Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
1. Introduction:
Nature of business
The primary focus of Shoal Games Ltd. (the
"Company") is the development and marketing of the Rooplay edugame system
for children and families. Rooplay is an advertising free platform of game
content that is directed at children.
The games on the Rooplay system are designed
to both entertain and educate. Children engaging with Rooplay learn
technology, solve puzzles, paint pictures, practice language, learn math,
and other educational games. Shoal Games is developing a content system
with Rooplay that builds tech literacy and encourages early learning.
Rooplay will generate revenue for the
Company from consumer subscriptions which customers pay to unlock the
Rooplay game catalog.
Shoal Games'
other mobile products include Garfield's Bingo (www.garfieldsbingo.com), and
Trophy Bingo (www.trophybingo.com), are free-to-play mobile games live in
the Apple, Google and Amazon App Stores. The Company has generated its main
source of revenue to-date from players making in-app purchases in Trophy
Bingo and Garfield's Bingo.
Continuing operations
These
consolidated financial statements have been prepared on the going concern
basis, which presumes the realization of assets and the settlement of
liabilities in the normal course of operations. The application of the
going concern basis is dependent upon the Company achieving profitable
operations to generate sufficient cash flows to fund continued operations,
or, in the absence of adequate cash flows from operations, obtaining
additional financing. The Company has reported losses from operations for
the year ended December 31, 2016 and 2015, and has an accumulated deficit of
$21,563,438 as at December 31, 2016. This raises substantial doubt about
the Company's ability to continue as a going concern.
In view of the
matters described in the preceding paragraph, recoverability of a major
portion of the recorded asset amounts and settlement of the liability
amounts shown in the accompanying balance sheets is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's
ability to succeed in its future operations. The Financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
Management
continues to review operations in order to identify additional strategies
designed to generate cash flow, improve the Company's financial position,
and enable the timely discharge of the Company's obligations. If management
is unable to identify sources of additional cash flow in the short term, it
may be required to further reduce or limit operations.
Page 24
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies:
(a)
Basis of
presentation:
These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP") applicable to annual financial information and with the rules
and regulations of the United States Securities and Exchange Commission. The
financial statements include the accounts of the Company's subsidiaries,
Company
|
Registered
|
%
Owned
|
Shoal Media (Canada) Inc.
|
British Columbia, Canada
|
100%
|
Coral Reef Marketing Inc.
|
Anguilla
|
100%
|
Shoal Media Inc.
|
Anguilla
|
100%
|
Shoal Games (UK) Plc
|
United Kingdom
|
99%
|
Rooplay Media Ltd.
|
British Columbia, Canada
|
100%
|
In addition,
there are the following dormant subsidiaries;
Bingo.com (Antigua) Inc., Bingo.com
(Wyoming) Inc., and Bingo Acquisition Corp.
During the year ended December 31, 2016, English Bay Office Management
Limited changed its name to Shoal Media (Canada) Inc. During the year ended
December 31, 2016, Rooplay Media Ltd. was registered in British Columbia,
Canada.
All
inter-company balances and transactions have been eliminated in the
consolidated financial statements.
Subsequent to the year ended December 31, 2016, Shoal Media UK Ltd. was
incorporated under the laws of England and Wales.
(b)
Use of
estimates:
The
preparation of consolidated financial statements in conformity with US GAAP,
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and
recognized revenues and expenses for the reporting periods.
Significant
areas requiring the use of estimates include the valuation of long-lived
assets, the collectibility of accounts receivable and the valuation of
deferred tax assets. Actual results may differ significantly from these
estimates.
(c)
Revenue
recognition:
Trophy Bingo and Garfield's Bingo revenues have been recognized from the
sale of in-game purchases, net of platform fees, at the time of purchase by
the player. The revenue from in-game advertising is recognized when
advertising is served to the player.
Page 25
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(c)
Revenue
recognition: (Continued)
Advertising revenues, not generated in Trophy Bingo or Garfield's Bingo,
have been recognized when collection of the amounts are reasonably assured.
Rooplay revenue have been recognized when collection of the subscriptions
are reasonably assured and the provision of service has occurred.
(d)
Foreign currency:
The consolidated financial statements are presented in United States
dollars, the functional currency of the Company and its subsidiaries. The
Company accounts for foreign currency transactions and translation of
foreign currency financial statements under Statement ASC 830, Foreign
Currency Matters. Transaction amounts denominated in foreign currencies are
translated at
exchange rates prevailing at the transaction dates. Carrying values of
monetary assets and liabilities are adjusted at each balance sheet date to
reflect the exchange rate at that date. Non-monetary assets and liabilities
are translated at the exchange rate on the original transaction date.
Gains and losses from restatement of foreign currency monetary and
non-monetary assets and liabilities are included in net income. Revenues and
expenses are translated at the rates of exchange prevailing on the dates
such items are recognized in earnings.
(e) Accounts
receivable:
Trade and
other accounts receivable are reported at face value less any provisions for
uncollectible accounts considered necessary. Accounts receivable includes
receivables from payment processors and trade receivables from customers.
The Company estimates doubtful accounts on an item-by-item basis and
includes over-aged accounts as part of allowance for doubtful accounts,
which are generally ones that are ninety-days overdue. Bad debt expense,
for the year ended December 31, 2016, was $nil (2015 - $nil).
(f)
Equipment:
Equipment is recorded at cost less accumulated depreciation. Depreciation is
provided for annually on the declining balance method over the following
periods :
Equipment and computers 3 years
Furniture and fixtures 5
years
Expenditures for maintenance and repairs are charged to expenses as
incurred. Major improvements are capitalized. Gains and losses on
disposition of equipment are included in income or expenses as realized.
Page 26
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(g)
Software
Development Costs:
Software development costs incurred in the research and development of new
software products and enhancements to existing software products for
external use are expensed as incurred until technological feasibility has
been established. After technological feasibility
is established, any software development costs are capitalized and amortized
at the greater of the straight-line basis over the estimated economic life
of the related product or the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues
for the related product. Commencing January 1, 2014, the Company obtained
technological feasibility and is amortizing the capitalized software
development costs over a period of 3 years. The Company performs an annual
review of the estimated economic life and the recoverability of such
capitalized software costs, using a net realizable value test. The Company
completed the amortization of the capitalized Trophy Bingo software
development expenses on December 31, 2016.
If a
determination is made that capitalized amounts are not recoverable based on
the estimated cash flows to be generated from the applicable software, any
remaining capitalized amounts are written off. Although the Company believes
that its approach to estimates and judgments as described herein is
reasonable, actual results could differ and the Company may be exposed to
increases or decreases in revenue that could be material.
Total software
development costs for the development of all three games; Rooplay,
Garfield's Bingo and Trophy Bingo, were $4,935,274 as at December 31, 2016
(December 31, 2015 - $3,857,636).
(h)
Advertising:
The Company expenses the cost of advertising in the period in which the
advertising space or airtime is used.
Advertising
costs from continuing operations charged to selling and marketing expenses
in 2016 totaled $403,523 (2015 - $549,534).
(i)
Stock-based compensation:
The Company
recognizes all stock-based compensation as an expense in the financial
statements and that such cost be measured at the fair value of the award.
The fair value
of each option grant has been estimated on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions:
|
|
2016
|
|
2015
|
Expected dividend yield
|
|
-
|
|
-
|
Expected stock price
volatility
|
|
78%
|
|
-
|
Weighted average
volatility
|
|
78%
|
|
-
|
Risk-free interest rate
|
|
1.9%
|
|
-
|
Expected life of options
|
|
5 years
|
|
-
|
Forfeiture rate
|
|
0%
|
|
-
|
Page 27
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(j)
Impairment of long-lived assets and long-lived assets to be disposed of:
The Company
accounts for long-lived assets in accordance with the provisions of ASC 360,
Property, Plant and Equipment and ASC 350, Intangibles-Goodwill and Others.
During the periods presented, the only long-lived assets reported on the
Company's consolidated balance sheet are equipment, game development assets,
and security deposits. These provisions require that long-lived assets and
certain identifiable recorded intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
If such assets
are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount and the fair value less costs to sell.
(k) Income
taxes:
The Company
follows the asset and liability method of accounting for income taxes.
Under this method, current income taxes are recognized for the estimated
income taxes payable for the current period. Deferred income taxes are
provided based on the estimated future tax effects of temporary differences
between financial statement carrying amounts of assets and liabilities and
their respective tax bases, as well as the benefit of losses available to be
carried forward to future years for tax purposes.
Deferred tax
assets and liabilities are measured using the enacted tax rates that are
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered and settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in operations in the period that includes the enactment date. A valuation
allowance is recorded for deferred tax assets when it is not more likely
than not that such future tax assets will be realized.
(l) Net
(loss) income per share:
ASC 260,
"Earnings Per Share", requires presentation of basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic earnings
(loss) per share is computed by dividing earnings (loss) available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential
dilution, using the treasury stock method, that could occur if outstanding
options or warrants were exercised and converted into common stock. In
computing diluted earnings per share, the treasury stock method assumes that
outstanding
Page 28
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(l) Net
(loss) income per share: (Continued)
options and
warrants are exercised and the proceeds are used to purchase common stock at
the average market price during the period.
Options and
warrants will have a dilutive effect under the treasury stock method only
when the average market price of the common stock during the period exceeds
the exercise price of the options and warrants. In periods where losses are
reported, the weighted average
number of
common shares outstanding excludes common stock equivalents because their
inclusion would be anti-dilutive. A total of 1,010,000 (2015 - nil) stock
options were excluded as at December 31, 2016.
The earnings
per share data for the year ended December 31, 2016 and 2015 are summarized
as follows:
|
|
2016
|
|
2015
|
Loss for the year from
continuing operations
|
$
|
(3,156,302)
|
$
|
(2,981,987)
|
Income (loss) for the
year from discontinued operations
|
$
|
-
|
$
|
16,305
|
|
|
|
|
|
Basic and diluted
weighted average number of common shares
outstanding
|
|
58,227,957
|
|
55,812,511
|
|
|
|
|
|
Basic and diluted (loss)
earnings per common share outstanding
|
|
|
|
|
Continuing operations
|
$
|
(0.05)
|
$
|
(0.05)
|
Discontinued operations
|
|
-
|
$
|
0.00
|
(m) Domain
name and intangible assets:
The Company had capitalized the cost of the purchase of the domain name
Bingo.com and was amortizing the cost over five years from the date of
commencement of operations.
In 2002, the
Company suspended the amortization of the domain name cost in accordance
with
ASC 350, where companies are no longer required to amortize indefinite life
assets but
instead test
the indefinite intangible asset for impairment at least annually.
The capitalized amount was based on the
net present value of the minimum payments permitted under the terms of the
purchase agreement. The domain name is tested for impairment by
comparing the future cash flows of the domain name with its carrying value.
The Company determined that as a result of level 3 unobservable inputs in
accordance with ASC 820, Fair Value Measurements and Disclosures, that the
fair value of the domain name exceeded the carrying value and therefore no
impairment existed for the years presented.
(n)
New
accounting pronouncements and changes in accounting policies:
In May 2014, the FASB issued ASU No.
2014-09, Revenue from Contracts with Customers and issued subsequent
amendments to the initial guidance in August 2015, March 2016,
Page 29
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(n)
New
accounting pronouncements and changes in accounting policies: (Continued)
April 2016, and May 2016 within ASU 2015-04,
ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12, respectively. The
guidance in this update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance throughout
the Codification. Additionally, this update supersedes some cost guidance
included in ASC 605-35, Revenue Recognition - Construction-Type and
Production-Type Contracts. In addition, the existing requirements for the
recognition of a gain or loss on the transfer of nonfinancial assets that
are not in a contract with a customer (for example, assets within the scope
of ASC 360, Property, Plant, and Equipment, and
intangible assets, within the scope of ASC
350, Intangibles - Goodwill and Other) are amended to be consistent with the
guidance on recognition and measurement in this update. The standard was to
be effective for the Company as of January 1, 2018. An entity can apply the
revenue standard retrospectively to each prior reporting period presented
(full retrospective method) or retrospectively with the cumulative effect of
initially applying the standard recognized at the date of initial
application in retained earnings (simplified transition method). The Company
is currently assessing the impact of this update on its consolidated
financial statements. The Company has not yet selected an adoption date, a
transition method nor has it determined the effect of the standard on its
ongoing financial reporting.
In June 2014, the FASB issued ASU No.
2014-12, Compensation-Stock Compensation. This guidance requires that a
performance target that affects vesting, and that could be achieved after
the requisite service period, be treated as a performance condition. As
such, the performance target should not be reflected in estimating the grant
date fair value of the award. This update further clarifies that
compensation cost should be recognized in the period in which it becomes
probable that the performance target will be achieved and should represent
the compensation cost attributable to the periods for which the requisite
service has already been rendered. The new standard is effective for fiscal
years, and interim periods within those fiscal years, beginning after
December 15, 2015 and can be applied either prospectively or retrospectively
to all awards outstanding as of the beginning of the earliest annual period
presented as an adjustment to opening retained earnings. Early adoption is
permitted. The adoption of ASU 2014-12 did not have a material impact on our
financial condition, liquidity or results of operations.
In August 2014, the FASB issued ASU No.
2014-15, Presentation of Financial Statements - Going Concern (Subtopic
205-40): Disclosure of Uncertainties about an Entity's Ability to Continue
as a Going Concern ("ASU 2014-15"). ASU 2014-15 provides guidance about
management's responsibility to evaluate whether there is substantial doubt
about an entity's ability to continue as a going concern and sets rules for
how this information should be
Page 30
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(n)
New
accounting pronouncements and changes in accounting policies: (Continued)
disclosed in the financial statements. ASU
2014-15 is effective for annual periods ending after December 15, 2016 and
interim periods thereafter. Early adoption is permitted. The Company is
evaluating the effect of ASU 2014-15 on our consolidated financial condition
and results of operations.
In November 2014, the FASB issued ASU No.
2014-16, Determining Whether the Host Contract in a Hybrid Financial
Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.
This standard requires an entity to "determine the nature of the host
contract by considering all stated and implied substantive terms and
features of the hybrid financial instrument, weighing each term and feature
on the basis of the relevant facts and circumstances which the hybrid
financial instrument was issued or acquired and the potential outcome of the
hybrid financial instrument. ASU 2014-16 is effective for annual periods
ending after December 15, 2015 and interim periods thereafter. Early
adoption is permitted. The adoption of ASU 2014-16 did not have a material
impact on our financial condition, liquidity or results of operations.
In January 2015, the FASB issued ASU
2015-01, which eliminates from GAAP the concept of extraordinary items. If
an event or transaction meets the criteria for extraordinary classification,
it is segregated from the results of ordinary operations and is shown as a
separate item in the income statement, net of tax. ASU 2015-01 is effective
for annual periods, and interim periods within those annual periods,
beginning after December 15, 2015. Early adoption is permitted.
The adoption of ASU 2015-01 did not have a
material impact on our financial condition, liquidity or results of
operations.
In February 2015, the FASB issued ASU
2015-02, which provides guidance for reporting entities that are required to
evaluate whether they should consolidate certain legal entities. In
accordance with ASU 2015-02, all legal entities are subject to reevaluation
under the revised consolidation model. ASU 2015-02 is effective for public
business entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2015. Early adoption is
permitted. The adoption of ASU 2015-02 did not have a material impact on our
financial condition, liquidity or results of operations.
On April 17, 2015, the FASB issued ASU No.
2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires
debt issuance costs to be presented in the balance sheet as a direct
deduction from the associated debt liability. Currently, debt issuance
costs are recorded as an asset and amortization of these deferred financing
costs is recorded in interest expense. Under the new standard, debt
issuance costs will continue to be amortized over the life of the debt
instrument and amortization will continue to be recorded in interest
expense. The new standard is effective for the Company on January 1, 2016
and will be applied on a retrospective basis. The adoption of ASU 2015-03
did not have a material
Page 31
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(n)
New
accounting pronouncements and changes in accounting policies: (Continued)
impact on our financial condition, liquidity
or results of operations.
The FASB has issued ASU 2015-05, Intangibles
- Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's
Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments
in ASU 2015-05 provide guidance to customers about whether a cloud computing
arrangement includes a software license. If a cloud computing arrangement
includes a software license, then the customer should account for the
software license element of the arrangement consistent with the acquisition
of other software licenses. If a cloud computing arrangement does not
include a software license, the customer should account for the arrangement
as a service contract. The amendments do not change the accounting for a
customer's accounting for service contracts. As a result of the amendments,
all software licenses within the scope of Subtopic 350-40 will be accounted
for consistent with other licenses of intangible assets. ASU 2015-05 is
effective for public entities for annual periods, including interim periods
within those annual periods, beginning after December 15, 2015. The adoption
of ASU 2015-05 did not have a material impact on our financial condition,
liquidity or results of operations.
In September 2015, the FASB issued ASU
2015-16, Simplifying the Accounting for Measurement-Period Adjustments
guidance to simplify the accounting for adjustments in a business
combination. An acquirer should recognize adjustments to provisional amounts
with a corresponding adjustment of goodwill, as well as the effect on
earnings of changes in depreciation, amortization or other income effects,
in the reporting period in which the adjustments are identified as if the
accounting had been completed at the acquisition date. Disclosure is
required, by line item, of the amount recorded in current period earnings
that would have been recorded in previous reporting periods. This guidance
is effective for fiscal years and interim periods beginning after December
15, 2015, and requires prospective application. Early adoption is permitted.
The adoption of ASU 2015-16 did not have a material impact on our financial
condition, liquidity or results of operations.
In November 2015, the FASB issued ASU
2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes , which requires deferred income tax liabilities and assets to be
classified as noncurrent on the balance sheet rather than being separated
into current and noncurrent. The guidance is effective for public entities
for annual periods beginning after December 15, 2016, and interim periods
within those annual periods with early adoption being permitted. The Company
is still assessing the potential impact of ASU 2015-17 on its consolidated
financial statements.
In January 2016, the FASB issued ASU
2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"),
which requires that equity investments, except for those accounted for under
the
Page 32
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(n)
New
accounting pronouncements and changes in accounting policies: (Continued)
equity method or those that result in
consolidation of the investee, be measured at fair value, with subsequent
changes in fair value recognized in net income. However, an entity may
choose to measure equity investments that do not have readily determinable
fair values at cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer. ASU 2016-01 also
impacts the presentation and disclosure requirements for financial
instruments. ASU 2016-01 is effective for public business entities for
annual periods, and interim periods within those annual periods, beginning
after December 15, 2017. Early adoption is permitted only for certain
provisions. The Company does not expect that the adoption of ASU 2016-01
will have a material effect on its consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842), which requires lessees to recognize most leases
on the balance sheet. This ASU requires lessees to recognize a right-of-use
asset and lease liability for all leases with terms of more than 12 months.
Lessees are permitted to make an accounting policy election to not recognize
the asset and liability for leases with a term of twelve months or less. The
ASU does not significantly change the lessees' recognition, measurement and
presentation of expenses and cash flows from the previous accounting
standard. Lessors' accounting under the ASC is largely unchanged from the
previous accounting standard. In addition, the ASU expands the disclosure
requirements of lease arrangements. Lessees and lessors will use a modified
retrospective transition approach, which includes a number of practical
expedients. The provisions of this guidance are effective for annual periods
beginning after December 15, 2018, and interim periods within those years,
with early adoption permitted. Management is evaluating the requirements of
this guidance and has not yet determined the impact of the adoption on the
Company's financial position or results of operations.
In March 2016, the FASB issued Accounting
Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"),
which addresses how companies account for certain aspects of share-based
payments to employees. Entities will be required to recognize the income tax
effects of awards in the statement of income when the awards vest or are
settled, and to present excess tax benefits as an operating activity on the
statement of cash flows rather than as a financing activity. The ASU also
addresses such areas as an accounting policy election for forfeitures and
the amount an employer can withhold to cover income taxes and still qualify
for equity classification. The amendments in this ASU will be effective for
annual periods beginning after December 15, 2016 and interim periods within
those annual periods. Early adoption is permitted. The Company is currently
Page 33
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(n)
New
accounting pronouncements and changes in accounting policies: (Continued)
evaluating the impact of the adoption of
this standard on its consolidated financial statements.
In June 2016, the FASB issued ASU No.
2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments". The accounting standard changes the
methodology for measuring credit losses on financial instruments and the
timing when such losses are recorded. ASU No. 2016-13 is effective for
fiscal years, and interim periods within those years, beginning after
December 15, 2019. Early adoption is permitted for fiscal years, and interim
periods within those years, beginning after December 15, 2018. The Company
is currently evaluating the impact of ASU No. 2016-13 on its financial
position, results of operations and liquidity.
In August 2016, the FASB issued ASU No.
2016-15, "Statement of Cash Flows (Topic 230)". The new guidance is intended
to reduce diversity in practice in how certain transactions are classified
in the statement of cash flows. ASU No. 2016-15 is effective for fiscal
years, and interim periods within those years, beginning after December 15,
2017. Early adoption is permitted, provided that all of the amendments are
adopted in the same period. The guidance requires application using a
retrospective transition method. The Company is currently evaluating the
impact of ASU No. 2016-15 on its financial position, results of operations
and liquidity.
In October 2016, the Financial Accounting
Standards Board ("FASB") issued ASU No. 2016-16, Income Taxes (Topic 740).
The standard improves the accounting for income tax consequences of
intra-entry transfers of assets other than inventory. This pronouncement is
effective for annual reporting periods beginning after December 15, 2017.
The amendments in this ASU should be applied using a modified retrospective
approach. The Company is currently evaluating the impact of ASU No. 2016-16
on its financial position, results of operations and liquidity.
In November 2016, the Financial Accounting
Standards Board ("FASB") issued ASU No. 2016-18 (Topic 230) Statement of
Cash Flow: Restricted Cash. The pronouncement requires that the statement of
cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The
amendments of this ASU are effective for reporting periods beginning after
December 15, 2017, with early adoption permitted. The standard must be
applied retrospectively to all periods presented. The Company is currently
evaluating the impact of adoption on the Consolidated Financial Statements.
Page 34
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
2. Summary of
significant accounting policies: (Continued)
(n)
New
accounting pronouncements and changes in accounting policies: (Continued)
There have been no other recent accounting
standards, or changes in accounting standards, during the year ended
December 31, 2016, as compared to the recent accounting standards described
in the Annual Report, that are of material significance, or have potential
material significance, to us.
(o) Financial
instruments:
(i) Fair
values:
The fair value
of accounts receivable, accounts payable, accrued liabilities and accounts
payable and accrued liabilities - related party approximate their financial
statement carrying amounts due to the short-term maturities of these
instruments. Cash is carried at fair value using a level 1 fair value
measurement.
In general,
fair values determined by Level 1 inputs utilize quoted prices (unadjusted)
in active markets for identical assets or liabilities. Fair values
determined by Level 2 inputs utilize data points that are observable such as
quoted prices, interest rates and yield curves. Fair values determined by
Level 3 inputs are unobservable data points for the asset or liability, and
included
situations
where there is little, if any, market activity for the asset. The Company's
cash was measured using Level 1 inputs.
(ii) Foreign
currency risk:
The Company
operates internationally, which gives rise to the risk that cash flows may
be adversely impacted by exchange rate fluctuations. The Company has not
entered into any forward exchange contracts or other derivative instrument
to hedge against foreign exchange risk.
3. Accounts Receivable:
The accounts receivable as at December 31, 2016, is summarized as follows:
|
|
2016
|
|
2015
|
Accounts receivable
|
$
|
44,860
|
$
|
44,948
|
|
|
|
|
|
Provision for doubtful
accounts
|
|
(27,666)
|
|
-
|
|
|
|
|
|
Net accounts receivable
|
$
|
17,194
|
$
|
44,948
|
The Company had bank accounts with the National Bank of Anguilla. During the
year ended December 31, 2016, the National Bank of Anguilla, filed for
chapter 11 protection. The Company has expensed the balance on account of
$27,666 (2015 - $nil) as a doubtful debt.
Page 35
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
4. Prepaid development
During the
year ended December 31, 2016, the Company had prepaid for future development
expenses for Rooplay, Garfield's Bingo and Trophy Bingo. As at August 31,
2016, Roadhouse Interactive Limited, the Company's outsourced developer of
Trophy Bingo and Garfield's Bingo was placed in receivership. The Company
immediately hired the key developers to continue development of the
Company's products in-house. Shoal Games owned all the source code and art
works for the Company's products.
|
|
2016
|
Prepaid development paid
|
$
|
863,660
|
|
|
|
Expensed during the year
|
|
(364,869)
|
|
|
|
Loss on prepaid
development
|
|
(498,791)
|
|
|
|
Net prepaid development
|
$
|
-
|
5.
Equipment:
2016
|
|
Cost
|
|
Accumulated depreciation
|
|
Net book
Value
|
|
|
|
|
|
|
|
Equipment and computers
|
$
|
112,804
|
$
|
103,555
|
$
|
9,249
|
Furniture and fixtures
|
|
7,541
|
|
6,642
|
|
899
|
|
$
|
120,345
|
$
|
110,197
|
$
|
10,148
|
2015
|
|
Cost
|
|
Accumulated depreciation
|
|
Net book
Value
|
|
|
|
|
|
|
|
Equipment and computers
|
$
|
105,853
|
$
|
100,279
|
$
|
5,574
|
Furniture and fixtures
|
|
7,088
|
|
6,348
|
|
740
|
|
$
|
112,941
|
$
|
106,627
|
$
|
6,314
|
Depreciation expense was $3,570 (2015 - $3,467) for the year ended December
31, 2016.
6. Game
development assets:
During the year ended December 31, 2012, the
Company commenced development of a social bingo game, Trophy Bingo. During
the year ended December 31, 2014, the Company soft launched Trophy Bingo.
The Company ceased to capitalize the development costs and commenced the
amortization of the capitalized development costs over a period of three
years. As at December 31, 2016, the capitalized development costs were
amortized in full.
December 31, 2016
|
|
Capitalized Expenses
|
|
Accumulated amortization
|
|
Net book
Value
|
|
|
|
|
|
|
|
Capitalized development
expenses
|
$
|
1,446,038
|
$
|
1,446,038
|
$
|
-
|
Page 36
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
6. Game
development assets: (Continued)
December 31, 2015
|
|
Capitalized Expenses
|
|
Accumulated amortization
|
|
Net book
Value
|
|
|
|
|
|
|
|
Capitalized development
expenses
|
$
|
1,446,038
|
$
|
964,025
|
$
|
482,013
|
During the
year ended December 31, 2016, the Company obtained the license to develop
Garfield's Bingo. The game was launched in November 2016. In addition,
during the year ended December 31, 2016, the Company obtained the license
for Rooplay. The Company commenced development of the Rooplay platform.
During the year ended December 31, 2016, the Company has expensed the
development costs of all three products as incurred and has expensed the
following development costs for its three products.
|
|
2016
|
|
2015
|
Opening total game
development costs
|
$
|
3,857,636
|
$
|
2,627,420
|
|
|
|
|
|
Game development during
the year
|
|
1,077,638
|
|
1,230,216
|
Closing total game
development costs
|
$
|
4,935,274
|
$
|
3,857,636
|
7.
Discontinued operations
Effective
December 31, 2014, the Company sold the www.bingo.com domain name to Unibet
Group plc. for cash consideration of $2,000,000 and redemption of the
15,000,000 common shares of the Company, which were held by Unibet Group
plc, at a price of $0.40 per share. The 15,000,000 common shares held by
Unibet have been returned to the Company's treasury and were cancelled.
In addition, the Company disposed its online bingo business to Unibet Group
plc. The Company recognized the residual gain on the sale of the online
bingo business of $16,305 received during the year ended December 31, 2015.
8.
Promissory notes:
During the year ended December 31, 2016, the Company issued three unsecured
promissory notes for $400,000, accruing interest of $811 from shareholders
of the Company. The notes are repayable on March 31, 2018. The interest on
the notes are 2% per annum, calculated and compounded annually and paid
annually. Interest in arrears shall accrue interest. The unpaid principal
amount due hereunder may be reduced to zero from time to time without
affecting the validity of this note.
The promissory notes are accounted for by discounting the notes in a manner that reflects the entity's
borrowing rate when interest cost is recognized in subsequent periods. The
Company applied an estimated market rate of 15% to the promissory notes. In doing so, the Company used the
discounted cash flow approach to value the present value of the notes. The
cash flow stream from the coupon interest payments and the final
principal payment were discounted at 15% to arrive at the valuations.
The Company used a deemed rate of 15% as the appropriate
Page 37
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
8.
Promissory notes: (Continued)
discount rate
after examining the interest rates for similar instruments issued in the
same time frame for similar companies without the conversion feature.
The discount of the promissory notes was $58,284 and
the Company recognized $5,171 of interest accretion for the year
ended December 31, 2016.
Subsequent to the year ended December 31, 2016, the Company issued four
unsecured promissory notes for $188,135 from shareholders of the
Company.
9.
Stockholders' equity:
The holders of
common stock are entitled to one vote for each share held. There are no
restrictions that limit the Company's ability to pay dividends on its common
stock. The Company has not declared any dividends since incorporation. The
Company's common stock has no par value per common stock.
(a) Common
stock issuances:
During the year ended December 31, 2016, the
Company had a private placement with two closings for a total of 3,337,934
common shares at CAD$0.60 per share, which raised proceeds of $1,562,479
(CAD$2,002,760). The Company incurred issuance costs of $33,876.
On October 11, 2016, the Company closed its
rights issued raising $80,949 (CAD$107,168) from the issuance of 172,681
common shares at an average price of CAD$0.626 per share. The Company
incurred issuance costs of $36,148.
During the
year ended December 31, 2015, the holders of 515,000 stock options exercised
their options for 515,000 shares for $77,250 at an exercise price of $0.15
per share.
(b) Stock
option plans:
(i) 2015 stock
option plan
In the year
ended December 31, 2015, the shareholders approved the 2015 stock option
plan and the 1999, 2001 and the 2005 plans were discontinued. The 2015 stock
option plan is intended to provide incentive to employees, directors,
advisors and consultants of the Company to encourage proprietary interest in
the Company, to encourage such employees to remain in the employ of the
Company or such directors, advisors and consultants to remain in the service
of the Company, and to attract new employees, directors, advisors and
consultants with outstanding qualifications. The maximum number of shares
issuable under the Plan shall not exceed 10% of the number of Shares of the
Company issued and outstanding as of each Award Date unless shareholder
approval is obtained in advance in accordance unless shareholder approval is
obtained in advance in accordance. The Board of Directors determines the
terms of the options granted, including the number of options granted, the
exercise price and their vesting schedule. The maximum term possible is 10
Page 38
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
9.
Stockholders' equity: (Continued)
(b) Stock
option plans: (Continued)
years. Under the 2015 plan we have reserved 10% of the number of Shares of
the Company
issued and
outstanding as of each Award Date.
During the
year ended December 31, 2016, the Company granted 1,010,000 options with an
exercise price of CAD$0.54 (approximately $0.42) per share, expiring
December 20, 2021. As at December 31, 2016, there were a total of 1,010,000
stock options (2015 - nil) outstanding. During the year ended December 31,
2016, there were nil options exercised (2015 - nil) and nil options expired
unexercised (2015 - nil).
(ii) 2005
stock option plan:
During the year ended December 31, 2005, the
Company's Board of Directors adopted the 2005 stock option plan, which was
approved by the shareholders at the Annual General meeting. The Company has
reserved a total of 2,000,000 common shares for issuance under the 2005
stock option plan. The Plan was
intended to provide incentive to employees, directors, advisors and
consultants of the Company to encourage proprietary interest in the Company,
to encourage such employees to remain in the employ of the Company or such
directors, advisors and consultants to remain in the service of the Company,
and to attract new employees, directors, advisors and consultants with
outstanding qualifications. The Board of Directors determines the terms of
the options granted, including the number of options granted, the exercise
price and their vesting schedule. The
plan was discontinued in the year ended December 31, 2015.
As at December
31, 2016, there were a total of nil (2015 - nil) stock options outstanding
under the 2005 Stock Option Plan. During the year ended December 31, 2016,
nil stock options were exercised. During the year ended December 31, 2015,
515,000 stock options were exercised at exercise prices of $0.15 per share
raising $77,250. During the year ended December 31, 2016, nil (2015 - 5,000)
stock options expired unexercised.
Page 39
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
9.
Stockholders' equity: (Continued)
(b) Stock
option plans: (Continued)
A summary of
stock option activity for the stock option plans for the years ended
December 31, 2016 and 2015 are as follows:
|
|
Number of options
|
|
Weighted average exercise
price
|
Outstanding and
exercisable, December 31, 2014
|
|
520,000
|
$
|
0.15
|
|
|
|
|
|
Exercised
|
|
(515,000)
|
|
0.15
|
Expired
|
|
(5,000)
|
|
0.15
|
|
|
|
|
|
Outstanding and exercisable, December 31,
2015
|
|
-
|
|
-
|
|
|
|
|
|
Granted
|
|
1,010,000
|
|
0.42
|
Exercised
|
|
-
|
|
-
|
|
|
|
|
|
Outstanding and
exercisable, December 31, 2016
|
|
1,010,000
|
$
|
0.42
|
The aggregate
intrinsic value for options as of December 31, 2016 was $nil (2015 - $nil).
The Company recorded stock -based compensation of $257,293 on the 1,010,000
options granted (2015 - nil) with a weighted average fair value per option
of $0.42 (2015 - $nil).
(c) Escrow shares
In conjunction with the Listing Application
for the TSX-V listing, the Company's major shareholders were required to
place 33,909,104 common shares of the Company in escrow under the terms of a
TSX-V Tier 1 issuer. The escrow shares will be released in thirty three
percent (33%) tranches on the dates that are six, twelve and eighteen months
after the listing date. The Escrow Shares will be released as follows:
|
|
Number of shares
|
|
|
|
Balance
December 31, 2014
|
|
33,909,104
|
|
|
|
Released in
2015
|
|
(11,303,035)
|
|
|
|
Balance
December 31, 2015
|
|
22,606,069
|
|
|
|
Release in 2016
|
|
(22,606,069)
|
|
|
|
Balance
December 31, 2016
|
|
-
|
10.
Commitments:
The Company leases office facilities in Vancouver, British Columbia, Canada,
and The Valley, Anguilla, British West Indies. These office facilities are
leased under operating lease
Page 40
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
10.
Commitments: (Continued)
agreements.
The Canadian operating lease expired on December 31, 2016, but
unless 30 day notice is given this lease
automatically renews for a future 3
months until notice is given. The Anguillan operating lease expired on April
1, 2011 but unless 3 month's notice is given it automatically renews for a
future 3 months until notice is given.
Minimum lease
payments under these operating leases are approximately as follows:
The Company paid rent expense totaling $26,152 for the year ended December
31, 2016 (2015 - $22,347).
The Company has a management consulting
agreement with T.M. Williams (Row), Inc., an Anguilla incorporated company,
and Mr. T. M. Williams. During the year ended December 31, 2014, the Company
amended a previous agreement with Mr. T. M. Williams to provide for a
consultancy payment of 2.5% of the monthly social bingo business with a
minimum of $11,000 and a maximum of $25,000 per month.
During the year ended December 31, 2014, the
Company entered into an agreement with Jayska Consulting Ltd. and Mr. J. M.
Williams, Chief Executive Officer of the Company for the provision of
services of Mr. J. M. Williams as Chief Executive Officer of the Company.
The Consulting agreement provides for a consultancy payment of GBP5,000 per
month. In addition, during the year ended December 31, 2014, the Company
entered into an agreement with LVA Media Inc. and Mr. J. M. Williams, for
the provision of services of Mr. J. M. Williams as Chief Executive Officer
of the Company. The Consulting agreement provides for a consultancy payment
of 2.5% of the monthly social bingo business with a minimum of $7,500 and a
maximum of $25,000 per month.
During the year ended December 31, 2016, the
Company signed a licensing agreement with Paws, Inc. for the license for
Garfield's Bingo expiring on June 30, 2019 and a licensing agreement with
Rooplay Inc. for the license for Rooplay expiring on September 7, 2021.
These agreements have commitments to pay royalties on the revenue of the
products subject to minimum payments.
11. Income taxes:
The Company is
domiciled in the tax-free jurisdiction of Anguilla, British West Indies. The
computed benefit / expense differed from the amounts computed by applying
the United States of America federal income tax rate of 34 percent and
various other rates for other jurisdictions to the pretax income / losses
from operations as a result of the following:
Page 41
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
11. Income taxes: (Continued)
|
|
2016
|
|
2015
|
Computed "expected" tax
benefit (expense)
|
$
|
1,072,702
|
$
|
1,008,204
|
Reduction in income taxes
resulting from income taxes in other tax jurisdictions
|
|
(1,072,270)
|
|
(1,007,419)
|
Other
|
|
(35)
|
|
(84)
|
Change in taxation rates
in other jurisdictions
|
|
-
|
|
2,713
|
Change in exchange rates
|
|
1,190
|
|
(3,885)
|
Change in valuation
allowance
|
|
(2,881)
|
|
(9)
|
|
$
|
(1,294)
|
$
|
(480)
|
The tax
effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2016
and 2015 are presented below:
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Net operating loss
carry forwards
|
$
|
15,017
|
$
|
17,898
|
|
|
|
|
|
Valuation Allowance
|
|
(15,017)
|
|
(17,898)
|
|
$
|
-
|
$
|
-
|
The valuation
allowance for deferred tax assets as of December 31, 2016 and 2015, was
$15,017
and
$17,898,
respectively. The net change in the total valuation allowance was a
decrease of
$2,881 for the year ended December 31, 2016, and an increase of $9 for the
year ended December 31, 2015.
In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those differences become deductible.
Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in assessing the
realizability of deferred tax assets.
12. Related
party transactions:
The Company has a liability of $nil (2015 - $2,391) to a company owned by a
current director and officer of the Company for payment of consulting fees
of
$132,000 (2015 - $132,000) by the
current director and officer of the Company.
The Company has a liability of $2 (2015 - $6,507) to a current director and
officer of the Company for expenses incurred.
The Company has a liability of $nil (2015 - $14,804) to a company owned by a
current director and officer of the Company for payment of consulting fees
of $81,285 (2015 - $91,734) by the current director and officer of the
Company.
Page 42
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
12. Related
party transactions: (Continued)
The Company has a liability of $nil (2015 - $nil) to a company owned by a
current director and officer of the Company for payment of consulting fees
of $90,000 (2015 - $90,000) by the current director and officer of the
Company.
The Company has a liability of $2 (2015 - $831) to a company owned by a
previous director of the Company for payment of consulting fees of $8,378
(2015 - $3,948) by the previous director of the Company.
The Company
has a liability of $500 (2015 - $6,500), to independent directors of the
Company for payment of consulting fees. During the year ended December 31,
2016, the Company paid $6,000 (2015 - $9,500) to the independent directors
in director fees.
The Company
has a liability of $4,852 (2015 - $1,533), to an officer of the Company for
payment of consulting fees and
expenses incurred of $63,655 (2015 - $62,719)
by the officer of the Company.
The Company
has 3 promissory notes totaling $400,811, including interest, from
shareholders holding more than 10% of the Company. The interest on the notes
are 2% per annum, calculated and compounded annually and paid annually.
Subsequent to the year ended December 31, 2016, the Company issued four
unsecured promissory notes for $188,135 from shareholders of the Company.
During the
year ended December 31, 2016, the Company granted 500,000 options with an
exercise price of CAD$0.54 (approximately $0.42) per share to related
parties. The Company expensed $127,373 in stock based compensation for these
options granted to related parties.
The related
party transactions are in the normal course of operations and were measured
at the exchange amount, which is the amount of consideration established and
agreed to by the related party.
13. Segmented information:
The Company operates in one reportable
business segment, the sale of in-app purchases on Trophy Bingo and
Garfield's Bingo.
The Company had the following revenue by
geographical region.
|
|
2016
|
|
2015
|
Total revenue from
continuing operations
|
|
|
|
|
Western Europe
|
$
|
33,239
|
$
|
23,589
|
Central, Eastern and
Southern Europe
|
|
118
|
|
55
|
Nordics
|
|
1,355
|
|
468
|
North America
|
|
220,088
|
|
70,453
|
Other
|
|
24,121
|
|
17,045
|
Total revenue
|
$
|
278,921
|
$
|
111,610
|
Page 43
SHOAL GAMES
LTD.
and subsidiaries
(Expressed in
United States Dollars)
Notes to
Consolidated Financial Statements
Years ended
December 31, 2016 and 2015
13. Segmented information: (Continued)
Equipment
The Company's equipment is located as
follows:
Net Book Value
|
|
2016
|
|
2015
|
|
|
|
|
|
Anguilla
|
$
|
828
|
$
|
1,410
|
Canada
|
|
8,097
|
|
2,436
|
United Kingdom
|
|
1,223
|
|
1,834
|
United States of America
|
|
-
|
|
634
|
|
$
|
10,148
|
$
|
6,314
|
14. Concentrations:
Major customers
During the year ended December 31, 2016 and
2015, the Company sold in-app purchases on its social bingo sites, Trophy
Bingo and Garfield's Bingo. There was no single player who had purchased
more than 10% of the Trophy Bingo and Garfield's Bingo revenue. The Company
is reliant on the Google App, iOS App and Amazon App Stores to provide a
platform for Trophy Bingo and Garfield's Bingo to be played thereon.
During the year ended December 31, 2016 and
2015, the Company offered limited advertising. The Company is reliant on one
sales customer who provides the advertising revenue.
15.
Concentrations of credit risk:
Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
cash and accounts receivable. The Company places its cash with high quality
financial institutions and limits the amount of credit exposure with any one
institution.
The Company currently maintains a
substantial portion of its day-to-day operating cash balances at financial
institutions. At December 31, 2016, the Company had total cash balances of
$60,190 (2015 - $570,086) at financial institutions, where $nil (2015 -
$303,983) is in excess of federally insured limits.
The Company has concentrations of credit
risk with respect to accounts receivable, the majority of its accounts
receivable are concentrated geographically in the United States amongst a
small number of customers.
As of December 31, 2016, the Company had
four customers, totaling $13,300 who accounted for greater than 10% of the
total accounts receivable. As of December 31, 2015, the Company had three
customers, totaling $40,818 who accounted for greater than 10% of the total
accounts receivable.
The Company controls credit risk through
monitoring procedures and receiving prepayments of cash for services
rendered. The Company performs credit evaluations of its customers but
generally does not require collateral to secure accounts receivable.
Page 44