless we are required to do so by securities laws. Forward-looking statements:

 

☐

Typically include words and phrases about the future such as “outlook”, “may”, “estimates”, “intends”, “believes”, “plans”, “anticipates” and “expects”;

 

☐

Are not promises or guarantees of future performance. They represent our current views and may change significantly;

 

☐

Are based on a number of assumptions, including those listed below, which could prove to be significantly incorrect:

 

	-	Our ability to find viable companies in which to invest
	-	Our ability successfully manage companies in which we invest
	-	Our ability to successfully raise capital
	-	Our ability to successfully expand and leverage the distribution channels of our portfolio companies;
	-	Our ability to develop new distribution partnerships and channels
	-	Expected tax rates and foreign exchange rates.

 

☐

Are subject to substantial known and unknown material risks and uncertainties. Many factors could cause our actual results, achievements and developments in our business to differ significantly from those expressed or implied by our forward-looking statements. Actual revenues and growth projections of the Company or companies in which we are invested may be lower than we expect for any reason, including, without limitation:

 

	-	the continuing uncertain economic conditions
	-	price and product competition
	-	changing product mixes,
	-	the loss of any significant customers,
	-	competition from new or established companies,
	-	higher than expected product, service, or operating costs,
	-	inability to leverage intellectual property rights,
	-	delayed product or service introductions

 

Investors are cautioned not to place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future results.

 

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Overview

 

During the six months of 2020, the Company continues to focus on initiatives to grow revenue, expand its customer base, and develop new channels through its wholly owned subsidiary Nimbo Tracking LLC and direct to customer brands Medallion GPS PRO and CU TRAK. In addition to the Company’s Master Distributors and Sales Agents, all three brands are marketed through the T-Mobile IOT Factory platform and its respective Sales & Marketing Channels across the United States of America in seven geographic markets and the Territory of Puerto Rico.

 

Notable highlights of the six-month period ended June 30, 2020 include the following Company achievements:

 

The Company announced an exclusive and multi-year Nationwide Partnership Agreement with County Executives of America representing 700 Counties with over 450,000 self-insured commercial assets.

 

The Company launched Medallion GPS PRO for Light-Commercial Fleets with its Patent-Pending Digital Telematics Signature used for normalizing and scoring of driver behavior based on actuarial insurance metrics.

 

The Company signed a Sales & Marketing Agreement with Michigan Credit Union League Service Corporation (“MCULSC”) for the distribution of CU TRAK product line enabling Credit Unions to finance more members, improve loan performance, and to provide peace-of-mind for members and their families.

 

The Company launched the Next-Generation (NextGen) Platform for the Consumer Automotive Markets that included IGEN’s Patented “Digital Telematics Signature” for Universal Scoring of Driving Behavior.The NextGen Platform establishes a framework for the Company to expand its online presence along with expanding its customer base across the consumer automotive markets.

 

COVID-19

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial condition, liquidity, and operations. Through June 30, 2020, COVID-19 has had an impact on the economy, the auto industry, and the Company’s 2020 revenue activity. Looking forward, it could continue to have a material adverse effect on the Company’s business, financial condition, liquidity, results of operations, and cash flows.

 

Financial Condition and Results of Operations

 

Capital Resources and Liquidity

 

Current Assets and Liabilities, Working Capital, Net Debt

 

As of June 30, 2020, the Company’s current assets were $11,883, a decrease of 55% over the six-month period. Contributing to the net decrease to current assets was the reduction in sales during the period as a result of COVID-19 impacting Franchise and Pre-Owned Automotive Dealerships and the breach of terms of a distributor responsible for one of the Company’s house accounts. The Company expects to recover this loss business or receive monetary proceeds from settlement in 2020. The Company will focus its sales efforts on higher-margin opportunities across the T-Mobile/Sprint IoT Platform for all Company brands along with a focus on County Executive and Credit Union opportunities through recently announced partnerships.

 

Current liabilities increased $393,916, or 30%, over the three months, primarily due to the derivative liabilities that were established during 2019 and the six months ended June 30, 2020, and the amortization of debt issuance costs.

 

The Company finished the six-month period ended June 30, 2020, with a working capital deficiency of $1,686,400, a deterioration of $408,516 over the six months. Of the total working capital deficiency, $142,621 is short-term deferred revenue liabilities, net that will convert to revenues and cost of sales. During the six months ended June 30, 2020, the Company raised a total of $405,449 in cash proceeds from (1) the sale of shares of the Company’s common stock and series A preferred stock, (2) from the proceeds of a PPP loan and (3) a convertible note. The Company intends to improve its working capital position through ongoing equity and debt financing and continued focus on growth in its cash flow.

 

Total Assets and Liabilities, Total Stockholders’ Deficit

 

The Company’s total assets as of June 30, 2020 were $517,391, a decrease of $14,600 over the six months. This decrease was commensurate with the respective changes in current assets previously discussed.

 

Total liabilities increased $386,074 or 28% over the six months. This increase was composed primarily of the $515,447 increase in derivative liabilities, PPP loan, and convertible debt, net, and a decrease of $129,373 of accounts payable and deferred revenues, net, during the six months.

 

The above resulted in total stockholders’ deficit of $1,295,254, an increase of $436,052 from December 31, 2019. This change is a result of the net loss and deemed dividends for the six months ended June 30, 2020, offset by the $276,250 of cash proceeds from the sale of shares of the Company’s common stock and series A preferred stock during the six months.

 

As of the date of these financial statements, the Company requires additional capital to maintain adequate working capital and projected net revenues. The Company’s business plan is predicated on raising further capital for the purpose of further investment and acquisition of targeted technologies and companies, to fund growth in these technologies and companies, and to expand sales and distribution channels for companies it currently owns or is invested. It is anticipated the Company will continue to raise additional capital to fund growth and achieve profitability.

 

In December 2019, a novel strain of coronavirus diseases (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape. The Company is currently analyzing the potential impacts to its business. At this time, it is not possible to determine the magnitude of the overall impact of COVID-19 on the Company. However, it could have a material adverse effect on the Company’s business, financial condition, liquidity, results of operations, and cash flows.

 

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Results of Operations

 

Revenues and Net Loss For the Three Months Ended June 30, 2020

 

Revenues

 

The Company had revenues of $103,820 for the three months ended June 30, 2020, a 48% decrease over the similar period in 2019. Sales decrease was attributed to COVID-19 and its impact on Franchise and Pre-owned automotive dealerships along with the breach of terms of a distributor responsible for one of the Company’s house accounts. As stated in the CEO Outlook for 2020, the Company expects resolution on breach of terms with its house account along with additional revenue contribution from its new partnerships with County Executives and MCULSC in second half of 2020.

 

The three-month gross profit of $79,225 representing 76% gross margin compared to $84,383 and 43% gross margin over the similar period in 2019. During the three months ended June 30, 2020, the Company had a one-time correction to the amounts owed its main supplier of GPS units, resulting in a reduction of cost of sales of approximately $20,000, or an increase in margin of 19%. Additionally, the Company continues to focus its sales efforts on sales that generate higher than average margins.

 

The Company continues to review hardware, inventory, and order fulfillment strategies as well as product and service pricing and delivery models to grow sales and maximize overall margins.

 

Expenses

 

Operating expenses for the three months ended June 30, 2020 totaled $233,103 representing a 15% decrease in the operating expenses reported in the same period in 2019. Included in other income (expenses) for the three months ended June 30, 2020 and 2019 is $(1,048,462) and $177,877, respectively of change in fair value of derivative liabilities. During the three months ended June 30, 2020, the Company recorded a loss on the settlement of debt totaling $195,908 for the conversions of debt. During the three months ended June 30, 2020, the Company recorded $191,712 of interest expense related to its convertible debt and embedded conversion feature. The Company anticipates increases in development-associated labor and material costs as it completes the launch of its next generation platform. The Company will also expand its sales channels to support the Sprint IoT Factory initiatives.

 

Net Loss

 

The Company had a net loss of $1,623,296 for the three months ended June 30, 2020, an increase of $1,491,680 over the same period in 2019, for the reasons noted above.

 

The Company continues to invest in personnel, channels, and product development in order to drive revenue growth and increase gross profits sufficient to enable the Company to achieve profitability.

 

Revenues and Net Loss For the Six Months Ended June 30, 2020

 

Revenues

 

The Company had revenues of $215,619 for the six months ended June 30, 2020, a 51% decrease over the similar period in 2019. Sales decrease was attributed to COVID-19 and its impact on Franchise and Pre-owned automotive dealerships along with the breach of terms of a distributor responsible for one of the Company’s house accounts. As stated in the CEO Outlook for 2020, the Company expects resolution on breach of terms with its house account along with additional revenue contribution from its new partnerships with County Executives and MCULSC in second half of 2020.

 

The six-month gross profit of $123,075 represents a 57% gross margin compared to $192,757 and 43% gross margin over the similar period in 2019. During the six months ended June 30, 2020, the Company had a one-time correction to the amounts owed its main supplier of GPS units, resulting in a reduction of cost of sales of approximately $20,000. As revenues have decreased over the prior year, more of the Company’s sales are with one particular distributor whose pricing with the Company is lower than our average selling price, resulting in lower margins for the six-month period ended June 30, 2020 compared to the same period during 2019.

 

The Company continues to review hardware, inventory, and order fulfillment strategies as well as product and service pricing and delivery models to grow sales and maximize overall margins.

 

Expenses

 

Operating expenses for the six months ended June 30, 2020 totaled $676,818 representing a 17% increase in the operating expenses reported in the same period in 2019. This increase is due to the value of the Series B preferred stock that was issued during the six months ended June 30, 2020 and valued at $277,543. Included in other income (expenses) for the six months ended June 30, 2020 and 2019 is $(1,347,701) and $177,877, respectively of change in fair value of derivative liabilities. During the six months ended June 30, 2020, the Company recorded a loss on the settlement of debt totaling $273,518 for the conversions of debt. During the six months ended June 30, 2020, the Company recorded $197,443 of interest expense related to its convertible debt and embedded conversion feature. The Company anticipates increases in development-associated labor and material costs as it completes the launch of its next generation platform. The Company will also expand its sales channels to support the Sprint IoT Factory initiatives.

 

Net Loss

 

The Company had a net loss of $2,482,469 for the six months ended June 30, 2020, an increase of $2,154,346 over the same period in 2019, for the reasons noted above.

 

The Company continues to invest in personnel, channels, and product development in order to drive revenue growth and increase gross profits sufficient to enable the Company to achieve profitability.

 

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Cash Flows and Cash Position

 

The Company saw no change in its ending cash balance ($0) over the six months ended June 30, 2020. Net cash of $355,449 used in operating activities was offset by net financing cash of $355,449 raised via private placements and from the issuance of convertible debt and a PPP loan. Cash at the end of the period was $0.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, the Company is not required to provide the information required by this item.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Company carried out an evaluation, with the participation of all the Company’s officers, of the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2020. The conclusions of the Company’s principal officers was that the controls and procedures in place were not effective such that, the information required to be disclosed in our exchange and commission reports was a) recorded, processed, summarized and reported within the time periods specified in the appropriate exchange and commission rules and forms, and b) accumulated and communicated to our management, including our chief executive offer and chief operating officer, as appropriate to allow timely decisions regarding required disclosure.

 

Internal Control over Financial Reporting

 

During the last fiscal quarter there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). We identified the following material weakness:

 

☐	Our discovery of an error that was corrected in 2019, to properly account for our contract assets in accordance with relevant accounting guidance for revenue recognition.

 

As additional resources become available, we will work to remediate this identified material weakness.

 

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Part II

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company has filed a lawsuit against a distributor for breach of contract resulting in losses to the Company estimated to be in excess of $1,000,000.  Management believes the currently scheduled trial date in October 2020 will be delayed into early 2021 as a result of the backlog of cases due to COVID-19.

 

Item 1A. Risk Factors.

 

As a smaller reporting company, the Company is not required to provide the information required by this item, however for a discussion of risk factors affecting the Company please refer to the Cautionary Note Regarding Forward-looking Statements included in Part I Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the six months covered by this report and ended June 30, 2020, the following securities were sold or issued:

 

During the six months ended June 30, 2020, the Company sold a total of 26,750,000 shares of common stock for proceeds of $151,250.

 

During the six months ended June 30, 2020, the Company issued a total of 819,264,782 shares of common stock for the conversion of debt, accrued interest and fees, and the conversion of series A preferred stock and accrued dividends.

 

During the six months ended June 30, 2020, the Company issued 62,579,483 shares of common stock for the cashless exercise of warrants.

 

During the six months ended June 30, 2020, the Company issued 26,828,800 shares of common stock for the conversion of accrued expenses owed to the CEO and VP of Operations.

 

On April 9, 2019 and separately on June 11, 2019, the Company entered into a Series A Preferred Stock Purchase Agreement with an investor. On April 9, 2019, the Company issued 86,000 shares for net proceeds of $75,000 (after deducting $3,000 of direct legal costs) and on June 11, 2019, the Company issued 58,300 shares for net proceeds of $50,000 (after $3,000 deduction of direct legal costs).

 

On September 17, 2019, the Company entered into a Series A Preferred Stock Purchase Agreement with an investor. The Company issued 58,300 shares for net proceeds of $50,000 (after $3,000 deduction of direct legal costs).

 

On February 25, 2020, the Company entered into a Series A Preferred Stock Purchase Agreement with an investor. The Company issued 47,300 shares for proceeds of $43,000.

 

During the quarter ended June 30, 2020, the Company entered into two Series A Preferred Stock Purchase Agreements with an investor. The Company issued 100,100 shares for proceeds of $91,000.

 

Item 3. Defaults Upon Senior Securities.

 

There has been no material default in the payment of any element of indebtedness of the Company. The Company has no preferred stock for which dividends are paid, hence no related arrearage or delinquencies in payments of dividends.

 

Item 4. Mine Safety Disclosures.

 

The Company is not an operator, nor has a subsidiary that is an operator, of a coal or other mine.

 

Item 5. Other Information.

 

During the period covered by this report there was no information, required to be disclosed in a report on Form 8-K, that was not reported.

 

During the period covered by this report there were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors.

 

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Item 6. Exhibits.

 

Exhibit		Index
31.1		Certification – Rule 13(a)-14(a)/15d-14(a) - CEO
32.1		Certification – Section 1350 - CEO
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	IGEN Networks Corp
August 19, 2020	By:	/s/ Neil Chan
		Neil Chan
		Chief Executive Officer and Director
		(Principal Executive Officer, Principal Financing
		Officer and Principal Accounting Officer)

 

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