The Company’s consolidated financial statements for the years ended December 31, 2018 and 2017 are included herewith.
We have audited the accompanying consolidated balance sheet of IGEN Networks Corp. and subsidiary (the "Company") as of December 31, 2018, the related consolidated statement of operations, other comprehensive loss, stockholders’ deficit and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the 2018 financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
(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, 2018 and 2017
(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 business (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, 2018 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, 2018 and 2017, has a working capital deficit of $1,213,665 and an accumulated deficit of $11,376,368 as of December 31, 2018, 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 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, 2018 and 2017.
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, 2018. 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.
Prior to January 1, 2018, the goodwill impairment test consisted of two steps. In step one, the Company compared the carrying value of each reporting unit to its fair value. In step two, if the carrying value of a reporting unit exceeded its fair value, the Company would measure goodwill impairment as the excess of the carrying value of the reporting unit’s goodwill over the fair value of its goodwill, if any. The fair value of goodwill was derived as the excess of the fair value of the reporting unit over the fair value of the reporting unit’s identifiable assets and liabilities.
Effective January 1, 2018, the Company elected to early adopt guidance issued by the FASB which simplified the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead, as of January 1, 2018 and all subsequent periods, goodwill impairment is measured as the amount by which a reporting unit's carrying value exceeds its fair value.
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 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 Accounting Standards Codification (“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. 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 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.
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.
Any revenue that has been deferred and is expected to be recognized beyond one year is classified as deferred revenue, net of current portion.
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.
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. During 2018, the Company recorded $ 60,910 of accumulated other comprehensive income associated with its formed Canadian Subsidiary that was dissolved in the prior year.
Stock-based Compensation
We account for stock-based compensation under the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) – 718 Compensation – Stock Compensation. The guidance under ASC 718 requires companies to estimate the fair value of the stock-based compensation awards on the date of grant for employees and directors and record expense over the related service periods, which are generally the vesting period of the equity awards. Awards for consultants are accounted for under ASC 505-50 - Equity Based Payments to Non-Employees. The estimated fair values of employee and non - 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. 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, 2018 and 2017, the Company has 8,089,673 and 13,021,952 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, 2018 and 2017, comprehensive income (loss) consists of foreign currency translation gains and losses.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. This new standard replaces most of the existing revenue recognition guidance in U.S. GAAP permits the use of either the retrospective or cumulative effect transition method. The new standard, as amended, became effective in the first quarter of fiscal year 2018. The Company adopted the standard using the modified retrospective method. There was no effect for any adjustments to retained earnings (accumulated deficit) upon adoption of the standard on January 1, 2018.
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 adopted this standard on January 1, 2019, but currently evaluating the impact this standard will have on the consolidated financial statements.
In November 2015, FASB issued ASU No. 2016-08,
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 period within those annual periods, with early adoption permitted. The Company adopted the standard on January 1, 2018 by using the retrospective transition method. Adoption of the standard effected the presentation of cash in the Company’s condensed consolidated statements of cash flows and related disclosures. Restricted cash of $25,000 and $25,000 have been reclassified within the condensed consolidated balance sheets for the periods presented as cash.
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.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation: Scope of Modification Accounting
. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. An entity should account for effects of a modification unless all of the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original ward immediately before the original award is modified. The Company adopted this standard on January 1, 2018. Adoption of the standard did not have an effect on the Company’s 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
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Trade accounts receivable
|
|
$
|
31,567
|
|
|
$
|
55,575
|
|
GST and other receivable
|
|
|
-
|
|
|
|
164
|
|
Allowance for doubtful accounts
|
|
|
(7,014
|
)
|
|
|
(1,618
|
)
|
|
|
$
|
24,553
|
|
|
$
|
54,121
|
|
4.
Equipment
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Computer equipment
|
|
$
|
44,166
|
|
|
$
|
44,166
|
|
Office equipment
|
|
|
1,603
|
|
|
|
1,603
|
|
Software
|
|
|
6,012
|
|
|
|
6,012
|
|
Total
|
|
|
51,781
|
|
|
|
51,781
|
|
Accumulated depreciation
|
|
|
(51,781
|
)
|
|
|
(48,928
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
2,853
|
|
5.
Goodwill
As of December 31, 2018 and 2017, the Company had goodwill of $505,508 related to the acquisition of Nimbo.
6.
Accounts Payable and Accrued Liabilities
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Trade accounts payable
|
|
$
|
612,785
|
|
|
$
|
623,375
|
|
Accrued liabilities
|
|
|
19,862
|
|
|
|
49,696
|
|
Accrued interest payable
|
|
|
19,064
|
|
|
|
17,057
|
|
Payroll and commissions payable
|
|
|
71,971
|
|
|
|
84,299
|
|
Unrecognized tax position
|
|
|
90,000
|
|
|
|
80,000
|
|
Taxes payable
|
|
|
-
|
|
|
|
4,481
|
|
|
|
$
|
813,682
|
|
|
$
|
858,908
|
|
7.
Notes Payable
(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, 2017, the Company repaid the remaining balance of $65,000 of the principal and $7,000 of accrued interest. As of December 31, 2017, the carrying value of the note payable was $0, and the Company had an outstanding accrued interest balance of $0.
|
|
|
(b)
|
As of December 31, 2017, the Company had a note payable with a principal balance of $11,952 (Cdn$15,000) owed to a director, which was unsecured, bore interest at 5% per annum, and was due on October 30, 2017. As of December 31, 2017, the Company had an outstanding accrued interest balance of $2,386 (Cdn$2,960), which has been included in accounts payable and accrued liabilities. During the year ended December 31, 2018, the Company repaid all amounts due related to this note payable.
|
|
|
(c)
|
On March 23, 2017, the Company entered into a loan agreement with a third party for a principal amount of $8,695, which included a one-time loan fee of $695, which was charged to interest expense. The note payable was unsecured, non-interest bearing, and required 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 were used to pay off the loan. As of December 31, 2017, the balance of the note payable was $2,626. During the year ended December 31, 2018, the Company repaid all amounts due related to this loan agreement.
|
8.
Convertible Debentures
(a)
|
On March 30, 2017, the Company issued a convertible debenture to a third party in the principal amount of $50,000 which is unsecured, bore interest at 12% per annum, calculated monthly, and was due on September 30, 2017. Subject to the approval of the holder of the convertible debenture, the Company could 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 year ended December 31, 2017, $32,127 of amortization expense was recorded. As of December 31, 2017, the carrying value of the convertible debenture was $50,000. During the year ended December 31, 2018, the Company converted all amounts due related to this debenture into shares of common stock.
|
(b)
|
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 year ended December 31, 2017, $45,400 of accretion expense was recorded.
|
|
|
(c)
|
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 was unsecured, bore interest at 5% per annum, and was due on August 7, 2018. The holder could 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 was amortized over the term of the convertible debenture. During the years ended December 31, 2017 and 2018, $47,632 and $106,195, respectively, of amortization expense was recorded. As of December 31, 2017, the carrying value of the convertible debenture was $55,055. During the year ended December 31, 2018, the Company repaid $80,000 of principal in cash and converted $81,250 of principal into shares of common stock, leaving no amounts due as of December 31, 2018.
|
|
|
(d)
|
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 was unsecured, bore interest at 2% per annum, and was due on June 18, 2018. The holder could 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 was be amortized over the term of the convertible debenture. During the years ended December 31, 2017 and 2018, $72 and $46,999, respectively, of amortization expense was recorded. As of December 31, 2017, the carrying value of the convertible debenture is $8,001. On July 5, 2018, the Company provided an additional principal to the convertible debentures of $20,000 on the same terms. Related to this increase, the estimated fair value of the conversion feature was $6,698 and was recorded as a debt discount, which was amortized in full during the year ended December 31, 2018. During the year ended December 31, 2018, the Company repaid $55,000 of principal in cash and converted $20,000 of principal into shares of common stock, leaving no amounts due as of December 31, 2018.
|
9.
Derivative Liabilities
During the year ended December 31, 2016, the Company issued share purchase warrants as part of private placements with exercise prices denominated in Canadian dollars, which differs from the Company’s functional currency of U.S. dollars (Note 12) and cannot be considered to be indexed to the Company’s own stock. The Company records the fair value of its share purchase warrants with a Cdn$ 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, the Company had a derivative liability of $7,642 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, 2018 and 2017, assuming no expected dividends:
|
|
2018
|
|
|
2017
|
|
Expected volatility
|
|
|
-
|
%
|
|
|
195% - 196
|
%
|
Risk free interest rate
|
|
|
-
|
%
|
|
|
1.06% - 1.39
|
%
|
Expected life (in years)
|
|
|
-
|
|
|
|
0.25 – 0.50
|
|
During the years ended December 31, 2017, 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, 2018 and 2017, assuming no expected dividends:
|
|
2018
|
|
|
2017
|
|
Expected volatility
|
|
|
334% - 398
|
%
|
|
|
187% - 225
|
%
|
Risk free interest rate
|
|
|
1.49% - 1.73
|
%
|
|
|
1.22% - 1.62
|
%
|
Expected life (in years)
|
|
|
0.0 – 0.4
|
|
|
|
0.16 - 1.50
|
|
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:
|
|
2018
|
|
|
2017
|
|
Balance at January 1,
|
|
$
|
227,163
|
|
|
$
|
27,930
|
|
Issuance of embedded conversion derivative liabilities
|
|
|
6,698
|
|
|
|
278,425
|
|
Extinguishment due to conversion of convertible debentures
|
|
|
(176,820
|
)
|
|
|
(51,710
|
)
|
Change in fair value
|
|
|
(57,041
|
)
|
|
|
(27,482
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
227,163
|
|
10.
Related Party Transactions
(a)
|
During the years ended December 31, 2018 and 2017, the Company incurred $185,049 and $227,080, respectively, in management and consulting fees to officers and a Company controlled by a director.
|
|
|
(b)
|
As of December 31, 2018 and 2017, the Company owed $136,036 and $133,535, 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.
|
|
|
(c)
|
During the year ended December 31, 2018, the Company incurred $493,282, in purchases of hardware from a vendor controlled by a director of the Company. As of December 31, 2018, the amounts owed to this related-party vendor were $101,598.
|
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
2018
(a)
|
On January 1, 2018, the Company issued 274,020 shares of common stock with a fair value of $27,402 based on the closing price of the Company’s common stock for consulting services.
|
|
|
(b)
|
On January 22, 2018, the Company issued 2,777,778 shares of common stock of $0.07 per share for proceeds of $200,000.
|
|
|
(c)
|
On January 29, 2018, the Company issued 5,000,000 shares of common stock at $0.08 per share for proceeds of $400,000.
|
|
|
(d)
|
On February 28, 2018, the Company issued 806,916 shares of common stock with a fair value of $56,000 for the extinguishment of $50,000 of principal, $6,000 of accrued interest, and $39,407 of derivative liability related to one of the Company’s convertible debt instruments. The Company recognized a gain on extinguishment of debt of $39,407.
|
|
|
(e)
|
On May 21, 2018, the Company issued 1,250,000 shares of common stock with a fair value of $50,000 for board of director services. The services will be provided over a one-year period. As of September 30, 2018, the Company has recorded $18,011 of expense and has a prepaid asset of $31,989.
|
|
|
(f)
|
On June 1, 2018, the Company issued 3,333,333 shares of common stock at $0.06 per share (Including warrants to purchase 500,000 shares of common stock with an exercise price of $0.12 per share, immediately vested) for proceeds of $200,000.
|
|
|
(g)
|
On July 10, 2018, the Company issued 1,875,000 shares of common stock at $0.04 per share for proceeds of $75,000.
|
|
|
(h)
|
On July 20, 2018, the Company issued 2,000,000 shares of common stock at $0.04 per share for proceeds of $75,064.
|
|
|
(i)
|
On July 25, 2018, the Company issued 500,000 shares of common stock at $0.04 per share for proceeds of $18,989.
|
|
|
(j)
|
During the nine months ended September 30, 2018, the Company issued a total of 2,908,809 shares of common stock with a fair value of $139,974 for the extinguishment of $91,250 of principal and $53,147 of accrued intrest. The Company recognized a gain extinguishment of debt of $4,423.
|
|
|
(k)
|
On September 19, 2018, the Company issued 146,666 shares of common stock with a fair value of $7,333 for the extinguishment of $5,000 of principal and $1,853 of derivative liability related to one of the Company’s convertible debt instruments. The Company recognized a loss on extinguishment of debt of $480.
|
|
|
(l)
|
On October 19, 2018, the Company issued 1,666,666 shares of common stock at $0.06 per share for proceeds of $100,000.
|
|
|
(m)
|
On October 23, 2018, c issued 1,666,667 shares of common stock at $0.06 per share for proceeds of $100,000.
|
|
|
(n)
|
On December 4, 2018, the Company issued 183,486 shares of common stock with a fair value of $5,505 for the extinguishment of $5,000 of principal.
|
|
|
(o)
|
On December 7, 2018, the Company issued 2,222,222 shares of common stock at $0.04 per share for proceeds of $100,000.
|
|
|
(p)
|
On December 17, 2018, the Company issued 555,556 shares of common stock at $0.04 per share for proceeds of $25,000.
|
|
|
(q)
|
On December 26, 2018, the Company issued 333,333 shares of common stock with a fair value of $10,000 for the extinguishment of $10,000 of principal.
|
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.
|
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, 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
|
|
Issued
|
|
|
500,000
|
|
|
|
0.12
|
|
Expired
|
|
|
(838,240
|
)
|
|
|
0.23
|
|
Balance, December 31, 2018
|
|
|
3,899,673
|
|
|
$
|
0.20
|
|
As of December 31, 2018, the following share purchase warrants were outstanding:
Number of warrants outstanding
|
|
|
Exercise price
|
|
|
Expiration date
|
|
|
500,000
|
|
|
$
|
0.12
|
|
|
June 1, 2020
|
|
|
2,222,222
|
|
|
$
|
0.18
|
|
|
February 23, 2022
|
|
|
147,059
|
|
|
$
|
0.35
|
|
|
June 23, 2019
|
|
|
980,392
|
|
|
$
|
0.15
|
|
|
December 2, 2021
|
|
|
50,000
|
|
|
$
|
0.20
|
|
|
January 2, 2022
|
|
|
3,899,673
|
|
|
|
|
|
|
|
|
On June 1, 2018, the Company issued 500,000 share purchase warrants in connection with a capital raise.
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, 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
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Cancelled / forfeited
|
|
|
(985,000
|
)
|
|
|
0.09
|
|
|
|
|
Balance, December 31, 2018
|
|
|
4,190,000
|
|
|
$
|
0.16
|
|
|
$
|
-
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
250,000
|
|
|
3.8
|
|
|
|
0.08
|
|
|
|
250,000
|
|
|
|
0.08
|
|
$
|
0.13
|
|
|
|
1,425,000
|
|
|
3.4
|
|
|
|
0.13
|
|
|
|
1,100,000
|
|
|
|
0.13
|
|
$
|
0.16
|
|
|
|
225,000
|
|
|
2.1
|
|
|
|
0.16
|
|
|
|
187,500
|
|
|
|
0.16
|
|
$
|
0.19
|
|
|
|
2,270,000
|
|
|
1.7
|
|
|
|
0.19
|
|
|
|
2,270,000
|
|
|
|
0.19
|
|
Cdn$
|
0.25
|
|
|
|
20,000
|
|
|
1.7
|
|
|
Cdn$
|
0.25
|
|
|
|
20,000
|
|
|
Cdn$
|
0.25
|
|
|
|
|
|
|
4,190,000
|
|
|
2.4
|
|
|
$
|
0.16
|
|
|
|
3,827,500
|
|
|
$
|
0.16
|
|
2018
No stock options were granted by the Company in 2018.
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.
The fair values of stock options granted are amortized over the vesting period where applicable. During the years ended December 31, 2018 and 2017, the Company recorded $8,446 and $165,587, 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:
|
|
2018
|
|
|
2017
|
|
Expected volatility
|
|
|
-
|
|
|
|
136
|
%
|
Risk free interest rate
|
|
|
-
|
|
|
|
1.80
|
%
|
Expected life (in years)
|
|
|
-
|
|
|
|
4.8
|
|
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, 2018 and 2017, the Company had three and two customers which accounted for 74% and 74%, respectively, of total invoiced amounts, which are recorded as deferred revenues and amortized over the related service period to revenues.
As of December 31, 2018 and 2017, the Company had three and three customers, respectively, which accounted for 93% and 100%, respectively, of the gross accounts receivable balance.
16.
Income Taxes
The Company’s income tax provision consists of the following:
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
10,000
|
|
|
$
|
80,000
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total Current
|
|
|
10,000
|
|
|
|
80,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total Deferred
|
|
|
-
|
|
|
|
-
|
|
Provision for income taxes
|
|
$
|
10,000
|
|
|
$
|
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:
|
|
2018
|
|
|
2017
|
|
Computed tax benefit at federal statutory rate
|
|
$
|
(223,397
|
)
|
|
$
|
(441,204
|
)
|
Permanent items
|
|
|
6,987
|
|
|
|
(4,016
|
)
|
Stock-based compensation
|
|
|
11,840
|
|
|
|
21,635
|
|
Incentive stock options
|
|
|
1,773
|
|
|
|
57,042
|
|
Conversion feature derivative liability
|
|
|
(11,979
|
)
|
|
|
16,785
|
|
Impact of tax law change in rate
|
|
|
-
|
|
|
|
720,057
|
|
Change in tax rates and true up
|
|
|
-
|
|
|
|
-
|
|
Uncertain tax positions
|
|
|
10,000
|
|
|
|
80,000
|
|
Impact of difference related to foreign earnings
|
|
|
-
|
|
|
|
-
|
|
Gain on extinguishment of debt
|
|
|
(22,104
|
)
|
|
|
-
|
|
Valuation allowance
|
|
|
236,880
|
|
|
|
(370,299
|
)
|
Provision for income taxes
|
|
$
|
10,000
|
|
|
$
|
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:
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,826,000
|
|
|
$
|
1,798,000
|
|
Stock-based compensation
|
|
|
1,000
|
|
|
|
1,000
|
|
Accounts receivable and other timing differences
|
|
|
317,000
|
|
|
|
121,000
|
|
Basis difference in assets and debt
|
|
|
(42,000
|
)
|
|
|
61,000
|
|
Equipment
|
|
|
-
|
|
|
|
-
|
|
Share issuance costs
|
|
|
-
|
|
|
|
-
|
|
Total Deferred Tax Asset
|
|
|
2,102,000
|
|
|
|
1,981,000
|
|
Valuation allowance
|
|
|
(2,102,000
|
)
|
|
|
(1,981,0000
|
)
|
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 and state have been fully offset by a valuation allowance.
As of December 31, 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of $6,111,683 and $5,919,030, respectively, which expire beginning in the year 2029.
The Company is required to file US federal and California 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 $90,000 as of December 31, 2018, 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, 2018 is as follows:
|
|
Federal and
State
|
|
Balance at December 31, 2017
|
|
$
|
80,000
|
|
Additions for tax positions related to current year
|
|
|
10,000
|
|
Additions for tax positions related to prior years
|
|
|
-
|
|
Balance at December 31, 2018
|
|
$
|
90,000
|
|
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, 2018. There was no net impact on the Company’s consolidated financial statements for the year ended December 31, 2018 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
Withheld Payroll Taxes
Since its inception, the Company has made several payments to employees for wages, net of state and federal income taxes. Due to cash constraints, the Company has not yet remitted all of these withheld amounts to the appropriate government agency. Accordingly, as of December 31, 2018 the Company has recorded $14,878 related to this obligation in accounts payable and accrued liabilities, including estimated penalties and interest.
Operating Lease
In April 2017, we entered into non-cancelable operating lease amendment for 2,119 square feet of office space through April 2020.
Rent expense for the years ended December 31, 2018 and 2017 was approximately $35,000 and $47,000, respectively. As of December 31, 2018, we are obligated to make minimum lease payments under our operating lease as follows:
Year ending December 31,
|
|
Lease
Payments
|
|
2019
|
|
$
|
39,000
|
|
2020
|
|
|
13,000
|
|
|
|
$
|
52,000
|
|
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. Subsequent Events
In March 2019, The Company sold a total of 1,500,000 shares of common stock for total proceeds of $60,000.