Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited financial statements
have been prepared by Shoal Games Ltd. ("the Company") in conformity with
accounting principles generally accepted in the United States of America ("US
GAAP") applicable to interim financial information and with the rules and
regulations of the United States Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to such rules
and regulations. In the opinion of management, the unaudited interim
consolidated financial statements include all adjustments necessary for the fair
presentation of the results of the interim periods presented. All adjustments
are of a normal recurring nature, except as otherwise noted below. These
unaudited interim consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2017, included in the Company's
Annual Report on Form 10-K, filed March 20, 2018, with the Securities and
Exchange Commission. The results of operations for the interim periods are not
necessarily indicative of the results of operations for any other interim period
or for a full fiscal year.
Continuing operations
These unaudited
interim 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 quarters ended June 30, 2018
and 2017, and has an accumulated deficit of $25,130,230 as at June 30, 2018.
These material uncertainties raise 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 6
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
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%
|
Rooplay Media Ltd.
|
British Columbia, Canada
|
100%
|
Rooplay Media Kenya Limited
|
Kenya
|
100%
|
Shoal Media Inc.
|
Anguilla
|
100%
|
Shoal Games (UK) Plc
|
United Kingdom
|
99%
|
Shoal Media (UK) Ltd.
|
United Kingdom
|
100%
|
In addition, there
are the following dormant subsidiaries; Bingo.com (Antigua) Inc., Bingo.com (Wyoming) Inc., and Bingo Acquisition Corp.
During the quarter ended
March 31, 2017, Shoal Media UK Ltd. was
incorporated under the laws of England and Wales.
During the quarter ended September 30, 2017,
Rooplay Media Kenya Limited was incorporated under the laws of Kenya.
All inter-company
balances and transactions have been eliminated in the consolidated financial
statements.
(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 collectibility of accounts
receivable, the valuation of promissory notes and the estimated market rate of
15%, stock-based compensation, the derivative liability - warrants valuation and
the valuation of deferred tax assets. Actual results may differ significantly
from these estimates.
Page 7
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(c)
Revenue
recognition:
Trophy Bingo and Garfield's Bingo and Rooplay Originals 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.
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) 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.
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.
Page 8
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(e) Software
Development Costs: (Continued)
Total software
development costs were $6,304,540 as at June 30, 2018 (December 31, 2017 -
$5,768,476).
(f)
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:
|
|
2018
|
|
2017
|
Expected dividend
yield
|
|
-
|
|
-
|
Expected stock
price volatility
|
|
109%
|
|
-
|
Weighted average
volatility
|
|
96%
|
|
-
|
Risk-free interest
rate
|
|
1.97%
|
|
-
|
Expected life of
options
|
|
5 years
|
|
-
|
Forfeiture rate
|
|
5%
|
|
-
|
(g) Derivative liability - warrants
Some of the warrants have an exercise price in
Canadian dollars whilst the Company's functional currency is US Dollars.
Therefore, in accordance with ASU 815 - Derivatives and Hedging,
the warrants have a derivative liability value. This
liability value has no effect on the cashflow of the Company and does not
represent a cash payment of any kind.
A fair value of the derivative
liability of $215,687 has been estimated on the date of the subscription using
the Binomial Lattice pricing model. During the period ended June 30, 2018,
these warrants were either exercised or expired and there was a gain on
derivative liability - warrants of $44,572 and the derivative liability -
warrants value decreased to $nil with the following assumptions:
|
|
June 30, 2018
|
|
December 31, 2017
|
Average stock
price
|
|
-
|
|
CAD$0.65
|
Expected dividend
yield
|
|
-
|
|
-
|
Expected stock
price volatility
|
|
-
|
|
93.74%
|
Risk-free interest
rate
|
|
-
|
|
1.66%
|
Expected life of warrants
|
|
5 years
|
|
-
|
Forfeiture rate
|
|
-
|
|
0.5 year
|
The
average stock price is calculated on the probability weighted average price of
the exercise of the warrants.
Page 9
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(h)
New accounting
pronouncements and changes in accounting policy:
In May 2014, the Financial Accounting Standards
Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers and
issued subsequent amendments to the initial guidance in August 2016, March 2016,
April 2016, and May 2016 within ASU 2016-04, 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 guidance states that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. An entity should also disclose
sufficient information to enable users of financial statements to understand the
nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The standard was to be effective for the Company as of
January 1, 2017, but in August 2016, the FASB delayed the effective date of the
new revenue accounting standard to January 1, 2019, and would permit early
adoption as of the original effective date. Earlier adoption is not otherwise
permitted for public entities. 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
(modified retrospective method). The Company is currently assessing the impact
of this update on its consolidated financial statements. The Company adopted ASC
2014-09 as of January 1, 2018 using the modified retrospective method. The new
standard will therefore be applied to all contracts not completed as of January
1, 2018. The adoption of ASC 606 has not had a material impact to its results
of operations or cash flows.
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 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
Page 10
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(h)
New accounting
pronouncements and changes in accounting policy: (Continued)
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 adopted ASU 2016-01 as of
January 1, 2018 and ASU 2016-01 has not had a material impact on the
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 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. 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 adopted ASC 2014-09 as of January 1, 2018 and it will have
no material impact on the consolidated financial statements.
Page 11
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(h)
New accounting
pronouncements and changes in accounting policy: (Continued)
In October 2016, 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 adopted ASU 2016-16 on January 1, 2018 and
it did not have an impact on its consolidated financial statements.
In January of 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business. The
new standard provides a screen to determine when a set of assets and activities
is not a business. The screen requires that when substantially all of the fair
value of the gross assets acquired or disposed of is concentrated in a single
identifiable asset or a group of similar identifiable assets, the set is not a
business. This standard is effective for annual periods beginning after December
15, 2017 and interim periods within those periods, with early adoption
permitted, and should be applied prospectively on or after the effective date.
Upon the adoption of ASU 2017-01, it is expected that the majority of the
Company's acquisitions will be accounted for as asset acquisitions, whereas
under the current guidance the majority of the Company's acquisitions have been
accounted for as business combinations. The most significant difference between
the two accounting models that will impact the Company's consolidated financial
statements is that in an asset acquisition, property acquisition costs are
generally a component of the consideration transferred to acquire a group of
assets and are capitalized as a component of the cost of the assets, whereas in
a business combination, property acquisition costs are expensed and not included
as part of the consideration transferred. The Company adopted ASU 2017-01 on
January 1, 2018 and the adoption did not have a material impact on the Company's
consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
The new standard provides guidance about which changes to the terms or
conditions of a share-based payment award require an entity to apply
modification accounting in Topic 718. This pronouncement is effective for
annual reporting periods beginning after December 15, 2017 but early adoption is
permitted. The Company adopted ASU 2017-09 on January 1, 2018 and the adoption
did not have a material impact on the Company's consolidated financial
statements because the Company has not had significant modifications of its
awards.
Page 12
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(h)
New accounting
pronouncements and changes in accounting policy: (Continued)
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 850), the objective of which is to improve the
financial reporting of hedging relationships to better portray the economic
results of an entity's risk management activities in its financial statements.
In addition, the amendments in this Update make certain targeted improvements to
simplify the application and disclosure of the hedge accounting guidance in
current general accepted accounting principles. This pronouncement is effective
for public entities for fiscal years beginning after December 15, 2018. Early
application is permitted in any period after issuance. For cash flow and net
investment hedges existing at the date of adoption, an entity should apply a
cumulative-effect adjustment related to eliminating the separate measurement of
ineffectiveness to accumulated other comprehensive income with a corresponding
adjustment to the opening balance of retained earnings as of the beginning of
the fiscal year that an entity adopts the amendments in this Update. The amended
presentation and disclosure guidance is required only prospectively. The Company
is currently evaluating the impact of adopting this guidance on its financial
position, results of operations and liquidity.
In February 2018, FASB issued Accounting
Standards Update ("ASU") 2018-02, "Income Statement - Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income" to address a narrow-scope financial reporting issue
that arose as a consequence of the change in the tax law. On December 22, 2017,
the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for
Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the
Budget for Fiscal Year 2018 (Tax Cuts and Jobs Act of 2017). The ASU permits a
reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from the newly enacted federal
corporate income tax rate. The amount of the reclassification would be the
difference between the historical corporate income tax rate of 34% and the newly
enacted 21% corporate income tax rate. ASU 2018-02 is effective for all entities
for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years with early adoption permitted, including adoption in any
interim period, for (i) public business entities for reporting periods for which
financial statements have not yet been issued and (ii) all other entities for
reporting periods for which financial statements have not yet been made
available for issuance. The changes are required to be applied retrospectively
to each period (or periods) in which the effect of the change in the U.S.
federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 is
recognized. The Company is currently evaluating the impact of adopting this
guidance.
Page 13
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(h)
New accounting
pronouncements and changes in accounting policy: (Continued)
In February 2018, FASB issued ASU 2018-03,
"Technical Corrections and Improvements to Financial Instruments (Subtopic
825-10) - Recognition and Measurement of Financial Assets and Financial
Liabilities". This update was issued to clarify certain narrow aspects of
guidance concerning the recognition of financial assets and liabilities
established in ASU No. 2016-01, "Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities". This includes an amendment to clarify that an entity measuring an
equity security using the measurement alternative may change its measurement
approach to a fair valuation method in accordance with Topic 820, Fair Value
Measurement, through an irrevocable election that would apply to that security
and all identical or similar investments of the same issued. The update is
effective for fiscal years beginning after December 15, 2017 and interim periods
within those fiscal years beginning after June 15, 2018. The Company is
currently assessing the impact that adopting this new accounting standard will
have on our consolidated financial statements.
There have been no other recent accounting
standards, or changes in accounting standards, during the quarter ended June 30,
2018, as compared to the recent accounting standards described in the Annual
Report, that are of material significance, or have potential material
significance, to us.
(i) 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 and cash equivalents are 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 and cash equivalents were measured using Level 1 inputs.
Stock-based compensation and derivative liability - warrants were measured using
Level 2 inputs.
The Company deemed a fair value of the
promissory notes 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 level 3 inputs by applying 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.
Page 14
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
2. Summary of
significant accounting policies: (Continued)
(i) Financial
instruments: (Continued)
(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 June 30, 2018, is summarized as follows:
|
|
June 30, 2018
|
|
December 31, 2017
|
Accounts
receivable
|
$
|
15,907
|
$
|
42,688
|
|
|
|
|
|
Provision for
doubtful accounts
|
|
-
|
|
(27,666)
|
|
|
|
|
|
Net accounts
receivable
|
$
|
15,907
|
$
|
15,022
|
4.
Software development assets:
The Company has developed Trophy Bingo, a social
bingo game, which was launched in the year ended December 31, 2014.
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
and was initially launched in March 2017, with the full release in November
2017.
In
addition, during the year ended December 31, 2016, the Company commenced
development of the 'Rooplay Originals'.
During the period ended June 30, 2018, the Company
has expensed the development costs of all its technology as incurred and has
expensed the following software development costs.
|
|
Six
Months ended June 30, 2018
|
|
Six
Months ended June 30, 2017
|
|
Three
Months ended June 30, 2018
|
|
Three
Months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Opening total software
development costs
|
$
|
5,768,476
|
$
|
4,935,274
|
$
|
6,039,095
|
$
|
5,149,769
|
|
|
|
|
|
|
|
|
|
Software development during
the period
|
|
536,064
|
|
411,311
|
|
265,445
|
|
196,816
|
Closing total Software
development costs
|
|
6,304,540
|
|
5,346,585
|
|
6,304,540
|
|
5,346,585
|
Page 15
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
5.
Promissory notes:
The Company has issued unsecured promissory notes from shareholders of the
Company. The notes were 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 discount rate after examining the interest rates
for similar instruments issued in the same time frame for similar companies
without the conversion feature.
On March 31, 2017, the maturity date on the promissory notes was extended to
April 1, 2020. The Company treated the change as an extinguishment and
reissuance of the notes. The Company recognized a discount on the promissory
notes of $94,191 from the extinguishment and reissuance of the notes.
During the quarter ended June
30, 2018, the promissory notes were settled in exchange for the exercise of
warrants and the notes were extinguished. Since the extinguishment of the
promissory note is with related parties, then in accordance with ASC
470-50-40-2, the extinguishment transactions is in essence a capital
transaction. Therefore, the Company recognized a reduction of $65,955 from
equity of the Company. The Company recognized interest accretion of $37,090
(June 30, 2017 - $39,911).
|
|
June 30, 2018
|
|
December 31, 2017
|
Opening balance
|
$
|
502,313
|
$
|
347,698
|
|
|
|
|
|
Promissory note issued
|
|
-
|
|
188,135
|
|
|
|
|
|
Discount on promissory note
|
|
-
|
|
(23,461)
|
|
|
|
|
|
Gain on extinguishment and
reissuance of promissory notes with related parties
|
|
-
|
|
(94,191)
|
|
|
|
|
|
Reduction of capital on
extinguishment of promissory notes with related parties
|
|
65,955
|
|
-
|
|
|
|
|
|
Extinguishment of promissory
notes to related parties
|
|
(605,358)
|
|
(418,181)
|
|
|
|
|
|
Reissuance of promissory
notes to related parties
|
|
-
|
|
418,181
|
|
|
|
|
|
Accrued interest
|
|
5,124
|
|
11,288
|
|
|
|
|
|
Interest accretion
|
|
31,966
|
|
72,844
|
|
|
|
|
|
Closing balance
|
$
|
-
|
$
|
502,313
|
Page 16
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
6.
Stockholders' Equity (Deficiency):
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 period ended June 30, 2018,
the related party warrant holders
exercised their warrants for 1,200,000 shares at CAD$0.65 (US$0.50) per share
through the settlement of the promissory notes, in a non-cash transaction.
During the period ended March 31, 2018,
a warrant holder exercised their warrant
for 15,000 shares at $0.44 per share raising a total of $6,600.
During the period ended March 31, 2018,
the Company closed a TSX Venture Exchange
approved private placement financing totaling $2,551,500.
The private placement consisted of 7,290,000 shares
priced at $0.35 per share. Pursuant to the private placement the Company paid a
commission of $253,750 and incurred share issuance expense of $17,608 (Fiscal
2017 - $25,816).
In December 2017, two warrant holders exercised
their warrants and acquired 121,111 common shares of the Company at CAD$0.55
(approximately $0.43) per share totaling $52,310.
On October 27, 2017, the Company closed a TSX
Venture Exchange approved non-brokered private placement financing totaling
$45,011. The private placement consisted of 128,600
units priced at $0.35 per unit. Each Unit was comprised of one common share and
one share purchase warrant. Each share purchase warrant is exercisable into one
common share of the Company for 12 months following closing. The exercise price
of the warrants is $0.44 per share for the first six months following closing
and $0.52 per share for the period which is 7-12 months following closing.
On September 29, 2017, the Company closed a TSX
Venture Exchange approved non-brokered private placement financing totaling
$1,010,763. The private placement consisted of
2,887,895 units priced at $0.35 per unit. Each Unit was comprised of one common
share and one share purchase warrant. Each share purchase warrant is
exercisable into one common share of the Company for 12 months following
closing. The exercise price of the warrants is $0.44 per share for the first
six months following closing and $0.52 per share for the period which is 7-12
months following closing.
On June 16, 2017, the Company closed a TSX Venture Exchange approved
non-brokered private placement financing totaling CAD$1.045 million
(approximately $790,281). The private placement
consisted of 2,323,779 units priced at CAD$0.45 ($0.34) per unit. Each Unit was
comprised of one common share and one share purchase warrant. Each share
purchase warrant is exercisable into one common share of the Company for 12
months following closing. The exercise price of the warrants is CAD$0.55 per
share for the first six months following closing and CAD$0.65 per share for the
period which is 7-12 months following closing.
Page 17
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
6.
Stockholders' Equity (Deficiency): (Continued)
(b)
Warrants
A summary of warrant activity for the period ended
June 30, 2018 are as follows:
|
|
Number of warrants
|
|
Weighted average
exercise price
|
Outstanding, December 31, 2016
|
|
-
|
$
|
-
|
|
|
|
|
|
Granted
|
|
2,323,779
|
|
0.43 - 0.49
|
Granted
|
|
2,887,895
|
|
0.44 - 0.52
|
Granted
|
|
128,600
|
|
0.44 - 0.52
|
Exercised
|
|
(121,111)
|
|
(0.43)
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
5,219,163
|
|
0.48
|
|
|
|
|
|
|
Granted
|
|
-
|
|
-
|
Exercised
|
|
(1,215,000)
|
|
(0.50)
|
Expired, unexercised
|
|
(1,002,668)
|
|
(0.48)
|
|
|
|
|
|
Outstanding June 30, 2018
|
|
3,001,495
|
$
|
0.52
|
|
|
|
|
|
|
|
|
The following
table summarizes information concerning outstanding and exercisable warrants at
June 30, 2018:
Range of exercise
prices per share
|
Number of
outstanding warrants
|
Expiry date
|
|
0.52
|
2,872,895
|
September 28, 2018
|
|
0.52
|
128,600
|
October 26, 2018
|
|
|
3,001,495
|
|
(c) Stock option plans:
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 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.
Page 18
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
6.
Stockholders' Equity (Deficiency): (Continued)
(c) Stock option plans: (Continued)
During the quarter ended June 30, 2018, there
were 710,000 fully vested, 5 year, options granted with an exercise price of
CAD$0.54 (US$0.42) and 1,275,000 fully vested, 5 year options granted with an
exercise price of $0.50 and 145,000 vesting, 5 year options granted with an
exercise price of CAD$0.54 (US$0.42) to employees and consultants. During the
quarters ended March 31, 2018 and June 30, 2018, 75,000 options and 25,000
options,
were cancelled respectively.
A summary
of stock option activity for the stock option plans for the periods ended June
30, 2018 is as follows:
|
|
Number of options
|
|
Weighted average
exercise price
|
Outstanding, December 31, 2016
|
|
1,010,000
|
$
|
0.42
|
|
|
|
|
|
|
Granted
|
|
725,000
|
|
0.42
|
Exercised
|
|
-
|
|
-
|
Cancelled
|
|
(130,000)
|
|
(0.42)
|
|
|
|
|
|
Outstanding December 31, 2017
|
|
1,605,000
|
|
0.42
|
|
|
|
|
|
Granted
|
|
2,130,000
|
|
0.47
|
Exercised
|
|
-
|
|
-
|
Cancelled
|
|
(100,000)
|
|
(0.42)
|
|
|
|
|
|
Outstanding June 30, 2018
|
|
3,635,000
|
$
|
0.45
|
|
|
|
|
|
|
|
|
The aggregate
intrinsic value for options exercisable as at June 30, 2018 was $74,590
(December 31, 2017 - $nil).
The following
table summarizes information concerning outstanding and exercisable stock
options at June 30, 2018:
Range of exercise
prices per share
|
Number outstanding
|
Number exercisable
|
Expiry date
|
|
$ 0.42
|
855,000
|
855,000
|
December 20, 2021
|
|
0.42
|
650,000
|
380,000
|
November 8, 2022
|
|
0.42
|
855,000
|
724,500
|
June 4, 2023
|
|
0.50
|
1,275,000
|
1,275,000
|
June 4, 2023
|
|
|
3,635,000
|
3,234,500
|
|
7. 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 agreements. One
of the Canadian operating lease expired on December 31, 2016, but
unless 30 day notice is given this lease
automatically renews on a month to month basis
until notice is given. The second operating lease in Vancouver, Canada
Page 19
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
7. Commitments: (Continued)
is on a month to month basis 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 $6,849
for the quarter ended June 30, 2018 (June 30, 2017 - $4,614).
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.
As at June 30, 2018, the Company had a number of
renewable license commitments with large brands, including, Garfield, Moomins,
Mr Men and Little Miss, Mr. Bean, Peter Rabbit, Pororo and the Winx club. These
agreements have commitments to pay royalties on the revenue from the licenses
subject to the following minimum guarantee payments:
|
|
|
2018
|
$
|
32,099
|
2019
|
|
34,266
|
2020
|
|
3,000
|
|
|
|
The Company expensed the minimum guarantee payments over the life of the
agreement and recognized license expense of $7,701 (June 30, 2017 - $4,452) for
the period ended June 30, 2018.
Page 20
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
8. Income Taxes:
Shoal Games Ltd. is domiciled
in the tax-free jurisdiction of Anguilla, British West Indies. However certain
of the Company's subsidiaries incur income taxation.
The Tax Cuts and
Jobs Act ("Tax Act") was signed into law on December 22, 2017. Included as part
of the law, was a permanent reduction in the U.S. federal corporate income tax
rate from 34% to 21% effective January 1, 2018.
The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at June 30, 2018, and December 31, 2017, are
presented below:
|
|
June 30,
2018
|
|
December 31, 2017
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carry forwards
|
$
|
211,808
|
$
|
102,809
|
|
|
|
|
|
Valuation Allowance
|
|
(211,808)
|
|
(102,809)
|
|
$
|
-
|
$
|
-
|
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.
9. Related Party
Transactions:
The Company has a liability of $nil (December 31, 2017 - $33,000) to a company
owned by a current director and officer of the Company for payment of consulting services
rendered of
$33,000 (June 30, 2017 - $33,000) by the
current director and officer of the Company.
The Company has a liability of $773 (December 31, 2017 - $97) to a current
director and officer of the Company for expenses incurred.
The Company has a liability of $5,567 (December 31, 2017 - $3,982) to a current
director and officer of the Company for expenses incurred.
The Company has a liability of $nil (December 31, 2017 - $nil) to a company
owned by a current director and officer of the Company for payment of consulting services
rendered of $20,414 (June
30, 2017 - "$19,177) by the current director
and officer of the Company.
The Company has a liability of $nil (December 31, 2017 - $nil) to a company
owned by a current director and officer of the Company for payment of consulting services
rendered of $22,500 (June
30, 2017 - "$22,500) by the current director
and officer of the Company.
Page 21
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
9. Related Party
Transactions: (Continued)
The Company has a
liability of $4,000 (December 31, 2017
- $1,000), to independent directors of the Company for payment of
directors fees. During the quarter ended June 30, 2018, the Company accrued
$1,500 (June 30, 2017 - $500) to the independent directors in director fees.
The Company has a
liability of $7,819 (December 31, 2017
- $6,106), to an officer of the Company for payment of consulting services rendered and
expenses incurred of $27,716 (June 30, 2017 - $23,417)
by the officer of the Company.
The Company has
promissory notes totaling $nil (December 31, 2017, $600,235), 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. During the quarter ended June 30, 2018, these promissory notes were settled
through a warrant exercise, in a non-cash transaction.
The Company has a receivable of $nil (December
31, 2017 - $2,630) from a company of which a current director of the Company is a
director.
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.
10. Segmented information:
Revenue
The Company operates in one reportable business
segment, the sale of in-app purchases on Trophy Bingo and Garfield's Bingo;
recurring revenue from Rooplay; and one time purchase revenue from Rooplay
Originals.
The Company had the following revenue by
geographical region.
|
|
Six
Months ended June 30, 2018
|
|
Six
Months ended June 30, 2017
|
|
Three
Months ended June 30, 2018
|
|
Three
Months ended June 30, 2017
|
Total revenue
|
|
|
|
|
|
|
Western Europe
|
$
|
8,437
|
$
|
5,909
|
$
|
4,422
|
$
|
2,520
|
Central, Eastern and Southern Europe
|
|
522
|
|
355
|
|
235
|
|
177
|
Nordics
|
|
481
|
|
360
|
|
216
|
|
316
|
North America
|
|
29,865
|
|
39,781
|
|
15,108
|
|
15,737
|
Other
|
|
9,389
|
|
9,630
|
|
4,362
|
|
4,026
|
Total revenue
|
$
|
48,694
|
$
|
56,035
|
$
|
24,343
|
$
|
22,776
|
|
|
|
|
|
|
|
|
|
Equipment
The Company's equipment is
located as follows:
Net Book Value
|
|
June
30, 2018
|
|
December 31, 2017
|
Anguilla
|
$
|
460
|
$
|
552
|
Canada
|
|
11,854
|
|
8,353
|
United Kingdom
|
|
3,633
|
|
815
|
|
$
|
15,947
|
$
|
9,720
|
Page 22
SHOAL GAMES
LTD.
and Subsidiaries
(Expressed in
United States Dollars)
Notes to Consolidated Financial Statements
Three Months ended June 30, 2018 and 2017
(Unaudited)
11. Concentrations
Major customers
During the quarter ended June 30, 2018 and 2017,
the Company sold subscriptions on its site Rooplay and sold in-app purchases on
its social bingo sites, Trophy Bingo and Garfield's Bingo and Rooplay Originals.
There was no single player who had purchased more than 10% of the Rooplay,
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 Rooplay, Trophy
Bingo and Garfield's Bingo to be played thereon.
12.
Concentrations of Credit Risk:
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash, cash
equivalents and accounts receivable. The Company places its cash and cash
equivalents 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 and
cash equivalents balances at financial institutions. At June 30, 2018, the
Company had total cash and cash equivalents balances of $1,439,560
(December 31, 2017 - $478,397) at financial institutions, where $1,173,287
(December 31, 2017 - $336,756) 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 June 30, 2018, the Company had three
customers, totaling $11,627 who accounted for greater than 10% of the total
accounts receivable. As of December 31, 2017, the Company had three customers,
totaling $9,066 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 23