The Company’s consolidated financial statements for the years ended December 31, 2017 and 2016 are included herewith.
(The accompanying notes are an integral part of these consolidated financial statements)
(The accompanying notes are an integral part of these consolidated financial statements)
(The accompanying notes are an integral part of these consolidated financial statements)
(The accompanying notes are an integral part of these consolidated financial statements)
Notes to the Consolidated Financial Statements
Years Ended December 31, 2017 and 2016
(Expressed in U.S. dollars)
1.
Organization and Description of Business
IGEN Networks Corp, (“IGEN”, or the “Company”) was incorporated in the State of Nevada on November 14, 2006. IGEN has three lines of businesses: (i) investing in and managing private high-tech companies that offer products and services in the domains of wireless broadband and machine-to-machine communications and applications; (ii) negotiating distribution agreements with relevant organizations and selling their products and services through the distribution channels of IGEN; and (iii) providing lot inventory management, asset tracking, and stolen vehicle recovery solutions to the automotive dealership industry and its customers through its wholly-owned subsidiary, Nimbo, LLC (“Nimbo”).
Going Concern
The consolidated financial statements as of and for the year ended December 31, 2017 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 during the years ended December 31, 2017 and 2016, has a working capital deficit of $1,715,277 and an accumulated deficit of $10,223,288 as of December 31, 2017, 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 consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
2.
Summary of Significant Accounting Policies
Basic of Presentation and Consolidation
These consolidated financial statements and related notes include the records of the Company and the Company’s wholly-owned subsidiaries, Nimbo, which is formed in the USA, and IGEN Business Solutions, Inc. (“IBS”), which was incorporated in Canada (see below).
All intercompany transactions and balances have been eliminated. These consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), are expressed in U.S. dollars, and, in management’s opinion, have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.
Use of Estimates
The preparation of these 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 derivative liabilities, fair value of stock-based compensation, 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.
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.
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 recorded during the years ended December 31, 2017 and 2016.
Equipment
Office equipment, computer equipment, and software are recorded at cost. Amortization 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, 2017. For purposes of computing depreciation, the method of depreciating equipment is as follows:
|
Computer equipment
|
55% declining balance
|
|
Office equipment
|
20% declining balance
|
|
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, during the fourth quarter, 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.
The impairment testing is carried out in two steps. In the first step, the carrying amount of the reporting unit including goodwill is compared with its fair value. When the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit is considered to be impaired and the second step is necessary.
If the total of the expected undiscounted future cash flows is less than the carrying amount of the goodwill, a loss is recognized for the excess of the carrying amount over the fair value of the goodwill. Establishing an implied fair value of goodwill requires the Company to make estimates for key inputs into complex valuation models and to apply significant judgment in the selection of estimates, assumptions and methodologies required to complete the analysis. Areas of judgment include, but are not limited to, development of multi-year business cash flow forecasts, the selection of discount rates, and the identification and valuation of unrecorded assets.
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. Subsequent expenditure relating to an item of office equipment is capitalized when it is probable that future economic benefits from the use of the assets will be increased.
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.
The fair values of cash, 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 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 in what it believes to be credit-worthy financial institutions.
Revenue Recognition and Deferred Revenue
The Company derives revenue from the sale of devices and services provided in relation to vehicle tracking and recovery. In accordance with ASC 605, “Revenue Recognition”, revenue is recognized when all the following conditions are met:
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·
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There is clear evidence that an arrangement exists;
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|
|
·
|
Services are provided or products are delivered to customers;
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|
|
·
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Amounts are fixed or can be determined;
|
|
|
·
|
The ability to collect is reasonably assured;
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|
|
·
|
There is no significant obligation for future performance; and
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|
|
·
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The amount of future returns can be reasonably estimated.
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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 considered reasonably assured at the time of sale, the Company does not recognize revenue until collection occurs.
The Company has determined that the sale of our vehicle tracking device and related service is considered one unit of accounting and the revenue related to the sale is deferred and recognized over the service term, typically one year.
Revenue relating to the sale of service renewal fees on its vehicle tracking and recovery services is recognized over the life of the contract. The service renewal fees are offered in terms ranging from 12 to 36 months and are generally payable in full upon renewal.
Any revenue that has been deferred and is expected to be recognized beyond one year is classified as long-term deferred revenue.
Financing Costs and Debt Discount
Financing costs and debt discounts are recorded net of notes payable and convertible debentures in the consolidated balances sheet. 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.
Foreign Currency Translation
The Company’s reporting currency is the U.S. dollar. The consolidated financial statements of the Company are translated to U.S. dollars in accordance with ASC 830, “Foreign Currency Translation Matters”. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets, liabilities and items recorded in income arising from transactions denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income.
Assets and liabilities of the Company’s Canadian subsidiary are translated into U.S. dollars at the year-end exchange rates, and revenue and expenses are translated at the average exchange rates during the period. Exchange differences arising on translation are disclosed as a separate component of stockholders’ deficit.
Stock-based Compensation
The estimated fair values of employee stock option grants are determined as of the date of grant using the Black-Scholes option pricing model. This method incorporates the fair value of our common stock at the date of each grant and various assumptions such as the risk-free interest rate, expected volatility based on the historic volatility of publicly-traded peer companies, expected dividend yield, and expected term of the options. The estimated fair values of restricted stock awards are determined based on the fair value of our common stock on the date of grant. The estimated fair values of stock-based awards, including the effect of estimated forfeitures, are expensed over the requisite service period, which is generally the awards’ vesting period. We classify stock-based compensation expense in the consolidated statement of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified.
Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the guidance of ASC 718, “Compensation – Stock Compensation”. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance is reached. For transactions in which the fair value of the equity instrument issued to non-employees is the more reliable measurement and a measurement date has not been reached, the fair value is re-measured at each vesting and reporting date using the Black-Scholes option pricing model. Compensation expense for these share-based awards is recognized over the term of the consulting agreement or until the award is approved and settled.
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, 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 December 31, 2017 and 2016, the Company has 13,021,952 and 8,055,294 potentially dilutive shares outstanding, respectively.
Comprehensive Income (Loss)
ASC 220, “Comprehensive Income” establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. For the years ended December 31, 2017, and 2016, comprehensive income (loss) consists of foreign currency translation gains and losses.
Reclassifications
Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s presentation.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers". This new standard will replace most of the existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The new standard, as amended, becomes effective in the first quarter of fiscal year 2018, but allows the adoption of the standard one year earlier. The Company has not yet selected a transition method and is currently assessing the impact the adoption of ASU 2014-09 will have on its consolidated financial statements and disclosures.
In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, “Leases”. This new guidance was initiated as a joint project with the International Accounting Standards Board to simplify lease accounting and improve the quality of and comparability of financial information for users. This new guidance would eliminate the concept of off-balance sheet treatment for “operating leases” for lessees for the vast majority of lease contracts. Under ASU No. 2016-02, at inception, a lessee must classify all leases with a term of over one year as either finance or operating, with both classifications resulting in the recognition of a defined “right-of-use” asset and a lease liability on the balance sheet. However, recognition in the income statement will differ depending on the lease classification, with finance leases recognizing the amortization of the right-of-use asset separate from the interest on the lease liability and operating leases recognizing a single total lease expense. Lessor accounting under ASU No. 2016-02 would be substantially unchanged from the previous lease requirements under GAAP. ASU No. 2016-02 will take effect for public companies in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. The Company is currently evaluating the new guidance and have not determined the impact this standard may have on the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows: Classification of Restricted Cash”, which updates the guidance as to how restricted cash should be presented and classified. The updates are intended to reduce diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The Company expects the implementation of this standard to have an impact on the Company’s consolidated financial statements and related disclosures as the Company had restricted cash on our consolidated balance sheet of $25,000 as of December 31, 2017, and currently do not present the amount as a cash equivalent in our consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other”. ASU 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment should be applied on a prospective basis and is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect ASU 2017-04 to have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
The Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its consolidated financial position or results of operations.
3.
Accounts and Other Receivables
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|
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December 31,
2017
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|
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December 31,
2016
|
|
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Trade accounts receivable
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$
|
55,575
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|
|
$
|
149,825
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|
|
GST and other receivable
|
|
|
164
|
|
|
|
14,222
|
|
|
Allowance for doubtful accounts
|
|
|
(1,618
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)
|
|
|
(1,618
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)
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|
|
|
$
|
54,121
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|
|
$
|
162,429
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|
4.
Equipment
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
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Computer equipment
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|
$
|
44,166
|
|
|
$
|
52,303
|
|
|
Office equipment
|
|
|
1,603
|
|
|
|
1,603
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|
|
Software
|
|
|
6,012
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|
|
|
6,012
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|
|
Total
|
|
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51,781
|
|
|
|
59,818
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|
|
Accumulated depreciation
|
|
|
(48,928
|
)
|
|
|
(52,533
|
)
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|
Total
|
|
$
|
2,853
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|
|
$
|
7,385
|
|
5.
Goodwill
As of December 31, 2017 and 2016, the Company had goodwill of $505,508 related to the acquisition of Nimbo.
6.
Accounts Payable and Accrued Liabilities
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|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Trade accounts payable
|
|
|
623,375
|
|
|
$
|
652,537
|
|
|
Accrued liabilities
|
|
|
49,696
|
|
|
|
39,035
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|
|
Accrued interest payable
|
|
|
17,057
|
|
|
|
12,862
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|
|
Payroll and commissions payable
|
|
|
84,299
|
|
|
|
32,063
|
|
|
Unrecognized tax position
|
|
|
80,000
|
|
|
|
-
|
|
|
Taxes payable
|
|
|
4,481
|
|
|
|
6,379
|
|
|
|
|
|
858,908
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|
|
$
|
742,876
|
|
7.
Notes Payable
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(a)
|
On September 30, 2014, the Company issued a note payable with principal of $95,000 in exchange for settlement of accounts payable of the same amount. The note payable was unsecured, bore interest at 5% per annum, and was due on demand. The note payable was accounted for at amortized cost using the effective interest rate method with the effective interest rate of 14% per annum. The Company recorded a debt discount of $16,163 to the note payable, which was amortized in full as of December 31, 2016, and a corresponding amount to additional paid-in capital at issuance. During the year ended December 31, 2016, the Company amortized $7,762 of the debt discount to interest expense. During the year ended December 31, 2016, the Company repaid $30,000 of the principal. During the year ended December 31, 2017, the Company repaid the remaining balance of $65,000 of the principal and $7,000 of accrued interest. As of December 31, 2017 and 2016, the carrying value of the note payable was $0 and $65,000, respectively, and the Company had an outstanding accrued interest balance of $0 and $10,711, respectively, which has been included in accounts payable and accrued liabilities.
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|
|
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(b)
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As of December 31, 2017 and 2016, the Company had a note payable with a principal balance of $11,952 (Cdn$15,000) and $14,998 (Cdn$20,000), respectively, owed to a director, which is unsecured, bears interest at 5% per annum, and was due on October 30, 2017, and is now due on demand. As of December 31, 2017 and 2016, the Company had an outstanding accrued interest balance of $2,386 (Cdn$2,960) and $2,151 (Cdn$2,373), respectively, which has been included in accounts payable and accrued liabilities.
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|
|
|
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(c)
|
On March 23, 2017, the Company entered into a loan agreement with a third party for a principal amount of $8,695, which includes a one-time loan fee of $695, which was charged to interest expense. The note payable is unsecured, non-interest bearing, and requires minimum payments of 10% of the loan every ninety days from the start date of March 26, 2017. 25% of all funds processed through the Company’s PayPal account will be used to pay off the loan until the loan is repaid in full. As of December 31, 2017 and 2016, the balance of the note payable was $2,626 and $0, respectively.
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8.
Convertible Debentures
|
(a)
|
On June 1, 2016, the Company issued two convertible debentures in the principal amounts of $37,577 (Cdn$50,000) and $15,031 (Cdn$20,000), respectively. Under the terms of the debentures, the amounts were unsecured, bore interest at 15% per annum, payable monthly or at term, and were due on the four month anniversary of the closing dates of June 8, 2016 (i.e. October 8, 2016). Subject to the approval of the holder of the convertible debentures, the Company may convert any or all of the principal and/or interest at any time following the four month anniversary of the issuance date of the convertible debentures into common shares of the Company at a price per share equal to a 20% discount to the fair market value of the Company’s common stock.
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|
|
|
|
|
The Company analyzed the conversion option under ASC 815, “Accounting for Derivative Instruments and Hedging Activities” (“ASC 815”), and determined that the conversion feature should be classified as a liability and recorded at fair value due to there being no explicit limit to the number of shares to be delivered upon settlement of the conversion option. In accordance with ASC 815, the Company recognized the estimated fair value of the embedded conversion feature of $26,306. On October 8, 2016, the note became convertible resulting in the Company recording a derivative liability of $26,306 with a corresponding adjustment to loss on change in fair value of derivative liabilities. On October 13, 2016, the Company issued 512,880 shares of common stock for the full conversion of $54,087 (Cdn$70,000) of these debentures and $2,941 (Cdn$3,855) of accrued interest (see Note 11). During the year ended December 31, 2016, the Company amortized $26,306 of the debt discount to accretion of discount on convertible debentures expense.
|
|
(b)
|
On March 30, 2017, the Company issued a convertible debenture to a third party in the principal amount of $50,000 which is unsecured, bears interest at 12% per annum, calculated monthly, and was due on September 30, 2017, and is now due on demand. Subject to the approval of the holder of the convertible debenture, the Company may convert any or all of the principal and/or interest at any time following the six month anniversary of the issuance date of the convertible debenture (September 30, 2017) into common shares of the Company at a price per share equal to a 20% discount to the fair market value of the Company’s common stock. The estimated fair value of the derivative liability resulted in a discount to the convertible debenture of $32,127, which was accreted over the term of the convertible debenture. During the years ended December 31, 2017 and 2016, $32,127 and $0, respectively, of amortization expense was recorded. As of December 31, 2017 and 2016, the carrying value of the convertible debenture is $50,000 and $0, respectively.
|
|
(c)
|
On May 1, 2017, the Company issued two convertible debentures for aggregate proceeds of $50,000 which were unsecured, bore interest at 12% per annum, calculated monthly, and were due on May 1, 2019. Subject to the approval of the holder of the convertible debenture, the Company may convert any or all of the principal and/or interest at any time following the six month anniversary of the issuance date of the convertible debenture (November 1, 2017) into common shares of the Company at a price per share equal to a 20% discount to the fair market value of the Company’s common stock. The estimated fair value of the derivative liabilities resulted in a discount to the convertible debentures of $45,400, which was accreted over the term of the convertible debenture. On November 1, 2017, the Company issued 625,000 shares of common stock for the full conversion of these debentures. The discount was amortized in full as a result of the conversion. During the years ended December 31, 2017 and 2016, $45,400 and $0, respectively, of accretion expense was recorded.
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|
|
|
|
(d)
|
On August 7, 2017, the Company issued a convertible debenture to a third party in the principal amount of $161,250 with an original issuance discount of $11,250 and incurred $3,500 of financing costs to a third party, which is unsecured, bears interest at 5% per annum, and is due on August 7, 2018. The holder may convert any or all of the principal and/or interest at any time following the six month anniversary of the issuance date of the convertible debenture (February 7, 2018) into common shares of the Company at a price per share equal to 75% multiplied by the closing price of the Company’s common stock preceding the trading day that the Company receives a notice of conversion. The estimated fair value of the derivative liabilities of $153,827 resulted in a discount to the convertible debenture, which will be amortized over the term of the convertible debenture. During the years ended December 31, 2017 and 2016, $47,632 and $0, respectively, of amortization expense was recorded. As of December 31, 2017 and 2016, the carrying value of the convertible debenture is $55,055 and $0, respectively.
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|
|
|
|
(e)
|
On December 18, 2017, the Company issued a convertible debenture to a third party in the principal amount of $55,000 with an original issuance discount of $5,000 and incurred $1,500 of financing costs to a third party, which is unsecured, bears interest at 2% per annum, and is due on June 18, 2018. The holder may convert any or all of the principal and/or interest at any time following the six month anniversary of the issuance date of the convertible debenture (June 18, 2018) into common shares of the Company at a price per share equal to 75% multiplied by the closing price of the Company’s common stock preceding the trading day that the Company receives a notice of conversion. The estimated fair value of the derivative liabilities of $47,071 resulted in a discount to the convertible debenture, which will be amortized over the term of the convertible debenture. During the year ended December 31, 2017 and 2016, $72 and $0, respectively, of amortization expense was recorded. As of December 31, 2017 and 2016, the carrying value of the convertible debenture is $8,001 and $0, respectively.
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9.
Derivative Liabilities
During the year ended December 31, 2016, the Company issued share purchase warrants as part of private placements with exercise prices denominated in Canadian dollars, which differs from the Company’s functional currency of U.S. dollars (Note 12) and cannot be considered to be indexed to the Company’s own stock. The Company records the fair value of its share purchase warrants with a Cdn$ exercise price 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. As of December 31, 2017 and 2016, the Company had a derivative liability of $7,642 and $27,930, respectively, relating to the share purchase warrants. The Company uses a multi-nominal lattice model to fair value the derivative liabilities. The following inputs and assumptions were used to value the share purchase warrants denominated in Canadian dollars during the years ended December 31, 2017 and 2016, assuming no expected dividends:
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|
|
2017
|
|
|
2016
|
|
|
Expected volatility
|
|
|
195% - 196
|
%
|
|
|
148% - 233
|
%
|
|
Risk free interest rate
|
|
|
1.06% - 1.39
|
%
|
|
|
0.44% - 0.85
|
%
|
|
Expected life (in years)
|
|
|
0.25 – 0.50
|
|
|
|
0.40 - 1.20
|
|
During the years ended December 31, 2017 and 2016, the Company issued convertible debentures with variable exercise prices based on market rates (see Note 8). 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 years ended December 31, 2017 and 2016, assuming no expected dividends:
|
|
|
2017
|
|
|
2016
|
|
|
Expected volatility
|
|
|
187% - 225
|
%
|
|
|
175 - 233
|
%
|
|
Risk free interest rate
|
|
|
1.22% - 1.62
|
%
|
|
|
0.26
|
%
|
|
Expected life (in years)
|
|
|
0.16 – 1.50
|
|
|
|
0.10
|
|
The following table provides a reconciliation of the beginning and ending balances for our liabilities measured at fair value using Level 3 inputs for the years ended December 31:
|
|
|
2017
|
|
|
2016
|
|
|
Balance at January 1,
|
|
$
|
27,930
|
|
|
$
|
33,982
|
|
|
Issuance of embedded conversion derivative liabilities
|
|
|
278,425
|
|
|
|
26,306
|
|
|
Extinguishment due to conversion of convertible debentures
|
|
|
(51,710
|
)
|
|
|
(22,041
|
)
|
|
Change in fair value
|
|
|
(27,482
|
)
|
|
|
(10,317
|
)
|
|
Total
|
|
$
|
227,163
|
|
|
$
|
27,930
|
|
10.
Related Party Transactions
|
(a)
|
During the years ended December 31, 2017 and 2016, the Company incurred $227,080 and $250,200, respectively, in management and consulting fees to two officers and a Company controlled by a director.
|
|
|
|
|
(b)
|
As of December 31, 2017 and 2016, the Company owed $133,535 and $132,053, 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.
|
11.
Stockholders’ Deficit
Preferred Stock
On January 17, 2018, a new class of preferred stock consisting of 10,000,000 shares, with rights and privileges to be determined by the Board of Directors at a later date, was approved by the stockholders of the Company.
Common Stock
2017
|
(a)
|
On March 2, 2017, the Company issued 2,222,222 units at $0.09 per unit for proceeds of $200,000. Each unit consisted of one share of common stock and one share purchase warrant exercisable until March 2, 2019. The share purchase warrant is exercisable at $0.18 per share for the first year and $0.23 per share thereafter.
|
|
|
|
|
(b)
|
On March 2, 2017, the Company issued 56,000 shares of common stock with a fair value of $5,640 based on the closing price of the Company’s common stock for consulting services rendered by a company controlled by the Vice President of Finance of the Company.
|
|
|
|
|
(c)
|
On April 20, 2017, the Company issued 49,020 shares of common stock with a fair value of $5,392 based on the closing price of the Company’s common stock for consulting services rendered.
|
|
|
|
|
(d)
|
On June 23, 2017, the Company issued 147,059 units at $0.17 per unit for proceeds of $25,000 which was received as at December 31, 2016. Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.35 per share for a period of two years from their date of issuance.
|
|
|
|
|
(e)
|
On July 1, 2017, the Company issued 49,020 shares of common stock with a fair value of $4,902 based on the closing price of the Company’s common stock for consulting services rendered.
|
|
|
|
|
(f)
|
On August 29, 2017, the Company issued 1,875,000 shares of common stock at $0.08 per share for proceeds of $150,000.
|
|
|
|
|
(g)
|
On September 7, 2017, the Company issued 49,020 shares of common stock with a fair value of $3,922 based on the closing price of the Company’s common stock for consulting services rendered.
|
|
|
|
|
(h)
|
On October 1, 2017, the Company issued 75,000 shares of common stock with a fair value of $6,000 based on the closing price of the Company’s common stock for consulting services rendered.
|
|
|
|
|
(i)
|
On October 5, 2017, the Company issued 50,000 shares of common stock with a fair value of $4,000 based on the closing price of the Company’s common stock for consulting services rendered.
|
|
(j)
|
On October 17, 2017, the Company issued 150,000 shares of common stock to an employee with a fair value of $12,000 based on the closing price of the Company’s common stock for a bonus.
|
|
|
|
|
(k)
|
On November 1, 2017, the Company issued 625,000 shares of common stock with a fair value of $62,500 based on the closing price of the Company’s common stock for the conversion of two convertible notes payable with an aggregate value of $50,000 and derivative liabilities of $51,710. The Company recorded a gain on settlement of debt of $39,210 in connection with this debt settlement.
|
|
|
|
|
(l)
|
On November 6, 2017, the Company issued 1,428,571 shares of common stock at $0.07 per share for proceeds of $100,000.
|
|
|
|
|
(m)
|
On December 31, 2017, the Company issued 49,020 shares of common stock with a fair value of $4,902 based on the closing price of the Company’s common stock for consulting services rendered.
|
|
|
|
|
(n)
|
During the year ended December 31, 2015, the Company issued 498,801 shares of common stock with a fair value of $107,944 based on the closing price of the Company’s common stock for services. Of this amount, $70,300 relates to services to be rendered, which was recorded as deferred compensation. During the year ended December 31, 2017, the Company expensed $19,592 (2016 - $34,978) of the deferred compensation as consulting fees, which reflects the pro-rata portion of the services provided through July 24, 2017. The services have been fully earned as of July 24, 2017.
|
2016
|
(o)
|
On January 7, 2016, the Company issued 55,556 shares of common stock for proceeds of $5,000 pursuant to the exercise of options.
|
|
|
|
|
(p)
|
On March 29, 2016, the Company issued 588,240 units for proceeds of $76,029 (Cdn$100,000). Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.25 (Cdn$0.34) per share until March 29, 2018.
|
|
|
|
|
(q)
|
On May 4, 2016, the Company issued 250,000 units for proceeds of $22,770 (Cdn$30,000). Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.15 per share until May 4, 2018.
|
|
|
|
|
(r)
|
On June 9, 2016, the Company issued 312,500 units for proceeds of $39,283 (Cdn$50,000). Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.20 per share until June 9, 2017.
|
|
|
|
|
(s)
|
On October 12, 2016, the Company issued 357,143 units for proceeds of $37,659 (Cdn$50,000). Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.18 per share until October 12, 2017. In relation to this financing, the Company paid finder’s fees of $3,542, which was recorded as share issuance costs.
|
|
|
|
|
(t)
|
On October 12, 2016, the Company issued 50,000 shares of common stock with a fair value of $7,500 based on the closing price of the Company’s common stock for the settlement of debt of $6,000. There Company recorded a loss on settlement of debt of $1,500 in connection with this debt settlement.
|
|
|
|
|
(u)
|
On October 12, 2016, the Company issued 512,880 shares of common stock upon the conversion of two convertible debentures and accrued interest totaling $79,065.
|
|
|
|
|
(v)
|
On December 5, 2016, the Company issued 980,392 units for proceeds of $100,000. Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.15 per share until December 5, 2017.
|
|
|
|
|
(w)
|
On December 13, 2016, the Company issued 588,235 units for proceeds of $50,000. Each unit consisted of one share of common stock and one share purchase warrant exercisable at $0.12 per share until December 13, 2017.
|
|
|
|
|
(x)
|
During the year ended December 31, 2016, the Company issued 479,290 shares of common stock with the fair value of $60,480 based on the closing price of the Company’s common stock for consulting services rendered by external consultants.
|
12.
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, 2015
|
|
|
1,125,843
|
|
|
$
|
0.30
|
|
|
Issued
|
|
|
3,076,510
|
|
|
|
0.17
|
|
|
Expired
|
|
|
(147,059
|
)
|
|
|
0.40
|
|
|
Balance, December 31, 2016
|
|
|
4,055,294
|
|
|
|
0.20
|
|
|
Issued
|
|
|
2,419,281
|
|
|
|
0.17
|
|
|
Expired
|
|
|
(2,236,662
|
)
|
|
|
0.22
|
|
|
Balance, December 31, 2017
|
|
|
4,237,913
|
|
|
$
|
0.19
|
|
As of December 31, 2017, the following share purchase warrants were outstanding:
|
Number of warrants outstanding
|
|
|
Exercise price
|
|
|
Expiration date
|
|
|
|
588,240
|
|
|
Cdn$0.34
|
|
|
March 29, 2018
|
|
|
|
250,000
|
|
|
$
|
0.15
|
|
|
May 4, 2018
|
|
|
|
2,222,222
|
|
|
$
|
0.18
|
|
|
March 2, 2019
|
|
|
|
147,059
|
|
|
$
|
0.35
|
|
|
June 23, 2019
|
|
|
|
980,392
|
|
|
$
|
0.15
|
|
|
December 2, 2021
|
|
|
|
50,000
|
|
|
$
|
0.20
|
|
|
January 2, 2022
|
|
|
|
4,237,913
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2017, the Company issued 50,000 share purchase warrants with a fair value of $2,185 as contract fees to a third party for future financing, which was recorded as stock-based compensation expense. The Company uses the Black-Scholes option pricing model to establish the fair value of share purchase warrants issued, assuming no expected dividends or forfeitures, volatility of 173%, risk-free rate of 1.14%, and an expected life of 3 years.
13.
Stock Options
The following table summarizes the continuity schedule of the Company’s stock options:
|
|
|
Number of
options
|
|
|
Weighted average exercise price
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
4,080,556
|
|
|
$
|
0.12
|
|
|
|
|
|
Granted
|
|
|
675,000
|
|
|
|
0.13
|
|
|
|
|
|
Exercised
|
|
|
(55,556
|
)
|
|
|
0.09
|
|
|
|
|
|
Cancelled / forfeited
|
|
|
(700,000
|
)
|
|
|
0.18
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
4,000,000
|
|
|
|
0.16
|
|
|
|
|
|
Granted
|
|
|
1,800,000
|
|
|
|
0.12
|
|
|
|
|
|
Cancelled / forfeited
|
|
|
(625,000
|
)
|
|
|
0.14
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
5,175,000
|
|
|
$
|
0.15
|
|
|
$
|
11,350
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
75,000
|
|
|
|
0.3
|
|
|
$
|
0.07
|
|
|
|
75,000
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
|
250,000
|
|
|
|
4.8
|
|
|
|
0.08
|
|
|
|
250,000
|
|
|
|
0.08
|
|
|
$
|
0.09
|
|
|
|
910,000
|
|
|
|
0.3
|
|
|
|
0.09
|
|
|
|
910,000
|
|
|
|
0.09
|
|
|
$
|
0.13
|
|
|
|
1,425,000
|
|
|
|
4.4
|
|
|
|
0.13
|
|
|
|
1,100,000
|
|
|
|
0.13
|
|
|
$
|
0.16
|
|
|
|
225,000
|
|
|
|
3.1
|
|
|
|
0.16
|
|
|
|
112,500
|
|
|
|
0.16
|
|
|
$
|
0.19
|
|
|
|
2,270,000
|
|
|
|
2.7
|
|
|
|
0.19
|
|
|
|
2,270,000
|
|
|
|
0.19
|
|
|
Cdn$0.25
|
|
|
|
20,000
|
|
|
|
2.7
|
|
|
Cdn$0.25
|
|
|
|
20,000
|
|
|
Cdn$0.25
|
|
|
|
|
|
|
|
5,175,000
|
|
|
|
2.8
|
|
|
$
|
0.15
|
|
|
|
4,737,500
|
|
|
$
|
0.15
|
|
2017
On May 11, 2017, the Company granted 1,550,000 stock options to officers, directors, employees, and consultants of the Company, which are exercisable at $0.13 per share and expire on May 11, 2022. Of this amount, 1,150,000 stock options vested on the date of grant, 50,000 stock options vested on October 21, 2017, 50,000 stock options vested on November 11, 2017, and the remaining 300,000 stock options are scheduled to vest on May 11, 2018. During the year ended December 31, 2017, one employee and one consultant were terminated and a total of 125,000 options were cancelled.
On October 6, 2017, the Company granted 250,000 stock options to a consultant, which are exercisable at $0.08 per share, expire on October 6, 2022 and vested immediately.
2016
On April 18, 2016, the Company granted 200,000 stock options to an employee with an exercise price of $0.14 per share with an expiry date of April 18, 2020. The options vest 25% on July 18, 2016, 25% on October 18, 2016, and 50% on April 18, 2017.
On July 21, 2016, the Company granted 150,000 stock options to an employee with an exercise price of $0.16 per share with an expiry date of November 1, 2020. The options vest 50% on November 1, 2016 and 50% on November 1, 2017.
On July 21, 2016, the Company granted 25,000 stock options to an employee with an exercise price of $0.16 per share with an expiry date of July 21, 2021. The options vest 50% on July 21, 2017 and 50% on July 21, 2018.
On October 3, 2016, the Company granted 50,000 stock options to two consultants with an exercise price of $0.16 per share with an expiry date of October 3, 2021. The options vest 50% on August 9, 2017 and 50% on August 9, 2018.
On October 3, 2016, the Company granted 250,000 stock options to a consultant with an exercise price of $0.10 per share with an expiry date of October 3, 2021. The options vest 20% immediately and 200,000 quarterly thereafter.
The fair values of stock options granted are amortized over the vesting period where applicable. During the years ended December 31, 2017 and 2016, the Company recorded $165,587 and $52,702, respectively, in stock-based compensation in connection with the vesting of options granted. The Company uses the Black-Scholes option pricing model to establish the fair value of options granted assuming no expected dividends or forfeitures and the following weighted average assumptions:
|
|
|
2017
|
|
|
2016
|
|
|
Expected volatility
|
|
|
136
|
%
|
|
|
124
|
%
|
|
Risk free interest rate
|
|
|
1.80
|
%
|
|
|
1.16
|
%
|
|
Expected life (in years)
|
|
|
4.8
|
|
|
|
4.0
|
|
14.
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.
15.
Concentration Risk
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 years ended December 31, 2017 and 2016, the Company had two customers which accounted for 74% and 66%, respectively, of total invoiced amounts, which are recorded as deferred revenues and amortized over the related service period to revenues.
As of December 31, 2017 and 2016, the Company had three and two customers, respectively, which accounted for 100% and 90%, respectively, of the gross accounts receivable balance.
16.
Income Taxes
The Company’s income tax provision consists of the following:
|
|
|
2017
|
|
|
2016
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
80,000
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
Total Current
|
|
|
80,000
|
|
|
|
-
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
Total Deferred
|
|
|
-
|
|
|
|
-
|
|
|
Provision for income taxes
|
|
$
|
80,000
|
|
|
$
|
-
|
|
A reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company's loss before income taxes to the income tax provision is as follows:
|
|
|
2017
|
|
|
2016
|
|
|
Computed tax benefit at federal statutory rate
|
|
$
|
(441,204
|
)
|
|
$
|
(334,703
|
)
|
|
Permanent items
|
|
|
(4,016
|
)
|
|
|
78,459
|
|
|
Stock-based compensation
|
|
|
21,635
|
|
|
|
-
|
|
|
Incentive stock options
|
|
|
57,042
|
|
|
|
-
|
|
|
Conversion feature derivative liability
|
|
|
16,785
|
|
|
|
-
|
|
|
Impact of tax law change in rate
|
|
|
720,057
|
|
|
|
-
|
|
|
Change in tax rates and true up
|
|
|
-
|
|
|
|
(262,355
|
)
|
|
Uncertain tax positions
|
|
|
80,000
|
|
|
|
-
|
|
|
Impact of difference related to foreign earnings
|
|
|
-
|
|
|
|
33,247
|
|
|
Valuation allowance
|
|
|
(370,299
|
)
|
|
|
485,352
|
|
|
Provision for income taxes
|
|
$
|
80,000
|
|
|
$
|
-
|
|
Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
|
|
|
2017
|
|
|
2016
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,798,000
|
|
|
$
|
2,236,248
|
|
|
Stock-based compensation
|
|
|
1,000
|
|
|
|
-
|
|
|
Accounts receivable and other timing differences
|
|
|
121,000
|
|
|
|
-
|
|
|
Basis difference in assets and debt
|
|
|
61,000
|
|
|
|
-
|
|
|
Equipment
|
|
|
-
|
|
|
|
19,367
|
|
|
Share issuance costs
|
|
|
-
|
|
|
|
976
|
|
|
Total Deferred Tax Asset
|
|
|
1,981,000
|
|
|
|
2,256,591
|
|
|
Valuation allowance
|
|
|
(1,981,000
|
)
|
|
|
(2,256,591
|
)
|
|
Net Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets for the U.S. federal, state, and Canada have been fully offset by a valuation allowance.
As of December 31, 2017 and 2016, the Company had net operating loss carryforwards for federal and state income tax purposes of $5,299,849 and $5,954,978, respectively, which expire beginning in the year 2029. As of December 31, 2017, the Company had net operating loss carryforwards for foreign income tax purposes of $1,046,761 which expire beginning in the year 2032.
The Company is required to file US federal, California, and Canadian tax returns. Due to the Company's loss position the statute remains open for any losses carried over into the current year which means all years from 2006 remain open to examination.
The Company has adopted FASB ASC 740, “Income Taxes” to account for income taxes. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statement. This standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. ASC 740 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transaction. In accordance with ASC 740-10-50, the Company is classifying interest and penalties as a component of tax expense.
The Company has a reserve related to unrecognized tax positions of $80,000 as of December 31, 2017, which is presented as part of accounts payable and accrued liabilities. These unrecognized tax positions, if recognized, would affect the effective tax rate. A reconciliation of the change in the unrecognized tax positions for the year ended December 31, 2017 is as follows:
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Federal and
State
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Balance at December 31, 2016
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$
|
-
|
|
|
Additions for tax positions related to current year
|
|
|
10,000
|
|
|
Additions for tax positions related to prior years
|
|
|
70,000
|
|
|
Balance at December 31, 2017
|
|
|
80,000
|
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On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the "Act"). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018. As a result of the rate reduction, the Company has reduced the deferred tax asset balance as of December 31, 2017 by $720,057. Due to the Company's full valuation allowance position, there was no net impact on the Company's income tax provision at December 31, 2017 as the reduction in the deferred tax asset balance was fully offset by a corresponding decrease in the valuation allowance.
In conjunction with the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities at December 31, 2017. There was no net impact on the Company's consolidated financial statements for the year ended December 31, 2017 as the corresponding adjustment was made to the valuation allowance. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act.
17.
Commitments and Contingencies
Operating Lease
In April 2017, we entered into non-cancelable operating lease amendment for 2,119 square feet of office space through April 2019.
Rent expense for the years ended December 31, 2017 and 2016 was approximately $47,000 and $45,000, respectively. As of December 31, 2017, we are obligated to make minimum lease payments under our operating lease as follows:
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Year ending December 31,
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|
Lease
Payments
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|
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2018
|
|
$
|
38,900
|
|
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2019
|
|
|
13,100
|
|
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Total
|
|
$
|
52,000
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Investor Relations Agreement
In September 2017, we entered into an investor relations agreement with a consultant commencing in October 2017 for a period of one year. Per the terms of the agreement, the Company is to provide to the consultant the following: cash fee of $2,500 per month; shares of common stock valued at $7,500 (75,000 shares) for the first three months of service; shares of common stock valued at $22,500 (225,000 shares) for months four through twelve.
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 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.
18. Restatement
In connection with the audit of the Company’s consolidated financial statements for the fiscal year ended December 31, 2017, management of the Company conducted an analysis of the Company’s sales contracts related to its vehicle tracking device and service (“Sales Contracts”) and concluded they should be considered one unit of accounting and the revenue related to the sale should be deferred and recognized over the service term, typically one year. The Company determined that the original accounting for the Sales Contracts failed to appropriately record the sales proceeds as deferred revenue upon collection and recognized over the service term.
As a result of this analysis, the Company concluded that it was necessary to restate its previously filed consolidated financial statements for the year ended December 31, 2016 in the consolidated financial statements for the year ended December 31, 2017. The need to restate the Company’s consolidated financial statements is primarily due to the incorrect application of U.S. GAAP. The restatement is required to properly reflect the Company’s consolidated financial position as of December 31, 2016.
The effect on the consolidated balance sheet for the year ended December 31, 2016 is due to the recording of the Sales Contracts in accordance with U.S. GAAP. Accordingly, the consolidated balance sheet and statement of stockholders’ equity (deficit) for the year ended December 31, 2016 has been retroactively adjusted by $413,318 with no impact on net loss.
19.
Subsequent Events
On January 1, 2018, the Company issued 274,020 shares of common stock to consultants for services provided.
On January 22, 2018, the Company issued 2,777,778 shares of common stock at $0.072 per share for proceeds of $200,000.
On January 29, 2018, the Company issued 5,000,000 shares of common stock at $0.08 per share for proceeds of $400,000.
On February 28, 2018, the Company issued 806,916 shares of common stock for the conversion of $50,000 in principal and $6,000 in accrued interest of a convertible debenture. Refer to Note 8(b).
On March 6, 2018, the Company formed Medallion GPS, LLC, for future business opportunities.
In February and March 2018, the Company issued 554,954 shares of common stock for the conversion of $23,250 in principal of a convertible debenture. Refer to Note 8(d).