40-F
Enthusiast Gaming Holdings Inc. / Canada (EGLXF)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
40-F
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒
ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022 Commission File Number 001-40331
ENTHUSIASTGAMING HOLDINGS INC. / Canada
(Exactname of Registrant as specified in its charter)
BritishColumbia, Canada
(Provinceor Other Jurisdiction of Incorporation or Organization)
7372
(PrimaryStandard Industrial Classification Code)
Not
Applicable
(I.R.S.Employer Identification No.)
90Eglinton Avenue East,
Suite 805
Toronto, ON, M4P 2Y3
Tel:
604-785-0850
(Addressand telephone number of Registrant’s principal executive offices)
CTCorporation System 28Liberty Street NewYork, New York, 10005
Tel: 212-894-8940
(Name,address (including zip code) and telephone number (including area code) of agent for service in the United States)
Securities registered or to be registered pursuant to section 12(b) of the Act:
| Title<br> of Each Class | Trading<br> Symbol | Name<br> of Each Exchange on Which Registered |
|---|---|---|
| Common Shares, no par value | EGLX | The NASDAQ Stock Market, LLC |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this Form:
| ☒ Annual<br> Information Form | ☒ Audited<br> Annual Financial Statements |
|---|
Indicate
the number of outstanding shares of each of the Registrant’s classes of capital or common stock as of the close of the period covered by the annual report: The Registrant had 151,767,243 Common Shares, no par value, issued and outstanding as of December 31, 2022.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Emerging
growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
INTRODUCTORY
INFORMATION
Enthusiast Gaming Holdings Inc. (the “Registrant”, “Enthusiast Gaming”, we, or our) is a Canadian public company incorporated in British Columbia whose common shares (the “Common Shares”) are listed on the Toronto Stock Exchange (“TSX”) and the Nasdaq Stock Market, LLC (“Nasdaq”). Enthusiast Gaming is a “foreign private issuer” as defined in Rule 3b-4 under Securities Exchange Act of 1934, as amended (the “ExchangeAct”), and is eligible to file this Annual Report on Form 40-F (the “Annual Report”) pursuant to the Canada/United States multi-jurisdictional disclosure system (the “MJDS”).
References to the “Registrant” or “Enthusiast Gaming” mean Enthusiast Gaming Holdings Inc. and its subsidiaries, unless the context suggests otherwise.
NOTE
TO UNITED STATES READERS REGARDING DIFFERENCES BETWEEN UNITED STATES AND CANADIAN REPORTING PRACTICES
The Registrant is permitted to prepare this Annual Report in accordance with Canadian disclosure requirements, which are different from those of the United States. The Registrant has historically prepared its consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, which differ in certain respects from United States generally accepted accounting principles (“US GAAP”) and from practices prescribed by the United States Securities and Exchange Commission (the “SEC”). Therefore, the Registrant’s financial statements incorporated by reference in this Annual Report may not be comparable to financial statements prepared in accordance with US GAAP.
FORWARD-LOOKING
STATEMENTS
This Annual Report includes or incorporates by reference certain statements that constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. Forward-looking information involves statements that are not based on historical information, but rather relate to future operations, strategies, financial results or other developments. Forward-looking information is necessarily based upon estimates and assumptions, which are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Registrant’s control and many of which, regarding future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking information made by or on the Registrant’s behalf. Although the Registrant has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. All factors should be considered carefully and investors should not place undue reliance on the Registrant’s forward-looking information as actual results may vary. Examples of such forward-looking information within this Annual Report include statements relating to the Registrant’s expectations with respect to: the intended business activities of the Registrant; the sources of revenues and future operations, including sponsorship of the Registrant; the future growth and revenues of the esports industry generally; the Registrant’s anticipated financial performance; future development and growth prospects; expected operating costs, general and administrative costs, costs of services and other costs and expenses of the Registrant; the ability of the Registrant to meet current and future obligations; the ability of the Registrant to obtain financing on acceptable terms or at all to finance future operating or development plans in excess of free cash flow.
Forward-looking information reflects the Registrant’s current views with respect to expectations, beliefs, assumptions, estimates and forecasts about the Registrant’s business and the industry and markets in which the Registrant operates. Forward-looking information is not a guarantee of future performance and involves risks, uncertainties and assumptions, which are difficult to predict.
Persons reading this Annual Report are cautioned that forward-looking information is only a prediction, and that the Registrant’s actual future results or performance are subject to certain known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expressed or implied by such forward-looking information.
Some of the important risks and uncertainties that could affect forward-looking statements are described in this Annual Report. Should one or more of these risks and uncertainties materialize, or should underlying factors or assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements.
See also “Forward-Looking Information” in the Annual Information Form dated March 27, 2023, filed as Exhibit 99.1**,** as set forth in the Exhibit Index attached hereto.
This discussion, and the discussion of risk factors contained in the Annual Information Form dated March 27, 2023, filed as Exhibit 99.1, as set forth in the Exhibit Index attached hereto, are not exhaustive of the factors that may affect any of forward-looking statements or information concerning the Registrant. Further, any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by applicable law, the Registrant does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management of the Registrant to predict all such factors and to assess in advance the impact of each such factor on the business of the Registrant or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.
Our forward-looking statements are based on the reasonable beliefs, expectations and opinions of management on the date of this Annual Report. Although we have attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. There is no assurance that such information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. Accordingly, readers should not place undue reliance on forward-looking information. We do not undertake to update any forward-looking information, except as, and to the extent required by, applicable securities laws, including applicable United States federal securities laws. The forward-looking statements contained in this Annual Report (including the documents incorporated by reference herein are expressly qualified by this cautionary statement.
PRINCIPAL
DOCUMENTS
The following documents, filed as Exhibits 99.1, 99.2 and 99.3 to this Annual Report on Form 40-F, are hereby incorporated by reference into this Annual Report on Form 40-F:
| a) | Annual Information<br> Form for the year ended December 31, 2022; |
|---|---|
| b) | Audited Consolidated<br> Financial Statements for the years ended December 31, 2022 and 2021 together with the notes thereto, including the report<br> of the independent registered public accounting firm thereon; and |
| --- | --- |
| c) | Management’s<br>Discussion and Analysis dated March 27, 2023, for the year ended December 31, 2022. |
| --- | --- |
OFF-BALANCE
SHEET ARRANGEMENTS
The Registrant has not entered into any “off-balance sheet arrangements”, as defined in General Instruction B.(11) to Form 40-F, that have or are reasonably likely to have a current or future effect on the Registrant’s financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
NASDAQ CORPORATE GOVERNANCE
The Registrant is a “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act and its common shares are listed on NASDAQ. NASDAQ Marketplace Rule 5615(a)(3) permits a foreign private issuer to follow its home country practices in lieu of certain requirements in the NASDAQ Listing Rules. A foreign private issuer that follows home country practices in lieu of certain corporate governance provisions of the NASDAQ Listing Rules must disclose any significant ways in which its corporate governance practices differ from those followed by domestic companies, either on its website or in its annual filings with the Commission. A description of the significant ways in which the Registrant’s corporate governance practices differ from those followed by domestic companies pursuant to the applicable NASDAQ Listing Rules is disclosed on the Registrant’s website at https://www.enthusiastgaming.com/wp-content/uploads/2021/06/Enthusiast-Nasdaq-Statement-of-Corporate-Governance-Differences-FINAL.pdf.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management of the Company, under the supervision of the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures (as defined by the SEC in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) for the Company to ensure that material information relating to the Company, including its consolidated subsidiaries, that is required to be made known to the Chief Executive Officer and Chief Financial Officer by others within the Company and disclosed by the Company in reports filed or submitted by it under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms; and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer, along with management, have evaluated and concluded that the Company’s disclosure controls and procedures as of December 31, 2022 were effective.
While the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the Company’s disclosure controls and procedures or internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Management’s Annual Report onInternal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with IFRS. The control framework used to design the Company’s internal control over financial reporting is based on the Internal Control – Independent Framework (2013), published by the Committee of Sponsoring Organizations of the Treadway Commission. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on a review of the Company’s internal control procedures, the Company’s Chief Executive Officer and Chief Financial Officer believe its internal controls and procedures are appropriately designed and have certified on the operating effectiveness of internal controls as of December 31, 2022.
Attestation Report of the RegisteredPublic Accounting Firm
In accordance with the United States Jumpstart Our Business Startup Act (the “JOBS Act”) enacted on April 5, 2012, the Registrant qualifies as an “emerging growth company” (an “EGC”), which entitles the Registrant to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. Specifically, the JOBS Act defers the requirement to have the Registrant’s independent auditor assess the Registrant’s internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. As such, the Registrant is exempt from the requirement to include an auditor attestation report in this Annual Report, and will continue to be exempt from such requirement, for so long as the Registrant remains an EGC, which may be for as long as five years following its initial registration in the United States.
Changes In Internal Control Over FinancialReporting
During the year ended December 31, 2022 there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
NOTICES PURSUANT TO REGULATION BTR
The Company was not required by Rule 104 of Regulation BTR to send any notices to any of its directors or executive officers during the fiscal year ended December 31, 2021 concerning any equity security subject to a blackout period under Rule 101 of Regulation BTR.
AUDIT COMMITTEE
The board of directors of the Company (the “Board”) has a separately designated standing audit committee (the “Audit Committee”) established in accordance with Section 3(a)(58)(A) of the Exchange Act and satisfies the requirements of Exchange Act Rule 10A-3. The Company’s Audit Committee is comprised of three directors, all of
whom, in the opinion of the Company’s Board, are independent (as determined under Rule 10A-3 of the Exchange Act and applicable Nasdaq rules) and are financially literate, Michael Beckerman, Ben Colabrese and John Albright.
Audit Committee Financial Expert
The Board has determined that Ben Colabrese of the Audit Committee qualifies as an “audit committee financial expert” within the meaning of Item 407 of Regulation S-K. The Board has further determined that all members of the Audit Committee are “independent” within the meaning of applicable Commission regulations and the listing standards of the Nasdaq Stock Market LLC.
The Commission has indicated that the designation of a person as an audit committee financial expert does not make such person an “expert’ for any purpose, or impose any duties, obligations or liability on such person that are greater than those imposed on member of the audit committee and the board of directors who do not carry this designation, or affect the duties, obligations or liability of any other member of the audit committee or board of directors.
CODE OF ETHICS
We have adopted a Code of Ethics and Business Conduct, which qualifies as a “code of ethics” within the meaning of Form 40-F, that is applicable to each of our directors, officers and employees, including our chief executive officer, chief financial officer, corporate controller and persons performing similar functions. There were no amendments, or waivers granted in respect of, the Code of Ethics and Business Conduct during the fiscal year ended December 31, 2022. The Code of Ethics and Business Conduct was filed with the SEC as Exhibit 99.2 to its Form 6-K filed on June 7, 2021 (primary file number 001-40331) and can also be found on the Company’s website at https://www.enthusiastgaming.com/filings/ .. Amendments to the Code of Ethics and Business Conduct and waivers, if any, for executive officers will be disclosed on the Company’s website. Except for the Code of Ethics and Business Conduct, no information contained on the Company’s website or any other site shall be incorporated by reference in this Annual Report on form 40-F or in the documents incorporated by reference herein or attached as Exhibits hereto.
PRINCIPAL ACCOUNTING FEES AND SERVICES
KPMG LLP (Vaughan, ON, Canada, Auditor Firm ID: 85) acted as the independent registered public accounting firm of the Company for the fiscal year ended December 31, 2022. See the section “External Auditors Service Fees (By Category)” in our Annual Information Form, attached as Exhibit 99.1 to this Annual Report, which section is incorporated by reference herein, for the total amount billed to the Company by KPMG LLP, for services performed in the last two fiscal years by category of service (for audit fees, audit-related fees, tax fees and all other fees).
AUDIT COMMITTEE PRE-APPROVAL POLICESAND PROCEDURES
Under its charter, the Audit Committee is required to pre-approve all non-audit services to be performed by the Company’s external auditors in relation to us or any of our subsidiaries. The pre-approval process for non-audit services also involves consideration of the potential impact of such services on the independence of the external auditors and whether the service for which approval is sought is a prohibited service under applicable laws, regulations, rules or listing standards.
The Audit Committee may delegate the pre-approval of services provided by the external auditor to one or more members of the Audit Committee, which member(s) shall be independent to the extent required by any applicable law, regulation, rule or listing standard. Any such delegate shall report his or her approvals to the Audit Committee at the next scheduled meeting.
MINE SAFETY DISCLOSURE
Not applicable.
UNDERTAKING AND CONSENT TO SERVICE OFPROCESS
Undertaking
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
Consent to Service of Process
The Registrant has previously filed with the SEC an Appointment of Agent for Service of Process and Undertaking on Form F-X signed by the Registrant and its agent for service of process.
Any change to the name or address of the Registrant’s agent for service shall be communicated promptly to the Commission by amendment to Form F-X referencing the file number of the Registrant.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2023
| ENTHUSIAST GAMING HOLDINGS INC. | |
|---|---|
| By: | /s/ Alex Macdonald |
| Name: Alex Macdonald | |
| Title: Chief Financial Officer |
EXHIBIT INDEX
99.1
TABLEOF CONTENTS
| ANNUAL INFORMATION FORM | 3 |
|---|---|
| GLOSSARY OF DEFINED TERMS | 3 |
| FORWARD-LOOKING INFORMATION | 6 |
| CORPORATE STRUCTURE | 8 |
| GENERAL DEVELOPMENT OF THE BUSINESS | 10 |
| DESCRIPTION OF THE BUSINESS | 14 |
| Risk Factors | 25 |
| DIVIDENDS | 39 |
| GENERAL DESCRIPTION OF CAPITAL STRUCTURE | 39 |
| MARKET FOR SECURITIES | 40 |
| ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER | 42 |
| DIRECTORS AND OFFICERS | 43 |
| LEGAL PROCEEDINGS AND REGULATORY ACTIONS | 48 |
| INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS | 48 |
| TRANSFER AGENT AND REGISTRAR | 48 |
| MATERIAL CONTRACTS | 48 |
| INTERESTS OF EXPERTS | 49 |
| ADDITIONAL INFORMATION | 49 |
| AUDIT COMMITTEE INFORMATION | 49 |
| Schedule A AUDIT COMMITTEE CHARTER | A-1 |
ii
ANNUAL INFORMATION FORM
In this annual information form (the “Annual Information Form”), unless otherwise noted or the context indicates otherwise, the “Company”, “Enthusiast Gaming”, “we”, “us” and “our” refer to Enthusiast Gaming Holdings Inc. Unless stated otherwise, all financial information in this Annual Information Form is reported in Canadian dollars. Certain defined terms used herein have the meanings given to them under “Glossary of Defined Terms”.
The information contained herein is dated as of March 27, 2023 unless otherwise stated.
GLOSSARY OF DEFINED TERMS
In this Annual Information Form, the following words and terms shall have the following meanings:
“2022Annual Financial Statements” means the annual financial statements of the Company for the year ended December 31, 2022;
“2022Annual MD&A” means management’s discussion and analysis of the Company for the year ended December 31, 2022;
“AddictingGames” means Addicting Games, Inc.;
“AddictingGames Debenture” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“AddictingGames Share Consideration” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“Amalgamation” means the three-corner amalgamation transaction among J55, NewCo and GameCo completed on the terms and conditions of the Amalgamation Agreement;
“AmalgamationAgreement” means the amalgamation agreement dated May 30, 2019, as amended, among J55, GameCo and Newco;
“Arrangement” means the arrangement transaction among J55, GameCo and Former Enthusiast completed on the terms and conditions of the Arrangement Agreement;
“ArrangementAgreement” means the arrangement agreement dated May 30, 2019 among J55, GameCo and Former Enthusiast;
“AnnualInformation Form” means this annual information form, together with all schedules hereto;
“ApplicableSecurities Laws” means the securities legislation, securities regulation and securities rules, as amended, and the policies, notices, instruments and blanket orders having the force of law, in force from time to time in the Provinces of Ontario, Alberta and British Columbia;
“BC” means British Columbia;
“BCBCA” means the British Columbia Business Corporations Act, and the regulations thereunder, as amended from time to time;
“BlueAnt” has the meaning ascribed to it under “Year Ended December 31, 2020”;
“Board” means the board of directors of Enthusiast Gaming;
3
“CBCA” means the Canada Business Corporations Act, and the regulations thereunder, as amended from time to time;
“CCO” means Chief Corporate Officer;
“CEO” means Chief Executive Officer;
“CFO” means Chief Financial Officer;
“Chairman” means chair of the board of directors of a company;
“Closing” means the date on which the Transactions were completed, namely August 30, 2019;
“ClosingNote” has the meaning ascribed to it under “Year Ended December 31, 2020”;
“company” unless specifically indicated otherwise, means a corporation, incorporated association or organization, body corporate, partnership, trust, association or other entity, other than an individual;
“COO” means Chief Operating Officer;
“CPM” has the meaning ascribed to it under “Media and Content”;
“DSP” has the meaning ascribed to it under “Media and Content”;
“eCPM” has the meaning ascribed to it under “Media and Content”;
“EGI” means Enthusiast Gaming Inc., a company incorporated under the laws of Ontario, and a wholly-owned subsidiary of Enthusiast Gaming;
“EGLX” has the meaning ascribed to it under “Overview”;
“EnthusiastGaming” means Enthusiast Gaming Holdings Inc., formerly J55 Capital Corp., Enthusiast Gaming is the resulting issuer following (i) the Amalgamation, and (ii) the Arrangement, each completed on August 30, 2019;
“EnthusiastGaming Preferred Shares” means preferred shares in the capital of Enthusiast Gaming;
“EnthusiastGaming Shares” means common shares in the capital of Enthusiast Gaming;
“Facility” has the meaning ascribed to it under “Year Ended December 31, 2020”;
“FormerEnthusiast” means Enthusiast Gaming Properties Inc., formerly Enthusiast Gaming Holdings Inc. and Tova Ventures II Inc. Former Enthusiast is the resulting issuer following the amalgamation of Tova Ventures II Inc. with Enthusiast Gaming Properties Inc. completed on August 28, 2018;
“FormerEnthusiast Debenture” means the unsecured convertible debentures having a principal amount of $1,000 and accruing interest at 9% per annum, payable semi-annually until maturity, which comprised part of the Former Enthusiast Debenture Units;
“FormerEnthusiast Debenture Unit” means the debenture units issued at a price of $1,000 by Former Enthusiast in its oversubscribed, non-brokered private placement of convertible debentures completed on November 8, 2018, each of which were comprised of one Former Enthusiast Debenture and 315 Former Enthusiast Debenture Warrants;
“FormerEnthusiast Debenture Warrant” means the common share purchase warrants of Former Enthusiast, which comprised part of the Former Enthusiast Debenture Units;
4
“forward-lookingstatements” has the meaning ascribed to it under “Forward-Looking Information”;
“GameCo” means Aquilini GameCo Inc., a corporation incorporated under the laws of Canada;
“GameKnot” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“GameKnotDeferred Payment Liability” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“GDPR” has the meaning ascribed to it under “Risk Factors Relating to Enthusiast Gaming’s Operations”;
“IFRS” means International Financial Reporting Standards, as adopted by the International Accounting Standards Board, as amended from time to time;
“Inventory” has the meaning ascribed to it under “Media and Content”;
“June2021 Offering” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“J55” means J55 Capital Corp., a capital pool company incorporated under the laws of British Columbia;
“Luminosity” means, collectively, Luminosity Canada and Luminosity USA;
“LuminosityCanada” means Luminosity Gaming Inc., a private corporation incorporated under the laws of Ontario;
“LuminosityUSA” means Luminosity Gaming (USA), LLC, a California limited liability company;
“Nasdaq” has the meaning ascribed to it under “Corporate Structure”;
“Newco” means 11305751 Canada Inc., a wholly-owned subsidiary of J55, incorporated under the CBCA solely for the purpose of carrying out the Amalgamation;
“OBCA” means the Ontario Business Corporations Act, and the regulations thereunder, as amended from time to time;
“Omnia” has the meaning ascribed to it under “Overview”;
“OmniaAcquisition” has the meaning ascribed to it under “Year Ended December 31, 2020”;
“OmniaLoan” has the meaning ascribed to it under “Year Ended December 31, 2020”;
“OptionPlan” means Enthusiast Gaming’s option plan dated January 16, 2020, as amended;
“Outplayed” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“OutplayedShare Consideration” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“OverwatchLeague” means the Overwatch league established by Overwatch League, LLC and Overwatch League B.V.;
“PIPEDA” means Personal Information Protection and Electronic Documents Act (Canada);
“ScotiabankFacilities” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“SEDAR” means the Canadian System for Electronic Document Analysis and Retrieval;
5
“SSP” has the meaning ascribed to it under “Media and Content”;
“SteelMedia” means Steel Media Limited;
“SteelMedia Deferred Payment Liability” means US$1,000,000 of the up to US$1,500,000 balance of the purchase price (inclusive of the maximum earn-out payment) payable in connection with Enthusiast Gaming’s acquisition of Steel Media Limited in October 3, 2019, which could be settled by way of issuing Enthusiast Gaming Shares at a deemed price per share equal to the 5 day VWAP.
“SU” has the meaning ascribed to it under “General Description of Capital Structure”;
“SUPlan” has the meaning ascribed to it under “General Description of Capital Structure”;
“Tabwire” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“Transactions” means the Amalgamation and Arrangement;
“TSR” means The Sims Resource;
“TSX” means Toronto Stock Exchange;
“TSXV” means TSX Venture Exchange;
“UK” means United Kingdom;
“UnitedStates”, “U.S.”, or “U.S.A.” means the United States of America, its territories and possessions, any state of the United States and the District of Columbia;
“Vedatis” has the meaning ascribed to it under “Year Ended December 31, 2021”;
“VedatisShare Consideration” has the meaning ascribed to it under “Year Ended December 31, 2021”;
Words importing the singular include the plural and vice versa and words importing any gender include all genders.
FORWARD-LOOKING INFORMATION
Certain statements and information contained in this Annual Information Form constitute forward-looking statements or forward-looking information (collectively “forward-looking statements”) within the meaning of Applicable Securities Laws. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words or phrases such as “will”, “may”, “is expected to”, “anticipates”, “estimates”, “intends”, “plans”, “projection”, “could”, “vision”, “goals”, “objective”, “outlook” or similar words suggesting future outcomes or language suggesting an outlook.
In particular, this Annual Information Form contains forward-looking statements with respect to the following:
| ● | expectations<br> as to the intended business activities of the Company and its subsidiaries; |
|---|---|
| ● | expectations<br> as to the sources of revenues and future operations, including sponsorship of the Company<br> and its subsidiaries; |
| --- | --- |
| ● | expectations<br> regarding the future growth and revenues of the esports industry generally; |
| --- | --- |
6
| ● | future<br> development and growth prospects; |
|---|---|
| ● | the<br> ability of the Company and its subsidiaries to meet current and future obligations; |
| --- | --- |
| ● | the<br> ability of the Company and its subsidiaries to secure, maintain and comply with all required<br> licenses, permits, approvals and certifications to offer and market its product offerings<br> in the jurisdictions where the Company and its subsidiaries are currently doing business<br> or intends to do business; |
| --- | --- |
| ● | the<br> anticipated regulation or prohibition of online gaming or activities related to or necessary<br> for the operation and offering of online gaming in various jurisdictions; |
| --- | --- |
| ● | the<br> overall business and economic conditions; |
| --- | --- |
| ● | the<br> potential financial opportunity of the Company’s and its subsidiaries’ addressable<br> markets; |
| --- | --- |
| ● | the<br> potential financial opportunity of contracts signed by the Company and its subsidiaries<br> with third parties; |
| --- | --- |
| ● | the<br> competitive environment; |
| --- | --- |
| ● | the<br> protection of the Company’s and its subsidiaries’ current and future intellectual<br> property rights; |
| --- | --- |
| ● | the<br> ability of the Company and its subsidiaries to recruit and retain the services of its<br> key technical, sales, marketing and management personnel; |
| --- | --- |
| ● | the<br> ability of the Company and its subsidiaries to obtain additional financing on reasonable<br> terms or at all; |
| --- | --- |
| ● | the<br> ability of the Company and its subsidiaries to integrate acquisitions and generate synergies; |
| --- | --- |
| ● | the<br> risks associated with advancements in technology, including artificial intelligence,<br> and the risks associated with technology infrastructure, cyber security and cyber attacks; |
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| ● | the<br> impact of new laws and regulations in the jurisdictions in which the Company and its<br> subsidiaries are currently doing business or intend to do business, particularly those<br> related to online gaming or that could impact the ability to provide online gaming products<br> and services; |
| --- | --- |
| ● | marketing<br> plans; and |
| --- | --- |
| ● | the<br> expectation of obtaining new customers for the Company’s and its subsidiaries’<br> products and services, as well as expectations regarding expansion and acceptance of<br> the Company’s and its subsidiaries’ brand and products to new markets. |
| --- | --- |
Forward-looking information in this Annual Information Form is based on our opinions, estimates and assumptions in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances. Despite a careful process to prepare and review the forward-looking information, there can be no assurance that the underlying opinions, estimates and assumptions will prove to be correct.
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Forward-looking information is necessarily based on a number of opinions, estimates and assumptions that we considered appropriate and reasonable as of the date such statements are made, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual actions, events, results, performance or achievements to differ materially from what is projected in forward-looking information, including but not limited to the risks described in greater detail under “Risk Factors”.
Although we have attempted to identify important factors that could cause actual actions, events, results, performance or achievements to differ materially from those described in forward-looking information, there may be other factors not presently known to us or that we presently believe are not material that may cause actions, events, results, performance or achievements to differ from those anticipated, estimated or intended. Should one or more of these risks or uncertainties materialize or should assumptions underlying the forward-looking information prove incorrect, actual actions, events, results, performance or achievements may vary materially from those expressed and implied by such statements contained in this Annual Information Form. The purpose of forward-looking information is to provide the reader with a description of management’s expectations, and such statements may not be appropriate for any other purpose. Accordingly, readers should not place undue reliance on forward-looking information contained in this Annual Information Form. Although the Company believes that the expectations reflected in statements containing forward-looking information are reasonable, it can give no assurance that such expectations will prove to be correct. The Company disclaims any obligation to update any forward-looking information, whether as a result of new information or future events or results, except to the extent required by Applicable Securities Laws.
CORPORATE STRUCTURE
The Company’s head office is located at 90 Eglinton Avenue East, Suite 805, Toronto, Ontario M4P 2Y3, and its registered and records office is located at 510 West Georgia Street, Suite 1800, Vancouver, British Columbia (“BC”), V6B 0M3.
The Company, then called J55 Capital Corp. (“J55”), was formed by articles of incorporation filed under the British Columbia Business Corporations Act (“BCBCA”) on June 27, 2018 and, following its initial public offering, was a capital pool company (“CPC”) listed on the TSXV.
The Company is the resulting issuer following (i) a three-cornered amalgamation (the “Amalgamation”) involving J55, 11305751 Canada Inc. (“Newco”) and Aquilini GameCo Inc. (“GameCo”), and (ii) a plan of arrangement (the “Arrangement”) involving J55, GameCo and Enthusiast Gaming Properties Inc. (“FormerEnthusiast”), each completed on August 30, 2019.
The Amalgamation constituted the Company’s qualifying transaction. Prior to the Amalgamation, the Company completed a 1.25 to 1 share consolidation on August 26, 2019. Following the Arrangement, the Company changed its name to “Enthusiast Gaming Holdings, Inc.” on September 5, 2019 and completed a further 8 to 1 share consolidation on September 9, 2019.
In connection with the Transactions, J55 filed a notice of alteration under the BCBCA on September 5, 2019 to change its name to “Enthusiast Gaming Holdings Inc.”
On January 27, 2020, Enthusiast Gaming graduated to the TSX from the TSXV. The Enthusiast Gaming Shares began trading on the TSX under the ticker symbol “EGLX”. On April 21, 2021, the Enthusiast Gaming Shares commenced trading on the Nasdaq Global Select Market (the “Nasdaq”) under the ticker symbol “EGLX”.
Intercorporate Relationships
The following table describes the subsidiaries of Enthusiast Gaming as of the date hereof, their place of incorporation, continuance or formation, and the percentage of voting securities that are beneficially owned, controlled or directed by the Company.
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| Subsidiary | Jurisdiction<br> of Incorporation | Percentage<br> of Votes Attached to All Voting Securities |
|---|---|---|
| Aquilini<br> GameCo Inc. | Canada | 100%<br> (direct) |
| Enthusiast<br> Gaming Properties Inc. | Canada | 100%<br> (direct) |
| Omnia<br> Media Inc. | USA | 100%<br> (direct) |
| Luminosity<br> Gaming Inc. | Canada | 100%<br> (indirect) |
| Luminosity<br> Gaming (USA) LLC | USA | 100%<br> (indirect) |
| Enthusiast<br> Gaming Inc. | Canada | 100%<br> (indirect) |
| Enthusiast<br> Gaming Live Inc. | Canada | 100%<br> (indirect) |
| Enthusiast<br> Gaming Media (US) Inc. | USA | 100%<br> (indirect) |
| Enthusiast<br> Gaming (PG) Inc. | Canada | 100%<br> (indirect) |
| Steel<br> Media Limited | England<br> and Wales | 100%<br> (indirect) |
| GameCo<br> eSports USA Inc. | USA | 100%<br> (indirect) |
| Vedatis<br> SAS | France | 100%<br> (direct) |
| Tabwire<br> LLC | USA | 100%<br> (indirect) |
| GameKnot<br> LLC | USA | 100%<br> (indirect) |
| Addicting<br> Games, Inc. | USA | 100%<br> (indirect) |
| TeachMe,<br> Inc. | USA | 100%<br> (indirect) |
| Outplayed,<br> Inc. | USA | 100%<br> (indirect) |
| Fantasy<br> Football Scout Limited | England<br> and Wales | 100%<br> (indirect) |
| Fantasy<br> Media Ltd. | England<br> and Wales | 100%<br> (indirect) |
| Storied<br> Talent, LLC | USA | 100%<br> (indirect) |
Notes:
| (1) | On<br> January 1, 2023, (i) Enthusiast Gaming (TSR) Inc. amalgamated with Enthusiast Gaming<br> Media Holdings Inc., and (ii) Hexagon Games Corp. and Enthusiast Gaming Media Holdings<br> Inc. amalgamated with Enthusiast Gaming Inc. |
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GENERALDEVELOPMENT OF THE BUSINESS
Overview
Since completion of the Transactions, Enthusiast Gaming is and has been engaged in the businesses of media, content, esports, and entertainment, all as described in more detail below in “Description of the Business”. Enthusiast Gaming is building the largest media platform for video game and esports fans to connect and engage worldwide. Through its proprietary mix of digital media and entertainment assets, Enthusiast Gaming has built a vast network of like-minded communities to deliver the ultimate fan experience. This vertically integrated media platform engages a diverse, youthful and affluent audience who are watching, reading and consuming gaming content. Approximately 70%^1^ of Enthusiast Gaming’s audience is comprised of Gen Zs and Millennials who rely on the Enthusiast Gaming platform to learn, engage, communicate, create, and share gaming related content.
Between its online digital media properties, its network of partner websites and video channels, its library of web and mobile casual games, its video gaming expo, and its esports organization (Luminosity Gaming Inc., “Luminosity”), the Company engages approximately 300 million gaming enthusiasts worldwide monthly.
Three-YearHistory
Year Ended December 31, 2020
On January 27, 2020, Enthusiast Gaming graduated to the TSX from the TSXV. The Enthusiast Gaming Shares began trading on the TSX under the same ticker symbol “EGLX”.
On August 6, 2020, the Company received confirmation of a one-year extension on the term of its $20 million secured loan (the “OldFacility”). The Old Facility, entered into on August 2, 2019, had an original maturity date of August 2, 2021. Following the extension, the Old Facility had a maturity date of September 6, 2022.
On August 30, 2020, Enthusiast Gaming closed the acquisition (the “Omnia Acquisition”) of Omnia from Blue Ant Media Solutions Inc. (“Blue Ant”). The Company entered into a binding share purchase agreement on August 6, 2020, to acquire 100% of the issued and outstanding shares of Omnia from Blue Ant, to create the largest gaming media, esports and entertainment platform in North America by users, with 300 million video game and esports fans monthly for total consideration of 18.25 million Enthusiast Gaming Shares, an aggregate cash payment of $11.0 million, and a vendor-take-back note with a face value of $5.75 million, bearing a 9.0% annual interest rate (compounded annually) and carrying a maturity of 36 months (the “OmniaLoan”). The Cash Consideration was comprised of (i) a $9.1 million note issued to Blue Ant on closing of the Omnia Acquisition (the “Closing Note”), (ii) $1,400,000 payable into escrow in order to fund any repayment of a paycheck protection program loan received by Omnia in connection with the ongoing COVID-19 pandemic, and (iii) $500,000 held back to satisfy customary working capital adjustments in accordance with the terms of the Purchase Agreement. The Closing Note was repaid in full on August 31, 2020. Omnia’s main assets include short form video content, podcasts, and brands related to the Owned & Operated Content brands and channels. These include BCC Gaming, Arcade Cloud, GTA Today, The Squad, AC News, The Countdown, Wisecrack, Livestream Fails, and Best Cod Clips.
| ^1^ | Calculated<br>based on data provided by Comscore as of December 2022. |
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On August 31, 2020, the Company closed a bought deal offering issuing 11,500,000 Enthusiast Gaming Shares at a price of $1.50 per share resulting in aggregate gross proceeds of approximately $17.25 million. The proceeds of the offering were used to finance the Omnia Acquisition and for general corporate purposes.
On November 9, 2020, the Company applied to list the Enthusiast Gaming Shares on the Nasdaq.
On November 27, 2020, the Company entered into an amended and restated letter agreement with the Company’s lender, resulting in an increase in the total size of its credit facilities, under more flexible and growth-friendly terms. The amended credit agreement increased the Company’s total borrowing capacity to up to $24 million, including a term loan in the amount of $10 million, and revolving demand loans of up to $14 million.
YearEnded December 31, 2021
On January 20, 2021, the Company issued 429,354 Enthusiast Gaming Shares in settlement of the Steel Media Deferred Payment Liability.
On January 21, 2021, the Company issued notice to its holders of Former Enthusiast Debenture Units of its intention to convert outstanding Former Enthusiast Debenture Units. Upon completion of the conversions, $9 million in principal amount of the Former Enthusiast Debenture Units were converted into approximately 2,971,938 Enthusiast Gaming Shares. The Former Enthusiast Debentures were converted on or before January 27, 2021.
On February 10, 2021, the Company and Blue Ant closed a bought deal primary and secondary offering of 10,200,500 Enthusiast Gaming Shares at a price of $5.75 per share, resulting in aggregate gross proceeds of approximately $58.7 million. 7,383,000 Enthusiast Gaming Shares were issued from treasury with the Company receiving gross proceeds of approximately $42.5 million. The proceeds of the offering were to be used for future acquisitions, working capital and general corporate purposes.
On April 13, 2021, the Company filed a registration statement on Form 40-F with the United States Securities and Exchange Commission in order to become a reporting issuer in the United States.
On April 20, 2021, the Enthusiast Gaming Shares were approved for listing on the Nasdaq. The Enthusiast Gaming Shares commenced trading on the Nasdaq under the ticker symbol “EGLX” on April 21, 2021.
On May 1, 2021, Enthusiast Gaming closed the acquisition of Vedatis SAS (“Vedatis”), which owns the online fan community, Icy Veins. The Company entered into a binding purchase agreement dated May 1, 2021 to acquire 100% of the issued and outstanding shares of Vedatis for total consideration of €7,000,000 in cash and Enthusiast Gaming Shares, plus an earn-out subject to certain milestones being achieved. Upon closing of the acquisition, the Company made a cash payment of €3,500,000 and issued 226,563 Enthusiast Gaming Shares (the “Vedatis Share Consideration”) for an aggregate value of €5,000,000. At the option of the Company, €750,000 of the €2,000,000 balance of the purchase price, which was payable on the first anniversary of the closing date, was settled by way of issuing 348,852 additional Enthusiast Gaming Shares. In addition, the vendors are eligible for an earn-out payment, subject to certain conditions, equal to the sum of EBITDA of the purchased business (excluding new business generated by the Company) for the four best consecutive calendar quarterly periods within the 16 consecutive calendar quarterly periods immediately following the closing date.
On April 22, 2021, the Company entered into a definitive agreement to acquire 100% of the membership interest of Tabwire LLC (“Tabwire”), the owner of TabStats (www.tabstats.com), for US$11 million in cash and Enthusiast Gaming Shares. The acquisition closed on June 21, 2021. Upon closing of the acquisition, the Company made a cash payment of US$5 million and issued 790,094 Enthusiast Gaming Shares at an agreed value of CAD$9.51 per share, for total share consideration of US$6 million.
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On June 15, 2021, the Company closed a marketed public offering of 8,000,000 Enthusiast Gaming Shares at a price of US$5.75 per share resulting in aggregate gross proceeds of approximately US$46 million (the “June2021 Offering”). On June 21, 2021, the underwriters of the June 2021 Offering exercised the over-allotment option granted to them by the Company and Blue Ant, pursuant to which the Company offered and sold 600,000 Enthusiast Gaming Shares from treasury and Blue Ant offered and sold 600,000 Enthusiast Gaming Shares, with the Company and Blue Ant each receiving gross proceeds of US$3,450,000. Proceeds from the June 2021 Offering (including proceeds raised by the Company in connection with the exercise of the over-allotment option) were used primarily to strengthen the Company’s financial position, inclusive of future acquisitions, working capital, repayment of indebtedness and other general corporate purposes. In connection with the June 2021 Offering, the Omnia Loan was repaid together with accrued but unpaid interest.
On August 30, 2021, Enthusiast Gaming closed the acquisition of GameKnot LLC (“GameKnot”), owner of chess fan community, GameKnot.com. The Company entered into a binding purchase agreement dated August 30, 2021 to acquire 100% of the membership interest of GameKnot for total consideration of US$2.75 million, consisting of (i) a cash payment of US$1.5 million paid at closing, (ii) share consideration of US$0.75 million for which 165,425 Enthusiast Gaming Shares were issued, and (iii) a deferred payment of US$0.5 million, payable six months post-closing (in cash or Enthusiast Gaming Shares at the option of the Company) (the “GameKnotDeferred Payment Liability”).
On September 3, 2021, Enthusiast Gaming closed the acquisition of Addicting Games. The Company entered into a binding purchase agreement dated September 3, 2021 to acquire 100% of the issued and outstanding shares of Addicting Games for total consideration of approximately US$34.4 million, consisting of (i) a cash payment of US$10 million paid at closing; (ii) total share consideration of US$12 million for which 2,661,164 Enthusiast Gaming Shares were issued (the “Addicting Games Share Consideration”); (iii) deferred payments of US$7 million and US$3.8 million, payable on the first and second anniversaries of the closing date, respectively, which may be settled in cash or Enthusiast Gaming Shares at the option of the Company; and (iv) the assumption of a convertible debenture (the “Addicting Games Debenture”) in Addicting Games held by the Company, dated April 10, 2019, of approximately US$1.6 million inclusive of principal and accrued interest to the closing date. The Addicting Games Debenture was due to mature in April 2022, was secured against the assets of Addicting Games, and carried interest at 2% per annum. The Addicting Games Share Consideration is subject to a statutory hold period and a contractual lock-up with 50% released twelve months following the closing date and 50% released 24 months following the closing date. Any Enthusiast Gaming Shares issued in connection with the anniversary payments will be subject to a contractual lock-up, with 25% being released every three months after issuance.
On November 22, 2021, Enthusiast Gaming closed the acquisition of Outplayed, Inc. (“Outplayed”), owners of U.GG, one of the largest League of Legends fan communities in the world. Pursuant to a merger agreement dated November 22, 2021, the Company acquired 100% of the issued and outstanding shares of Outplayed for approximately US$57.3 million, consisting of (i) a cash payment of US$7.5 million paid at closing; (ii) total share consideration of US$20.8 million for which 5.2 million Enthusiast Gaming Shares were issued (the “Outplayed Share Consideration”); and (iii) two deferred payments of US$8.5 million each, payable on the first and second anniversaries of the closing date, which may be settled in cash or Enthusiast Gaming Shares at the option of the Company. The consideration payable also includes two earn-out payments of US$6 million each, payable following the first and second anniversaries of the closing date if certain performance milestones are achieved, which may be settled in cash or Enthusiast Gaming Shares at the option of the Company. The Outplayed Share Consideration is subject to a statutory hold period and a contractual lock-up with one third of 2,016,300 Enthusiast Gaming Shares issued to the founders of Outplayed being released on each of 180, 360 and 540 days following the closing date, and one half of 3,183,700 Enthusiast Gaming Shares issued to other Outplayed shareholders being released on each of 120 and 240 days following the closing date. Any Enthusiast Gaming Shares issued in connection with the anniversary payments or earn-outs will be subject to a contractual lock-up of 180 days if issued to the founders of Outplayed and 120 days if issued to any other former shareholders of Outplayed.
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On December 16, 2021, Enthusiast Gaming entered into a credit facility with The Bank of Nova Scotia, pursuant to which the Company obtained an operating facility with an initial limit of up to $5,000,000, subject to a borrowing base, and a term loan with an initial principal amount of up to $10,000,000 (together, the “Scotiabank Facilities”). The Scotiabank Facilities are secured by substantially all of the assets of the Company and certain subsidiaries acting as guarantors. The Scotiabank Facilities were used to repay the existing indebtedness owed by the Company under the Old Facility and for general corporate purposes. The Company announced the expansion of the term credit facility by way of amendment on September 19, 2022, increasing the size of the facility from $10,000,000 to $20,000,000. On December 31, 2022, the Company provided the its lender with notice of the exercise of the Company's option to extend the maturity date of the Scotiabank Facilities for an additional 12-month period ending December 31, 2024. On March 21, 2023, the Company received notice of the lender’s approval of the extension of the maturity date.
YearEnded December 31, 2022
On February 14, 2022, the Company issued 35,770 Enthusiast Gaming Shares in settlement of the Outplayed Share Consideration.
On February 28, 2022, the Company issued 111,267 Enthusiast Gaming Shares in settlement of the GameKnot Deferred Payment Liability.
On April 28, 2022, the Company, through its wholly-owned subsidiary, Steel Media Limited, acquired all of the issued and outstanding shares of Fantasy Media Ltd and Fantasy Football Scout Limited (collectively, “FFS”), pursuant to a share purchase agreement dated April 28, 2022 (the “FFS SPA”). Pursuant to the terms of the FFS SPA, the Company acquired all of the outstanding treasury shares of FFS in exchange for (i) a cash payment of $2,937,520 (GBP £1,825,000) on closing, which included an agreed upon cash excess amount of $523,120 (GBP £325,000), (ii) a payment of $1,609,600 (GBP £1,000,000) on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, (iii) an earn-out cash payment $804,800 (GBP £500,000) on the first anniversary of closing, based on the renewal of a Fantasy Premier League agreement, subject to adjustments, and (iv) a cash payment of $80,480 (GBP £50,000) on the second anniversary of closing, subject to adjustments. The earn-out cash payment of $804,800 (GBP £500,000) will be paid if the Fantasy Premier League agreement, which expired on August 1, 2022, is renewed for an additional three-year period, on substantially similar or more favourable terms.
On June 2, 2022, the Company settled certain deferred and earn-out payments in connection with its acquisitions of Addicting Games, Outplayed, and Vedatis through the issuance of an aggregate of 16,168,836 common shares at an implied weighted average value of US$2.47 per share.
On July 7, 2022, the Company entered into an agreement with Greywood Investments, LLC pursuant to which it agreed to appoint two nominees to its Board for election at its 2022 annual general meeting (the “2022 AGM”) and 2023 annual general meeting, and to undertake a transition plan to seek out a new Chief Executive Officer. To settle certain accounts payable incurred in connection with the contested 2022 AGM, the Company issued (i) 307,692 common shares on July 25, 2022 at a share price of $2.29 per share, and (ii) 790,633 common shares on September 19, 2022 at an implied weighted average value of $1.60 per share.
On August 31, 2022, the Company and the NFL announced a first-of-its-kind gaming collaboration bringing together NFL players and Legends with top gaming content creators from marquee gaming organizations including Luminosity Gaming. This multi-year partnership resulted in the launch of NFL Tuesday Night Gaming (“NFL TNG”). NFL TNG debuted September 13, 2022, on YouTube in the United States and Canada, and airs Tuesdays during the 2022-2023 NFL regular season. The show consists of a rotating roster of NFL players and legends, competing with gaming creators across multiple game titles each week
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On September 29, 2022, the Company announced the sale of certain video game editorial websites (the “Website Assets”) for a purchase price of approximately $6.8 million, representing a multiple of approximately 4.5x associated revenue. Among the Website Assets included as part of the sale were Destructoid.com, Siliconera.com, Upcomer.com, PCInvasion.com, Operationsports.com and EscapistMagazine.com, together with their respective social media handles and the Company’s rights to certain legacy domains and related content such as NintendoEnthusiast.com.
On November 3, 2022, the Company received a written notice from Nasdaq indicating that, for the prior thirty days, the bid price for the Enthusiast Gaming Shares had closed below the minimum US$1.00 per share requirement for continued listing as set forth in Nasdaq Listing Rule 5450(a)(1). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided an initial period of 180 calendar days (until May 2, 2023) to regain compliance by having the closing bid price of the Enthusiast Gaming Shares meet or exceed $1.00 per share for at least ten consecutive business days.
DevelopmentsSince Year Ended December 31, 2022
On February 22, 2023, the Company was ranked as the #1 gaming property for unique visitor traffic in the United States, based on the latest digital media ratings from Comscore, a leading independent media measurement firm (Comscore Media Metrix®, Games, January 2023, U.S.).
On March 1, 2023, the Company appointed Nick Brien as its Chief Executive Officer and transitioned Adrian Montgomery to the position of non-executive Chairman of the Board. In connection with the appointment of Mr. Brien as CEO, Mr. Brien was granted 6,062,976 stock options, being comprised of (i) 5,305,104 stock options (the “Time-Based Stock Options”) which will vest over a 4-year period with 25% of such Time-Based Stock Options vesting on March 1, 2024, and the remaining Time-Based Stock Options vesting in 36 equal monthly installments over the 36 months immediately subsequent to March 1, 2024, and (ii) 757,872 performance stock options (“Performance Stock Options”) which will vest over a 4-year period with 25% of such Performance Stock Options vesting on March 1, 2024, and the remaining Performance Stock Options vesting in 36 equal monthly installments over the 36 months immediately subsequent to March 1, 2024, provided, in all events, the vesting of such Performance Stock Options shall be subject to the performance requirement, being the Company’s common shares having an average share price of at least US$5.00 on the Nasdaq over a period of 90 consecutive days (with such threshold being subject to adjustment in the event of any stock split, reverse split or other capital reorganization event) at any point subsequent to March 1, 2023
The Company expects to continue executing on its business plans, including investing in new revenue-generating activities.
DESCRIPTION OF THE BUSINESS
Overview
Enthusiast Gaming deploys its products and services as a single reportable segment in the digital media and entertainment industry. Enthusiast Gaming’s products and services fall into three principal pillars, which consist of Media and Content (generating revenue in the amount of $180,765,848 for the financial year ended December 31, 2022 and $152,444,727 for the financial year ended December 31, 2021), Esports and Entertainment (generating revenue in the amount of $7,534,936 for the financial year ended December 31, 2022, and $5,483,444 for the financial year ended December 31, 2021), and Subscription (generating revenue in the amount of $14,535,137 for the financial year ended December 31, 2022 and $9,436,115 for the financial year ended December 31, 2021).
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Mediaand Content
Enthusiast Gaming’s media and content revenue stream is comprised of over 50 websites that are wholly owned or exclusively monetized by the Company and contain news, reviews, videos, live streams, blog posts, tips, chats, message boards, and other video-gaming related content and casual games. Central to Enthusiast Gaming’s ability to create valuable advertising space that can be sold on its websites, video channels and casual games (referred to as “Inventory”) is the ability to both develop content-rich digital media and foster the interaction and contributions of its users to its digital media properties. Enthusiast Gaming possesses a network of full and part-time content developers to ensure regular, interesting updates are made across its digital media properties to reflect the newest developments in the world of video games, in the form of videos, articles, blog posts, and other content.
The gaming community is drawn to different aspects and forms of content on Enthusiast Gaming’s network of websites. Part of Enthusiast Gaming’s strategy is to acquire profitable video gaming websites and video properties with differentiating content from its then current portfolio, providing valuable, relevant content for any gaming enthusiast. Some of the different types of content includes: long form, short form, and documentary styles of content.
Another prevalent aspect of the media content on Enthusiast Gaming’s sites or video properties may be referred to as “video game journalism”, an aspect of the video gaming industry whereby individuals will review, critique, and provide commentary on new and old video games, particular aspects of video games, upgrades, new hardware platforms, and other aspects of video games.
Omnia Media Inc. a subsidiary of the Company, principal business activities include the creation, distribution, and exploitation of owned and talent-produced gaming-related video content, as well as the representation and management of underlying talent. Omnia generates advertising revenue from its external talent network, its owned and operated content, as well as through direct brand sales through delivery of targeted advertisements on YouTube and other platforms that users click on, leading to direct engagement between users and advertisers. Omnia produces and programs over 20 weekly shows across advertising-based video on demand (“AVOD”) and over-the-top (“OTT”) channels and represents over 500 gaming influencers across YouTube and Twitch. Its distribution network reaches over 90 million unique viewers and has a significant U.S. market inventory of over 1,000 channels, over 600 million subscribers and generated over 25 billion total video views in 2022. Omnia owns content brands that matter to fans who love gaming and pop culture including BCC Gaming, Arcade Cloud and Wisecrack. BCC Gaming is a leading Fortnite community channel. Arcade Cloud is a gaming channel featuring original animations. Wisecrack is a collective of comedians, academics, filmmakers, and artists. Omnia generates advertising revenue from its external talent network, its owned and operated content, as well as through direct brand sales through delivery of targeted advertisements on YouTube and other platforms that users click on, leading to direct engagement between users and advertisers.
Addicting Games has a portfolio of casual games for desktop and mobile devices. Advertising space on Addicting Games’ casual games is included in media and content revenue.
For any publishing company, the key mission is to build a dedicated following of engaged visitors and brands are looking for high levels of engagement within a target market to run successful advertising campaigns. Enthusiast Gaming has amassed a platform of engaged, lifestyle gamers that has become a leading advertising platform for brands targeting the gamer demographic. Enthusiast Gaming’s web platform generates over two billion page views per quarter, and it’s video platform, operated by Omnia, generates over six billion video views per quarter. Each of these views produces Inventory available for sale. The majority of Enthusiast Gaming’s media and content revenue is driven by programmatic advertising across the platform. Enthusiast Gaming has built out a direct sales team to foster key relationships and drive revenue. The direct sales team is also responsible for developing long term clients looking for integrated advertising solutions across Enthusiast Gaming’s brands.
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Programmatic Media Value Chain
The programmatic media value chain consists of various industry players seeking to facilitate optimal purchasing of advertising from targeted publishers. Importantly, both the supply side (websites or video properties with ad space) and the demand side (brands and/or advertisers seeking ad space) have their own respective options when it comes to platforms. Supply Side Platforms (“SSPs”) and Display Side Platforms (“DSPs”) have been created in order to streamline publishing and ad-buying processes. Companies strategically use both SSPs and DSPs to facilitate optimal purchasing of advertising from targeted publishers.
A common advertising spending metric utilized in the digital publishing industry, is known as “Cost Per Thousand” (“CPM”) impressions.
CPM and other relevant metrics, allow SSPs and DSPs to navigate on a common basis whereby a more targeted marketing campaign will typically demand a higher CPM given that each ad impression can justifiably be worth more to the advertiser.
Should an advertiser or publisher decide to investigate one step deeper into the efficiency of its campaign, the metric of “Click Through Rate” serves as a percentage of people who saw the ad and subsequently clicked on it. Other methods of negotiating digital advertising and publishing transactions utilize “Cost Per Click”, wherein the advertiser pays on a per-click basis, or alternatively can pay on a more joint venture / commission basis sometimes referred to as “Cost Per Acquisition”.
Companies tend to utilize Effective Cost Per Thousand (“eCPM”) impressions in order to compare various advertising mechanisms and campaigns on a leveled basis. Essentially, eCPM inputs the earnings obtained via a certain campaign, divided by the number of actual impressions delivered. This results in a cost per impression, such that when multiplied by 1,000, will deliver an approximation for the eCPM.
Sale of Inventory
The digital media advertising revenue stream of Enthusiast Gaming’s business flows from the digital media publishing revenue stream. With content-rich digital media properties drawing billions of monthly page and video views, Enthusiast Gaming is able to sell valuable Inventory on its digital media properties. In addition to selling its own Inventory, Enthusiast Gaming acts as a representative for the sale of third-party Inventory on websites and video properties and applications that also host similarly themed content. By combining the Inventory in its own network with third-party Inventory, and in some instances, acting as an exclusive provider of advertising to third parties, Enthusiast Gaming gets access to exclusive ad auctions and sales opportunities through which it is able to command higher advertising revenues and negotiate favourable profit-sharing arrangements.
Online advertising revenue is determined by a number of metrics. Advertising revenues may factor in the number of individuals who view particular web pages or video properties in Enthusiast Gaming’s network of digital media properties, how often the web pages or videos are viewed, and how much time a user spends on a website or video property during each visit. Revenue can be accorded based on the number of advertising impressions, the “Click Through Rate”, and the rate at which advertisements lead to sales. The functioning of the advertisements themselves can have a significant effect on achieving key advertising metrics.
Enthusiast Gaming developed proprietary optimization tools which it utilizes to sell ads on. As opposed to the historical process of using humans to negotiate the purchase and sale of ad space, the optimization tool allows Enthusiast Gaming to set strategic parameters for the sale of Inventory in real time auctions that occur in milliseconds and are all executed by computer programs. Additionally, the programmatic optimization tools enable Enthusiast Gaming to target specific advertisers at specific times in order to receive the highest value for its Inventory.
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The Inventory or advertising space can be found in a variety of locations throughout the websites and video properties. New advertising impressions are generally created when a user opens a website or navigates to a different page, or when they watch a video. They can take on the form of pre-roll video advertisements, banner advertisements, ad-words, “skins” or background advertisements, in-application ads, or other forms of ad units as may be applicable to the respective property.
Enthusiast Gaming derives part of its total revenue from direct advertising campaigns. When a client opts for a direct campaign, Enthusiast Gaming will prepare a marketing plan with the client, consisting of the length of the campaign and set parameters which will define how the ad will be displayed such as, specific countries where the ad will be displayed, on desktop or mobile, whether the ad will click through to another site, etc. Additionally, depending on the campaign, Enthusiast Gaming may guarantee a certain amount of impressions or “Click Through Rate”.
A large majority of Enthusiast Gaming’s revenue is derived from the sales of ad inventory on its network of digital media properties. Enthusiast Gaming has steadily grown its network of digital media properties and has experienced a corresponding growth in revenue. Due to the steady growth, the fluctuation of spending in the advertising industry has not been obvious from Enthusiast Gaming’s operating results. Ad inventory derives its value from a number of factors, including supply and demand. In preparation for retail-oriented holidays, retail sector advertisers may increase their advertising budgets, thus reducing the availability of ad inventory and increasing its value. Similarly, advertisers in the technology industry may correlate their ad campaigns to the launch of new products.
Online advertisements can be sold in a variety of ways. Enthusiast Gaming enters into agreements with online advertising exchanges, through which advertisers will bid on space and time in Enthusiast Gaming Inventory and the Inventory of companies Enthusiast Gaming represents.
Under its affiliate agreements, Enthusiast Gaming provides advertising sales as a third party representative, to digital media publishers. Generally, Enthusiast Gaming will receive the right to market and sell all available advertising space within the digital media publisher’s website or video property for the duration of the agreement. In exchange for the opportunity to monetize the digital media publisher’s property, Enthusiast Gaming will compensate the digital media publisher, either in the form of fixed monthly payments subject to page views, or a percentage of ad revenue, or a combination of the two.
The advertising technology space is ever evolving, but like most industries, the race tends to be toward optimal efficiency. Enthusiast Gaming therefore believes, as do many industry experts, that original content production, curation, and publishing will continue to thrive and generate more value given its importance to target consumers. Conversely, as better efficiency is pursued, middle-firms currently exacting fees in between advertisers and publishers, should see their gross revenues and margins decline. Large advertisers are interested in widely distributed publishers like Enthusiast Gaming, and firms in between will become more secondary.
Esportsand Entertainment
The Company’s subsidiary, Luminosity, is a professional esports organization based in Toronto, Canada. It currently has fully-owned teams competing in Apex Legends, Rocket League, World of Warcraft, Call of Duty: Mobile, Rainbow Six Siege, PlayerUnknown’s Battlegrounds (“PUBG”), and Call of Duty: Warzone, Super Smash Bros: Melee, Super Smash Bros: Ultimate. Luminosity’s teams compete globally and Luminosity positions itself as a significant contender at the highest level of competition in all games in which it fields teams. In addition to its competitive esports teams, Luminosity also has teams of content creators on YouTube, Twitch, and TikTok.
The Company holds a non-controlling interest in the Vancouver Titans of the Overwatch League and the Seattle Surge of the Call of Duty® esports league. Enthusiast Gaming manages the Vancouver Titans and the Seattle Surge through a management services agreement with the majority owner.
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Enthusiast Gaming’s enterprise is made up of interrelated operations intended to derive revenue from assets acquired by Enthusiast Gaming across the esports value chain. Enthusiast Gaming leverages its esports operations to build content and develop an audience and fan base to facilitate merchandising and subscriptions, pursuant to direct sponsorships, endorsement deals, product placement deals, advertising sales and advertising.
The branding of Enthusiast Gaming and Luminosity is particularly important to its marketing initiatives and its ability to gain traction in the industry and engage marketing partners such as sponsors. The outcome of any contest, competition, or tournament for the teams and players that Enthusiast Gaming intends to manage and provide services to may affect the ability for Enthusiast Gaming to strengthen its brand. Enthusiast Gaming believes its business depends on identifiable intangible properties such as brand names.
Esports entities that rely on marketing initiatives as a source of revenue will need to have a large following in order to enable marketing partners to generate revenue by leveraging this following. To that end, Enthusiast Gaming has retained a management team that has business acumen, sports and entertainment experience and industry connections. Enthusiast Gaming leverages its direct sales team to not only sell advertising inventory, but to also sell sponsorships for its esports assets.
The Company previously operated a B2C live event named “EGLX”. In 2018, approximately 55,000 people attended two EGLX events and the Company continues to explore opportunities to grow its entertainment division to coincide with the significant growth of its platform online. Following the success of the two events in 2018, EGLX 2019 was brought back to the Metro Toronto Convention Centre with double the floor space. The 2019 EGLX had in excess of 30,000 attendees and featured over 150 exhibitors, panels, cosplay, free play, the Artist Alley, an Indie Corner and a Family Zone.
In November 2020, the Company held a virtual version of EGLX, which was live streamed from November 10-13, 2020 on eglx.com and on Twitch at twitch.tv/lgloyal. Supported by key sponsors, including SpiderTech, G FUEL and TikTok, the event featured world premieres, unique performances, and a number of gaming competitions. Featured talent and performances include: Muselk, NickEh30, Fresh, Anomaly, XQC, NFL superstars Richard Sherman and Darius Slay, and musicians ZHU and Goldlink.
The Company is exploring possible date and location for a future return of EGLX to a live event.
The Company’s entertainment division is also the operator of over 25 video game networking events across 11 countries, including key markets such as the U.S. and UK. The Company is an industry leader in B2B and consumer mobile gaming events. It owns and operates numerous successful networking events around the world with approximately 15,000 registered industry attendees and key sponsors and partners. As part of its B2B events, the Company hosts Pocket Gamer Party, Top 50 Developer Guide, Mobile Mixers, the Mobile Games Awards, and a feature event, Pocket Gamer Connects, the largest B2B mobile games conference series, with both virtual events and live events in locations such as London, San Francisco, Helsinki and Seattle. In November 2021, the Company announced two new digital conference series, being Pocket Gamer Connects Digital NEXT and Beyond Games. These two events focus on topics relevant to the gaming space including non-fungible tokens, blockchain gaming, and the metaverse.
Subscription
TSR operates on a subscription-based model and has a current subscriber base of approximately 195,000 monthly subscribers. TSR’s subscribers pay on average approximately USD$4 per month to access its VIP features.
In May 2021, the Company acquired Vedatis, which owns the web property, Icy Veins, and offers premium subscriptions to the Icy Veins website.
In June 2021, the Company acquired Tabwire, which offers monthly premium membership subscriptions to the Tabstats website as well as the Tabwire Twitch channel.
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In August 2021, the Company acquired GameKnot, which offers monthly and yearly premium membership subscriptions to the GameKnot website.
In September 2021, the Company acquired Addicting Games, which offers premium membership subscriptions to certain Addicting Games properties including Addicting Games, Shockwave, TeachMe, TypeRacer, and Little Big Snake.
In November 2021, the Company acquired Outplayed, which offers membership subscriptions to the U.GG website.
In April 2022, the Company acquired FFS, which offers membership subscriptions to the FFS and LiveFPL websites.
The Company plans to continue to expand its subscription offerings across its networks of web and video properties.
Market
GamingMarket
The robust global gaming market is rapidly expanding and represents one of the fastest growing segments within the broader media and entertainment ecosystem. Due to, among other things, increased engagement, technology adoption and shared experiences the global gaming market is expected to reach US$184.4 billion in 2022.^2^ According to Newzoo, the industry is expected to grow to US$211.2 billion by 2025.^2^ The proliferation of high-speed internet, accessible technology, and publishers using enhanced live operations and other tools have further accelerated the gaming market. Gaming has amassed a diverse audience who rely on the industry as a form of entertainment and social connection. Increasingly, younger generations are immersing themselves in gaming ecosystems and now choose gaming as their primary form of entertainment.
Newzoo expected there will be nearly 3.2 billion global gamers, who engage with interactive entertainment using PC, console, mobile device or cloud gaming service in 2022.^2^ It is expected that gamers will surpass 3.5 billion by 2025.^3^ Enhanced technology and high-fidelity content has allowed live concerts, movie screenings and birthday parties to take place within gaming ecosystems driving further engagement and excitement among young and old.
The industry is still in an early stage as developers and publishers continue to create new content, with better monetization and communication capabilities. Additionally, technology companies are fueling the rise of gaming by enhancing content through better platforms i.e., larger mobile phones, new consoles and cloud gaming, which allow gamers to play anytime, anywhere using any platform. As the industry continues to grow, dedicated fans are engaging with gaming related content even after they put their devices down. Video games have led to the rise of esports, streaming, dedicated news and fan sites as well as celebrities all of which accelerate the global excitement around gaming.
DigitalMedia
Over the past two decades, the proliferation of the internet and mobile devices has shifted the way consumers engage with media and content, amplifying the digital media industry. According to eMarketer, consumers in the U.S. spent an average of 181 minutes accessing digital media in 2010. ^4^ In 2020, this figure increased to 470 minutes a day, representing 160% growth. Due to, among other things, the shift in media consumption from traditional to digital and increased time consumers are spending online, advertisers have adjusted the way in which they allocate their advertising budgets.^5^ According to eMarketer, US$90 billion was spent globally on digital advertising in 2012.^6^ This spend increased to US$378 billion in 2020, representing growth of 319%. Digital advertising is expected to grow to US$766 billion by 2025, which will be around 71% of the total global media and spending.^7^
| ^2^ | Based<br> on Newzoo’s article: “Latest games Market estimates and forecasts”<br> published on January 20, 2023. |
|---|---|
| ^3^ | Based<br> on data provide by Newzoo’s 2022 Global Games Market Report |
| ^4^ | Based<br> on data provided by eMarketer as of January 2021. |
| ^5^ | Based<br> on data provided by Statista as of January 2023. |
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Specifically, with regards to gaming, digital media has become an increasingly important component of the industry. Gamers are now allocating significant time to gaming outside of playing their favorite titles, choosing to watch gaming video content, following esports teams and joining forums / blogs. According to Nielsen, 77% and 71% of Gen Z and Millennial gamers also consume Gaming Video Content, respectively.^8^ According to YouTube, viewers watched an approximately 50 billion hours of Gaming Video Content on its platform in 2018, doubling to approximately 100 billion in 2020.^9^ Additionally, the number of gaming-related tweets increased from approximately 218 million in 2017 to over 2 billion in 2020, according to Twitter.^10^ Gamers are spending time on gaming websites containing news, reviews, videos, blog posts, tips, chats, message boards, and other content. Furthermore, NewZoo points out that 9 in 10 Gen Alpha and Gen Z are game enthusiasts, among them 50% is willing to spend money on gaming, such as unlocking content, virtual goods, in-game currencies and gear.^11^
Viewers of Enthusiast Gaming’s network of digital media properties are both men and women ages 13 to 65+ with the majority of its users spending, on average, more than 15+ hours gaming per week. These individuals represent a highly sought-after demographic in a number of key advertising categories.
Esports
Esports, or electronic sports, is the evolution of video gaming. “Esports” typically refers to competitive gaming whereby gamers can, individually or in teams, compete against one another. Spectators can typically observe these competitions via different platforms online or in person at live events. The advent of online platforms, such as Twitch, has allowed more and more spectators to watch competitions globally from anywhere in the world and has contributed to the growth in the popularity of esports. Competitive gamers can now participate in regulated leagues, tournaments or other competitions and matches, for various different games on different entertainment systems. Further, competitive gamers, teams, team managers, streamers, game developers, viewing platforms and other participants in the esports industry are able to monetize the attention through different means, including through viewer subscriptions and marketing sponsorships.
Esports is an important component of online video gaming content. Most notably, esports turns competitive video-gaming into a spectator sport. Thousands of viewers will attend live events to watch professional video game players compete in tournaments. Additionally, these tournaments are often streamed online, with viewers logging on to watch from their computers, tablets or mobile devices.
According to Newzoo, by 2022, esports is set to generate nearly USD$1.8 billion in revenues while the global esports audience is reach to 532 million.^12^In January 2023, Technavio published a report on esports market that esports is set to generate nearly USD$3.52 billion in revenues from 2022 to 2027, growing at a compound annual growth rate of 21.8% during the forecast period, driven by more branding through esports, rising esports events and new platform launches.^13^
| ^6^ | Based<br> on data provided by eMarketer as of March 2021. |
|---|---|
| ^7^ | Based<br> on data provided by eMarketer as of January 2023. |
| ^8^ | Based<br> on Nielsen’s 2019 Millennials on Millennials: Gaming Media Consumption Report. |
| ^9^ | Based<br> on an article published by The Verge on December 8 2020 titled “YouTube Gaming<br> had its best year ever with more than 100 billion hours watched” and an article<br> published by YouTube on December 8 2020 titled “2020 is YouTube Gaming’s<br> biggest year ever: 100B watch time hours”. |
| ^10^ | Based<br> on articles published by Twitter on February 15 2018 and January 11 2021 titled “Gaming<br> and esports are happening<br> on Twitter” and “Over 2 Billion Gaming Tweets in 2020!”, respectively. |
| ^11^ | Based<br> on Newzoo’s Gamer Insights: Gen Alpha & Gen Z, the Future of Gaming, published<br> in September 2022. |
| --- | --- |
| ^12^ | Based<br> on an article published by eMarketer “Esports Ecosystem in 2023: Key industry companies,<br> viewership growth trends, and market revenue stats” published on January 1, 2023 |
| --- | --- |
| ^13^ | Based<br> on an article published by Technavio “Esports Market by Revenue Stream, Genre and<br> Geography - Forecast and Analysis 2023-2027” published in January 2023 |
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SpecializedSkill and Knowledge
Specialized skill and knowledge is necessary to capitalize on significant trends in the video gaming media industry. Each of the three principal pillars of Enthusiast Gaming’s products and services operate in the video gaming media industry. To that end, Enthusiast Gaming has retained a management team that has business acumen, sports and entertainment experience and industry connections.
In addition, market trends indicate that publishers will become more in-demand as users continue to seek diverse content. Enthusiast Gaming has assembled an in-house team of individuals, all of whom have specialized knowledge of digital media sales, adtech, and programmatic optimization tools (relevant to media and content), the competitive environment of esports and the position of both B2B and B2C events in the industry (relevant to esports and entertainment), and the deployment of “freemium” models (relevant to subscription), in order to maximize the value of its properties and give Enthusiast Gaming an advantage in the market.
Competitive Conditions
The digital media publishing industry in the gaming sector is highly competitive and fragmented. Enthusiast Gaming’s media and content and subscription revenue streams compete with many well-established media websites, video properties, ad networks and non-gaming networks. Enthusiast Gaming’s media and content and subscription offerings are targeted at the global English speaking gaming media market, which encompasses many geographic territories each with various competing entities.
In addition, the esports and entertainment revenue streams’ main audience has been the demographic cohort known as “Millennials” or “Gen Z”. As such, Enthusiast Gaming generally competes for sponsorship revenue with companies involved in industries – such as the music industry – that have an audience consisting of the same or similar demographic cohorts.
Many of Enthusiast Gaming’s competitors have adopted a centralized approach by developing a single website or video property with a strong brand to publish gaming and esports content. Unlike its competitors, Enthusiast Gaming has employed a decentralized approach and instead aggregated many smaller digital media publishing properties in order to achieve the benefits of selling Inventory with a large audience. Additionally, Enthusiast Gaming optimized its network of properties to function and to receive ads on multiple platforms, including video, mobile, the web, and tablets.
Due to the gaming media and esports industry’s potential for growth and monetization and low barriers to entry, Enthusiast Gaming expects to face additional competition from new entrants and increasing competition from established companies in the industry.
Intangible Properties
The Company believes the trademarks listed in the table below enjoy significant brand awareness, which we believe is essential to establishing and maintaining a leading position in the rapidly developing Media and Content, Esports, and Subscription markets. With the exception of the trademarks and patent listed below, Enthusiast Gaming currently relies on Canada’s common law for proprietary protection of its intellectual property. This is due to the large number of trademarks and copyrighted material that Enthusiast Gaming uses in its gaming network, and the projected expense required for formal proprietary protection of each copyrightable material and/or trademark it uses. The Company is actively investigating its ability to apply for other forms of proprietary protection, including registering the “#LGLOYAL” hashtag as well as “Luminosity Gaming” as trademarks. Enthusiast Gaming intends to continually monitor and evaluate the intellectual property used by its digital assets in order to identify intellectual property that may benefit from proprietary protections beyond those available to the Company under Canada’s common law.
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| Canadian<br> Registered Trademarks or Trademark Applications | ||
|---|---|---|
| Trademark | Registration Number | Filing/Registration Date |
| ENTHUSIAST<br> GAMING | 1933339 | 30-Nov-18 |
| GAMERS<br> GREATEST TALENT | 2110109 | 27-May-21 |
| RISING<br> STARS | 2001810 | 08-Jan-20 |
| GAMERS<br> LIVE HERE | 2001812 | 08-Jan-20 |
| RISING<br> STARS & Design | 2001811 | 08-Jan-20 |
| BCC<br> GAMING & DESIGN | 1989960 | 29-Oct-19 |
| BBC<br> & Design | 1989960 | 29-Oct-19 |
| TUESDAY<br> NIGHT GAME NIGHT | 2184782 | 11-May-22 |
| TUESDAY<br> NIGHT GAMING | 2206305 | 25-Aug-22 |
| US<br> Registered Trademarks or Trademark Applications | ||
| --- | --- | --- |
| Trademark | Registration Number | Filing/Registration Date |
| WARCRY | 3254681 | 26-Jun-07 |
| WARCRY<br> NETWORK | 3264291 | 17-Jul-07 |
| ENTHUSIAST<br> GAMING | 88391588 | 18-April-19 |
| DIEP | 5299155 | 03-Oct-17 |
| DIEP.IO | 5299156 | 03-Oct-17 |
| IOGAMES.SPACE | 5837595 | 20-Aug-19 |
| TEACHME | 5519150 | 17-Jul-18 |
| SHOCKWAVE | 2603706 | 06-Aug-22 |
| ADDICTING<br> GAMES | 3326790 | 30-Oct-07 |
| TYPERACER | 4438914 | 26-Nov-13 |
| MOPE.IO | 6299131 | 23-Mar-21 |
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| US<br> Registered Trademarks or Trademark Applications | ||
|---|---|---|
| Trademark | Registration Number | Filing/Registration Date |
| EV.IO | 6541083 | 26-Oct-21 |
| LITTLEBIGSNAKE | 88975338 | 09-Jul-19 |
| GIT<br> GUD | 5536890 | 07-Aug-18 |
| TUESDAY<br> NIGHT GAME NIGHT | 97404792 | 11-May-22 |
| TUESDAY<br> NIGHT GAMING | 97564975 | 25-Aug-22 |
| STORIED | 97584617 | 09-Sept-22 |
| United<br> Kingdom Registered Trademarks or Trademark Applications | ||
| --- | --- | --- |
| Trademark | Registration Number | Filing/Registration Date |
| POCKET<br> GAMER | UK00002618412 | 18-Apr-12 |
| ICY<br> VEINS | WO0000001157353 | 22-Feb-13 |
| France<br> Registered Trademarks or Trademark Applications | ||
| --- | --- | --- |
| Trademark | Registration Number | Filing/Registration Date |
| ICY<br> VEINS | 3883732 | 21-Dec-11 |
| Australia<br> Registered Trademarks or Trademark Applications | ||
| --- | --- | --- |
| Trademark | Registration Number | Filing/Registration Date |
| ICY<br> VEINS | 1555927 | 22-Feb-13 |
| World<br> Intellectual Property Organization Trademarks or Trademark Applications | ||
| --- | --- | --- |
| Trademark | Registration Number | Filing/Registration Date |
| ICY<br> VEINS ^(1)^ | 1157353 | 22-Feb-13 |
Notes:
| (1) | Filed<br> in US, United Kingdom and Australia. |
|---|
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| Granted<br> Patents | ||
|---|---|---|
| Patent | Patent Number | Filing Date |
| PERFORMANCE<br> MEASUREMENT IN A MULTI-PLAYER COMPUTER GAMING ENVIRONMENT | 10,632,389<br> B1 | 21-Jul-17 |
Employees
As of December 31, 2022, in addition to the officers of Enthusiast Gaming, the Company has approximately 210 full time employees, 30 full time contractors, and 130 part-time contractors, along with 60 esports influencers under contract.
Other
The Company’s business can fluctuate due to seasonal trends. A portion of the Company’s revenue is generated from advertising, a component of the media and content revenue streams, which has in past years shown significant increases in the fourth quarter of the Company’s financial year, and been lowest in the first quarter of the Company’s financial year. Based on historical and industry data, the Company would typically expect the breakdown of annual advertising revenue to be first quarter – 15%, second and third quarters – 25% each, and fourth quarter – 35%. This would exclude any impact of organic growth or decline, or other market events or forces which may impact the levels of media consumption or the market prices of digital ad inventory.
The Company’s revenues may also be affected by the timing of major events. Historically, the two largest revenue producing events in the Company’s portfolio – Pocket Gamer London (an event held in London, UK) and EGLX (an event held in Toronto, Canada) were typically held annually in the first and fourth quarter of the Company’s financial year, respectively; however, the availability of such events in a live format was limited during the COVID-19 pandemic. Although Pocket Gamer London returned as a live event in 2022, the Company continues to explore possible dates and locations for a future return of EGLX to a live event. In addition, a portion of the Company’s business activities depend on foreign operations, as a portion of the Company’s events operational team is based in the United Kingdom.
While the Company expects the seasonal trends above to continue for the foreseeable future, there can be no assurance that the seasonal trends and other factors that have impacted Company’s historical results will repeat in future periods as it cannot influence or forecast many of these factors: for instance, the Company’s revenues may also be affected by the scheduling of other events that do not occur annually and are at the discretion of management. For other factors that may cause its results to fluctuate, see “Risk Factors”.
Enthusiast Gaming does not have any investment policies regarding lending and investment restrictions.
Enthusiast Gaming or its subsidiaries have not been subject to any bankruptcy, receivership or similar proceedings, and there have not been any material reorganizations of Enthusiast Gaming or its subsidiaries within the three most recently completed financial years or during or proposed for the current financial year.
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Risk Factors
The securities of Enthusiast Gaming should be considered highly speculative due to the nature of the Company’s businesses and the current stage of its development.
The risks presented below may not be all of the risks that the Company may face. It is believed that these are the factors that could cause actual results to be different from expected and historical results. Other sections of this Annual Information Form, the 2022 Annual Financial Statements, the 2022 Annual MD&A, each of which is available on SEDAR at www.sedar.com, and other filings the Company has made and may make in the future with the applicable securities authorities, include additional factors that could have an effect on the business and financial performance of the Company’s business. The market in which the Company competes is very competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results.
In evaluating Enthusiast Gaming and its prospective businesses, investors should carefully consider the following risks.
RiskFactors Relating to Enthusiast Gaming’s Operations
Enthusiast Gaming has limited operating history
Enthusiast Gaming’s lack of operating history may make it difficult for investors to evaluate Enthusiast Gaming’s prospects for success and there is no guarantee that Enthusiast Gaming’s business models will achieve its strategic objectives. There is no assurance that Enthusiast Gaming will be successful and the likelihood of success must be considered in light of its relatively early stages of operation.
Reliance on advertisers for revenue
Enthusiast Gaming relies on advertisers to purchase inventory from the Company’s network of digital media publishers for future revenue. Enthusiast Gaming’s inability to secure contracts for advertising revenues may have a material adverse effect on its business, financial condition, and results of operations. Additionally, this is a relatively new and rapidly evolving industry and as such, it is difficult to predict the prospects for growth. There is no assurance that advertisers will continue to increase their purchases of online advertising or that the supply of advertising inventory on gaming digital media properties will not exceed the demand. If the industry grows slower than anticipated or Enthusiast Gaming’s existing products and services lose, or its new products and services fail to achieve market acceptance, Enthusiast Gaming may be unable to achieve its strategic business objectives, which could have a material adverse effect on its prospects, business, financial condition or results of operation.
Enthusiast Gaming depends on third parties, including users and content providers
Enthusiast Gaming is reliant to an extent on third parties, including content providers, users, and affiliate network publishers.
Many of Enthusiast Gaming’s business activities rely on telecommunication and network systems that the Company does not own or operate. Such telecommunication and network systems are complex electronic systems, subject to electronic and mechanical failures and possible sabotage. Given the event-based nature of the esports industry, even temporary or limited failures of these telecommunication and network systems would impair Enthusiast Gaming’s business activities and/or the growth of current and additional market opportunities, which would adversely affect Enthusiast Gaming’s results of operations. In addition, a majority of Enthusiast Gaming’s revenue is derived from the Company’s multi-channel network license, which it uses to monetize owned and operated as well as influencer video properties on YouTube. If the multi-channel license was terminated, or Enthusiast Gaming’s rights pursuant to the license were hindered, there could be a material and negative impact on the Company’s revenue.
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Enthusiast Gaming’s success is partially dependent on its ability to attract and retain quality content providers and to leverage these relationships and the reach of these content providers, as well as its owned and operated content, over various social networking and distribution platforms. There can be no assurance that these business relationships will continue to be maintained or that new ones will be successfully formed, nor can there be any assurance that the social networking and distribution platforms on which Enthusiast Gaming and these content creators operate will continue to operate or be available in certain jurisdictions or at all, including through potential regulatory prohibitions restricting the availability of any social networking or distribution platforms such as the potential ban of TikTok by the United States government. A breach or disruption in these relationships or failure to engage contractors could be detrimental to the future business, operating results and/or profitability of Enthusiast Gaming.
Moreover, Enthusiast Gaming’s financial performance will be significantly determined by its success in adding, retaining, and engaging active users of its networks of digital media properties. If users do not perceive Enthusiast Gaming’s content as interesting, unique and useful, Enthusiast Gaming may not be able to attract or retain additional users, which could adversely affect its business.
Enthusiast Gaming may be unable to complete favourable acquisitions
As part of Enthusiast Gaming’s business strategy, the Company may attempt to acquire businesses that it believes are a strategic fit with its business, such as gaming digital media publishers. Enthusiast Gaming may not be able to complete such acquisitions, or obtain financing for such acquisitions on favourable terms, if at all. Any future acquisitions may result in unforeseen operating difficulties and expenditures, and may absorb significant management attention that would otherwise be available for ongoing development of its business. Since Enthusiast Gaming may not be able to accurately predict these difficulties and expenditures, these costs may outweigh the value it realizes from a future acquisition, and any acquisition Enthusiast Gaming completes could be viewed negatively by its advertisers. Future acquisitions could result in issuances of securities that would dilute shareholders’ ownership interest, the incurrence of debt, contingent liabilities, amortization of expenses related to other intangible assets, and the incurrence of large, immediate write-offs.
Difficultiesintegrating acquisitions and strategic investments
Enthusiast Gaming has acquired businesses, personnel and technologies in the past and expects to continue to pursue acquisitions, and investments that are complementary to the existing business, and expanding the employee base and the breadth of its business. Since Enthusiast Gaming expects the esports industry to consolidate in the future, the Company may face significant competition in executing its growth strategy. Future acquisitions or investments could result in potential dilutive issuances of equity securities, use of significant cash balances or incurrence of debt, and contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could adversely affect the financial condition and results of operations of the Company. The benefits of an acquisition or investment may also take considerable time to develop, and the Company cannot be certain that any particular acquisition or investment will produce the intended benefits. The above risks and difficulties, if they materialize, could disrupt the Company’s ongoing business, distract management, result in the loss of key personnel, increase expenses and otherwise have a material adverse effect on the Company’s business, results of operations and financial performance.
Limited long-term agreements for advertising revenue
Enthusiast Gaming’s success requires it to maintain and expand its current advertising revenue-generating relationships and to develop new relationships. Enthusiast Gaming’s contracts that help drive advertising revenue generally do not include long-term obligations requiring third parties to purchase Enthusiast Gaming’s inventory and services or Enthusiast Gaming to market its advertising inventory. As a result, Enthusiast Gaming may have limited visibility as to its future advertising revenue streams. Enthusiast Gaming cannot ensure its advertising revenue generating sources will continue to operate or that Enthusiast Gaming will be able to replace, in a timely or effective manner, departing clients with new sources that generate comparable revenue. Any non-renewal, renegotiation, cancellation or deferral of significant advertising contracts that in the aggregate account for a significant amount of revenue, could have a material adverse effect on Enthusiast Gaming’s prospects, business, financial condition or results of operations.
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Brand development
The brand identities that Enthusiast Gaming has developed have significantly contributed to the success of its business. Maintaining and enhancing the Enthusiast Gaming brand is critical to expanding Enthusiast Gaming’s user bases and networks of publishers and advertisers. Enthusiast Gaming believes that the importance of brand recognition will increase due to the relatively low barrier to entry in the industry. Enthusiast Gaming brands may be negatively impacted by a number of factors, including software malfunctions, delivery of incorrect information, and data privacy and security issues. If Enthusiast Gaming fails to maintain and enhance its brands, or if Enthusiast Gaming incurs excessive expenses in this effort, it could have a material adverse effect on Enthusiast Gaming’s prospects, business, financial condition or results of operations. Maintaining and enhancing the Enthusiast Gaming brand will depend largely on Enthusiast Gaming’s ability to continue to provide high-quality products and services, which Enthusiast Gaming may not continue to do successfully.
The adtech and programmatic optimization tools utilized by Enthusiast Gaming are highly technical, and if not utilized properly, Enthusiast Gaming’s business could be adversely affected
The adtech and programmatic optimization tools utilized by Enthusiast Gaming enable it to target advertisements by a number of factors, including age, gender, income, occupation, etc. There can be no assurance that the adtech and programmatic optimization tools utilized by Enthusiast Gaming will not be enhanced or rendered obsolete by advances in technology, or that Enthusiast Gaming will be able to utilize the adtech or programmatic tools necessary to remain competitive. This could have an adverse effect on Enthusiast Gaming’s business, operations or financial condition. Moreover, the adtech and programmatic optimization tools utilized by Enthusiast Gaming are highly technical and complex and may now or in the future contain undetected errors, bugs, or vulnerabilities which may result in unsuccessful advertising campaigns. Any unsuccessful advertising campaigns could result in damage to Enthusiast Gaming’s reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect Enthusiast Gaming’s business and financial results.
Users may use ad-blockers
The success of Enthusiast Gaming’s business models depend on its ability to deliver targeted, highly relevant ads to users of Enthusiast Gaming’s networks of digital media properties. Targeted advertising is done primarily through analysis of data, much of which is collected on the basis of user-provided permissions. This data might include a user’s location, or data collected when users view an advertisement or when they click on or otherwise engage with an advertisement. Users may elect not to allow data sharing for targeted advertising for a number of reasons, such as privacy concerns. In addition, companies are constantly developing products that enable users to prevent advertisements from appearing on its web browsers. Wider adoption of these products could have a material adverse effect on Enthusiast Gaming’s prospects, business, financial conditions or results of operations.
Enthusiast Gaming’s transmission of user data
Enthusiast Gaming transmits and stores a large volume of data. Enthusiast Gaming may be subject to increased legislation and regulations on the collection, storage, retention, transmission and use of user-data that they collect. Enthusiast Gaming’s efforts to protect the personal information of its users, partners and clients may be unsuccessful due to the actions of third parties, software bugs or technical malfunctions, employee error or malfeasance, or other factors. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to Enthusiast Gaming’s data, its users’ data, its partners’ data or its clients’ data. If any of these events occur, users’, partners’ or clients’ information could be accessed or disclosed improperly. Any incidents involving the unauthorized access to or improper use of the information of users or incidents involving violation of Enthusiast Gaming’s terms of service or policies could damage Enthusiast Gaming’s reputation and Enthusiast Gaming’s brands and diminish its competitive position. Moreover, affected users, clients or governmental authorities could initiate legal or regulatory action against Enthusiast Gaming in connection with such incidents, which could cause Enthusiast Gaming to incur significant expense and liability or result in orders or consent decrees forcing Enthusiast Gaming to modify its business practices and remediate the effects of any such incidents of unauthorized access or use. Any of these events could have a material adverse effect on Enthusiast Gaming’s prospects, business, financial condition or results of operations.
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Enthusiast Gaming is subject to privacy laws in each jurisdiction in which it operates and may face risks related to breaches of the applicable privacy laws
Enthusiast Gaming collects and stores personal information about its users, clients and partners and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly user and partner lists, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach could have a material adverse effect on Enthusiast Gaming’s business, financial condition or results of operations.
In addition, there are a number of federal and provincial laws protecting the confidentiality of personal information and restricting the use and disclosure of that protected information. In particular, the privacy rules under the Personal Information Protectionand Electronic Documents Act (Canada) (“PIPEDA”), protect personal information by limiting its use and disclosure of personal information. If Enthusiast Gaming were found to be in violation of the privacy or security rules under PIPEDA or other laws protecting the confidentiality of personal information, it could be subject to sanctions and civil or criminal penalties, which could increase its liability, harm its reputation and have a material adverse effect on the business, financial condition or results of operations of Enthusiast Gaming.
In Europe, the General Data Protection Regulation (“GDPR”), which came into force in May 2018, introduced new obligations that apply internationally to entities that control or process the personal data of the citizens of the European Union. Several of these obligations, if applicable, may require changes to the processes used by Enthusiast Gaming. Enthusiast Gaming is also subject to the European Union data protection law, GDPR. Existing and proposed laws and regulations, in particular in the European Union and the United States, concerning user privacy, use of personal information and on-line tracking technologies could affect the efficacy and profitability of internet-based and digital marketing. The costs of compliance with these laws may increase in the future as a result of the implementation of new laws or regulations, such as the GDPR, or changes in interpretations of current ones. Any failure by Enthusiast Gaming to comply with these legal requirements, or its application in an unanticipated manner, could harm its business and result in penalties or significant legal liability.
Enthusiast Gaming’s esports business faces intense and wide-ranging competition
The success of an esports business like Enthusiast Gaming’s is dependent upon the performance and/or popularity of its franchises and esports players. Further, Enthusiast Gaming is in competition with other sporting and entertainment events, both live and delivered over television networks, radio, the internet and online services, mobile applications and other alternative sources.
As a result of the large number of options available and global nature of the online gaming industry, Enthusiast Gaming faces strong competition for esports fans. Enthusiast Gaming must compete with other esports organizations, in varying respects and degrees. Given the nature of esports, there can be no assurance that Enthusiast Gaming will be able to compete effectively, including with companies that may have greater resources than Enthusiast Gaming, and as a consequence, Enthusiast Gaming’s business and results of operations may be materially negatively affected.
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Enthusiast Gaming’s esports business is substantially dependent on the continuing popularity of the esports industry as a whole
The esports industry is in the early stages of its development. Although the esports industry has experienced rapid growth, consumer preferences may shift and there is no assurance that this growth will continue in the future. Enthusiast Gaming has taken steps to diversify its business and mitigate these risks to an extent and continues to seek out new opportunities in the esports industry. However, due to the rapidly evolving nature of technology and online gaming, the esports industry may experience volatile and declining popularity as new options for online gaming and esports become available, or consumer preferences shift to other forms of entertainment, and as a consequence, Enthusiast Gaming’s business and results of operations may be materially negatively affected.
Enthusiast Gaming’s business is substantially dependent on the developing and continuing popularity and/or competitive success of its players
Enthusiast Gaming’s financial results depend in large part on becoming and remaining popular with its fan bases. In addition, the popularity of Enthusiast Gaming’s players can impact online viewership and television ratings, which could affect the long-term value of the media rights and sponsorship opportunities. There can be no assurance that Enthusiast Gaming’s players will develop or maintain continued popularity.
Enthusiast Gaming’s esports decisions may have a material negative effect on Enthusiast Gaming’s business and results of operations
Creating and maintaining the popularity of Enthusiast Gaming’s players is key to the success of Enthusiast Gaming’s esports business. Accordingly, efforts to improve revenues and earnings from operations from period to period may be secondary to actions that management believes will generate long-term value. Any of these actions could increase expenses for a particular period. There can be no assurance that any actions taken by management to increase Enthusiast Gaming’s long-term value will be successful.
A significant factor in Enthusiast Gaming’s ability to attract and retain talented players is compensation. It is expected that players’ salaries may increase as the popularity of the esports industry increases, and Enthusiast Gaming’s expenses may increase as it offers larger salaries to players. Enthusiast Gaming may pay their players different aggregate salaries and a different proportion of its revenues than other esports franchises.
The success of Enthusiast Gaming’s esports players and likelihood of injury or illness
Enthusiast Gaming’s financial results are dependent in part on the performance and popularity of the Company’s esports players and teams. The likelihood of the players achieving high performance levels or popularity may be substantially impacted by untimely injuries or illnesses that are not under the Company’s control. In addition, the players’ salaries represent significant financial commitments for our business. In the absence of disability insurance, Enthusiast Gaming may be obligated to pay all of an injured player’s salary.
Defection of Enthusiast Gaming’s esports players to other teams or managers could hinder their success
Enthusiast Gaming competes with other esports athlete management businesses to sign and retain world class esports players, some of which have greater resources or brand recognition and popularity than our own. Enthusiast Gaming’s players under contract may choose to defect to other esports organizations for various reasons, including that they have been made a superior offer or they have chosen to pursue new or other opportunities. The loss or defection of any of our esports players could have negative consequences on Enthusiast Gaming’s business and results of operations. While Enthusiast Gaming takes all appropriate steps to retain their players and protect their interests in management contracts, there can be no assurances that players will not defect to other esports organizations.
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Competition and changes in technology
The industry in which Enthusiast Gaming operates is very competitive. Numerous factors could affect Enthusiast Gaming’s competitive position. Other companies may decide to enter the space and could have substantially greater financial, marketing and other resources. Several of these companies may have greater name recognition and well-established relationships with some of Enthusiast Gaming’s target customers. Furthermore, these potential competitors may be able to adopt more aggressive pricing policies and offer more attractive terms to customers than Enthusiast Gaming is able to offer. Enthusiast Gaming may face increasing price pressure from competitors and customers. In addition, current and potential competitors have established or may establish cooperative relationships amongst themselves or with third parties to compete more effectively. Existing and potential competitors may also develop enhancements to, or future generations of, competitive products and services that will have better performance features than Enthusiast Gaming’s products and services.
As a result of the early stage of the industry in which Enthusiast Gaming operates, the Company expects to face additional competition from new entrants. To remain competitive, the Company will require a continued high level of investment in research and development, marketing, sales and client support. The Company may not have sufficient resources to maintain research and development, marketing, sales and client support efforts on a competitive basis which could materially and adversely affect the business, financial condition and results of operations of Enthusiast Gaming.
The requirements of being a public company may strain Enthusiast Gaming’s resources, divert management’s attention and affect its ability to attract and retain executive management and qualified board members
As a reporting issuer, Enthusiast Gaming is subject to the reporting requirements of applicable securities legislation of the jurisdiction in which it is a reporting issuer, the listing requirements of the TSX and other applicable securities rules and regulations. Compliance with these rules and regulations may increase Enthusiast Gaming’s legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on its systems and resources. Applicable Securities Laws require Enthusiast Gaming to, among other things, file certain annual and quarterly reports with respect to its business and results of operations. In addition, Applicable Securities Laws require Enthusiast Gaming to, among other things, maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve its disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. Specifically, due to the increasing complexity of its transactions, Enthusiast Gaming is improving its disclosure controls and procedures and internal control over financial reporting primarily through the continued development and implementation of formal policies, improved processes and documentation procedures, as well as the continued sourcing of additional finance resources. As a result, management’s attention may be diverted from other business concerns, which could harm Enthusiast Gaming’s business and results of operations. To comply with these requirements, Enthusiast Gaming may need to hire more employees in the future or engage outside consultants, which will increase its costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Enthusiast Gaming intends to continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue generating activities to compliance activities. If its efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to its application and practice, regulatory authorities may initiate legal proceedings against Enthusiast Gaming and Enthusiast Gaming’s business may be adversely affected.
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As a public company subject to these rules and regulations, Enthusiast Gaming may find it more expensive to obtain director and officer liability insurance, and may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for Enthusiast Gaming to attract and retain qualified members of its Board, particularly to serve on its audit committee and compensation committee, and qualified executive officers.
As a result of disclosure of information in filings required of a public company, Enthusiast Gaming’s business and financial condition have become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, Enthusiast Gaming’s business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in its favor, these claims, and the time and resources necessary to resolve it, could divert the resources of Enthusiast Gaming’s management and harm its business and results of operations.
History of net losses
Enthusiast Gaming has incurred operating losses since its incorporation. Enthusiast Gaming may not be able to achieve or maintain profitability and may continue to incur significant losses in the future. In addition, Enthusiast Gaming expects to continue to increase operating expenses as it implements initiatives to continue to grow its business. If Enthusiast Gaming’s revenues do not increase to offset these expected increases in costs and operating expenses, Enthusiast Gaming may not be profitable.
Negative operating cash flow
Enthusiast Gaming has historically had negative cash flow from operating activities. Continued losses may have the following consequences:
| ● | increasing<br>Enthusiast Gaming’s vulnerability to general adverse economic and industry conditions; |
|---|---|
| ● | limiting<br>Enthusiast Gaming’s ability to obtain additional financing to fund future working capital, capital expenditures, operating<br>costs and other general corporate requirements; and |
| --- | --- |
| ● | limiting<br>Enthusiast Gaming’s flexibility in planning for, or reacting to, changes in its business and the industry. |
| --- | --- |
Reliance on management
The success of Enthusiast Gaming will be dependent upon the ability, expertise and judgment of its senior management. Any loss of the services of such individuals could have a material adverse effect on Enthusiast Gaming’s business, operations, results, financial condition or prospects.
Dependence on personnel
Due to the technical nature of its business and the dynamic market in which Enthusiast Gaming competes, the Company’s success depends on its ability to attract and retain highly skilled managerial, marketing and sales personnel. In particular, Enthusiast Gaming’s future success will depend in part on the continued services of each of its proposed executive officers and other key employees. Competition for qualified personnel in the industry in which Enthusiast Gaming operates is intense. The Company believes that there are only a limited number of people with the requisite skills to serve in many key positions and it is difficult to hire and retain these people. The loss of one or more of these key personnel may have a significant adverse effect on the Company’s sales, operations and profits.
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Litigation
Enthusiast Gaming may become party to litigation from time to time in the ordinary course of business, which could adversely affect its business. Should any litigation in which Enthusiast Gaming become involved be determined against Enthusiast Gaming, such a decision could adversely affect Enthusiast Gaming’s ability to continue operating and the market price for Enthusiast Gaming Shares, and could use significant financial and personnel resources of Enthusiast Gaming. Even if Enthusiast Gaming is involved in litigation and wins, litigation can redirect significant company resources.
In addition to being subject to litigation in the ordinary course of business, in the future, Enthusiast Gaming may be subject to class actions, derivative actions and other securities litigation and investigations. This litigation may be time consuming, expensive and may distract Enthusiast Gaming from the conduct of its daily business. It is possible that Enthusiast Gaming will be required to pay substantial judgments, settlements or other penalties and incur expenses that could have a material adverse effect on its operating results, liquidity or financial position. Expenses incurred in connection with these lawsuits, which would be expected to include substantial fees of lawyers and other professional advisors, and Enthusiast Gaming’s obligations to indemnify officers and directors who may be parties to such actions, could materially adversely affect Enthusiast Gaming’s reputation, operating results, liquidity or financial position. Furthermore, it is not known with certainty if any of this type of litigation or any resulting expenses will be fully or even partially covered by Enthusiast Gaming’s insurance. In addition, these lawsuits may cause insurance premiums to increase in future periods.
Cyber security
Cyber attacks or other breaches of network or IT systems security may cause disruptions to Enthusiast Gaming’s operations. A major security breach could result in the loss of critical data, theft of intellectual property, disclosure of confidential information, customer claims and litigation, reduced revenues due to business interruption, costs associated with remediation of infrastructure and systems, class action and derivative action lawsuits and damage to Enthusiast Gaming’s reputation. Furthermore, the prevalence and sophistication of these types of threats are increasing and Enthusiast Gaming’s security measures may not be sufficient to prevent the damage that such threats can inflict on Enthusiast Gaming’s assets and information. Enthusiast Gaming’s insurance may not be adequate to fully reimburse the company for these costs and losses.
Intellectual property
Enthusiast Gaming may protect its intellectual property through trade secrets, reliance upon copyright legislation, common law trademark protection, and trademark applications and registrations. However, filing trademark applications may not result in enforceable trademark rights in all jurisdictions that Enthusiast Gaming may operate in. Unauthorized parties may attempt to copy aspects of Enthusiast Gaming’s products or to obtain information it regards as proprietary. Policing unauthorized use of proprietary technology, if required, may be difficult, time-consuming and costly. If a third-party misappropriates Enthusiast Gaming’s intellectual property, Enthusiast Gaming may be unable to enforce its rights. If Enthusiast Gaming is unable to protect its intellectual property against unauthorized use by others, it could have an adverse effect on its competitive position. Enthusiast Gaming may be challenged by allegations of its infringement of the intellectual property of others. There is no assurance that Enthusiast Gaming will be successful in defending such claims and, if Enthusiast Gaming is unsuccessful, there is no assurance that Enthusiast Gaming will be successful in obtaining a licence for the intellectual property in question. Intellectual property claims are expensive and time consuming to defend and, even if they are without merit, may cause delay in the introduction of new products or services. In addition, Enthusiast Gaming’s managerial resources could be diverted in order to defend its rights, which could disrupt its operations.
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Enthusiast Gaming may receive assertions or claims from third parties alleging that Enthusiast Gaming’s products violate or infringe its intellectual property rights. This potential liability, if realized, could materially adversely affect Enthusiast Gaming’s business, operating results and financial condition. In addition to potentially being found to be liable for substantial damages in the event of an unfavorable outcome in such a claim, Enthusiast Gaming may have to cease the sale of certain products and restructure its business.
Difficulty to forecast
Enthusiast Gaming must rely largely on their own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this preliminary stage of the esports industry. A failure in the demand for its products or services to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of Enthusiast Gaming.
Variable revenues and earnings
The revenues and earnings of Enthusiast Gaming may fluctuate from quarter to quarter, which could affect the market price of Enthusiast Gaming Shares. Revenues and earnings may vary quarter to quarter as a result of a number of factors, including the timing of releases of new products or services, activities of Enthusiast Gaming’s competitors, cyclical fluctuations related to the evolution of the esports industry and online gaming technologies, concentration in Enthusiast Gaming’s customer bases, transition periods associated with the migration to new technologies, impairment of goodwill or intangible assets which may result in a significant change to earnings in the period in which an impairment is determined, and operating expenses that are generally fixed in the short-term and therefore difficult to rapidly adjust to different levels of business. Any of the factors listed above could cause significant variations to Enthusiast Gaming’s revenues, gross margins and earnings in any given quarter.
Suppliers
In the event that Enthusiast Gaming is unable to maintain or establish relationships with suppliers or service providers as required, the availability, pricing and quality of its products and services may be adversely affected, causing an adverse effect on Enthusiast Gaming’s business, operating results and financial condition. Relationships with third-party suppliers and service providers also expose Enthusiast Gaming to risks associated with the integrity, quality, reputation, solvency and performance of such parties.
Operating risk and insurance coverage
Enthusiast Gaming may obtain insurance to protect their assets, operations and employees. Such insurance may be subject to coverage limits and exclusions and may not be available for the risks and hazards to which Enthusiast Gaming is exposed. In addition, no assurance can be given that such insurance would be adequate to cover Enthusiast Gaming’s liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable. If Enthusiast Gaming were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if Enthusiast Gaming were to incur such liability at a time when they are not able to obtain liability insurance, its business, results of operations and financial condition could be materially adversely affected.
Management of growth
Enthusiast Gaming may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of Enthusiast Gaming to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee bases. The inability of Enthusiast Gaming to deal with this growth may have a material adverse effect on Enthusiast Gaming’s business, financial condition, results of operations and prospects.
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Conflicts of interest
Enthusiast Gaming may be subject to various potential conflicts of interest because of the fact that some of its officers and directors may be engaged in a range of business activities. In addition, Enthusiast Gaming’s executive officers and directors may devote time to its outside business interests, so long as such activities do not materially or adversely interfere with their duties to Enthusiast Gaming. In some cases, Enthusiast Gaming’s executive officers and directors may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to Enthusiast Gaming’s business and affairs and that could adversely affect Enthusiast Gaming’s operations. These business interests could require significant time and attention of Enthusiast Gaming’s executive officers and directors.
In addition, Enthusiast Gaming may also become involved in other transactions which conflict with the interests of its directors and officers who may from time to time deal with persons, firms, institutions or companies with which Enthusiast Gaming may be dealing, or which may be seeking investments similar to those desired by it. The interests of these persons could conflict with those of Enthusiast Gaming. In addition, from time to time, these persons may be competing with Enthusiast Gaming for available investment opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, in the event that such a conflict of interest arises at a meeting of Enthusiast Gaming’s directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the directors of Enthusiast Gaming are required to act honestly, in good faith and in the best interests of Enthusiast Gaming.
Dividends
Enthusiast Gaming does not anticipate paying any dividends in the foreseeable future. Dividends paid by Enthusiast Gaming would be subject to tax and, potentially, withholdings.
Credit concentration and credit risk
Enthusiast Gaming intends to provide credit to its customers in the normal course of operations. Credit risk arises from the potential that a customer or counterparty will fail to meet its contractual obligations. Enthusiast Gaming is exposed to credit risk from their customers on their receivables and unbilled revenue. Accounts receivable include amounts due from customers which expose Enthusiast Gaming to risk of non-payment. Although Enthusiast Gaming attempts to manage their credit risk exposures, there is no assurance that this provision will be adequate.
Reputational risk
Reputational damage can result from the actual or perceived occurrence of any number of events, and could include any negative publicity, whether true or not. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views, whether true or not. Reputation loss may result in decreased customer confidence and an impediment to Enthusiast Gaming’s overall ability to advance its products and services with customers, thereby having a material adverse impact on its financial performance, financial condition, cash flows and growth prospects.
Third party dependence
Many of Enthusiast Gaming’s business activities rely on telecommunication and network systems that the Company does not own or operate. Such telecommunication and network systems are complex electronic systems, subject to electronic and mechanical failures and possible sabotage. Given the event-based nature of the esports industry, even temporary or limited failures of these telecommunication and network systems would impair Enthusiast Gaming’s business activities and/or the growth of current and additional market opportunities, which would adversely affect Enthusiast Gaming’s results of operations.
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Industry growth
There can be no assurance that Enthusiast Gaming’s targeted vertical and geographic markets will grow, or that it will be successful in establishing new vertical and geographic markets. If the various markets in which Enthusiast Gaming’s products and services compete fail to grow, or grow more slowly than anticipated, or if it is unable to establish itself in new markets, its growth plans could be materially adversely affected.
Accounting estimates
The Company’s management makes various estimates and assumptions in determining its respective reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses for each year presented as disclosed in Note 4 of the 2022 Annual Financial Statements. Changes in estimates and assumptions will occur based on the passage of time and the occurrence of certain events.
Internal controls
Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. However, internal controls over financial reporting are not guaranteed to provide absolute assurance with regard to the reliability of financial reporting and financial statements.
Foreign exchange
It is anticipated that Enthusiast Gaming’s operations will expand with increased global sales, thus exposing Enthusiast Gaming to increased amounts of foreign currency risk.
Government regulations
Although Enthusiast Gaming believes that it has obtained the necessary approvals for the products and services that it currently sells, Enthusiast Gaming may not be able to obtain approvals for future products and services on a timely basis, or at all. In addition, regulatory requirements may change or Enthusiast Gaming may not be able to obtain regulatory approvals from countries in which Enthusiast Gaming may desire to sell products in the future. Enthusiast Gaming may be required to incur additional costs in order to comply with foreign and state government regulations as they might pertain to certain issues concerning compliance with local regulations governing its devices, content, privacy, taxation and other considerations.
Globaleconomic conditions and public health crises
Events in the financial markets have demonstrated that businesses and industries throughout the world are very tightly connected to each other. General global economic conditions, even if seemingly unrelated to Enthusiast Gaming or to its industry, including, without limitation, interest rates, general levels of economic activity, fluctuations in the market prices of securities, participation by other investors in the financial markets, economic uncertainty, national and international political circumstances, natural disasters, or other events outside of the Company’s control may affect the activities of Enthusiast Gaming directly or indirectly.
For example, general volatility in the equity markets could hurt Enthusiast Gaming’s ability to raise capital and significantly impact the Company’s access to funding and liquidity. Enthusiast Gaming may also be negatively impacted by volatility in the equity markets as a result of a number of catastrophic events that are beyond the Company’s control, including infectious diseases, pandemics or similar health threats, such as the COVID-19 outbreak or fear of the foregoing. The risks to the Company of epidemics, pandemics and other public health crises, such as COVID-19, could include risks to employee health and safety. In addition, any prolonged restrictive measures put in place in order to control an outbreak of contagious disease, such as quarantines or other requirements or circumstances may require the Company to change the way it conducts its business and operations, including requiring the Company to reduce or cease operations at some or all of its offices for an indeterminate period of time. Further, the Company’s critical supply chains may similarly be disrupted for an indeterminate amount of time. While these effects may be mitigated through vaccinations, the effectiveness of vaccines against variant strains of COVID-19, ongoing uncertainty with respect to the extent and duration of the pandemic, including as a result of the potential emergence of other variants of the virus in the future, the severity of variant strains, the duration of the various disruptions to businesses locally and internationally and the related financial impact cannot be reasonably estimated at this time. All of these factors could have a material impact on the Company’s business, operations, personnel and financial condition.
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In addition to the above, the Company could also experience negative impacts to its business and results of operations as a result of other macroeconomic, geopolitical and other challenges, uncertainties and volatility. For example, in response to the recent action of Russian military forces in Ukraine, a number of countries, including the U.S., Canada and the European Union member states, have taken actions against Russia, including the imposition of sanctions and restrictions on certain sectors of the Russian economy, the expulsion of some Russian banks from the SWIFT global banking payment system, and other measures, with further restrictions likely as the conflict continues. The outcome of the conflict is uncertain, and the conflict could lead to heightened volatility in the global markets and increase inflation, all of which could reduce the Company’s profitability and have a material adverse effect on its business, operations, personnel or financial condition.
During the financial year ended December 31, 2022, revenue from Russia and Ukraine made up, on a combined basis, less than 0.1% of the total revenue. Due to the recent actions of the Russian military in Ukraine, there could be a significant decrease in revenue from Russia and Ukraine which could adversely impact Enthusiast Gaming’s revenue from these regions. Currently the impact of this conflict on the global economy and, in particular, on Enthusiast Gaming’s operations and future financial performance is unknown and will depend on how these events evolve.
Such public health crises or military conflicts may also have a material adverse impact on the North American capital markets and the Company’s ability to raise sufficient funds to finance its ongoing development of its material business. A reduction in credit, combined with reduced economic activity, may materially adversely affect businesses and industries that collectively constitute a significant portion of Enthusiast Gaming’s client base and may make it more difficult for Enthusiast Gaming to maintain business activities at the levels currently forecast. It is not always possible to fully insure against such risks, and Enthusiast Gaming may decide not to insure such risks as a result of high premiums or other reasons. Should liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of Enthusiast Gaming Shares.
Cancellationor curtailing of events
We and our suppliers have operations in, and our customers reside in, locations subject to natural occurrences such as natural crises, severe weather and other geological events, including, without limitation, pandemics (including the COVID-19 pandemic), epidemics, outbreaks of infectious disease, hurricanes, earthquakes, floods, blizzards, wild fires or tsunamis that could disrupt operations and gameplay. Our business is affected by the scheduling and live broadcasting of events. Disruptions to the scheduling and broadcasting of those events, including disruptions resulting from any of the aforementioned natural occurrences, may have a material impact on our business, results of operations or financial condition for the relevant period. In some instances, the scheduling of major sporting and other events occurs seasonally, or at regular but infrequent intervals.
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The cancellation, postponement or curtailment of significant events, for example due to adverse weather conditions, terrorist acts or other acts of war or hostility or the outbreak of infectious diseases (including the COVID-19 pandemic), pandemics, or cancellation of, disruption to, or postponement of such events, for example due to contractual disputes, or technological or communication problems, could materially adversely affect our business, results of operations, financial condition and prospects.
Climatechange
Global climate change could exacerbate certain of the threats facing Enthusiast Gaming’s business, including the frequency and severity of weather-related events and changing temperatures, which can disrupt the Company’s operations, create financial risk to the business of the Company or otherwise have a material adverse effect on our results of operations, financial position or liquidity. These may result in substantial costs to respond during the event, to recover from the event and possibly to modify existing or future plants to prevent recurrence. Climate change could also disrupt the operations of Enthusiast Gaming by impacting the availability and cost of services or materials needed and increasing the cost of insurance and other operating costs.
Global climate change also results in regulatory risks. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. Increased public awareness and concern regarding global climate change may result in more legislative and/or regulatory requirements.
Risk Factors Relating to the Enthusiast Gaming Shares
Share price fluctuations
The market price of Enthusiast Gaming Shares may be subject to wide fluctuations in response to many factors, including variations in the operating results of Enthusiast Gaming and its subsidiaries, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, changes in the business prospects of Enthusiast Gaming and its subsidiaries, general economic conditions, legislative changes, and other events and factors outside of Enthusiast Gaming’s control. In particular, the recent actions of the Russian military in Ukraine and any restrictive actions that are or may be taken by other countries in response thereto, such as sanctions or export controls, could have potential impacts on commodity prices and negative implications on the financial markets. Accordingly, the market price of the Enthusiast Gaming Shares may decline even if Enthusiast Gaming’s operating results, underlying asset values or prospects have not changed. In addition, stock markets have from time to time experienced extreme price and volume fluctuations, which, as well as general economic and political conditions, could adversely affect the market price for Enthusiast Gaming Shares.
Limited market for securities
There can be no assurance that an active and liquid market for Enthusiast Gaming Shares will be maintained and an investor may find it difficult to resell Enthusiast Gaming Shares.
In addition, since the Enthusiast Gaming Shares currently trade on the Nasdaq Global Market, the Company must comply with Nasdaq’s continued listing requirements to avoid its common shares being delisted, including, among others, a minimum bid price requirement of $1.00 per share. The Company’s results of operations and fluctuating share price directly impact its ability to satisfy this listing standard. Nasdaq notified the Company on November 3, 2022 that it did not satisfy the minimum bid price requirement under Nasdaq’s continued listing rules. If the Company is unable to re-establish and maintain compliance with Nasdaq’s listing standards, the Enthusiast Gaming Shares may be subject to delisting. A delisting from Nasdaq would result in the Enthusiast Gaming Shares being eligible for quotation on the over-the-counter (OTC) market, which is generally considered to be a less efficient system than listing on national exchanges such as NASDAQ because of the OTC’s lower trading volumes, transaction delays, and reduced security analyst and news media coverage. These factors could contribute to lower prices and larger spreads in the bid and ask prices for the Enthusiast Gaming Shares.
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Additional financing
In order to execute its anticipated growth strategies, Enthusiast Gaming may require additional equity and/or debt financing to support ongoing operations, to undertake capital expenditures, or to undertake business combination transactions or other initiatives. There can be no assurance that additional financing will be available to Enthusiast Gaming when needed or on terms which are acceptable. Enthusiast Gaming’s inability to raise additional financing could limit Enthusiast Gaming’s growth and may have a material adverse effect upon its businesses, operations, results, financial condition or prospects.
If additional funds are raised through further issuances of equity or securities convertible into equity, existing shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of holders of Enthusiast Gaming Shares. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for Enthusiast Gaming to obtain additional capital and to pursue business opportunities.
If research analysts do not publish research about Enthusiast Gaming’s business or if they issue unfavourable commentary or downgrade Enthusiast Gaming Shares, Enthusiast Gaming’s stock price and trading volume could decline
The trading market for the securities of Enthusiast Gaming may depend in part on the research and reports that research analysts publish about Enthusiast Gaming and its business. If Enthusiast Gaming does not maintain adequate research coverage, or if one or more analysts who cover Enthusiast Gaming downgrades its stock, or publishes inaccurate or unfavourable research about Enthusiast Gaming’s business, the price of Enthusiast Gaming Shares could decline. If one or more of the research analysts ceases to cover Enthusiast Gaming or fails to publish reports on it regularly, demand for securities of Enthusiast Gaming could decrease, which could cause Enthusiast Gaming’s stock price or trading volume to decline.
The market price of Enthusiast Gaming Shares may decline due to the large number of outstanding common shares eligible for future sale
Sales of substantial amounts of Enthusiast Gaming Shares in the public market, or the perception that these sales could occur, could cause the market price of Enthusiast Gaming Shares to decline. These sales could also make it more difficult for Enthusiast Gaming to sell equity or equity-related securities in the future at a time and price that they deem appropriate.
Certain shares of Enthusiast Gaming, such as those subject to escrow agreements, will have restrictions on trading.
Enthusiast Gaming may also issue Enthusiast Gaming Shares or securities convertible into Enthusiast Gaming Shares from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to existing holders of Enthusiast Gaming Shares and cause the trading price of Enthusiast Gaming’s securities to decline.
Enthusiast Gaming may issue additional equity securities, or engage in other transactions that could dilute its book value or affect the priority of its shares, which may adversely affect the market price of its shares
The boards of directors of Enthusiast Gaming may determine from time to time that they need to raise additional capital by issuing additional Enthusiast Gaming Shares or other securities. Enthusiast Gaming will not be restricted from issuing additional Enthusiast Gaming Shares, including securities that are convertible into or exchangeable for, or that represent the right to receive, Enthusiast Gaming Shares. Because Enthusiast Gaming’s decisions to issue securities in any future offering will depend on market conditions and other factors beyond Enthusiast Gaming’s control, they cannot predict or estimate the amount, timing, or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity offerings may dilute the holdings of its existing shareholders or reduce the market price of its common stock, or both. Holders of Enthusiast Gaming Shares are not entitled to pre-emptive rights or other protections against dilution. New investors also may have rights, preferences, and privileges that are senior to, and that adversely affect Enthusiast Gaming’s then-current holders of Enthusiast Gaming Shares. Additionally, if Enthusiast Gaming raises additional capital by making offerings of debt or preference shares, upon liquidation of Enthusiast Gaming, holders of its debt securities and preference shares, and lenders with respect to other borrowings, may receive distributions of its available assets before the holders of Enthusiast Gaming Shares.
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Tax considerations applicable to an investment in Enthusiast Gaming Shares
Each prospective investor should consult with its own tax advisor with respect to the Canadian and non-Canadian income tax consequences of acquiring, holding, and disposing of Enthusiast Gaming Shares, based on each prospective investor’s particular circumstances.
DIVIDENDS
Enthusiast Gaming and its subsidiaries have not paid dividends and Enthusiast Gaming does not expect to pay dividends in the near future. Enthusiast Gaming has no restrictions on paying dividends. Enthusiast Gaming’s board of directors will determine if and when dividends should be declared and paid in the future based upon the Company’s financial position at the relevant time. If Enthusiast Gaming generates earnings in the foreseeable future, it expects that they will be retained to finance operations and growth.
GENERAL DESCRIPTION OF CAPITAL STRUCTURE
The authorized capital of Enthusiast Gaming consists of an unlimited number of common shares (the “Enthusiast Gaming Shares”) and an unlimited number of preferred shares (the “Enthusiast Gaming Preferred Shares”). As of March 27, 2023, the Company had 151,767,243 Enthusiast Gaming Shares outstanding. No Enthusiast Gaming Preferred Shares have been issued or are outstanding.
The holders of Enthusiast Gaming Shares are entitled to dividends, if, as and when declared by the Company’s Board, entitled to one vote per share at meetings of the shareholders and, upon dissolution, entitled to share equally in such assets of Enthusiast Gaming as are distributable to the holders of Enthusiast Gaming Shares, subject to the rights of the holders of Enthusiast Gaming Preferred Shares.
The Enthusiast Gaming Preferred Shares may be issued in one or more series and, subject to the BCBCA, the Board may, by resolution, if none of the shares of any particular series are issued, alter the articles of the Company and authorize the alteration of the notice of articles of the Company, as the case may be, to, inter alia, attach special rights or restrictions to the shares of that series, or alter any such special rights or restrictions.
In addition, the Company has the following equity instruments issued and outstanding as of March 27, 2023:
| Security | Number<br> or Amount | Exercise<br> or Conversion Price | Expiry/Maturity<br> Date |
|---|---|---|---|
| Stock<br> options^(1)^ | 9,982,628 | Ranges<br> from $0.91 to $8.75 per common share | Ranges<br> from November 2023 to March 2033 |
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| Security | Number<br> or Amount | Exercise<br> or Conversion Price | Expiry/Maturity<br> Date |
|---|---|---|---|
| Share<br> Units^(2)^ | 4,133,266 | N/A | N/A |
Notes:
| (1) | Enthusiast<br>Gaming adopted its stock option plan (the “Option Plan”) on January 16, 2020, and amended it on December 17,<br>2020 to replace its previous stock option plan adopted and amended on July 23, 2018 and July 9, 2019, respectively, pursuant to<br>which the Board may from time to time, in its discretion, and in accordance with the TSX requirements, grant to directors, officers,<br>consultants and employees of Enthusiast Gaming or its subsidiaries, non-transferable options to purchase Enthusiast Gaming Shares,<br>provided that, in addition to other restrictions outlined in the Option Plan, the number of shares reserved for issuance will<br>not exceed 10% of the issued and outstanding shares exercisable for a period of up to 10 years from the date of grant, and the<br>number of shares reserved for issuance to any one person will not exceed five percent (5%) of the issued and outstanding Enthusiast<br>Gaming Shares. |
|---|---|
| (2) | Enthusiast<br>Gaming adopted its share unit plan (the “SU Plan”) on November 5, 2020, pursuant to which the Board may from<br>time to time, in its discretion, and in accordance with the TSX requirements, grant to a consultant, service provider, part-time<br>and full-time employee, director, including non-executive directors, or officer of a Participating Company (such term including<br>the Company and its Affiliates, as designated by the Board from time to time) non-transferable share units (“SUs”)<br>which entitle the holder thereof to, in the sole discretion of the Company, (i) the number of Enthusiast Gaming Shares equal to<br>one Enthusiast Gaming Share for each whole vested SU; (ii) an amount in cash equal to the value of the number of vested SUs (as<br>determined in accordance with the SU Plan); or (iii) a combination of (i) and (ii), subject in each case to applicable taxes and<br>provided that, in addition to other restrictions outlined in the SU Plan, the number of Enthusiast Gaming Shares reserved for<br>issuance to insiders under the SU Plan and any other share based compensation arrangement adopted by the Company will not exceed<br>10% of the issued and outstanding shares exercisable for a period of up to 10 years from the date of grant, and the number of<br>Enthusiast Gaming Shares reserved for issuance to any one person under the SU Plan will not exceed five percent (5%) of the issued<br>and outstanding Enthusiast Gaming Shares. In any event, the maximum number of Enthusiast Gaming Shares that are issuable to settle<br>SUs that may settle in treasury Enthusiast Gaming Shares granted under the SU Plan shall not exceed 4% of the aggregate number<br>of Enthusiast Gaming Shares issued and outstanding from time to time. |
| --- | --- |
MARKET FOR SECURITIES
Trading Price and Volume
The outstanding Enthusiast Gaming Shares are listed and posted for trading on the TSX under the symbol “EGLX”, the Nasdaq under the symbol “EGLX”, the Frankfurt Stock Exchange under the symbol “2AV”, and the OTCQB under the symbol “ENGMF”.
The following tables set out the price range (monthly high and low prices) and monthly trading volumes of the Enthusiast Gaming Shares on the TSX and Nasdaq during the financial year ended December 31, 2022.
TSX
| TSX<br> Price Range () | ||
|---|---|---|
| Month<br> and Year | Low<br> ($) | Volume<br><br> (number of shares) |
| January<br> 2022 | $2.36 | 11,706,173 |
| February<br> 2022 | $2.67 | 15,683,299 |
| March<br> 2022 | $2.85 | 10,622,293 |
| April<br> 2022 | $2.40 | 7,932,126 |
| May<br> 2022 | $2.05 | 14,477,001 |
| June<br> 2022 | $2.51 | 7,966,248 |
| July<br> 2022 | $2.00 | 7,216,036 |
| August<br> 2022 | $1.67 | 11,569,153 |
| September<br> 2022 | $1.08 | 10,801,572 |
| October<br> 2022 | $0.88 | 8,224,346 |
| November<br> 2022 | $0.71 | 8,946,016 |
| December<br> 2022 | $0.70 | 6,809,678 |
All values are in US Dollars.
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Nasdaq
| Nasdaq<br> Price Range (US) | ||
|---|---|---|
| Month<br> and Year | Low<br> (US$) | Volume<br><br> (number of shares) |
| January<br> 2022 | $1.84 | 11,752,500 |
| February<br> 2022 | $2.09 | 14,848,048 |
| March<br> 2022 | $2.22 | 8,999,356 |
| April<br> 2022 | $1.87 | 6,194,111 |
| May<br> 2022 | $1.56 | 15,100,274 |
| June<br> 2022 | $1.80 | 4,101,525 |
| July<br> 2022 | $1.55 | 3,480,536 |
| August<br> 2022 | $1.27 | 8,219,459 |
| September<br> 2022 | $0.78 | 8,142,672 |
| October<br> 2022 | $0.63 | 5,011,047 |
| November<br> 2022 | $0.53 | 5,795,945 |
| December<br> 2022 | $0.51 | 8,286,184 |
All values are in US Dollars.
Prior Sales
During the most recently completed financial year, and up to the date of this Annual Information Form, the Company has issued the following securities that were not listed on an exchange or marketplace:
| Security | Number<br> of <br><br> Securities Issued | Exercise<br> Price | Date<br> of Issue | Expiry<br> Date |
|---|---|---|---|---|
| Stock<br> Options | 1,560,697^(1)^ | $2.75 | April<br> 20, 2022 | April<br> 20, 2027 |
| Share<br> Units | 1,922,877^(2)^ | N/A | April<br> 20, 2022 | N/A |
| Stock<br> Options | 122,608^(2)^ | $1.13 | November<br> 17, 2022 | February<br> 16, 2027 |
| Share<br> Options | 89,334^(4)^ | $1.13 | November<br> 17, 2022 | November<br> 17, 2027 |
| Stock<br> Units | 437,636^(5)^ | N/A | November<br> 17, 2022 | N/A |
| Share<br> Options | 6,062,976^(6)^ | $0.91 | March<br> 1, 2023 | March<br> 1, 2033 |
Notes:
| (1) | On<br> April 20, 2022, Enthusiast Gaming granted stock options to certain directors, officers<br> and employees pursuant to the Option Plan. |
|---|---|
| (2) | On<br> April 20, 2022, Enthusiast Gaming granted SUs to certain directors, officers and employees<br> pursuant to the Company’s SU Plan. These SUs vest as follows: (i) 166,666 on April<br> 20, 2022, (ii) 557,608 on January 1, 2023, (iii) 83,334 on April 20, 2023, (iv) 557,608<br> on January 1, 2024, and (v) 557,661 on January 1, 2025. |
| --- | --- |
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| (3) | On<br> November 17, 2022, Enthusiast Gaming granted stock options to certain directors of the<br> Company pursuant to the Option Plan. |
|---|---|
| (4) | On<br> November 17, 2022, Enthusiast Gaming granted stock options to certain officers, employees<br> and consultants of the Company pursuant to the Option Plan. |
| --- | --- |
| (5) | On<br> November 17, 2022, Enthusiast Gaming granted SUs to certain directors, officers, employees<br> and consultants of the Company pursuant to the Company’s SU Plan. These SUs vest<br> as follows: (i) 155,108 on November 17, 2022, (ii) 102,507 on January 1, 2023 (iii) 90,007<br> on January 1, 2024, and (iv) 90,014 on January 1, 2025. |
| --- | --- |
| (6) | On<br> March 1, 2023, Enthusiast Gaming granted stock options to Mr. Brien in connection with<br> his appointment as CEO of the Company. These options are comprised of (i) 5,305,104 Time-Based<br> Stock Options which will vest over a 4-year period, with 25% of such Time-Based Stock<br> Options vesting on March 1, 2024 and the remaining Time-Based Stock Options vesting in<br> 36 equal monthly installments over the 36 months immediately subsequent to March 1, 2024,<br> and (ii) 757,872 Performance Stock Options which will vest over a 4-year period, with<br> 25% of such Performance Stock Options vesting on March 1, 2024 and the remaining Performance<br> Stock Options vesting in 36 equal monthly installments over the 36 months immediately<br> subsequent to March 1, 2024, provided, in all events, the vesting of such Performance<br> Stock Options shall be subject to the performance requirement, being the Company’s<br> common shares having an average share price of at least US$5.00 on the Nasdaq over a<br> period of 90 consecutive days (with such threshold being subject to adjustment in the<br> event of any stock split, reverse split or other capital reorganization event) at any<br> point subsequent to March 1, 2023. |
| --- | --- |
ESCROWED SECURITIES AND SECURITIES SUBJECT TO RESTRICTION ON TRANSFER
The following table summarizes details of the Company’s securities of each class held, to the Company’s knowledge, in escrow or that are subject to a contractual restriction on transfer as of March 27, 2023.
| Designation<br> of class | Number<br> of securities held in escrow or that are subject to a contractual restriction on transfer | Percentage<br> of Enthusiast Gaming Shares outstanding |
|---|---|---|
| Common<br> Shares | 520,833^(1)^ | 0.34% |
| Common<br> Shares | 1,330,582^(2)^ | 0.88% |
| Common<br> Shares | 672,100^(3)^ | 0.44% |
Notes:
| (1) | Influencer Service Agreement. These shares are subject to resale restrictions set out in an<br> exclusive service agreement with Blue Umbrella LLC for the influencer services, including<br> the receipt of the services therein. There is no escrow agent in respect of these shares. |
|---|---|
| (2) | Addicting Games Acquisition. These shares are subject to a contractual lock-up in connection<br> with the acquisition of Addicting Games, from which they will be released on the date<br> that is twenty-four months following the closing date. There is no escrow agent in respect<br> of these shares. |
| --- | --- |
| (3) | Outplayed Acquisition. These shares are subject to a contractual lock-up in connection with<br> the acquisition of Outplayed, from which they will be released on the date that is 540<br> days following the closing of the Outplayed acquisition. There is no escrow agent in<br> respect of these shares. |
| --- | --- |
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DIRECTORS AND OFFICERS
The following table sets out information regarding our directors and executive officers as at the date hereof. The Company’s directors are elected annually and all of them are expected to hold office until the next annual meeting of holders of Enthusiast Gaming Shares, at which time they may be re-elected or replaced.
| Name and Place<br><br> <br>of Residence | Positions / Title | Director Since | Principal<br><br> <br>Occupation(s) for<br><br> <br>the Past Five Years | Number of Shares | Percentage of Shares Outstanding (%) |
|---|---|---|---|---|---|
| Nick<br> Brien<br><br> <br><br><br> <br>Los<br>Angeles, California, USA | Chief Executive Officer | N/A | CEO<br> of the Company<br><br> <br><br><br> <br>Former<br> CEO of Amobee<br><br> <br><br><br> <br>Former<br> CEO of Dentsu Americas<br><br> <br><br><br> <br>Former<br>CEO of iCrossing | Nil | Nil |
| Bill<br> Karamouzis<br><br> <br><br><br> <br>Los<br>Angeles, California, USA | President | N/A | President<br> of the Company<br><br> <br><br><br> <br>CEO<br>of Addicting Games, Inc. | 1,468,750 | 0.97% |
| Alex<br> Macdonald<br><br> <br><br><br> <br>Toronto,<br> Ontario, Canada | Chief Financial Officer | N/A | CFO<br> of the Company<br><br> <br><br><br> <br>CFO<br> of GameCo<br><br> <br><br><br> <br>Former<br>CFO of Peeks Social Ltd. | 20,000 | 0.01% |
| Eric<br> Bernofsky^(1)^<br><br> <br><br><br> <br>Toronto,<br> Ontario, Canada | Chief Corporate Officer | N/A | CCO<br> of the Company<br><br> <br><br><br> <br>Former<br> COO and Senior VP Finance of Enthusiast Gaming<br><br> <br><br><br> <br>Former<br>CFO of Former Enthusiast | 1,235,084 | 0.81% |
| J.B.<br> Elliott<br><br> <br><br><br> <br>Toronto,<br> Ontario, Canada | Senior Vice President and General Counsel | N/A | SVP<br> and General Counsel of the Company<br><br> <br><br><br> <br>Lawyer<br>at Stikeman Elliott LLP | Nil | Nil |
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| Name and Place of Residence | Positions / Title | Director Since | Principal Occupation(s) for the Past Five Years | Number of Shares | Percentage of Shares Outstanding (%) |
|---|---|---|---|---|---|
| Adrian<br> Montgomery<br><br> <br><br><br> <br>Toronto,<br> Ontario, Canada | Non-Executive Chairman and Director | June<br> 27, 2018 | CEO<br> of the Company<br><br> <br><br><br> <br>CEO,<br> Director of GameCo<br><br> <br><br><br> <br>Former<br> CEO of Aquilini Sports and Entertainment<br><br> <br><br><br> <br>Former<br> CEO of QM Environmental Services<br><br> <br><br><br> <br>Former<br>President of Tuckamore Capital | 3,218,700 | 2.12% |
| Michael<br> Beckerman ^(2)(3)^<br><br> <br><br><br> <br>Toronto,<br>Ontario, Canada | Director | August<br> 30, 2019 | Chief<br> Client Officer of Torstar Corporation^(5)^<br><br> <br><br><br> <br>Former<br>CEO and President of MKTG Canada | 51,666 | 0.03% |
| Alan<br> Friedman^(3)(4)^<br><br> <br><br><br> <br>Toronto,<br>Ontario, Canada | Director | August<br> 30, 2019 | Principal<br> of Bayline Capital Partners^(6)^<br><br> <br><br><br> <br>Principal<br>of Rivonia Capital Inc.^(7)^ | 890,837 | 0.59% |
| Ben<br> Colabrese^(2)^<br><br> <br><br><br> <br>Oakville,<br>Ontario, Canada | Director | August<br> 30, 2019 | EVP<br> & CFO of the Toronto Blue Jays^(8)^ | 20,000 | 0.01% |
| John<br> Albright^(2)(9)^<br><br> <br><br><br> <br>Toronto,<br>Ontario, Canada | Director | July<br> 20, 2021 | Managing<br> Partner at Relay Ventures^(10)^ | 757,648^(14)^ | 0.50% |
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| Name and Place<br><br> <br>of Residence | Positions / Title | Director Since | Principal<br><br> <br>Occupation(s) for<br><br> <br>the Past Five Years | Number of Shares | Percentage of Shares Outstanding (%) |
|---|---|---|---|---|---|
| Richard<br> Sherman^(3)^<br><br> <br><br><br> <br>Maple<br>Valley, Washington, United States | Director | April<br> 23, 2021 | Former<br> Professional football player at the Tampa Bay Buccaneers ^(11)^<br><br> <br><br><br> <br>Former<br> professional football player at the San Francisco 49ers^(11)^<br><br> <br><br><br> <br>Former<br>professional football player at the Seattle Seahawks^(11)^ | 77,357 | 0.05% |
| Scott<br> O’Neil^(3)(12)^<br><br> <br><br><br> <br>Newtown,<br> Pennsylvania, United States | Director | July<br> 19, 2022 | CEO<br> of Merlin Entertainment<br><br> <br><br><br> <br>Co-Founder<br> of Elevate Sports Ventures^(13)^<br><br> <br><br><br> <br>Former<br>CEO of Harris Blitzer Sports & Entertainment | 324,971 | 0.21% |
| Angela<br> Ruggiero^(3)^<br><br> <br><br><br> <br>Weston,<br>Massachusetts, USA | Director | July<br> 19, 2022 | CEO<br> and Co-Founder of Sports Innovation Lab^(14)^ | Nil | Nil |
| David<br> Goldhill^(15)^<br><br> <br><br><br> <br>Bedford<br> Corners, New York, USA | Director | July<br> 19, 2022 | Co-Founder<br> and Chief Executive Officer of Sesame Inc.^(15)^<br><br> <br><br><br> <br>Former<br>CEO of Game Show Network | Nil | Nil |
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| Name and Place<br><br> <br>of Residence | Positions / Title | Director Since | Principal<br><br> <br>Occupation(s) for<br><br> <br>the Past Five Years | Number of Shares | Percentage of Shares Outstanding (%) |
|---|---|---|---|---|---|
| Janny<br> Lee^(3)(15)^<br><br> <br><br><br> <br>Livingston<br> Manor, New York, USA | Director | July<br> 19, 2022 | Founding<br> Partner of Anchorvest^(16)^<br><br> <br><br><br> <br>Managing<br> Partner and COO of Redbadge<br><br> <br><br><br> <br>Founding<br>Partner of Redbadge Pacific | Nil | Nil |
| Total: | 8,065,013 | 5.31% |
Notes:
| (1) | Includes<br> 350,000 Enthusiast Gaming Shares owned by Jabenomli Holdings Inc., which is owned and<br> controlled by Mr. Bernofsky. |
|---|---|
| (2) | Member<br> of the Company’s Audit Committee. |
| --- | --- |
| (3) | Member<br> of the Company’s Compensation & Governance Committee. |
| --- | --- |
| (4) | Includes<br> 316,500 Enthusiast Gaming Shares owned by Esmys Family Trust and 62,797 Enthusiast Gaming<br> Shares owned by Grayston Capital Investments Inc., which are controlled by Mr. Friedman. |
| --- | --- |
| (5) | Torstar<br> Corporation is a Canadian media and data company, best known for its ownership of the<br> Toronto Star newspaper. |
| --- | --- |
| (6) | Bayline<br> Capital Partners is a financial advisory firm that is engaged in providing clients with<br> advisory services relating to fund raising, corporate strategic alternatives and go-public<br> transactions. |
| --- | --- |
| (7) | Rivonia<br> Capital Inc. is a Canadian investment firm involved in the business of identifying, financing,<br> structuring, administering and managing opportunities in emerging and developed markets,<br> in the resources, infrastructure, technology and alternative medical sectors. |
| --- | --- |
| (8) | Toronto<br> Blue Jays is a major league baseball team wholly-owned by Rogers Communications Inc. |
| --- | --- |
| (9) | Includes<br> 579,604 Enthusiast Gaming Shares owned by Relay Ventures Fund LP, 114,788 Enthusiast<br> Gaming Shares owned by Relay Ventures Parallel Fund LP and 29,956 Enthusiast Gaming Shares<br> owned by Relay Ventures Parallel US Fund LP, which are controlled by Mr. Albright. |
| --- | --- |
| (10) | Relay<br> Ventures is a venture capital firm with investments from start-up phase to late venture<br> and growth capital across North America. |
| --- | --- |
| (11) | The<br> Tampa Bay Buccaneers, San Francisco 49ers and the Seattle Seahawks are professional American<br> football teams that compete in the National Football League. |
| --- | --- |
| (12) | Through<br> his interest in 1776 Innovation Lab Investments LLC, a then security holder of Outplayed,<br> Mr. O’Neil has indirect, beneficial interest in approximately 324,971 Common Shares. |
| --- | --- |
| (13) | Elevate<br> Sports Venture is a sports and entertainment consulting firm. |
| --- | --- |
| (14) | Sports<br> Innovation Lab is a technology-powered market research firm focused on the intersection<br> of sports and innovation. |
| --- | --- |
| (15) | Sesame<br> Inc. provides online health care solutions, offering a direct-pay healthcare marketplace<br> where patients pay doctors directly for care, including telehealth, prescriptions, and<br> in-person care. |
| --- | --- |
| (16) | Mr.<br> Goldhill and Ms. Lee are nominees of Greywood Investments, LLC. |
| --- | --- |
| (17) | Anchorvest<br> is a global alternative asset manager that provides investors access to a diversified<br> range of investments. |
| --- | --- |
46
The directors and officers of Enthusiast Gaming, as a group, own, directly or indirectly, or exercise control or direction over, an aggregate of 8,065,013 Enthusiast Gaming Shares (on an undiluted basis), representing approximately 5.31% of the issued and outstanding Enthusiast Gaming Shares on an undiluted basis. Each director’s term of office shall expire at the next annual meeting of the Company shareholders unless re-elected at such meeting.
Applicable corporate law permits the Board to appoint directors to fill any casual vacancies that may occur. The Board is permitted to add additional directors between successive annual meetings of holders of Enthusiast Gaming Shares so long as the number appointed does not exceed more than one-third of the number of directors appointed at the previous annual meeting. Individuals appointed as directors to fill casual vacancies on the Board or added as additional directors hold office like any other director until the next annual meeting at which time they may be re-elected or replaced.
Corporate Cease Trade Orders or Bankruptcies
To the knowledge of the Company, none of the directors or executive officers of the Company (nor any personal holding company of any of such individuals) is, or has been within 10 years before the date of this Annual Information Form, a director, chief executive officer or chief financial officer of any other company (including the Company) that:
| a) | was<br> subject to an order that was issued while the director or executive officer was acting<br> in the capacity as director, chief executive officer or chief financial officer; or |
|---|---|
| b) | was<br> subject to an order that was issued after the director or executive officer ceased to<br> be a director, chief executive officer or chief financial officer and which resulted<br> from an event that occurred while that person was acting in the capacity as director,<br> chief executive officer or chief financial officer; |
| --- | --- |
where “order” refers to a cease trade or similar order, or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than 30 days.
To the knowledge of the Company, none of the directors or executive officers of the Company (nor any personal holding company of any of such individuals), or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company:
| a) | is,<br> as at the date of this Annual Information Form, or has been within the 10 years before<br> the date of this Annual Information Form, a director or executive officer of any company<br> (including the Company) that, while that person was acting in that capacity, or within<br> a year of that person ceasing to act in that capacity, became bankrupt, made a proposal<br> under any legislation relating to bankruptcy or insolvency or was subject to or instituted<br> any proceedings, arrangement or compromise with creditors or had a receiver, receiver<br> manager or trustee appointed to hold its assets; or |
|---|---|
| b) | has,<br> within the 10 years before the date of this Annual Information Form, become bankrupt,<br> made a proposal under any legislation relating to bankruptcy or insolvency, or become<br> subject to or instituted any proceedings, arrangement or compromise with creditors, or<br> had a receiver, receiver manager or trustee appointed to hold the assets of the director,<br> executive officer or shareholder. |
| --- | --- |
Penalties or Sanctions
No director or executive officer of Enthusiast Gaming (nor any personal holding company of any of such individuals), or a shareholder anticipated to hold sufficient securities of the Company to affect materially the control of the Company, has
| (a) | been<br> subject to any penalties or sanctions imposed by a court relating to securities legislation<br> or by a securities regulatory authority or has entered into a settlement agreement with<br> a securities regulatory authority; or |
|---|---|
| (b) | been<br> subject to any other penalties or sanctions imposed by a court or regulatory body that<br> would likely be considered important to a reasonable investor in making an investment<br> decision about the Company. |
| --- | --- |
47
Conflicts of Interest
Other than disclosed herein, there are no known existing or potential material conflicts of interest among the Company or its subsidiaries and any director or officer of the Company or of its subsidiaries.
Directors and officers of Enthusiast Gaming may be presented from time to time with situations or opportunities which give rise to apparent conflicts of interest which cannot be resolved by arm’s length negotiations but only through exercise by the officers and directors of such judgment as is consistent with their fiduciary duties to the Company which arise under applicable corporate law, especially insofar as taking advantage, directly or indirectly, of information or opportunities acquired in their capacities as directors or officers of the Company. It is expected that all conflicts of interest will be resolved in accordance with the BCBCA. It is expected that any transactions with officers and directors will be on terms consistent with industry standards and sound business practice in accordance with the fiduciary duties of those persons to the Company, and, depending upon the magnitude of the transactions and the absence of any disinterested Board members, may be submitted to the shareholders for their approval. See “Risk Factors”.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
The Company is not aware of: (a) any legal proceedings to which the Company or its subsidiaries is a party, or by which any of the Company’s property or its subsidiaries’ property is subject, which would be material to the Company or its subsidiaries, during the Company’s financial year, and the Company is not aware of any such proceedings being contemplated; (b) any penalties or sanctions imposed by a court relating to securities legislation, or other penalties or sanctions imposed by a court or regulatory body against the Company or its subsidiaries during the most recently completed financial year or that would otherwise likely be considered important to a reasonable investor making an investment decision; or (c) any settlement agreements that the Company or its subsidiaries has entered into before a court relating to securities legislation or with a securities regulatory authority during the most recently completed financial year.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Other than as disclosed in this Annual Information Form or in the 2022 Annual Financial Statements, none of the directors or executive officers of the Company, nor any person or company that beneficially owns, or controls or directs, directly or indirectly, more than 10% of any class or series of the Company’s outstanding voting securities, nor any associate or affiliate of the foregoing persons, has or has had any material interest, direct or indirect, in any transaction within the three years prior to the date of this Annual Information Form that has materially affected or is reasonably expected to materially affect the Company or its subsidiaries.
TRANSFER AGENT AND REGISTRAR
Enthusiast Gaming’s registrar and transfer agent is Computershare Investor Services Inc., located at 3rd Floor – 510 Burrard Street, Vancouver, British Columbia V6C 3B9.
MATERIALCONTRACTS
The Company and/or its subsidiaries, as applicable, have entered into the following material contracts since the beginning of the Company’s most recently completed financial year or before the Company’s most recently completed financial year if any such contract is still in effect, and which are outside of the ordinary course of the Company’s business. A description and summary for each material contract is provided below or has been cross-referenced in this Annual Information Form.
| ● | SU<br> Plan. See “General Description of Capital Structure”. |
|---|
48
| ● | Option<br> Plan. See “General Description of Capital Structure”. |
|---|
INTERESTS OF EXPERTS
Except as disclosed herein, no person or company whose profession or business gives authority to a report, valuation, statement or opinion made by the person or company and who is named as having prepared or certified the report, valuation, statement or opinion described in or included in this Annual Information Form or a filing made under National Instrument 51-102 by the Company, during, or relating to, the Company’s most recently completed financial year holds more than 1% beneficial interest, direct or indirect, in any securities or other property of the Company or of an associate or affiliate of the Company and no such person is expected to be elected, appointed or employed as a director, senior officer or employee of the Company or of an associate or affiliate of the Company.
KPMG LLP, the current external auditor of the Company, is independent of the Company within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation and regulations, and is independent with respect to the Company under all relevant U.S. professional and regulatory standards.
ADDITIONAL INFORMATION
Additional information relating to Enthusiast Gaming is available at www.sedar.com under the Company’s profile.
Enthusiast Gaming shareholders may contact Enthusiast Gaming at its office by mail at 2 Bloor Street East, Suite 1921, Toronto, Ontario, M4W 1A8, to request copies of Enthusiast Gaming’s financial statements and related MD&A. Financial information of Enthusiast Gaming is provided in the 2022 Annual Financial Statements and 2022 Annual MD&A. Additional information, including information about directors and officers remuneration and indebtedness, principal holders of Company’s securities and securities authorized for issuance under equity compensation plans, is contained in the Company’s information circular for its most recent annual meeting of securityholders that involved the election of directors, which is available at www.sedar.com.
AUDIT COMMITTEE INFORMATION
Audit Committee Charter
The full text of Enthusiast Gaming’s Audit Committee Charter is disclosed in Schedule A at A-1.
Composition of Audit Committee and Independence
NI 52-110 provides that a member of an audit committee is “independent” if the member has no direct or indirect material relationship with Enthusiast Gaming, which could, in the view of the Enthusiast Gaming Board, reasonably interfere with the exercise of the member’s independent judgment. All of the members of Enthusiast Gaming’s Audit Committee are considered by the Enthusiast Gaming Board to be independent as that term is defined in NI 52-110.
Relevant Education and Experience
NI 52-110 provides that an individual is “financially literate” if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the particular issuer’s financial statements. All of the members of Enthusiast Gaming’s Audit Committee are considered by the Enthusiast Gaming Board to be financially literate as that term is defined in NI 52-110.
49
Ben Colabrese
Mr. Colabrese is employed as the Executive VP Finance at The Toronto Blue Jays, which is wholly owned by Rogers Communications Inc. He is responsible for all financial matters at the Blue Jays including all reporting to the parent company and Major League Baseball. Mr. Colabrese has been with Rogers since 2015 where he held the roles of VP & GM of Mobilicity (which Rogers acquired in 2015), and then SVP Finance, before moving to his current role at the Blue Jays. From May 2013 to December 2014, he was the CFO of Pelmorex Media Inc. / The Weather Network. Prior to joining Pelmorex, Mr. Colabrese was the VP Corporate Development at Rogers from July 2005 to April 2013, where he was responsible for all mergers and acquisitions activity and completed over 30 transactions. From July 2015 to January 2017, Mr. Colabrese served on the board of Perk.com until it was acquired by RhythmOne. From November 2017 to February 2021, Mr. Colabrese served on the board of Vecima Networks. Mr. Colabrese has a comprehensive understanding of financial statements, their preparation, analysis and interpretation.
John Albright
Mr. Albright is Co-Founder and Managing Partner of Relay Ventures, an early stage venture fund exclusively focused on mobile connectivity. During his tenure in the venture capital business, Mr. Albright has gained extensive experience assisting entrepreneurs shape their vision and capital plans into successful long term growth programs which typically involved an aggressive financing strategy. Mr. Albright has a history of assisting entrepreneurial companies through significant growth and eventually to the public markets. His ability to work with and advise senior management of investee companies, as well as his skills in filling supporting roles where existing management lack the experience or skill set, has been vital to the success of past investments. Mr. Albright is a Chartered Financial Analyst and received his Bachelor of Business Administration degree from the Schulich School of Business at York University.
Michael Beckerman
Mr. Beckerman is a highly experienced C-level sale and marketing executive with over 20 years’ experience. Mr. Beckerman is currently the Chief Client Officer of Torstar Corporation. From 1987 to 1996 Mr. Beckerman held senior sales and marketing positions at NIKE in Asia, Europe and the U.S., including serving as Director of Advertising for NIKE in Europe and Director of Retail for NIKE in the U.S. After leaving NIKE, Mr. Beckerman went on to become the VP Marketing for Canadian Airlines from 1996 to 1999; VP Marketing and International for MVP.com from 1999 to 2001; Chief Marketing Officer for BMO Financial Group from 2001 to 2006; President and then Chief Executive Officer for Ariad Communications from 2006 to 2015 and then CEO of both Ariad and US based Bluespire Marketing until 2016. Since 2016 Mr. Beckerman has run a marketing consulting practice with clients in technology, travel, sports and automotive. Mr. Beckerman has been a director of Points International Ltd. Since 2016 and is also currently a director of Bluerush Inc. Mr. Beckerman obtained his Bachelor of Arts from the University of British Columbia in 1986. Mr. Beckerman has a comprehensive understanding of financial statements, their preparation, analysis and interpretation.
Audit Committee Oversight
Since the commencement of Enthusiast Gaming’s most recently completed financial year, the Audit Committee of Enthusiast Gaming has not made any recommendations to nominate or compensate an external auditor which were not adopted by the Enthusiast Gaming Board.
Reliance on Certain Exemptions
Since the commencement of Enthusiast Gaming’s most recently completed financial year, Enthusiast Gaming has not relied upon:
| (a) | the<br> exemption in Section 2.4 (De Minimis Non-audit Services) of NI 52-110; or |
|---|
50
| (b) | an<br> exemption from NI 52-110, in whole or in part, granted under Part 8 (Exemptions). |
|---|---|
| (c) | an<br> exemption from NI 52-110, in whole or in part, granted under Part 7 (U.S. Listed Issuers). |
| --- | --- |
Pre-Approval Policies and Procedures
The Audit Committee has not adopted any specific policies and procedures for the engagement of non-audit services.
External Auditors Service Fees (By Category)
The aggregate fees billed by Enthusiast Gaming’s external auditors in each of its last two financial years:
| Fees | December<br> 31, 2022 ($) | December<br> 31, 2021 ($) |
|---|---|---|
| Audit<br> Fees ^(1)^ | 650,560 | 1,045,069 |
| Audit-Related<br> Fees | - | - |
| Tax<br> Fees ^(2)^ | 124,548 | 120,161 |
| All<br> Other Fees | - | - |
| Total | 775,108 | 1,165,230 |
Notes:
| (1) | Includes<br> the aggregate fees billed for the audit of the Company’s annual financial statements,<br> interim review of financial statements, and services that are normally provided in relation<br> to statutory and regulatory filings or securities engagements. |
|---|---|
| (2) | Includes<br> fees for tax consultancy and the preparation of returns. |
| --- | --- |
51
Schedule A
AUDIT COMMITTEE CHARTER
A-1
Schedule A
AUDIT COMMITTEE CHARTER
ENTHUSIAST GAMING HOLDINGS INC.
(the “Corporation”)
AUDIT COMMITTEE CHARTER
| 1. | MANDATE |
|---|
The audit committee (the “Committee”) will assist the board of directors of the Corporation (the “Board”) in fulfilling its financial oversight responsibilities. The Committee will review and consider, in consultation with the Corporation’s external auditors, the financial reporting process, the system of internal controls over financial reporting and the audit process. In performing its duties, the Committee will maintain effective working relationships with the Board, management and the external auditors. To effectively perform his or her role, each member of the Committee must obtain an understanding of the principal responsibilities of membership of the Committee as well as the Corporation’s business, operations and risks.
| 2. | COMPOSITION |
|---|
The Board will appoint, from among their membership, a Committee after each annual meeting of the shareholders of the Corporation. The Committee will consist of a minimum of three directors. The members of the Committee shall meet the independence requirements of Sec. 1.4 of National Instrument 52-110 (“NI 52-110”), The NASDAQ Stock Market LLC (“Nasdaq”) and Rule 10A-3 under the U.S. Securities Exchange Act of 1934, as amended. No member of the Committee may have participated in the preparation of the financial statements of the Corporation or any current subsidiary of the Corporation at any time during the past three years. Each member of the Committee must be “financially literate” (as defined in Sec. 1.6 of NI 52-110) and shall be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement, as required by Nasdaq. The Board shall review these requirements on an annual basis to ensure continued compliance by the members of the Committee. In addition, at least one member of the Committee shall have accounting or related financial management expertise and meet the financial sophistication requirements of Nasdaq and shall be an “audit committee financial expert” as defined by the Securities and Exchange Commission. The members of the Committee shall be appointed by the Board and shall serve such term or terms as the Board may determine or until earlier resignation or death. Committee members serve at the pleasure of, and may be replaced at any time by, the Board. All vacancies will be filled by the Board.
| 3. | MEETINGS |
|---|
The Committee shall meet in accordance with a schedule established each year by the Board, and at other times that the Committee may determine. The Committee shall meet at least annually with the Corporation’s Chief Financial Officer and external auditors in separate executive sessions.
-1-
| 4. | ROLES AND RESPONSIBILITIES |
|---|
The Committee shall fulfill the following roles and discharge the following responsibilities:
| 4.1 | External Audit |
|---|
The Committee shall be directly responsible for overseeing the work of the external auditors in preparing or issuing the auditor’s report, or performing other audit, review or attestation services, including the resolution of disagreements between management and the external auditors regarding financial reporting. In carrying out this duty, the Committee shall:
| (a) | recommend to the Board that the external auditor to be nominated for the purpose of preparing<br>or issuing an auditor’s report or performing other audit, review or attestation services for the Corporation; |
|---|---|
| (b) | review (by discussion and enquiry) the external auditors’ proposed audit scope and approach; |
| --- | --- |
| (c) | review the performance of the external auditors and recommend to the Board the appointment or discharge of the external auditors; |
| --- | --- |
| (d) | review and recommend to the Board the compensation to be paid to the external auditors; |
| --- | --- |
| (e) | review and confirm the independence of the external auditors by reviewing the non-audit services provided and the external auditors’ assertion of their independence in accordance with professional standards; and |
| --- | --- |
| (f) | review and approve the Corporation’s hiring policies regarding partners and employees, and former partners and employees, of the present and former external auditor of the Corporation. |
| --- | --- |
| 4.2 | Internal Control |
| --- | --- |
The Committee shall consider whether adequate controls are in place over annual and interim financial reporting as well as controls over assets, transactions and the creation of obligations, commitments and liabilities of the Corporation. In carrying out this duty, the Committee shall:
| (a) | evaluate the adequacy and effectiveness of management’s system of internal controls over the accounting and financial reporting system within the Corporation; and |
|---|---|
| (b) | ensure that the external auditors discuss with the Committee any event or matter which suggests the possibility of fraud, illegal acts or deficiencies in internal controls. |
| --- | --- |
-2-
| 4.3 | Financial Reporting |
|---|
The Committee shall review the financial statements and financial information of the Corporation prior to their release to the public. In carrying out this duty, the Committee shall:
General
| (a) | review significant accounting and financial reporting issues, especially complex, unusual and related party transactions; |
|---|---|
| (b) | review and ensure that the accounting principles selected by management in preparing financial statements are appropriate; |
| --- | --- |
Annual Financial Statements
| (c) | review the draft annual financial statements and provide a recommendation to the Board with respect to the approval of the financial statements; |
|---|---|
| (d) | meet with management and the external auditors to review the financial statements and the results of the audit, including any difficulties encountered; |
| --- | --- |
| (e) | review management’s discussion and analysis respecting the annual reporting period prior to its release to the public; |
| --- | --- |
Interim Financial Statements
| (f) | review and approve the interim financial statements prior to their release to the public; |
|---|---|
| (g) | review management’s discussion and analysis respecting the interim reporting period prior to its release to the public; and |
| --- | --- |
Release of Financial Information
| (h) | where reasonably<br>possible, review and approve all public disclosure containing financial information, including news releases, prior to release to the<br>public. The Committee must be satisfied that adequate procedures are in place for the review of the Corporation’s public disclosure<br>of financial information extracted or derived from the Corporation’s financial statements, and must periodically assess the adequacy<br>of those procedures. |
|---|
-3-
| 4.4 | Non-Audit Services |
|---|
All non-audit services (being services other than services rendered for the audit and review of the financial statements or services that are normally provided by the external auditor in connection with statutory and regulatory filings or engagements) which are proposed to be provided by the external auditors to the Corporation or any subsidiary of the Corporation shall be subject to the prior approval of the Committee.
Delegation of Authority
| (a) | The Committee may delegate to one or more independent members of the Committee the authority to approve non-audit services, provided any non-audit services approved in this manner must be presented to the<br>Committee at its next scheduled meeting. |
|---|
De-Minimis Non-Audit Services
| (b) | The Committee may satisfy the requirement for the pre-approval of non-audit services if: |
|---|---|
| (i) | the aggregate amount of all non-audit services that were not pre-approved is reasonably expected to constitute no more than five per cent of the total amount of fees paid by the Corporation and its subsidiaries<br>to the external auditor during the fiscal year in which the services are provided; or |
| --- | --- |
| (ii) | the services are brought to the attention of the Committee and approved, prior to the completion of the audit, by the Committee or by one or more of its members to whom authority to grant such approvals has<br>been delegated. |
| --- | --- |
Pre-Approval Policies and Procedures
| (c) | The Committee may also satisfy the requirement for the pre-approval of non-audit services by adopting specific policies and procedures for the engagement of non-audit services, if: |
|---|---|
| (i) | the pre-approval policies and procedures are detailed as to the particular service; |
| --- | --- |
| (ii) | the Committee is informed of each non-audit service; and |
| --- | --- |
| (iii) | the procedures do not include delegation of the Committee’s responsibilities to management. |
| --- | --- |
-4-
| 4.5 | Other Responsibilities |
|---|
The Committee shall:
| (a) | establish procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters or matters of legal or regulatory concern; |
|---|---|
| (b) | establish procedures for the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters or matters of legal or regulatory concern; |
| --- | --- |
| (c) | ensure that significant findings and recommendations made by management and the external auditor are received and discussed on a timely basis; |
| --- | --- |
| (d) | review the policies and procedures in effect for considering officers’ expenses and perquisites; |
| --- | --- |
| (e) | perform other oversight functions as requested by the Board; and |
| --- | --- |
| (f) | review and update this Charter and receive approval of changes to this Charter from the Board. |
| --- | --- |
| 4.6 | Reporting Responsibilities |
| --- | --- |
The Committee shall regularly update the Board about committee activities and make appropriate recommendations.
| 5. | RESOURCES AND AUTHORITY OF THE AUDIT COMMITTEE |
|---|
The Committee shall have the resources and the authority appropriate to discharge its responsibilities, including the authority to
| (a) | engage independent counsel and other advisors as it determines necessary to carry out its duties; |
|---|---|
| (b) | set and pay the compensation for any advisors employed by the Committee; and |
| --- | --- |
| (c) | communicate directly with the internal and external auditors. |
| --- | --- |
-5-
| 6. | GUIDANCE - ROLES & RESPONSIBILITIES |
|---|
The Committee should consider undertaking the actions described in the following guidance, which is intended to provide the Committee members with additional guidance on fulfilment of their roles and responsibilities on the Committee:
| 6.1 | Internal Control |
|---|---|
| (a) | evaluate whether management is setting the goal of high standards by communicating the<br>importance of internal controls and ensuring that all individuals possess an understanding of their roles and responsibilities; |
| --- | --- |
| (b) | focus on the extent to which external auditors review computer systems and applications, the security of such systems and applications, and the contingency plan for processing financial information in the event<br>of an IT systems breakdown; |
| --- | --- |
| (c) | gain an understanding of whether internal control recommendations made by external auditors have been implemented by management; |
| --- | --- |
| 6.2 | Financial Reporting |
| --- | --- |
General
| (a) | review significant accounting and reporting issues, including recent professional and regulatory pronouncements, and understand their impact on the financial statements; |
|---|---|
| (b) | ask management and the external auditors about significant risks and exposures and the plans to minimize such risks; |
| --- | --- |
| (c) | understand industry best practices and the Corporation’s adoption of them; |
| --- | --- |
Annual Financial Statements
| (d) | review the annual financial statements and determine whether they are complete and consistent with the information known to the members of the Committee, and assess whether the financial statements reflect appropriate<br>accounting principles in light of the jurisdictions in which the Corporation reports or trades its shares; |
|---|---|
| (e) | pay attention to complex and / or unusual transactions such as restructuring charges and derivative disclosures; |
| --- | --- |
| (f) | focus on judgmental areas such as those involving valuation of assets and liabilities, including, for example, the accounting for and disclosure of loan losses; warranty, professional liability; litigation reserves; and<br>other commitments and contingencies; |
| --- | --- |
-6-
| (g) | consider management’s handling of proposed audit adjustments identified by the external auditors; |
|---|---|
| (h) | ensure that the external auditors communicate all required matters to the Committee; |
| --- | --- |
Interim Financial Statements
| (i) | be briefed on how management develops and summarizes interim financial information, the extent to which the external auditors review interim financial information; |
|---|---|
| (j) | meet with management and the auditors, either electronically or in person, to review the interim financial statements; |
| --- | --- |
| (k) | to gain insight into the fairness of the interim statements and disclosures, obtain explanations from management on whether: |
| --- | --- |
| (i) | actual financial results for the quarter or interim period varied significantly from budgeted or projected results; |
| --- | --- |
| (ii) | changes in financial ratios and relationships of various balance sheet and operating statement figures in the interim financial statements are consistent with changes in the Corporation’s operations and financing<br>practices; |
| --- | --- |
| (iii) | generally accepted accounting principles have been consistently applied; |
| --- | --- |
| (iv) | there are any actual or proposed changes in accounting or financial reporting practices; |
| --- | --- |
| (v) | there are any significant or unusual events or transactions; |
| --- | --- |
| (vi) | the Corporation’s financial and operating controls are functioning effectively; |
| --- | --- |
| (vii) | the Corporation has complied with the terms of loan agreements, security indentures or other financial position or results dependent agreement; and |
| --- | --- |
| (viii) | the interim financial statements contain adequate and appropriate disclosures; |
| --- | --- |
| 6.3 | Compliance withLaws and Regulations |
| --- | --- |
| (a) | periodically obtain updates from management regarding compliance with this policy and industry “best practices”; |
| --- | --- |
| (b) | be satisfied that all regulatory compliance matters have been considered in the preparation of the financial statements; |
| --- | --- |
-7-
| (c) | review the findings of any examinations by securities regulatory authorities and stock exchanges; and |
|---|---|
| 6.4 | Other Responsibilities |
| --- | --- |
| (a) | Review, with the Corporation’s counsel, any legal matters that could have a significant impact on the Corporation’s financial statements. |
| --- | --- |
-8-
99.2
Enthusiast Gaming Holdings Inc.
Consolidated Statements of Financial Position
As of December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| Note | December 31, 2022 | December 31, 2021 | ||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current | ||||||||
| Cash | $ | 7,415,516 | $ | 22,654,262 | ||||
| Trade and other receivables | 6 | 37,868,107 | 33,801,990 | |||||
| Investments | 7 | 125,000 | 131,342 | |||||
| Loans receivable | 23 | 50,935 | 176,931 | |||||
| Income tax receivable | 367,092 | 356,366 | ||||||
| Prepaid expenses | 2,017,004 | 2,145,184 | ||||||
| Total current assets | 47,843,654 | 59,266,075 | ||||||
| Non-current | ||||||||
| Property and equipment | 9 | 180,621 | 247,988 | |||||
| Right-of-use assets | 12 | 2,099,996 | 2,885,662 | |||||
| Investment in associates and joint ventures | 8 | 2,450,031 | 885,269 | |||||
| Long-term portion of prepaid expenses | 279,814 | 261,922 | ||||||
| Intangible assets | 10 | 116,967,438 | 129,138,595 | |||||
| Goodwill | 11 | 171,615,991 | 195,097,659 | |||||
| Total Assets | $ | 341,437,545 | $ | 387,783,170 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current | ||||||||
| Accounts payable and accrued liabilities | 13 | $ | 32,823,320 | $ | 34,391,221 | |||
| Contract liabilities | 5,380,378 | 3,890,569 | ||||||
| Income tax payable | 129,485 | 114,094 | ||||||
| Current portion of long-term debt | 14 | 17,431,625 | 2,000,000 | |||||
| Current portion of deferred payment liability | 17 | 2,391,863 | 27,244,146 | |||||
| Current portion of lease liabilities | 12 | 872,429 | 796,835 | |||||
| Current portion of other long-term debt | 15 | 10,891 | 11,121 | |||||
| Total current liabilities | 59,039,991 | 68,447,986 | ||||||
| Non-current | ||||||||
| Long-term debt | 14 | - | 7,681,867 | |||||
| Long-term portion of deferred payment liability | 17 | 1,451,939 | 20,794,275 | |||||
| Long-term portion of lease liabilities | 12 | 1,478,438 | 2,213,512 | |||||
| Other long-term debt | 15 | 144,844 | 136,324 | |||||
| Deferred tax liability | 22 | 24,671,326 | 25,740,885 | |||||
| Total liabilities | $ | 86,786,538 | $ | 125,014,849 | ||||
| Shareholders’ Equity | ||||||||
| Share capital | 19 | 442,781,376 | 387,087,948 | |||||
| Contributed surplus | 20, 21 | 30,402,742 | 25,485,361 | |||||
| Accumulated other comprehensive income | 8,629,848 | 527,166 | ||||||
| Deficit | (227,162,959 | ) | (150,332,154 | ) | ||||
| Total shareholders’ equity | 254,651,007 | 262,768,321 | ||||||
| Total liabilities and shareholders’ equity | $ | 341,437,545 | $ | 387,783,170 |
Commitments (Note 26)
Subsequentevents (Note 28)
Approved by the Board of Directors of the Company:
| Signed: “Adrian Montgomery”<br><br>Director | Signed: “Ben Colabrese”<br><br>Director |
|---|
The accompanying notes are an integral part of these consolidated financial statements.
1
Enthusiast Gaming Holdings Inc.
Consolidated Statements of Loss and Comprehensive Loss
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| Note | December 31, 2022 | December 31, 2021 | ||||||
|---|---|---|---|---|---|---|---|---|
| Revenue | 27 | $ | 202,835,921 | $ | 167,364,286 | |||
| Cost of sales | 139,371,400 | 129,589,540 | ||||||
| Gross margin | 63,464,521 | 37,774,746 | ||||||
| Operating expenses | ||||||||
| Professional fees | 2,691,148 | 3,073,330 | ||||||
| Consulting fees | 19, 23 | 5,789,576 | 4,591,688 | |||||
| Advertising and promotion | 2,682,684 | 3,047,149 | ||||||
| Office and general | 9,533,291 | 6,972,055 | ||||||
| Annual general meeting legal and advisory costs | 19 | 3,386,596 | - | |||||
| Salaries and wages | 23 | 36,493,089 | 25,140,326 | |||||
| Technology support, web development and content | 21,858,408 | 10,640,184 | ||||||
| Esports player, team and game expenses | 4,352,150 | 5,497,165 | ||||||
| Foreign exchange gain | (446,625 | ) | (2,079,774 | ) | ||||
| Share-based compensation | 20, 21 | 7,751,370 | 18,918,489 | |||||
| Amortization and depreciation | 9, 10, 12 | 16,707,844 | 9,518,471 | |||||
| Total operating expenses | 110,799,531 | 85,319,083 | ||||||
| Other expenses (income) | ||||||||
| Goodwill impairment | 11 | 31,281,286 | - | |||||
| Transaction costs | 5 | 114,853 | 1,490,463 | |||||
| Share of net (income) loss from investment in associates and joint ventures | 8 | (1,241,684 | ) | 266,641 | ||||
| Interest and accretion | 12, 14 - 18 | 3,620,186 | 2,844,956 | |||||
| Loss on settlement of deferred payment liability | 17 | 3,302,824 | - | |||||
| (Gain) loss on revaluation of deferred payment liability | 17 | (621,780 | ) | 181,707 | ||||
| Loss on derecognition of long-term debt | 14 | 482,282 | - | |||||
| Gain on repayment of long-term debt | 14 | - | (39,502 | ) | ||||
| Gain on settlement of long-term debt | 14 | - | (11,991 | ) | ||||
| Gain on sale of intangible assets | 10 | (4,836,075 | ) | - | ||||
| Gain on player buyouts | (518,581 | ) | - | |||||
| Change in fair value of investment | 7 | - | 444,764 | |||||
| Loss on settlement of vendor-take-back loan | 18 | - | 316,241 | |||||
| Interest income | (36,252 | ) | (51,529 | ) | ||||
| Net loss before income taxes | (78,882,069 | ) | (52,986,087 | ) | ||||
| Income taxes | ||||||||
| Current tax expense | 22 | 250,955 | 194,222 | |||||
| Deferred tax recovery | 22 | (2,302,219 | ) | (1,133,687 | ) | |||
| Net loss for the year | (76,830,805 | ) | (52,046,622 | ) | ||||
| Other comprehensive income | ||||||||
| Items that may be reclassified to profit or loss | ||||||||
| Foreign currency translation adjustment | 8,102,682 | 481,738 | ||||||
| Net loss and comprehensive loss for the year | $ | (68,728,123 | ) | $ | (51,564,884 | ) | ||
| Net loss per share, basic and diluted | $ | (0.54 | ) | $ | (0.43 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 143,535,305 | 121,002,659 |
The accompanying notes are an integral part of these consolidated financial statements.
2
EnthusiastGaming Holdings Inc.
ConsolidatedStatements of Shareholders’ Equity
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| Note | Number<br> of shares | Share<br> capital | Contributed<br> surplus | Accumulated<br> other comprehensive income | Deficit | Total<br> shareholders’ equity | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2021 | 104,930,981 | $ | 232,616,997 | $ | 7,494,164 | $ | 45,428 | $ | (98,285,532 | ) | $ | 141,871,057 | |||||
| Issuance of shares for<br> the Offerings, net of transaction costs | 19 | 15,983,000 | 95,146,338 | - | - | - | 95,146,338 | ||||||||||
| Issuance of shares to<br> effect the Vedatis acquisition | 5,<br> 19 | 226,563 | 2,374,380 | - | - | - | 2,374,380 | ||||||||||
| Issuance of shares to<br> effect the Tabwire acquisition | 5,<br> 19 | 790,094 | 5,238,323 | - | - | - | 5,238,323 | ||||||||||
| Issuance of shares to<br> effect the GameKnot acquisition | 5,<br> 19 | 165,425 | 921,417 | - | - | - | 921,417 | ||||||||||
| Issuance of shares to<br> effect the Addicting Games acquisition | 5,<br> 19 | 2,661,164 | 14,636,402 | - | - | - | 14,636,402 | ||||||||||
| Issuance of shares to<br> effect the Outplayed acquisition | 5,<br> 19 | 5,164,223 | 26,182,611 | - | - | - | 26,182,611 | ||||||||||
| Shares issued upon exercise of options | 19 | 363,176 | 1,711,723 | (927,292 | ) | - | - | 784,431 | |||||||||
| Shares issued upon conversion<br> of convertible debentures | 16,<br> 19 | 2,835,289 | 7,626,957 | - | - | - | 7,626,957 | ||||||||||
| Shares issued for settlement of deferred payment<br> liability | 17,<br> 19 | 429,354 | 632,800 | - | - | - | 632,800 | ||||||||||
| Share-based compensation | 20,<br> 21 | - | - | 18,918,489 | - | - | 18,918,489 | ||||||||||
| Other comprehensive income<br> for the year | - | - | - | 481,738 | - | 481,738 | |||||||||||
| Net loss for<br> the year | - | - | - | - | (52,046,622 | ) | (52,046,622 | ) | |||||||||
| Balance, December 31, 2021 | 133,549,269 | $ | 387,087,948 | $ | 25,485,361 | $ | 527,166 | $ | (150,332,154 | ) | $ | 262,768,321 | |||||
| Issuance of shares to effect the Outplayed<br> acquisition | 5,<br> 19 | 35,770 | 181,389 | - | - | - | 181,389 | ||||||||||
| Shares issued upon exercise of options | 19 | 760,938 | 2,862,076 | (2,527,504 | ) | - | - | 334,572 | |||||||||
| Shares issued upon settlement of restricted<br> share units | 19 | 42,838 | 306,485 | (306,485 | ) | - | - | - | |||||||||
| Shares issued for settlement of deferred payment<br> liability | 17,<br> 19 | 16,280,103 | 50,373,851 | - | - | - | 50,373,851 | ||||||||||
| Shares issued for settlement of accounts payable | 19 | 1,098,325 | 1,969,627 | - | - | - | 1,969,627 | ||||||||||
| Share-based compensation | 20,<br> 21 | - | - | 7,751,370 | - | - | 7,751,370 | ||||||||||
| Other comprehensive income for the year | - | - | - | 8,102,682 | - | 8,102,682 | |||||||||||
| Net loss for<br> the year | - | - | - | - | (76,830,805 | ) | (76,830,805 | ) | |||||||||
| Balance,<br> December 31, 2022 | 151,767,243 | $ | 442,781,376 | $ | 30,402,742 | $ | 8,629,848 | $ | (227,162,959 | ) | $ | 254,651,007 |
The accompanying notes are an integral part of these consolidated financial statements.
3
Enthusiast Gaming Holdings Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| Note | December 31, 2022 | December 31, 2021 | ||||||
|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities | ||||||||
| Net loss for the year | $ | (76,830,805 | ) | $ | (52,046,622 | ) | ||
| Items not affecting cash: | ||||||||
| Goodwill impairment | 11 | 31,281,286 | - | |||||
| Amortization and depreciation | 9, 10, 12 | 16,707,844 | 9,518,471 | |||||
| Share-based compensation | 20, 21 | 7,751,370 | 18,918,489 | |||||
| Interest and accretion | 12, 14 - 18 | 2,334,783 | 1,294,774 | |||||
| Deferred tax recovery | 22 | (2,302,219 | ) | (1,133,687 | ) | |||
| Share of net (income) loss from investment in associates and joint ventures | 8 | (1,241,684 | ) | 266,641 | ||||
| Gain on sale of intangible assets | 10 | (4,876,659 | ) | - | ||||
| Loss on settlement of deferred payment liability | 17 | 3,302,824 | - | |||||
| (Gain) loss on revaluation of deferred payment liability | 17 | (621,780 | ) | 181,707 | ||||
| Foreign exchange gain | (775,004 | ) | (172,776 | ) | ||||
| Gain on player buyouts | (518,581 | ) | - | |||||
| Gain on settlement of accounts payable | 19 | (587,769 | ) | - | ||||
| Loss on derecognition of long-term debt | 14 | 482,282 | - | |||||
| Gain on repayment of long-term debt | 14 | - | (39,502 | ) | ||||
| Gain on settlement of long-term debt | 14 | - | (11,991 | ) | ||||
| Loss on settlement of vendor-take-back loan | 18 | - | 316,241 | |||||
| Shares for services | (179,374 | ) | 173,567 | |||||
| Provisions | 479,007 | - | ||||||
| Change in fair value of investment | 7 | - | 444,764 | |||||
| Changes in working capital: | ||||||||
| Changes in trade and other receivables | (3,328,743 | ) | (8,322,247 | ) | ||||
| Changes in prepaid expenses | 128,180 | (1,599,739 | ) | |||||
| Changes in loans receivable | 125,995 | 37,500 | ||||||
| Changes in accounts payable and accrued liabilities | 944,457 | 7,687,368 | ||||||
| Changes in contract liabilities | 1,142,087 | 1,284,406 | ||||||
| Changes in income tax receivable and payable | 98,932 | (174,052 | ) | |||||
| Income tax paid | (156,784 | ) | (301,975 | ) | ||||
| Net cash used in operating activities | (26,640,355 | ) | (23,678,663 | ) | ||||
| Cash flows from investing activities | ||||||||
| Cash paid for mergers and acquisitions | 5 | (2,937,520 | ) | (36,222,278 | ) | |||
| Cash acquired from mergers and acquisitions | 5 | 1,748,602 | 2,406,356 | |||||
| Proceeds from sale of intangible assets | 10 | 5,460,959 | - | |||||
| Proceeds from player buyouts, net of transaction costs | 518,581 | - | ||||||
| Repayment of deferred payment liability | 17 | (472,833 | ) | - | ||||
| Proceeds from redemption of investments | 6,865 | - | ||||||
| Investment in associates and joint venture | 8 | - | (125,000 | ) | ||||
| Acquisition of property and equipment | 9 | (11,278 | ) | (3,398 | ) | |||
| Net cash provided by (used in) investing activities | 4,313,376 | (33,944,320 | ) | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from the issuance of shares for Offerings, net of transaction costs | 19 | - | 95,146,338 | |||||
| Proceeds from long-term debt, net of transaction costs | 14 | 9,758,128 | 10,823,240 | |||||
| Repayment of long-term debt | 14 | (2,588,238 | ) | (23,773,470 | ) | |||
| Proceeds from exercise of options | 19 | 289,034 | 784,431 | |||||
| Repayment of vendor-take-back loan | 18 | - | (6,158,329 | ) | ||||
| Repayment of other long-term debt | 15 | (12,871 | ) | (5,561 | ) | |||
| Lease payments | 12 | (948,040 | ) | (802,013 | ) | |||
| Net cash provided by financing activities | 6,498,013 | 76,014,636 | ||||||
| Foreign exchange effect on cash | 590,220 | (61,214 | ) | |||||
| Net change in cash | (15,238,746 | ) | 18,330,439 | |||||
| Cash, beginning of year | 22,654,262 | 4,323,823 | ||||||
| Cash, end of year | $ | 7,415,516 | $ | 22,654,262 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 1. | Nature of operations |
|---|
Enthusiast Gaming Holdings Inc. (the “Company” or “Enthusiast”) was incorporated under the Business Corporation Act (British Columbia) on June 27, 2018. The Company is publicly traded on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Select Market (“Nasdaq”) under the symbol “EGLX”. The Company maintains its registered office at 510 West Georgia Street, Suite 1800, Vancouver, British Columbia and its executive office at 90 Eglinton Avenue East, Suite 805, Toronto, Ontario, M4P 2Y3.
The Company’s principal business activities are comprised of media and content, entertainment and esports. The Company’s digital media platform includes video gaming related websites, YouTube channels and a library of casual games. The Company’s esports division, Luminosity Gaming Inc. (“Luminosity”), is a leading global esports franchise that consists of professional esports teams under ownership and management, including the Vancouver Titans Overwatch team and the Seattle Surge Call of Duty team. The Company’s entertainment business owns and operates the largest mobile gaming event in Europe, Pocket Gamer Connects.
On May 1, 2021, the Company acquired all of the issued and outstanding shares of Vedatis SAS (“Vedatis”) pursuant to a share purchase agreement dated May 1, 2021 (the “Vedatis SPA”). The Vedatis SPA is accounted for in accordance with IFRS 3, as the operations of Vedatis constitute a business.
On June 21, 2021, the Company, through its wholly-owned subsidiary, Enthusiast Gaming Media (US) Inc. (“Media US”), acquired all of the issued and outstanding membership interest of Tabwire LLC (“Tabwire”) pursuant to an equity purchase agreement dated April 22, 2021 (the “Tabwire EPA”). The Tabwire EPA is accounted for in accordance with IFRS 3, as the operations of Tabwire constitute a business.
On August 30, 2021, the Company, through its wholly-owned subsidiary, Media US, acquired all of the issued and outstanding membership interest of GameKnot LLC (“GameKnot”) pursuant to an equity purchase agreement dated August 30, 2021 (the “GameKnot EPA”). The GameKnot EPA is accounted for in accordance with IFRS 3, as the operations of GameKnot constitute a business.
On September 3, 2021, the Company, through its wholly-owned subsidiary, Media US, acquired all of the issued and outstanding shares of Addicting Games, Inc. and TeachMe, Inc. (“TeachMe”, which together with Addicting Games, Inc., is herein referred to as “Addicting Games”) pursuant to a share purchase agreement dated September 3, 2021 (the “Addicting Games SPA”). The Addicting Games SPA is accounted for in accordance with IFRS 3, as the operations of Addicting Games constitute a business.
On November 22, 2021, the Company, through its wholly-owned subsidiary, Media US, acquired all of the issued and outstanding shares of Outplayed, Inc. (“Outplayed”) pursuant to a merger agreement dated November 22, 2021 (the “Outplayed MA”). Pursuant to the Outplayed MA between Enthusiast Acquisition Corp. (“Acquisition Corp”), a subsidiary of Media US incorporated to facilitate this transaction, and Outplayed, Outplayed merged with and into Acquisition Corp and Acquisition Corp changed its name to Outplayed, Inc. The Outplayed MA is accounted for in accordance with IFRS 3, as the operations of Outplayed constitute a business.
On April 28, 2022, the Company, through its wholly-owned subsidiary, Steel Media Limited, acquired all of the issued and outstanding treasury shares of Fantasy Media Ltd (“FML”) and Fantasy Football Scout Limited (“FFS”, which together with “FML” is herein referred to as “FFS”), pursuant to a share purchase agreement dated April 28, 2022 (the “FFS SPA”). The FFS SPA is accounted for in accordance with IFRS 3, as the operations of FFS constitute a business.
The Vedatis SPA, Tabwire EPA, GameKnot EPA, Addicting Games SPA, Outplayed MA and FFS SPA are collectively called the “Mergers and Acquisitions” in these consolidated financial statements. For information relating to the accounting of the Mergers and Acquisitions to Note 5.
Approval of Financial Statements
These consolidated financial statements were authorized for issuance by the Board of Directors of the Company on March 27, 2023.
5
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 2. | Statement of compliance and basis of preparation |
|---|---|
| (i) | Statement of compliance |
| --- | --- |
The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) using the accounting policies described herein as issued by International Accounting Standards Board (“IASB”) and interpretations by the IFRS Interpretations Committee.
| (ii) | Basis of presentation |
|---|
The consolidated financial statements are prepared under the historical cost convention except for the revaluation of certain financial assets and liabilities to fair value. All financial information is presented in Canadian dollars, except as otherwise noted.
| (iii) | Basis of consolidation |
|---|
Subsidiaries are entities controlled by the Company where control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are included in the consolidated financial statements from the date control is obtained until the date control ceases. All intercompany balances, transactions, income and expenses have been eliminated on consolidation.
These consolidated financial statements include the accounts of Enthusiast Gaming Holdings Inc. and its wholly-owned subsidiaries. The accounts of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. The table below lists the Company’s wholly-owned subsidiaries:
| Name of Subsidiary | Jurisdiction | Functional Currency | Accounting Method |
|---|---|---|---|
| Aquilini GameCo Inc.<br><br><br> <br>GameCo eSports USA Inc.<br><br><br> <br>Luminosity Gaming Inc.<br><br><br> <br>Luminosity Gaming (USA) LLC<br><br><br> <br>Enthusiast Gaming Properties Inc.<br><br><br> <br>Enthusiast Gaming Inc.<br><br><br> <br>Enthusiast Gaming Live Inc.<br><br><br> <br>Enthusiast Gaming Media (US) Inc.<br><br><br> <br>Tabwire LLC<br><br><br> <br>GameKnot LLC<br><br><br> <br>Addicting Games, Inc.<br><br><br> <br>TeachMe, Inc.<br><br> <br>Outplayed, Inc.<br><br><br> <br>Storied Talent, LLC<br><br><br> <br>Enthusiast Gaming Media Holdings Inc.<br><br><br> <br>Enthusiast Gaming (TSR) Inc.<br><br><br> <br>Hexagon Games Corp.<br><br><br> <br>Enthusiast Gaming (PG) Inc.<br><br><br> <br>Steel Media Limited<br><br><br> <br>Fantasy Media Ltd.<br><br> <br>Fantasy Football Scout Limited<br><br> <br>Omnia Media Inc.<br><br><br> <br>Vedatis SAS | Canada<br><br><br> <br>USA<br><br><br> <br>Canada<br><br><br> <br>USA<br><br><br> <br>Canada<br><br><br> <br>Canada<br><br><br> <br>Canada<br><br><br> <br>USA<br><br><br> <br>USA<br><br><br> <br>USA<br><br><br> <br>USA<br><br><br> <br>USA<br><br><br> <br>USA<br><br><br> <br>USA<br><br><br> <br>Canada<br><br><br> <br>Canada<br><br><br> <br>Canada<br><br><br> <br>Canada<br><br><br> <br>England and Wales<br><br><br> <br>England and Wales<br><br><br> <br>England and Wales<br><br><br> <br>USA<br><br><br> <br>France | Canadian dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>Canadian dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>Canadian dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>Canadian dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>Canadian dollars<br><br><br> <br>U.S. dollars<br><br><br> <br>Canadian dollars<br><br><br> <br>Canadian dollars<br><br><br> <br>UK Pound Sterling<br><br><br> <br>UK Pound Sterling<br><br><br> <br>UK Pound Sterling<br><br><br> <br>U.S. dollars<br><br><br> <br>Euro | Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation<br><br><br> <br>Consolidation |
Refer to Note 8 for the Company’s investment in associates and joint ventures.
6
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies |
|---|
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements.
| (i) | Foreign currency |
|---|
The consolidated financial statements are presented in Canadian dollars. The functional currency of Enthusiast Gaming Holdings Inc., Aquilini GameCo Inc., Luminosity Gaming Inc., Enthusiast Gaming Properties Inc., Enthusiast Gaming Gaming Live Inc., Enthusiast Gaming Media Holdings Inc., Hexagon Games Corp., Enthusiast Gaming (PG) Inc., AIG eSports Canada Holdings Ltd. and AFK Media Partnership is Canadian dollars. The functional currency of Enthusiast Gaming Inc., Omnia Media Inc., Enthusiast Gaming Media (US) Inc., Enthusiast Gaming (TSR) Inc., Luminosity Gaming (USA) LLC, GameCo eSports USA Inc., Tabwire LLC, GameKnot LLC, Addicting Games, Inc., TeachMe, Inc., Outplayed, Inc. and AIG eSports USA Intermediate Holdings, LLC is United States dollars. The functional currency of Steel Media Limited, Fantasy Football Scout Limited and Fantasy Media Ltd. is the UK pound sterling. The functional currency of Vedatis SAS is Euro.
Assets and liabilities of subsidiaries having a functional currency other than the Canadian dollar are translated at the rate of exchange at the reporting period date. Revenues and expenses are translated at average rates for the period, unless exchange rates fluctuated significantly during the period, in which case the exchange rates at the dates of the transaction are used. The resulting foreign currency translation adjustments are recognized in accumulated other comprehensive loss included in the consolidated statements of shareholders’ equity. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. At the end of each reporting period, foreign currency denominated monetary assets and liabilities are translated to the functional currency using the prevailing rate of exchange at the reporting period date. Gains and losses on translation of monetary items are recognized in the consolidated statements of loss and comprehensive loss.
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income (“OCI”) in the translation reserve.
| (ii) | Revenue |
|---|
Media and content revenue
The Company generates media and content revenues primarily by delivering performance and brand advertising. Performance advertising creates and delivers relevant advertisements that users will click, leading to direct engagement with advertisers. Brand advertising enhances users’ awareness of and affinity with advertisers’ products and services, through videos, text, images, and other advertisements that run across various devices. Revenue from digital advertising is recognized when the user clicks on the advertisement or when the user views the advertisement for a specified period of time or based on cost-per-impression, which is based on the number of times an advertisement is displayed.
Brand advertising revenue is also earned from talent management and representation. Within brand advertising revenue, the Company generates revenue through programs and promotions directly with advertisers on behalf of the talent it represents, by arranging for product placement, presentation, or additional advertisement of brands embedded directly within or around the video and social media content that is produced by the represented talent. This brand advertising revenue is recognized over time, using an output method, upon fulfillment of contractual campaigns based on the number of advertising units utilized.
Subscription revenue
The Company generates recurring subscription revenue from subscriptions to websites and casual games. Revenue is recognized ratably over the contractual subscription term as control of the goods or services is transferred to the customer, beginning on the date that the subscription is made available to the customer.
7
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (ii) | Revenue (continued) |
| --- | --- |
Entertainment revenue
The Company generates revenue through ticket sales and sponsorships during its exhibition events. The exhibition events are short in duration ranging from three to four days. The Company records revenue from ticket sales and sponsorships once the event is held and the performance obligation is met.
Esports revenue
The Company earns brand advertising revenue by undertaking programs and promotions directly with advertisers by arranging for product placement, presentation, or additional advertisement of brands embedded directly within or around video content that is produced by Luminosity influencers and teams. This brand advertising revenue is recognized over time, using an output method, upon fulfillment of contractual campaigns.
The Company earns prize revenue from its winnings from various esports tournaments and competitions that Luminosity teams enter into. Revenue is recognized once the competition ends.
The Company earns league fees from Luminosity teams being participants in certain various esports leagues. These fees are recognized over the term of the participation in the league.
The Company earns revenue on physical and digital merchandise that it sells through its website and video games. Revenue is recognized when the products are shipped or digital products have been redeemed.
The Company earns revenue by providing a series of esports management services, see Note 23. Revenue is recognized as the services are provided.
Gross versus net revenue
Third party arrangements are evaluated to determine whether the Company acts as the principal or agent under the specific terms of each arrangement. To the extent that the Company acts as the principal in an arrangement, revenues are reported on a gross basis; revenue and expenses are recognized in their respective financial statement line items. Conversely, if the Company acts as the agent, revenues are reported on a net basis; revenues are presented net of any expenses.
Determination of principal or agent classification is based on an evaluation of whether the nature of the Company’s promise is a performance obligation to provide specific goods or services to the customer (principal), or simply arrange for those goods and services to be provided to the customer by a third party (agent). The most significant factors to consider include whether the Company controls the good or service immediately before it is transferred to the customer, is primarily responsible for fulfilling the promise to provide the specified good or service, has inventory risk before transferring the specified good or service, and has discretion in establishing prices for the specified good or service.
| (iii) | Contract liabilities |
|---|
Contract liabilities represents the portion of goods or services to be transferred to the customer for the contractual subscription term remaining as of the period-end date, the portion of goods to services to be transferred to the customer for performance and brand advertising invoicing in excess of delivery as of the period-end date and amounts received in advance of live entertainment events to be held as of the period-end date.
| (iv) | Investment in associates and joint ventures |
|---|
An associate is an entity over which the Company has significant influence and is neither a subsidiary nor a joint arrangement. The Company has significant influence when it has the power to participate in the financial and operating policy decisions of the associate but does not have control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the contractual arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The Company accounts for its investments in associates and joint ventures using the equity method.
8
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (iv) | Investment in associates and joint ventures (continued) |
| --- | --- |
Under the equity method, the Company’s investments in associates and joint ventures are initially recognized at cost, including transaction costs, and subsequently increased or decreased to recognize the Company’s share of net earnings or losses of the associates and joint ventures after any adjustments necessary to give effect to uniform accounting policies and for impairment losses after the initial recognition date. The Company’s share of earnings or losses of the associates and joint ventures are recognized in net loss during the period. Unrealized gains and losses on transactions between the Company and its associates and joint ventures are eliminated to the extent of the Company’s interest in the associates and joint ventures.
The Company assesses if there are any indicators of impairment of the carrying amount of the investments in associates and joint ventures at each reporting period. An impairment test is performed when there is objective evidence of impairment, such as significant adverse changes in the external environment in which the associates and joint ventures operates or a significant or prolonged decline in the fair value of the investment in associates and joint ventures below its carrying amount. An impairment loss is recorded when the recoverable amount becomes lower than the carrying amount.
| (v) | Share-based payments |
|---|
The Company has a stock option plan for directors, officers, employees and consultants. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. For employees and those performing employee like services, the fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. For non-employees, the fair value of each tranche is measured based on the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case, the Company measures their value based on the fair value of the equity instruments granted. Compensation expense is recognized over the tranche’s vesting period based on the number of awards expected to vest with the offset credited to contributed surplus. The number of awards expected to vest is reviewed quarterly with any impact being recognized immediately.
If and when stock options are exercised, consideration received is credited to share capital and the fair value attributed to these options is transferred from contributed surplus to share capital.
| (vi) | Income taxes and deferred taxes |
|---|
The income tax provision comprises current and deferred tax. Income tax is recognized in the consolidated statements of loss and comprehensive loss except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period and are expected to apply when the asset is realized or liability is settled. Deferred tax assets are recognized for deductible temporary differences, unused tax losses and other income tax deductions to the extent that it is probable the Company will have taxable income against which those deductible temporary differences, unused tax losses and other income tax deductions can be utilized. The extent to which deductible temporary differences, unused tax losses and other income tax deductions are expected to be realized is reassessed at the end of each reporting period.
In a business combination, temporary differences arise as a result of differences in the fair values of identifiable assets and liabilities acquired and their respective tax basis. Deferred tax assets and liabilities are recognized for the tax effects of these differences. Deferred tax assets and liabilities are not recognized for temporary differences arising from goodwill or from the initial recognition of assets and liabilities acquired in a transaction other than a business combination which do not affect either accounting or taxable income or loss.
9
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (vii) | Property and equipment |
| --- | --- |
Property and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statements of loss and comprehensive loss during the period in which they are incurred.
Depreciation is calculated at 20% of the declining balance for furniture and fixtures, 30% of the declining balance for computer equipment, 20% of the declining balance for production equipment and over the term of the lease for leasehold improvements. Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted, if required.
Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other gains and losses in the consolidated statements of loss and comprehensive loss.
| (viii) | Intangible assets |
|---|
Intangible assets with finite lives that are acquired separately are measured on initial recognition at cost, which comprises its purchase price plus any directly attributable costs of preparing the asset for its intended use. Following initial recognition, such intangible assets are carried at cost less any accumulated amortization on a straight-line basis over the following periods:
Schedule of Intangible Assets
| Game application and technology development | 0.5 - 1.5 years |
|---|---|
| Website content | 2 years |
| Sponsorship relationships | 2 - 6 years |
| Application and technology development | 0.25 - 2 years |
| Digital content | 2 years |
| Talent contracts | 3 years |
| Subscriber relationships | 2 - 10 years |
| Multi-channel network license | 10 years |
| Player contracts | Over the term of the contract including renewal options |
| Domain name | Indefinite life |
| Brand name | Indefinite life |
| Talent management brand | Indefinite life |
| Owned and operated content brand | Indefinite life |
Amortization expense is included in the consolidated statements of loss and comprehensive loss.
The estimated useful life and amortization method are reviewed annually, with the effect of any change in estimate being accounted for on a prospective basis.
| (ix) | Goodwill |
|---|
Goodwill represents the excess of the acquisition cost in a business combination over the fair value of the Company’s share of the identifiable net assets acquired. Goodwill is carried at cost less accumulated impairment losses.
10
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (x) | Impairment testing of goodwill, other intangible assets and property and equipment |
| --- | --- |
For purposes of assessing impairment under IFRS, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating unit). The Company has seven cash-generating units (“CGUs”) and goodwill is tested for impairment on an annual basis at the end of the fourth quarter or at an interim date when events or changes in the business environment (triggering events) would more likely than not reduce the fair value of a CGU below its carrying amount. Intangible assets that have indefinite useful lives are also tested for impairment at each reporting period. The Company assesses if there are any indicators of impairment of the carrying amount of goodwill and indefinite-life intangible assets at each reporting period. All other long-lived assets and finite life intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s or CGU’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to sell or value-in-use. Fair value less cost to sell is estimated as the arm’s length sale price between knowledgeable willing parties less costs of disposal. To determine the value-in-use, management estimates expected future cash flows from the CGU and determines a suitable pre-tax discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Company’s latest approved budget, adjusted as necessary to exclude the effects of future reorganizations and asset enhancements.
Discount factors have been determined for each CGU and reflect its risk profile as assessed by management.
Impairment losses for the CGU reduce first the carrying amount of any goodwill allocated to that CGU, with any remaining impairment loss charged pro rata to the other assets in the CGU. In allocating an impairment loss, the Company does not reduce the carrying amount of an asset below the highest of its fair value less costs to sell or its value-in-use and zero.
With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. An impairment charge is reversed if the assets’ recoverable amount exceeds its carrying amount only to the extent that the new carrying amount does not exceed the carrying value of the asset, had it not originally been impaired.
| (xi) | Financial instruments |
|---|
Financial assets
Recognition and initialmeasurement
The Company recognizes financial assets when it becomes party to the contractual provisions of the instrument. Financial assets are measured initially at their fair value plus, in the case of financial assets not subsequently measured at fair value through profit or loss, transaction costs that are directly attributable to their acquisition. Transaction costs attributable to the acquisition of financial assets subsequently measured at fair value through profit or loss are expensed in profit or loss when incurred.
Classification and subsequentmeasurement
On initial recognition, financial assets are classified as subsequently measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss. The Company determines the classification of its financial assets, together with any embedded derivatives, based on the business model for managing the financial assets and their contractual cash flow characteristics.
Financial assets are classified as follows:
| ● | Amortized cost - Assets that are held for collection of contractual cash flows where those cash<br>flows are solely payments of principal and interest are measured at amortized cost. Interest revenue is calculated using the effective<br>interest method and gains or losses arising from impairment, foreign exchange and derecognition are recognized in profit or loss.<br>Financial assets measured at amortized cost are comprised of cash, trade and other receivables and loans receivable. |
|---|
11
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (xi) | Financial instruments (continued) |
| --- | --- |
Financial assets (continued)
Classification and subsequentmeasurement (continued)
| ● | Fair value through other comprehensive income - Assets that are held for collection of contractual<br>cash flows and for selling the financial assets, and for which the contractual cash flows are solely payments of principal and<br>interest, are measured at fair value through other comprehensive income. Interest income is calculated using the effective interest<br>method and gains or losses arising from impairment and foreign exchange are recognized in profit or loss. All other changes in<br>the carrying amount of the financial assets are recognized in other comprehensive income. Upon derecognition, the cumulative gain<br>or loss previously recognized in other comprehensive income is reclassified to profit or loss. The Company does not hold any financial<br>assets measured at fair value through other comprehensive income. |
|---|---|
| ● | Mandatorily at fair value through profit or loss - Assets that do not meet the criteria to be measured<br>at amortized cost, or fair value through other comprehensive income, are measured at fair value through profit or loss. All interest<br>income and changes in the financial assets’ carrying amount are recognized in profit or loss. The Company does not hold any<br>financial assets mandatorily measured at fair value through profit or loss. |
| --- | --- |
| ● | Designated at fair value through profit or loss – On initial recognition, the Company may<br>irrevocably designate a financial asset to be measured at fair value through profit or loss in order to eliminate or significantly<br>reduce an accounting mismatch that would otherwise arise from measuring assets or liabilities, or recognizing the gains and losses<br>on them, on different basis. All interest income and changes in the financial assets’ carrying<br>amount are recognized in profit or loss. Financial assets designated at fair value through<br>profit or loss are comprised of investments. |
| --- | --- |
The Company measures all equity investments at fair value. Changes in fair value are recorded in profit or loss.
Business model assessment
The Company assesses the objective of its business model for holding a financial asset at a level of aggregation which best reflects the way the business is managed and information is provided to management. Information considered in this assessment includes stated policies and objectives.
Contractual cash flow assessment
The cash flows of financial assets are assessed as to whether they are solely payments of principal and interest on the basis of their contractual terms. For this purpose, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, the credit risk associated with the principal amount outstanding, and other basic lending risks and costs. In performing this assessment, the Company considers factors that would alter the timing and amount of cash flows such as prepayment and extension features, terms that might limit the Company’s claim to cash flows, and any features that modify consideration for the time value of money.
Impairment
The Company recognizes a loss allowance for the expected credit losses associated with its financial assets, other than financial assets measured at fair value through profit or loss. Expected credit losses are measured to reflect a probability-weighted amount, the time value of money, and reasonable and supportable information regarding past events, current conditions and forecasts of future economic conditions. The Company applies the simplified approach for trade receivables. Using the simplified approach, the Company records a loss allowance equal to the expected credit losses resulting from all possible default events over the assets’ contractual lifetime.
The Company assesses whether a financial asset is credit-impaired at the reporting date. Regular indicators that a financial instrument is credit-impaired include significant financial difficulties as evidenced through borrowing patterns or observed balances in other accounts and breaches of borrowing contracts such as default events or breaches of borrowing covenants. For financial assets assessed as credit-impaired at the reporting date, the Company continues to recognize a loss allowance equal to lifetime expected credit losses.
12
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (xi) | Financial instruments (continued) |
| --- | --- |
Financial assets (continued)
Impairment (continued)
For financial assets measured at amortized cost, loss allowances for expected credit losses are presented in the consolidated statements of financial position as a deduction from the gross carrying amount of the financial asset.
Financial assets are written off when the Company has no reasonable expectations of recovering all or any portion thereof.
Derecognition of financialassets
The Company derecognizes a financial asset when its contractual rights to the cash flows from the financial asset expire.
Financial liabilities
Recognition and initialmeasurement
The Company recognizes a financial liability when it becomes party to the contractual provisions of the instrument. At initial recognition, the Company measures financial liabilities at their fair value plus transaction costs that are directly attributable to their issuance, with the exception of financial liabilities subsequently measured at fair value through profit or loss for which transaction costs are immediately recorded in profit or loss.
Where an instrument contains both a liability and equity component, these components are recognized separately based on the substance of the instrument, with the liability component measured initially at fair value and the equity component assigned the residual amount.
Classification and subsequentmeasurement
Subsequent to initial recognition, all financial liabilities are measured at amortized cost using the effective interest rate method. Interest, gains and losses relating to a financial liability are recognized in profit or loss.
Derecognition of financialliabilities
The Company derecognizes a financial liability only when its contractual obligations are discharged, cancelled or expire.
| (xii) | Provisions |
|---|
Provisions represent liabilities of the Company for which the amount or timing is uncertain. Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Where material, provisions are measured at the present value of the expected expenditures to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
| (xiii) | Cash |
|---|
Cash comprises of cash held with financial institutions and cash held in trust.
| (xiv) | Loss per share |
|---|
Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares outstanding during the reporting period. Diluted loss per share is computed similarly to basic loss per share except that the weighted average number of shares outstanding is increased to include additional shares for the assumed exercise of stock options and vesting of restricted share units, if dilutive. The average number of shares is calculated by assuming that the proceeds upon exercise of stock options were used to acquire common shares at the average market price during the reporting period. For the years ended December 31, 2022 and 2021, potentially dilutive common shares issuable upon the exercise of stock options and vested restrictive share units were not included in the computation of loss per share because their effect was anti-dilutive.
13
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (xv) | Business combinations |
| --- | --- |
On the acquisition of a business, the acquisition method of accounting is used, whereby the purchase consideration is allocated to the identifiable assets and liabilities on the basis of fair value of the date of acquisition. Provisional fair values allocated at a reporting date are finalized as soon as the relevant information is available, within a period not to exceed twelve months from the acquisition date with retroactive restatement of the impact of adjustment to those provisional fair values effective as at the acquisition date. Incremental costs related to acquisitions are expensed as incurred.
When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9, Financial Instruments, or IAS 37, Provisions, Contingent Liabilitiesand Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss.
| (xvi) | Restricted Share Units |
|---|
The Company has a Share Unit Plan for directors, officers, employees and consultants. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Fair value of equity-settled restricted share units is measured at the grant date based on the market value of the Company’s common shares on that date. Compensation expense is recognized over the tranche’s vesting period based on the number of awards expected to vest with the offset credited to contributed surplus. The number of awards expected to vest is reviewed quarterly with any impact being recognized immediately.
When common shares are issued for restricted share units, the fair value attributed to these restricted share units is transferred from contributed surplus to share capital.
| (xvii) | Leases |
|---|
The Company assesses, at the inception of contract, whether it contains a lease. A contract is classified as a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company recognizes a right-of-use asset and lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises of the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any indirect costs incurred.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined using the same criteria as those for property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses and adjusted for certain remeasurements of the lease liability, if any.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the Company’s incremental borrowing rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payment arising from a change in an index or rate, or changes in assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.
14
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 3. | Significant accounting policies (continued) |
|---|---|
| (xvii) | Leases (continued) |
| --- | --- |
Short-term leases and leasesof low-value assets
The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
| (xviii) | Standards, amendments and interpretations issued but not yet effective |
|---|
The following amendments have been recently issued by the IASB. The Company intends to adopt these amendments when they become effective. Standards and amendments that are irrelevant or not expected to have a significant impact to the Company have been excluded.
IAS 1 – Presentation of Financial Statements (“IAS 1”)
In February 2021, the IASB issued amendments to IAS 1 to assist entities in determining which accounting policies to disclose in the financial statements. The amendments to IAS 1 require that an entity disclose its material accounting policies, instead of its significant accounting policies. The amendments apply to annual reporting periods beginning on or after January 1, 2023. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
In January 2020, IAS 1 was amended to provide a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. The amendments clarify that the classification of liabilities as current or non-current is based solely on a company’s right to defer settlement at the reporting date. The right needs to be unconditional and must have substance. The amendments also clarify that the transfer of a company’s own equity instruments is regarded as settlement of a liability, unless it results from the exercise of a conversion option meeting the definition of an equity instrument. The amendments are effective for annual periods beginning on January 1, 2023 and are to be applied retrospectively. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”)
In February 2021, the IASB issued “Definition of Accounting Estimates”, which amends IAS 8. The amendment replaces the definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty.” The amendment provides clarification to help entities to distinguish between accounting policies and accounting estimates. The amendments are effective for annual periods beginning on or after January 1, 2023. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
IAS 12 – Income Taxes (“IAS 12”)
In May 2021, the IASB issued “Deferred Tax related to Assets and Liabilities arising from a Single Transaction”, which amends IAS 12. The amendment narrows the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offset temporary differences. As a result, companies will need to recognize a deferred tax asset and deferred tax liability for temporary differences arising on initial recognition of transactions such as leases and decommissioning obligations. The amendments are effective for annual periods beginning on or after January 1, 2023 and are to be applied retrospectively. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
15
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 4. | Significant accounting judgments, estimates and uncertainties |
|---|
The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes to the consolidated financial statements. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to the accounting estimates are recognized in the period in which the estimates are revised. Significant areas requiring the Company to make estimates include goodwill impairment testing and recoverability of assets, identification and valuation of intangible assets acquired in business combinations, estimated useful lives of long-lived assets, income taxes, the fair value of share-based payments, provisions for expected credit losses, fair value measurement of an investment not quoted in an active market, recognition of revenue on a gross versus net basis and functional currency. These estimates and judgments are further discussed below.
| (i) | Goodwill impairment testing and recoverability of assets |
|---|
In evaluating impairment, the Company determines the recoverable amount based on an assessment of value-in-use using a discounted cash flow approach. In determining the estimated recoverable amount, the Company’s significant assumptions include expected future cash flows, terminal growth rates and discount rates. The approach uses cash flow projections based upon a financial forecast approved by management, covering a five-year period. Cash flows for the years thereafter are extrapolated using the estimated terminal growth rate. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ or change quickly, depending on economic conditions and other events.
| (ii) | Identification and valuation of intangible assets acquired in business combinations |
|---|
In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of intangible assets. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, management with assistance from an independent valuation expert develops the fair value using appropriate valuation techniques which are based on a forecast of the total expected future net cash flows. In determining the fair value of the intangible assets at the acquisition date, the Company’s significant assumptions include the future net cash flows, royalty rates, attrition rates and the discount rate applied.
Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last for one year from the acquisition date.
| (iii) | Estimated useful lives of long-lived assets |
|---|
Management reviews the useful lives of depreciable assets at each reporting date. Management assesses that the useful lives represent the expected utilization in terms of duration of the assets to the Company. Actual utilization, however, may vary due to technical obsolescence, particularly relating to website content and application and technology development.
| (iv) | Income taxes |
|---|
At the end of each reporting period, the Company assesses whether the realization of deferred tax benefits is sufficiently probable to recognize deferred tax assets. This assessment requires the exercise of judgment on the part of management with respect to, among other things, benefits that could be realized from available income tax strategies and future taxable income, as well as other positive and negative factors. The recorded amount of total deferred tax assets could be reduced if estimates of projected future taxable income and benefits from available income tax strategies are lowered, or if changes in current income tax regulations are enacted that impose restrictions on the timing or extent of the Company’s ability to utilize deferred tax benefits.
The Company’s effective income tax rate can vary significantly quarter-to-quarter for various reasons, including the mix and volume of business in lower income tax jurisdictions and in jurisdictions for which no deferred income tax assets have been recognized because management believed it was not probable that future taxable profit would be available against which income tax losses and deductible temporary differences could be utilized. The Company’s effective income tax rate can also vary due to the impact of foreign exchange fluctuations.
16
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 4. | Significant accounting judgments, estimates and uncertainties (continued) |
|---|---|
| (v) | Share-based payments |
| --- | --- |
The fair value of all share-based payments granted are determined using the Black-Scholes option pricing model which incorporates assumptions regarding risk-free interest rates, dividend yield, expected volatility, estimated forfeitures, and the expected life of options. The Company has a significant number of options outstanding and expects to continue to make option grants.
| (vi) | Provision for expected credit losses (“ECLs”) |
|---|
The Company performs impairment testing annually for trade receivables in accordance with IFRS 9. The ECL model requires considerable judgment, including consideration of how changes in economic factors affect ECLs, which are determined on a probability-weighted basis. IFRS 9 outlines a three-stage approach to recognizing ECLs which is intended to reflect the increase in credit risks of a financial instrument based on i) 12-month ECLs, or ii) lifetime ECLs. The Company measures provisions for ECLs at an amount equal to lifetime ECLs.
The Company applies the simplified approach to determine ECLs on trade receivables by using a provision matrix based on historical credit loss experiences. The historical results are used to calculate the run rates of default which are then applied over the expected life of the trade receivables, adjusted for forward looking estimates.
| (vii) | Fair value measurement of an investment not quoted in an active market |
|---|
The fair value of an investment that is not quoted in an active market requires the use of judgments and estimates by management. Management uses the valuation techniques and inputs outlined in Note 7 using all available data on the investment and market conditions at the date of these financial statements. Changes in these assumptions and conditions could result in changes of the reported fair value of this investment.
| (viii) | Recognition of revenue on a gross versus net basis |
|---|
The Company follows the guidance provided in IFRS 15, Revenue from Contracts with Customers, for determining whether the Company is the principal or an agent in arrangements with customers that involve another party that contributes to providing a specified service to a customer. In these instances, the Company determines whether it controls the promised specified service itself (as principal) or arranges for the specified service to be provided by another party (as an agent). This determination depends on the facts and circumstances of each arrangement and, in some instances, involves significant judgment. The most significant factors to consider include whether the Company controls the good or service immediately before it is transferred to the customer, is primarily responsible for fulfilling the promise to provide the specified good or service, has inventory risk before transferring the specified good or service, and has discretion in establishing prices for the specified good or service.
| (ix) | Functional currency |
|---|
The functional currency of the Company and each of its subsidiaries is the currency of the primary economic environment in which the entities operate. The Company has determined that the functional currency for the Company is Canadian dollars while the functional currencies of subsidiaries are United States dollars, UK pound Sterling or Euro. Assessment of functional currency involves certain judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions which determined the primary economic environment.
17
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions |
|---|---|
| (i) | FFS SPA |
| --- | --- |
As described in Note 1, on April 28, 2022, the Company, through its wholly-owned subsidiary, Steel Media Limited, completed the acquisition of FFS. Based in England and Wales, FFS owns the web property Fantasy Football Scout. Pursuant to the terms of the FFS SPA, the Company acquired all of the outstanding treasury shares of FFS in exchange for (i) a cash payment of $2,937,520 (GBP £1,825,000) on closing, which includes an agreed upon cash excess amount of $523,120 (GBP £325,000), which was paid in April 2022, (ii) a payment of $1,609,600 (GBP £1,000,000) on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, (iii) an earn-out cash payment $804,800 (GBP £500,000) on the first anniversary of closing, based on the renewal of a Fantasy Premier League agreement, subject to adjustments, and (iv) a cash payment of $80,480 (GBP £50,000) on the second anniversary of closing, subject to adjustments.
The earn-out cash payment of
$804,800 (GBP £500,000) will be paid if the Fantasy Premier League agreement, which expired on August 1, 2022, is renewed for an additional three-year period, on substantially similar or more favourable terms. The Fantasy Premier League agreement was renewed on August 1, 2022 for an additional three-period on substantially similar terms.
Following the acquisition, the Company controls FFS and for accounting purposes the Company is deemed the acquirer. The FFS SPA is accounted for in accordance with IFRS 3 as the operations of FFS constitute a business. As a result, the business combination is accounted for using the acquisition method of accounting and FFS’ identifiable net assets acquired are recognized at their fair value.
The FFS SPA has been accounted for at the fair value of the consideration provided to FFS, consisting of cash and the deferred payment liability. The Company’s deferred payment liability to the former shareholder of FFS is carried at fair value. Management uses current and historical operational results of the acquired business, estimates and probabilities of the Fantasy Premier League agreement renewal to estimate the earn-out payment, see Note 17.
The following table summarizes the recognized amounts of assets acquired, liabilities assumed, and consideration paid, at the date of acquisition:
Schedule of acquisition of assets and liabilities and consideration paid
| Fair Value | |||
|---|---|---|---|
| Fair value of identifiable net assets | |||
| Cash | $ | 1,748,602 | |
| Trade and other receivables | 85,031 | ||
| Intangible assets | 2,573,000 | ||
| Goodwill | 2,053,293 | ||
| Accounts payable and accrued liabilities | (193,030 | ) | |
| Contract liabilities | (347,722 | ) | |
| Income tax payable | (62,517 | ) | |
| Deferred tax liability | (603,098 | ) | |
| $ | 5,253,559 | ||
| Purchase Price | |||
| Consideration: | |||
| Cash^(a)^ | $ | 2,937,520 | |
| Deferred payment liability^(b)^ | 2,316,039 | ||
| $ | 5,253,559 | ||
| a. | Cash<br> consists of the $2,937,520 (GBP £1,825,000) amount due on closing. | ||
| --- | --- | ||
| b. | The<br> fair value of the deferred payment liability consists of the present value of the payment<br> of $1,609,600 (GBP £1,000,000) due on the first anniversary of closing, the present<br> value of earn-out cash payment of $804,800 (GBP £500,000) due on the first anniversary<br> of closing and the present value of the cash payment of $80,480 (GBP £50,000) due<br> on the second anniversary of closing, see Note 17. | ||
| --- | --- |
Trade receivables have been recorded at fair value which represent gross contractual amounts receivable. Goodwill represents intangible assets that cannot be measured directly such as brand name, subscriber and sponsorship relationships and website technology, and synergies expected to be achieved from integrating FFS into the Company’s existing business. Goodwill is not expected to be deductible for tax purposes.
18
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions (continued) |
|---|---|
| (ii) | Vedatis SPA |
| --- | --- |
As described in Note 1, on May 1, 2021, the Company completed the acquisition of Vedatis. Based in Lyon, France, Vedatis owns the web property Icy Veins. Pursuant to the terms of the Vedatis SPA, the Company acquired all of the outstanding common shares of Vedatis in exchange for i) a cash payment of Euro €3,500,000, subject to a Euro €100,000 target working capital adjustment, which was paid on April 28, 2021, (ii) the issuance of Euro €1,500,000 of common shares of the Company, for which 226,563 common shares were issued on May 4, 2021, (iii) a cash payment of Euro €1,250,000 on the first anniversary of closing which was paid to escrow on June 23, 2021, (iv) a payment of Euro €750,000 on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, and (v) an earn-out payment based on the performance of Vedatis.
The earn-out payment, subject to certain conditions, is equal to the sum of earnings before interest, taxes, depreciation and amortization for the best four consecutive quarters of the existing Vedatis business at the time of closing excluding new business generated or enhanced by the Company. The earn-out period is for four years following May 1, 2021. The Company has, at its option, the ability to settle the earn-out payment half in cash and half in common shares. The earn-out payment is to be paid no later than 60 days from the completion of the earn-out period.
Following the acquisition, the Company controls Vedatis and for accounting purposes the Company is deemed the acquirer. The Vedatis SPA is accounted for in accordance with IFRS 3 as the operations of Vedatis constitute a business. As a result, the business combination is accounted for using the acquisition method of accounting and Vedatis’ identifiable net assets acquired are recognized at their fair value.
The Vedatis SPA has been accounted for at the fair value of the consideration provided to Vedatis, consisting of cash, common shares, the deferred payment liability and the settlement of a pre-existing relationship. The Company’s deferred payment liability to the former shareholders of Vedatis is carried at fair value. Management uses current and historical operational results, estimates and probabilities of future earnings and discounted cash flows to estimate the earn-out payment, see Note 17.
The following table summarizes the recognized amounts of assets acquired, liabilities assumed and consideration paid, at the date of acquisition:
Schedule of acquisition of assets and liabilities and consideration paid
| Fair Value of identifiable net assets | ||
| Cash | 156,168 | |
| Trade and other receivables | 72,915 | |
| Property and equipment | 2,097 | |
| Intangible assets | 3,511,000 | |
| Goodwill | 9,372,025 | |
| Accounts payable and accrued liabilities | (599,981 | ) |
| Contract liabilities | (45,391 | ) |
| Income tax payable | (233,829 | ) |
| Deferred tax liability | (878,284 | ) |
| 11,356,720 | ||
| Purchase price | ||
| Consideration | ||
| Cash (a) | 7,006,067 | |
| Fair value of 226,563 common shares issued at 10.48 per share (b) | 2,374,380 | |
| Deferred payment liability (c) | 2,649,930 | |
| Settlement of pre-existing relationship (d) | (673,657 | ) |
| 11,356,720 |
All values are in US Dollars.
| a. | Cash<br> consists of the $7,130,507 (Euro €4,750,000) amount due on closing less a working<br> capital recovery of $124,440. |
|---|---|
| b. | The<br> fair value per share was measured to be $10.48 based on the closing price of the Company’s<br> shares on the TSX on the date of acquisition. |
| --- | --- |
19
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions (continued) |
|---|---|
| (ii) | Vedatis SPA (continued) |
| --- | --- |
| c. | The fair value of the deferred payment liability is the present value of the payment of $1,109,850<br>(Euro €750,000) due on the first anniversary of closing and the present value of estimated earn-out payable to the former<br>shareholders of Vedatis of $1,920,745 (Euro €1,297,976), see Note 17. |
| --- | --- |
| d. | The settlement of a pre-existing relationship consists of accounts payable due by the Company to<br>Vedatis with a fair value of $673,657 which was effectively settled on the date of acquisition. |
| --- | --- |
Trade receivables have been reflected at fair value which represent gross contractual amounts receivable. Goodwill represents intangible assets that cannot be measured directly such as brand name, subscriber relationships and website content, and synergies expected to be achieved from integrating Vedatis into the Company’s existing business. Goodwill is not expected to be deductible for tax purposes.
| (iii) | Tabwire EPA |
|---|
As described in Note 1, on June 21, 2021, the Company, through its wholly-owned subsidiary, Media US, completed the acquisition of Tabwire. Based in Chicago, Illinois, Tabwire is a technology company that gives gamers the ability to login directly to view their game data in real time. Pursuant to the term of the Tabwire EPA, the Company acquired all of the outstanding membership interests of Tabwire in exchange for i) a cash payment of USD $5,000,000, subject to an accounts receivable adjustment, which was paid on June 23, 2021, and (ii) the issuance of USD $6,000,000 of common shares of the Company, for which 790,094 common shares were issued on June 21, 2021.
Following the acquisition, the Company controls Tabwire and for accounting purposes the Company is deemed the acquirer. The Tabwire EPA is accounted for in accordance with IFRS 3 as the operations of Tabwire constitute a business. As a result, the business combination is accounted for using the acquisition method of accounting and Tabwire’s identifiable net assets acquired are recognized at their fair value.
The Tabwire EPA has been accounted for at the fair value of the consideration provided to Tabwire, consisting of cash, common shares and the settlement of a pre-existing relationship.
The following table summarizes the recognized amounts of assets acquired, liabilities assumed and consideration paid, at the date of acquisition:
Schedule of acquisition of assets and liabilities and consideration paid
| Fair Value of identifiable net assets | ||
| Cash | 6,506 | |
| Trade and other receivables | 76,647 | |
| Intangible assets | 3,304,000 | |
| Goodwill | 9,013,287 | |
| Accounts payable and accrued liabilities | (6,097 | ) |
| Contract liabilities | (2,388 | ) |
| Deferred tax liability | (941,970 | ) |
| 11,449,985 | ||
| Purchase price | ||
| Consideration | ||
| Cash (a) | 6,262,616 | |
| Fair value of 790,094 common shares issued at 6.63 per share (b) | 5,238,323 | |
| Settlement of pre-existing relationship (c) | (50,954 | ) |
| 11,449,985 |
All values are in US Dollars.
| a. | Cash<br> consists of the $6,143,500 (USD $5,000,000) amount due on closing and the accounts receivable<br> adjustment payable of $119,116. |
|---|---|
| b. | The<br> fair value per share was measured to be $6.63 based on the closing price of the Company’s<br> shares on the TSX on the date of acquisition. |
| --- | --- |
| c. | The<br> settlement of a pre-existing relationship consists of accounts payable due by the Company<br> to Tabwire with a fair value of $50,954 which was effectively settled on the date of<br> acquisition. |
| --- | --- |
20
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions (continued) |
|---|---|
| (iii) | Tabwire EPA (continued) |
| --- | --- |
Trade receivables have been reflected at fair value which represent gross contractual amounts receivable. Goodwill represents intangible assets that cannot be measured directly such as brand name, subscriber relationships and developed technology, and synergies expected to be achieved from integrating Vedatis into the Company’s existing business. Goodwill is not expected to be deductible for tax purposes.
| (iv) | Gameknot EPA |
|---|
As described in Note 1, on August 30, 2021, the Company, through its wholly-owned subsidiary, Media US, completed the acquisition of GameKnot. Based in Sausalito, California, GameKnot owns the web property GameKnot. Pursuant to the terms of the GameKnot EPA, the Company acquired all of the outstanding membership interest of GameKnot in exchange for i) a cash payment of USD $1,500,000 which was paid on August 30, 2021, (ii) the issuance of USD $750,000 of common shares of the Company, for which 165,425 common shares were issued on August 30, 2021 (iii) a payment of USD $500,000 on the six-month anniversary of closing which may be paid in cash or common shares at the option of the Company.
Following the acquisition, the Company controls GameKnot and for accounting purposes the Company is deemed the acquirer. The GameKnot EPA is accounted for in accordance with IFRS 3 as the operations of GameKnot constitute a business. As a result, the business combination is accounted for using the acquisition method of accounting and GameKnot’s identifiable net assets acquired are recognized at their fair value.
The GameKnot EPA has been accounted for at the fair value of the consideration provided to GameKnot, consisting of cash, common shares and the deferred payment liability. The Company’s deferred payment liability to the former owner of GameKnot is carried at fair value.
The following table summarizes the recognized amounts of assets acquired, liabilities assumed and consideration paid, at the date of acquisition:
Schedule of acquisition of assets and liabilities and consideration paid
| Fair Value of identifiable net assets | ||
| Cash | 9,513 | |
| Trade and other receivables | 19,119 | |
| Investments | 6,317 | |
| Intangible assets | 601,000 | |
| Goodwill | 3,111,023 | |
| Accounts payable and accrued liabilities | (8,077 | ) |
| Contract liabilities | (145,739 | ) |
| Deferred tax liability | (168,160 | ) |
| 3,424,996 | ||
| Purchase price | ||
| Consideration | ||
| Cash (a) | 1,890,450 | |
| Fair value of 165,425 common shares issued at 5.57 per share (b) | 921,417 | |
| Deferred payment liability (c) | 613,129 | |
| 3,424,996 |
All values are in US Dollars.
| a. | Cash<br> consists of the $1,890,450 (USD $1,500,000) amount due on closing. |
|---|---|
| b. | The<br> fair value per share was measured to be $5.57 based on the closing price of the Company’s<br> shares on the TSX on the date of acquisition. |
| --- | --- |
| c. | The<br> fair value of the deferred payment liability is the present value of the payment of $631,750<br> (USD $500,000) due on the six-month anniversary of closing, see Note 17. |
| --- | --- |
Trade receivables have been reflected at fair value which represent gross contractual amounts receivable. Goodwill represents intangible assets that cannot be measured directly such as brand name and subscriber relationships, and synergies expected to be achieved from integrating GameKnot into the Company’s existing business. Goodwill is not expected to be deductible for tax purposes.
21
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions (continued) |
|---|---|
| (v) | Addicting Games SPA |
| --- | --- |
As described in Note 1, on September 3, 2021, the Company, through its wholly-owned subsidiary, Media US, completed the acquisition of Addicting Games. Based in Los Angeles, California, Addicting Games is an innovator in casual gaming with a portfolio of casual games for desktop and mobile devices. Pursuant to the terms of the Addicting Games SPA, the Company acquired all of the outstanding common shares of Addicting Games in exchange for i) a cash payment of USD $10,000,000, subject to a working capital adjustment and other adjustments, of which USD $10,090,533 was paid in September (inclusive of estimated working capital and other adjustments), (ii) the issuance of USD $12,000,000 of common shares of the Company, for which 2,661,164 common shares were issued on September 3, 2021, (iii) a cash payment of USD $7,000,000 on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, and (iv) a payment of USD $3,800,000 on the second anniversary of closing which may be paid in cash or common shares at the option of the Company.
Following the acquisition, the Company controls Addicting Games and for accounting purposes the Company is deemed the acquirer. The Addicting Games SPA is accounted for in accordance with IFRS 3 as the operations of Addicting Games constitute a business. As a result, the business combination is accounted for using the acquisition method of accounting and Addicting Games’ identifiable net assets acquired are recognized at their fair value.
The Addicting Games SPA has been accounted for at the fair value of the consideration provided to Addicting Games, consisting of cash, common shares, the deferred payment liabilities and the settlement of a pre-existing relationship, which comprised the investment Enthusiast Gaming Properties Inc. (“Enthusiast Properties”) held in Addicting Games, see Note 7. The Company’s deferred payment liabilities to the former shareholders of Addicting Games and investment held in Addicting Games are carried at fair value.
The following table summarizes the recognized amounts of assets acquired, liabilities assumed and consideration paid, at the date of acquisition:
Schedule of acquisition of assets and liabilities and consideration paid
| Fair Value of identifiable net assets | ||
| Cash | 316,920 | |
| Trade and other receivables | 674,067 | |
| Prepaid expenses | 41,935 | |
| Property and equipment | 6,476 | |
| Right-of-use assets | 410,208 | |
| Intangible assets | 16,539,000 | |
| Goodwill | 28,947,665 | |
| Accounts payable and accrued liabilities | (411,057 | ) |
| Contract liabilities | (755,019) | |
| Income tax payable | (290,003) | |
| Current portion of lease liabilities | (133,533) | |
| Long-term lease liabilities | (284,773) | |
| Other long-term debt | (144,948) | |
| Deferred tax liability | (3,268,434 | ) |
| 41,648,504 | ||
| Purchase price | ||
| Consideration | ||
| Cash (a) | 12,477,901 | |
| Fair value of 2,661,164 common shares issued at 5.50 per share (b) | 14,636,402 | |
| Deferred payment liability (c) | 12,328,753 | |
| Settlement of pre-existing relationship (d) | 2,205,448 | |
| 41,648,504 |
All values are in US Dollars.
| a. | Cash<br> consists of the $12,631,330 (USD $10,090,533) amount due on closing less the estimated<br> working capital and other adjustment recoveries of $153,429. |
|---|---|
| b. | The<br> fair value per share was measured to be $5.50 based on the closing price of the Company’s<br> shares on the TSX on the date of acquisition. |
| --- | --- |
22
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions (continued) |
|---|---|
| (v) | Addicting Games SPA (continued) |
| --- | --- |
| c. | The fair value of the deferred payment liability is the present value of the payment of $8,762,600<br>(USD $7,000,000) due on the first anniversary of closing and the present value of the payment of $4,756,840 (USD $3,800,000) due<br>on the second anniversary of closing, see Note 17. |
| --- | --- |
| d. | The settlement of a pre-existing relationship consists of the investment Enthusiast Properties<br>held in Addicting Games with a fair value of $2,115,525 plus interest receivable of $89,923 which is effectively settled on the<br>date of acquisition, see Note 7. |
| --- | --- |
Trade receivables have been reflected at fair value which represent gross contractual amounts receivable. The other long-term debt has been reflected at fair value which represents the fair value of future cash outflows. Goodwill represents intangible assets that cannot be measured directly such as domain names, subscriber relationships and game application and technology development, and synergies expected to be achieved from integrating Addicting Games into the Company’s existing business. Goodwill is not expected to be deductible for tax purposes.
| (vi) | Outplayed MA |
|---|
As described in Note 1, on November 22, 2021, the Company, through its wholly-owned subsidiary, Media US, completed the acquisition of Outplayed. Based in Austin, Texas, Outplayed owns the web property U.GG, one of the largest League of Legends fan communities in the world. By combining a rigorous data science approach with a proprietary user centric experience, Outplayed provides actionable, data-driven insights supporting, educating, connecting, and engaging a monthly active user base. Pursuant to the terms of the Outplayed MA, the Company acquired all of the outstanding common shares of Outplayed in exchange for i) a cash payment of USD $7,500,000, subject to working capital and other adjustments, of which USD $7,216,958 was paid on November 23, 2021 (inclusive of estimated working capital and other adjustments), (ii) the issuance of 5,200,000 of common shares of the Company, for which 5,164,223 common shares were issued on December 31, 2021 and 35,770 common shares were issued on February 14, 2022, (iii) a payment of USD $8,500,000 on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, (iv) a payment of USD $8,500,000 on the second anniversary of closing which may be paid in cash or common shares at the option of the Company, (v) a first anniversary earn-out payment of USD $6,000,000 based on the performance of Outplayed, and (vi) a second anniversary earn-out payment of USD $6,000,000 based on the performance of Outplayed.
The earn-out payments, subject to certain conditions, will be paid if certain site traffic based targets are met in the first and second years of operations. The first anniversary earn-out period is for one year from the closing date and the second anniversary earn-out period is for one year from the end of the first anniversary earn-out period. The Company has, at its option, the ability to settle the earn-out payments in common shares. The first anniversary earn-out payment is to be paid no later than 30 days from the completion of the first anniversary earn-out period and the second anniversary earn-out payment is to be paid no later than 30 days from the completion of the second anniversary earn-out period.
Following the acquisition, the Company controls Outplayed and for accounting purposes the Company is deemed the acquirer. The Outplayed MA is accounted for in accordance with IFRS 3 as the operations of Outplayed constitute a business. As a result, the business combination is accounted for using the acquisition method of accounting and Outplayed’s identifiable net assets acquired are recognized at their fair value.
The Outplayed MA has been accounted for at the fair value of the consideration provided to Outplayed, consisting of cash, common shares and the deferred payment liabilities. The Company’s deferred payment liability to the former shareholders of Outplayed are carried at fair value. Management used current and historical operating results, estimates and probabilities of future site traffic to estimate the earn-out payments, see Note 17.
23
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions (continued) |
|---|---|
| (vi) | Outplayed MA (continued) |
| --- | --- |
The following table summarizes the recognized amounts of assets acquired, liabilities assumed and consideration paid, at the date of acquisition:
Schedule of acquisition of assets and liabilities and consideration paid
| Fair Value of identifiable net assets | ||
| Cash | 1,917,249 | |
| Trade and other receivables | 2,024,454 | |
| Prepaid expenses | 31,339 | |
| Right-of-use assets | 365,184 | |
| Intangible assets | 32,494,000 | |
| Goodwill | 37,844,194 | |
| Accounts payable and accrued liabilities | (225,978 | ) |
| Contract liabilities | (32,032) | |
| Current portion of lease liabilities | (185,495) | |
| Long-term lease liabilities | (204,294) | |
| Deferred tax liability | (6,395,405 | ) |
| 67,633,216 | ||
| Purchase price | ||
| Consideration | ||
| Cash (a) | 10,429,399 | |
| Fair value of 5,200,000 common shares issued at 5.07 per share (b) | 26,364,000 | |
| Deferred payment liability (c) | 30,839,817 | |
| 67,633,216 |
All values are in US Dollars.
| a. | Cash<br> consists of the $9,510,000 (USD $7,500,000) amount due on closing plus the estimated<br> working capital and other adjustments of $919,399. |
|---|---|
| b. | The<br> fair value per share was measured to be $5.07 based on the closing price of the Company’s<br> shares on the TSX on the date of acquisition. Pursuant to the round down clause in the<br> Outplayed MA, the total common shares issued were 7 common shares less than 5,200,000<br> common shares to be issued per the Outplayed MA. As at December 31, 2021, 35,770 consideration<br> common shares in the amount of $181,389 were to be issued which was included in accounts<br> payable and accrued liabilities. These common shares were issued on February 14, 2022. |
| --- | --- |
| c. | The<br> fair value of the deferred payment liability is the present value of the payment of $10,778,000<br> (USD $8,500,000) due on the first anniversary of closing, the present value of the payment<br> of $10,778,000 (USD $8,500,000) due on the second anniversary of closing, the present<br> value of the first earn-out payment of $7,608,000 (USD $6,000,000) and the present value<br> of the second earn-out payment of $7,608,000 (USD $6,000,000), see Note 17. |
| --- | --- |
Trade receivables have been reflected at fair value which represent gross contractual amounts receivable. Goodwill represents intangible assets that cannot be measured directly such as brand name, developed technology and subscriber relationships, and synergies expected to be achieved from integrating Outplayed into the Company’s existing business. Goodwill is not expected to be deductible for tax purposes.
For a pre-existing relationship between the Company and the Mergers and Acquisitions that is not extinguished on the business combination, such a relationship is considered effectively settled as part of the business combination even if it is not legally cancelled. At the acquisition date, it becomes an intercompany relationship and is eliminated upon consolidation.
The Mergers and Acquisitions are consistent with the Company’s targeted acquisition strategy of identifying value-enhancing independent gaming web and video properties that can enhance viewership base, data and analytics platform and pricing optimization strategy.
The
Company incurred transaction costs of $114,853 (December 31, 2021 - $1,490,463) relating to the Mergers and Acquisitions which are included in the consolidated statements of loss and comprehensive loss.
24
Enthusiast Gaming Holdings Inc.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022and 2021
(Expressed in Canadian Dollars)
| 5. | Mergers and acquisitions (continued) |
|---|
Since
the date of acquisition of FFS, revenue of $1,188,062 and net income of $364,430 have been included in the consolidated statements of loss and comprehensive loss for the year ended December 31, 2022. If the FFS acquisition had occurred on January 1, 2022, pro-forma revenue and net loss would have been $203,641,308 and $76,404,672 respectively for the year ended December 31, 2022.
Since
the date of acquisition of Vedatis, revenue of $129,270 and a net loss of $1,293,335 have been included in the consolidated statements of loss and comprehensive loss during the year ended December 31, 2021. Since the date of acquisition of Tabwire, revenue of $176,534 and a net loss of $170,391 have been included in the consolidated statements of loss and comprehensive loss during the year ended December 31, 2021. Since the date of acquisition of GameKnot, revenue of $168,866 and net income of $146,625 have been included in the consolidated statements of loss and comprehensive loss during the year ended December 31, 2021. Since the date of acquisition of Addicting Games, revenue of $2,765,343 and net income of $681,426 have been included in the consolidated statements of loss and comprehensive loss during the year ended December 31, 2021. Since the date of acquisition of Outplayed, revenue of $1,411,255 and net income of $960,160 have been included in the consolidated statements of loss and comprehensive loss during the year ended December 31, 2021. If the Vedatis, Tabwire, GameKnot, Addicting Games, and Outplayed acquisitions had occurred on January 1, 2021, pro-forma revenue and net loss would have been $177,223,858 and $50,708,448 respectively for the year ended December 31, 2021.
| 6. | Trade and other receivables |
|---|
A summary of trade and other receivables is as follows:
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Trade receivables (Note 23, 25) | $ | 31,894,090 | $ | 30,034,661 | ||
| HST and VAT receivables | 368,127 | 142,699 | ||||
| Other receivables (Note 10, 23) | 5,906,625 | 3,683,102 | ||||
| Expected credit loss provision (Note 25) | (300,735 | ) | (58,472 | ) | ||
| $ | 37,868,107 | $ | 33,801,990 | |||
| 7. | Investments | |||||
| --- | --- |
In
April 2019, Enthusiast Properties entered into a Senior Convertible Debenture Purchase Agreement to invest in Addicting Games, an innovator in casual gaming. Under the Senior Convertible Debenture Purchase Agreement, Enthusiast Properties invested USD $1,500,000 by way of a 3-year secured convertible debenture with interest accruing at 2% per annum. The convertible debenture and accrued interest can be converted into common shares of Addicting Games at the option of the Company based on a conversion price which is the lesser of the price of the common shares as valued in Addicting Games’ next equity raise or a liquidation event or by dividing USD $30,000,000 by the aggregate number of outstanding common shares, warrants and options.
The convertible debenture has been accounted for in accordance with IFRS 9, as a financial asset at fair value, with changes in fair value recognized in profit and loss as they arise at each subsequent reporting period.
The fair value of the convertible debenture was valued using a binomial model using a ‘with derivatives’ and ‘without derivatives’ approach. The ‘with derivatives’ approach fair values the convertible debenture with the conversion option. The ‘without derivatives’ approach fair values the convertible debenture by treating the debt component of the loan as a plain vanilla bond. The fair value of the debt portion was determined using the discounted cash flow method by discounting the expected cash flows using a risk-adjusted discount rate. The difference in fair values from the ‘with’ and ‘without’ approaches represents the fair value of the embedded derivative component (the conversion option). The ‘with’ and ‘without’ scenarios assumed the occurrence of i) a liquidity event, as well as, ii) a non-liquidity event, and considered the fair value of the conversion option to be the weighted average of these two values.
The Company acquired Addicting Games on September 3, 2021. The convertible debenture plus interest receivable was effectively settled on the date of acquisition, see Note 5. Historically, the fair value of the convertible debentures was determined assuming the occurrence of i) a liquidity event, as well as, ii) a non-liquidity event. As this is a step-acquisition under IFRS 3, the revaluation of the convertible debenture was performed as of September 3, 2021. As the Company has full knowledge of the upcoming acquisition of Addicting Games, the fair value under the no-liquidity event scenario was not required as the probability of a liquidity event was 100% as of the September 3, 2021 revaluation date.
25
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 7. | Investments (continued) |
|---|
The valuation of the investment included the following inputs for a liquidity event:
| September<br> 3, 2021 | |
|---|---|
| Liquidity<br> event probability | 100.00% |
| Exercise<br> price for conversion | USD<br> $15 |
| Time<br> to maturity | 0.01<br> years |
| Initial<br> stock price | USD<br> $15 |
| Volatility | 95.00% |
| Risk<br>free interest rate | 0.05% |
| Credit<br>spread | 262<br>bps |
| Risk adjusted rate | 2.66% |
| Discount for lack of marketability<br>(“DLOM”) | 14.00% |
| Synthetic<br> credit rating | B |
As at September 3, 2021, the expected liquidity event date was estimated to be September 3, 2021.
As
at September 3, 2021, the debt portion had been valued at $1,967,790 and the derivative portion had been valued at $147,735. The fair value of the long-term investment was $2,115,525. The loss from the change in the fair value of the long-term investment during the year ended December 31, 2021 of $444,764 is included in the consolidated statements of loss and comprehensive loss. The loss from the change in foreign exchange movements during the year ended December 31, 2021 of $45,811 is included in the foreign currency translation adjustment in the consolidated statements of loss and comprehensive loss.
A summary of the Company’s investments at December 31, 2022 and December 31, 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Guaranteed investment certificates | $ | 125,000 | $ | 131,342 |
| Total investments | $ | 125,000 | $ | 131,342 |
| 8. | Investment in associates and joint ventures | |||
| --- | --- | |||
| (i) | Investment in associates | |||
| --- | --- |
On August 30, 2019, pursuant to an investment agreement between Aquilini GameCo Inc. (“GameCo”) and Aquilini Properties LP (a former related party by nature of it being under the control or direction of the former Chairman of the Company), GameCo acquired 100 class B common shares of AIG eSports Canada Holdings Ltd. (“AIG Canada”) and GameCo eSports USA Inc. acquired a 25% non-voting participating interest in AIG eSports USA Intermediate Holdings, LLC (“AIG USA”). Collectively, AIG Canada and AIG USA own and manage professional esports teams in Canada and the United States. Aquilini Properties LP controls AIG Canada and AIG USA.
On
October 1, 2022, the Company made a capital contribution of $323,078 to AIG Canada through the settlement of trade receivables due from AIG eSports LP. GameCo, through the class B common shares acquired in AIG Canada, holds 25% of the limited partnership units of AIG eSports LP.
A summary of the Company’s investment in associates is as follows:
Changes in associates
| AIG Canada | AIG USA | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2021 | $ | 665,991 | $ | 360,919 | $ | 1,026,910 | |||
| Share of net loss from investment in associate | (3,138 | ) | (197,412 | ) | (200,550 | ) | |||
| Balance, December 31, 2021 | $ | 662,853 | $ | 163,507 | $ | 826,360 | |||
| Contributions | 323,078 | - | 323,078 | ||||||
| Share of net income from investment in associate | 760,117 | 528,240 | 1,288,357 | ||||||
| Balance, December 31, 2022 | $ | 1,746,048 | $ | 691,747 | $ | 2,437,795 |
26
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 8. | Investment in associates and joint ventures (continued) |
|---|---|
| (ii) | Investment in joint ventures |
| --- | --- |
On
July 7, 2021, the Company, through its wholly-owned subsidiary, Enthusiast Gaming Inc., entered into a joint venture with Toronto Star Newspapers Limited (“Torstar”) to create an original online news platform and community for gamers named AFK Media Partnership (“AFK”). The Company and Torstar each hold a 50% interest in this joint venture. The Company and Torstar have each invested $125,000 into AFK as startup capital.
A summary of the Company’s investment in AFK is as follows:
Investments in associates and AFK
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | - | |
| Contributions – cash | 125,000 | ||
| Share of net loss from investment in joint venture | (66,091 | ) | |
| Balance, December 31, 2021 | $ | 58,909 | |
| Share of net loss from investment in joint venture | (46,673 | ) | |
| Balance, December 31, 2022 | $ | 12,236 |
A summary of the Company’s investment in associates and joint ventures is as follows:
Investments in associates and joint ventures
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| AIG Canada | $ | 1,746,048 | $ | 662,853 |
| AIG USA | 691,747 | 163,507 | ||
| AFK | 12,236 | 58,909 | ||
| Total investment in associates and joint ventures | $ | 2,450,031 | $ | 885,269 |
| 9. | Property and equipment | |||
| --- | --- |
Schedule of changes in property, plant and equipment
| Furniture and<br><br> fixtures | Computer <br><br>equipment | Leasehold<br><br> improvements | Production <br><br>equipment | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cost | |||||||||||||||
| Balance, January 1, 2021 | $ | 183,094 | $ | 183,877 | $ | 87,207 | $ | 45,934 | $ | 500,112 | |||||
| Mergers and Acquisitions (Note 5) | 3,717 | 4,856 | - | - | 8,573 | ||||||||||
| Additions | - | 3,398 | - | - | 3,398 | ||||||||||
| Effect of movement in exchange rates | (566 | ) | (1,038 | ) | (288 | ) | (195 | ) | (2,087 | ) | |||||
| Balance, December 31, 2021 | $ | 186,245 | $ | 191,093 | $ | 86,919 | $ | 45,739 | $ | 509,996 | |||||
| Additions | 514 | 10,764 | - | - | 11,278 | ||||||||||
| Effect of movement in exchange rates | 8,729 | 10,706 | 4,625 | 3,125 | 27,185 | ||||||||||
| Balance, December 31, 2022 | $ | 195,488 | $ | 212,563 | $ | 91,544 | $ | 48,864 | $ | 548,459 | |||||
| Accumulated depreciation | |||||||||||||||
| Balance, January 1, 2021 | $ | 34,085 | $ | 78,848 | $ | 24,558 | $ | 7,771 | $ | 145,262 | |||||
| Depreciation | 33,712 | 52,812 | 17,053 | 12,808 | 116,385 | ||||||||||
| Effect of movement in exchange rates | 148 | 32 | 68 | 113 | 361 | ||||||||||
| Balance, December 31, 2021 | $ | 67,945 | $ | 131,692 | $ | 41,679 | $ | 20,692 | $ | 262,008 | |||||
| Depreciation | 30,645 | 28,412 | 17,558 | 12,419 | 89,034 | ||||||||||
| Effect of movement in exchange rates | 3,931 | 8,169 | 2,779 | 1,917 | 16,796 | ||||||||||
| Balance, December 31, 2022 | $ | 102,521 | $ | 168,273 | $ | 62,016 | $ | 35,028 | $ | 367,838 | |||||
| Net book value | |||||||||||||||
| Balance, December 31, 2021 | $ | 118,300 | $ | 59,401 | $ | 45,240 | $ | 25,047 | $ | 247,988 | |||||
| Balance, December 31, 2022 | $ | 92,967 | $ | 44,290 | $ | 29,528 | $ | 13,836 | $ | 180,621 |
27
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 10. | Intangibles |
|---|
Schedule of changes in intangible assets
| Domain<br> names | Application<br> & technology development & website content | Brand<br> name | Subscriber<br> & sponsorship relationships | Player<br> contracts | Multi<br> channel network license | Talent<br> management & owned & operated content brand | Talent<br> contracts & digital content | Game<br> application & technology development | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2021 | $ | 40,930,000 | $ | 3,250,922 | $ | 8,602,563 | $ | 6,832,646 | $ | 311,200 | $ | 10,749,000 | $ | 9,363,000 | $ | 5,507,000 | $ | - | $ | 85,546,331 | ||||
| Mergers and Acquisitions<br> (Note 5) | 9,779,000 | 13,684,000 | 25,928,000 | 1,070,000 | - | - | - | - | 5,988,000 | 56,449,000 | ||||||||||||||
| Effect<br> of movement in foreign exchange rates | 125,054 | 20,256 | 43,569 | 11,759 | - | - | - | - | 75,887 | 276,525 | ||||||||||||||
| Balance, December 31,<br> 2021 | $ | 50,834,054 | $ | 16,955,178 | $ | 34,574,132 | $ | 7,914,405 | $ | 311,200 | $ | 10,749,000 | $ | 9,363,000 | $ | 5,507,000 | $ | 6,063,887 | $ | 142,271,856 | ||||
| Mergers and Acquisitions<br> (Note 5) | - | 837,000 | 845,000 | 891,000 | - | - | - | - | - | 2,573,000 | ||||||||||||||
| Disposals | (1,955,000 | ) | (340,000 | ) | - | - | (311,200 | ) | - | - | - | - | (2,606,200 | ) | ||||||||||
| Effect<br> of movement in foreign exchange rates | 676,519 | 865,525 | 1,558,148 | 70,014 | - | - | - | - | 275,749 | 3,445,955 | ||||||||||||||
| Balance,<br> December 31, 2022 | $ | 49,555,573 | $ | 18,317,703 | $ | 36,977,280 | $ | 8,875,419 | $ | - | $ | 10,749,000 | $ | 9,363,000 | $ | 5,507,000 | $ | 6,339,636 | $ | 145,684,611 | ||||
| Accumulated amortization | ||||||||||||||||||||||||
| Balance, January 1, 2021 | $ | - | $ | 2,021,324 | $ | - | $ | 955,500 | $ | 311,200 | $ | 365,200 | $ | - | $ | 787,100 | $ | - | $ | 4,440,324 | ||||
| Amortization | - | 2,366,160 | - | 899,727 | - | 1,074,920 | - | 2,316,840 | 2,014,866 | 8,672,513 | ||||||||||||||
| Effect<br> of movement in foreign exchange rates | - | 7,282 | - | 1,008 | - | - | - | - | 12,134 | 20,424 | ||||||||||||||
| Balance, December 31, 2021 | $ | - | $ | 4,394,766 | $ | - | $ | 1,856,235 | $ | 311,200 | $ | 1,440,120 | $ | - | $ | 3,103,940 | $ | 2,027,000 | $ | 13,133,261 | ||||
| Amortization | - | 7,605,307 | - | 1,333,806 | - | 1,074,920 | - | 1,826,400 | 3,853,494 | 15,693,927 | ||||||||||||||
| Disposals | - | (340,000 | ) | - | - | (311,200 | ) | - | - | - | - | (651,200 | ) | |||||||||||
| Effect<br> of movement in foreign exchange rates | - | 311,890 | - | 24,828 | - | - | - | - | 204,467 | 541,185 | ||||||||||||||
| Balance,<br> December 31, 2022 | $ | - | $ | 11,971,963 | $ | - | $ | 3,214,869 | $ | - | $ | 2,515,040 | $ | - | $ | 4,930,340 | $ | 6,084,961 | $ | 28,717,173 | ||||
| Balance, December 31, 2021 | $ | 50,834,054 | $ | 12,560,412 | $ | 34,574,132 | $ | 6,058,170 | $ | - | $ | 9,308,880 | $ | 9,363,000 | $ | 2,403,060 | $ | 4,036,887 | $ | 129,138,595 | ||||
| Balance, December<br> 31, 2022 | $ | 49,555,573 | $ | 6,345,740 | $ | 36,977,280 | $ | 5,660,550 | $ | - | $ | 8,233,960 | $ | 9,363,000 | $ | 576,660 | $ | 254,675 | $ | 116,967,438 |
During the year ended December 31, 2022, the Company derecognized $311,200 of player contracts, which were fully amortized, for players no longer on the Company’s active roster.
During
the year ended December 31, 2022, the Company sold certain web properties for gross proceeds of $6,831,659 (USD $5,000,000) pursuant to an asset purchase agreement dated September 29, 2022. As of December 31, 2022, the Company has a promissory note receivable for $1,354,400 (USD $1,000,000) of the gross proceeds which is included in trade and other receivables. The promissory note is non-interest bearing and due by September 29, 2023. The Company derecognized $1,955,000 of domain names and $340,000 of application and technology development and website content, which were fully amortized, as a result of the asset sale. The Company recognized a gain on sale of intangible assets of $4,836,075, net of $40,584 of transaction costs, which is included in the consolidated statements of loss and comprehensive loss.
28
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 11. | Goodwill |
|---|
The following comprises the balance of goodwill by CGU. Goodwill arose through the acquisitions of (i) Luminosity on August 27, 2019; (ii) Enthusiast Properties on August 30, 2019; (iii) Steel Media Limited (“Steel Media”) on October 3, 2019; (iv) Omnia Media Inc. (“Omnia”) on August 30, 2020; (v) Vedatis on May 1, 2021; and (vi) Tabwire on June 21, 2021 (vii) GameKnot on August 30, 2021 (viii) Addicting Games on September 2, 2021, (ix) Outplayed on November 22, 2021 and (x) FFS on April 28, 2022.
In April 2019, Enthusiast Properties acquired 100% of the assets of The Sims Resource (“TSR”) from Generatorhallen AB and IBIBI HB. TSR is identified as a separate CGU from Enthusiast Properties based on the nature of the business and the assessment that TSR generates cash flows that are largely independent of the cash flows from other assets deployed in Enthusiast Properties. The Company has included Vedatis, Tabwire and GameKnot within the Enthusiast Properties CGU based on the nature of these businesses and the assessment that they generate cash flows that are not largely independent of the cash flows from other assets deployed in Enthusiast Properties. The Company has included FFS within the Steel Media CGU based on the nature of these businesses and the assessment that they generate cash flows that are not largely independent of the cash flows from other assets deployed in Steel Media.
A summary goodwill by CGU is as follows:
| Enthusiast Properties | TSR | Luminosity | Steel Media | Omnia | Addicting Games | Outplayed | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2021 | $ | 54,467,041 | $ | 20,898,598 | $ | 6,003,150 | $ | 1,890,627 | $ | 22,921,670 | $ | - | $ | - | $ | 106,181,086 | ||||
| Mergers and Acquisitions (Note 5) | 21,496,335 | - | - | - | - | 28,947,665 | 37,844,194 | 88,288,194 | ||||||||||||
| Effect of movement in foreign exchange rates | 299,900 | - | - | - | - | 334,749 | (6,270 | ) | 628,379 | |||||||||||
| Balance, December 31, 2021 | $ | 76,263,276 | $ | 20,898,598 | $ | 6,003,150 | $ | 1,890,627 | $ | 22,921,670 | $ | 29,282,414 | $ | 37,837,924 | $ | 195,097,659 | ||||
| Mergers and Acquisitions (Note 5) | - | - | - | 2,053,293 | - | - | - | 2,053,293 | ||||||||||||
| Goodwill impairment | - | - | - | - | (14,082,162 | ) | (17,199,124 | ) | - | (31,281,286 | ) | |||||||||
| Effect of movement in foreign exchange rates | 849,126 | - | - | 45,344 | - | 2,015,165 | 2,836,690 | 5,746,325 | ||||||||||||
| Balance, December 31, 2022 | $ | 77,112,402 | $ | 20,898,598 | $ | 6,003,150 | $ | 3,989,264 | $ | 8,839,508 | $ | 14,098,455 | $ | 40,674,614 | $ | 171,615,991 |
The Company performs its annual impairment tests at December 31 or at an interim date when events or changes in the
business environment (triggering events) would more likely than not reduce the fair value of a CGU below its carrying value. During the year ended December 31, 2022, the Company concluded that there were triggering events requiring an impairment assessment as of September 30, 2022 and December 31, 2022 due to overall macroeconomic conditions including but not limited to increasing interest rates, high inflation, and softening of the digital advertisement demand and spending due to uncertain market economic outlook. In addition, there was a decline in the Company’s share price resulting in market capital being lower than the net assets of the Company. The Company performed impairment testing as of September 30, 2022, and determined that impairment charges were necessary for the Omnia CGU of $14,082,162 (December 31, 2021 - $Nil) and the Addicting Games CGU of $17,199,124 (December 31, 2021 - $Nil) due to the overall macroeconomic conditions. The Company performed impairment testing as of December 31, 2022 and determined that no further impairment charges were necessary.
The Company determined the recoverable amount based on the value-in-use approach to assess the value of Enthusiast Properties, TSR, Luminosity, Steel Media, Omnia, Addicting Games, and Outplayed CGUs. The recoverable amount of the Company’s CGUs was estimated based on an assessment of their value-in-use using a discounted cash flow approach. The approach uses cash flow projections based upon a financial forecast approved by management and the Board of Directors, covering a five-year period. Cash flows for the years thereafter are extrapolated using the estimated terminal growth rate. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ or change quickly, depending on economic conditions and other events.
The Company has made certain assumptions in determining the expected future cash flows based on budgets approved by management and include management’s best estimate of expected market conditions. Accordingly, it is possible that future changes in assumptions may negatively impact future valuations of goodwill and the Company would be required to recognize an impairment loss.
29
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 11. | Goodwill (continued) |
|---|
At December 31, 2022, the following are key assumptions on which management based its determinations of the recoverable amount for goodwill based on each CGU’s value-in-use:
| Enthusiast Properties | TSR | Luminosity | Steel Media | Omnia | Addicting Games | Outplayed | |
|---|---|---|---|---|---|---|---|
| Average<br> revenue growth rates | 28.6% | 6.4% | 54.7% | 18.0% | 12.7% | 22.5% | 32.5% |
| Terminal<br> revenue growth rates | 3.0% | 3.0% | 3.0% | 3.0% | 3.0% | 3.0% | 3.0% |
| Pre-tax<br> discount rate | 23.1% | 25.0% | 23.8% | 23.8% | 27.3% | 25.9% | 22.3% |
At December 31, 2021, the following are key assumptions on which management based its determinations of the recoverable amount for goodwill based on each CGU’s value-in-use:
| Enthusiast Properties | TSR | Luminosity | Steel Media | Omnia | Addicting Games | Outplayed | |
|---|---|---|---|---|---|---|---|
| Average<br> revenue growth rates | 32.9% | 7.7% | 62.3% | 21.5% | 14.7% | 90.9% | 146.4% |
| Terminal<br> revenue growth rates | 3.0% | 3.0% | 3.0% | 3.0% | 3.0% | 3.0% | 3.0% |
| Pre-tax<br> discount rate | 17.6% | 25.2% | 17.4% | 20.4% | 25.9% | 20.3% | 23.3% |
The Company determined the revenue growth rate, the terminal revenue growth rate based on past performance and its expectations for market development. The pre-tax discount rates used reflect specific risks in relation to the CGU.
| 12. | Right-of-use assets and lease liabilities |
|---|
The
Company’s leased assets consist of office premises. When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using incremental borrowing rates of 4.20% to 5.00%.
A summary of right-of-use assets is as follows:
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | 2,848,400 | |
| Office lease additions - cost, mergers and acquisitions (Note 5) | 775,392 | ||
| Depreciation | (729,573 | ) | |
| Effect of movement in exchange rates | (8,557 | ) | |
| Balance, December 31, 2021 | $ | 2,885,662 | |
| Depreciation | (924,883 | ) | |
| Effect of movement in exchange rates | 139,217 | ||
| Balance, December 31, 2022 | $ | 2,099,996 |
A summary of lease liabilities is as follows:
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | 2,886,666 | |
| Office lease additions - finance cost, mergers and acquisitions (Note 5) | 808,095 | ||
| Payments | (802,013 | ) | |
| Accretion | 119,470 | ||
| Effect of movement in exchange rates | (1,871 | ) | |
| Balance, December 31, 2021 | $ | 3,010,347 | |
| Payments | (948,040 | ) | |
| Accretion | 105,496 | ||
| Effect of movement in exchange rates | 183,064 | ||
| Balance, December 31, 2022 | 2,350,867 | ||
| Current portion of lease liabilities | 872,429 | ||
| Long-term portion of lease liabilities | $ | 1,478,438 |
30
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 12. | Right-of-use assets and lease liabilities (continued) |
|---|
Note
25 provides a summary of undiscounted lease payments to be made as of the statement of financial position date. Variable lease payments during the year ended December 31, 2022, which are not included in lease liabilities are $247,968 (December 31, 2021
- $253,206). The total cash outflow for leases during the year ended December 31, 2022 is $1,196,008 (December 31, 2021 - $1,055,219).
| 13. | Accounts payable and accrued liabilities |
|---|
A summary of accounts payable and accrued liabilities is as follows:
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Accounts payable | $ | 23,404,129 | $ | 25,247,351 |
| Accrued liabilities | 9,419,191 | 9,143,870 | ||
| Net | $ | 32,823,320 | $ | 34,391,221 |
The Company, in the course of its normal operations, is subject to claims, lawsuits, and contingencies. Accruals are made in instances where it is probable that liabilities may be incurred and where such liabilities can be reasonably estimated.
| 14. | Long-term debt |
|---|---|
| (i) | The Facility |
| --- | --- |
Under
the terms of a loan facility agreement dated August 2, 2019, an arm’s length lender (the “Lender”) agreed to provide the Company with a loan of up to $20,000,000 (the “Facility”) comprising two advances: (i) an initial advance in an amount of up to $3,000,000 (the “Initial Advance”) at the request of the Company following satisfaction or waiver by the Lender of certain conditions precedent, and (ii) a further advance in an amount equal to the remaining difference between $20,000,000 and the amount of the Initial Advance (the “Further Advance”) at the request of the Company following satisfaction or waiver by the Lender of certain additional conditions precedent, including the completion of the acquisition of Enthusiast Properties. The Company received the Initial Advance and Further Advance, aggregating $20,000,000, during the year ended December 31, 2019. The Facility is secured by the Company’s assets.
The loan had a term (the “Term”) which expired on August 2, 2021, the date that was 24 months from the date of the Initial Advance (the “Maturity Date”). Interest (or standby fees at an equivalent rate in lieu thereof) accrued at a rate per annum that was equal to the prime rate plus 5.05% calculated on the aggregate amount of the Facility, compounded monthly, whether or not the conditions precedent were satisfied or the Facility was advanced. The Company had further agreed to pay the Lender a success fee at an amount that was equal to 4.1% per annum, payable monthly, calculated on the full amount of the Facility from the date of the Initial Advance.
Interest (and any such equivalent amount by way of standby fee) and the success fee were capitalized during the first 12 months of the Term and, commencing in August 2020, interest and the success fee were payable in cash on the last business day of each and every month until the Maturity Date.
The Company was entitled to prepay all or a part of the Facility at any time, from time to time, without bonus or penalty after the date that was twelve (12) months following the date of completion of the acquisition of Enthusiast Properties.
On August 30, 2020 the Company entered into an amending facility agreement (the “Amended Facility”). The Amended Facility extended the Facility expiry Term to September 6, 2022 and commencing in August 2021 principal repayments of $250,000 per month were payable every month until maturity, the remaining outstanding principal amount was to be repaid on September 6, 2022. The Company was entitled to prepay all or a part of the Facility at any time, from time to time, without bonus or penalty. The Company incurred an amendment fee in the amount of $200,000 in connection with the Amended Facility which was netted against the Facility long-term debt balance.
On November 27, 2020 the Company entered into an amending and restated facility agreement (the “Amended and Restated Facility”). The Amended and Restated Facility increased the total size of the loan and allowed for three loans, Facility A, B and C. Facility A and B were revolving loans up to $10,000,000 each. Facility C was a term loan in the amount of $10,000,000. Facility A and B were limited to an aggregate principal amount of $14,000,000.
The
maximum amount of Facility A was based on the aggregate of 85% eligible accounts receivable less the amount of Facility A then outstanding and less amounts payable and reserves for material subsidiaries. The Company incurred transaction cost of $17,500 in connection with the Amended and Restated Facility which was netted against the Facility long-term debt balance.
31
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 14. | Long-term debt (continued) |
|---|---|
| (i) | The Facility (continued) |
| --- | --- |
As
terms of the amended facilities were not substantially different from the terms of the Facility, the amendments were determined to be a modification of debt in accordance with IFRS 9. A loss on modification of long-term debt in the amount of $814,899 and $325,421 was recognized in the consolidated statements of loss and comprehensive loss the during the year ended December 31, 2020 related to the August 30, 2020 and November 27, 2020 amendments, respectively.
The
Amended and Restated Facility was amortized at an effective interest rate of 7.29% following the transaction costs and loss on modification of debt recognized pursuant to the amendments.
The Amended and Restated Facility was used for purposes of (i) working capital and (ii) to finance future acquisitions.
On
December 31, 2020 the Company was advanced $75,333 and $150,667 on Facility A and B respectively for a total advance of $226,000. As of December 31, 2020 the total principal balances of Facility A, B and C were $9,972,104, $2,856,579 and $10,000,000 respectively for a total principal balance of $22,828,682.
On
January 18, 2021 and February 3, 2021, the Company was further advanced $441,921 and $502,866 respectively on Facility A and B. On February 12, 2021, the Company repaid Facility A and B principal balances of $13,773,470.
The
Amended and Restated Facility was amortized at an effective interest rate of 7.28% following the repayment on February 12, 2021.
On
December 17, 2021, in conjunction with obtaining the Term Credit and Operating Credit, see Note 14(ii), the Company repaid the remaining principal balance then outstanding on Facility C of $9,250,000 and extinguished the Amended and Restated Facility. The Company incurred a prepayment fee of $166,438 relating to the extinguishment which is included in interest and accretion in the consolidated statements of loss and comprehensive loss.
During the year ended December 31, 2022, the Company recognized $Nil (December 31, 2021 - $847,322) of interest expense, $Nil (December 31, 2021 - $450,475) of success fee expense and $Nil (December 31, 2021 - $21,780) of accretion income which are included in interest and accretion in the consolidated statements of loss and comprehensive loss.
The following tables shows the movement of the Facility balance during the year:
Schedule of Long term debt facility balance
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | 22,901,956 | |
| Advances | 944,787 | ||
| Repayments | (13,773,470 | ) | |
| Principal repayments | (10,000,000 | ) | |
| Gain on repayment of long-term debt | (39,502 | ) | |
| Gain on settlement of long-term debt | (11,991 | ) | |
| Accretion | (21,780 | ) | |
| Balance, December 31, 2021 and 2022 | - | ||
| Current portion of long-term debt | - | ||
| Long-term debt | $ | - |
The
Amended and Restated Facility agreement contained certain covenants that the Company must comply with including maintaining a total consolidated equity of at least $20,000,000 and maintaining a minimum cash balance of $2,000,000. The Company was in compliance with these covenants during the year ended December 31, 2021.
32
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 14. | Long-term debt (continued) |
|---|---|
| (ii) | The Term Credit and Operating Credit |
| --- | --- |
Under the terms of a commitment letter (the “Commitment Letter”) dated December 3, 2021, an arm’s length lender (the “Bank”) agreed to provide the Company, as borrower, and certain Canadian and U.S. subsidiaries of the Company, as guarantors, with a non-revolving term facility (the “Term Credit”) and an operating line (the “Operating Credit”).
The
Term Credit consists of an authorized credit limit amount of $10,000,000, bearing interest at the Banker’s Acceptance fee equal to CDOR rate plus 7.5% per annum, with interest payable monthly. The Term Credit is repayable in up to 24 equal monthly instalments of principal based on an amortization period of 60 months, with final payment of the remaining principal then outstanding due 24 months from the initial drawdown date of advance. On December 17, 2021 the Company was advanced $10,000,000 which was used to extinguish the Facility, see Note 14(i). The Term Credit will be used for purposes of (i) working capital and (ii) to finance future acquisitions.
The Operating Credit consists of an authorized amount of $5,000,000, subject to a borrowing base, bearing interest at the greater of (i) the Bank’s prime lending rate plus 1.25%, and (ii) 2.45% per annum, with interest payable monthly. The Operating Credit is repayable no later than 24 months from the date of the satisfaction or waiver of conditions precedent. The Operating Credit will be used for purposes of (i) general operating requirement, and (ii) to finance future acquisitions.
The aggregate of all advances under the Operating Credit and Bank credit cards are not to exceed the lesser of (i) the Operating Credit, and (ii) the borrowing base. The borrowing base is based on a percentage of eligible accounts receivable less certain accounts payable for material subsidiaries of the Company.
Subject to the Bank’s approval, the Company can exercise an option to extend the maturity date of both the Term Credit and Operating Credit for an additional 12-month period. The Term Credit and Operating Credit are secured by substantially all of the assets of the Company and the guarantor subsidiaries. The Company will be entitled to prepay all or part of the Term Credit and Operating Credit at any time with penalty.
During
the year ended December 31, 2021, the Company received Term Credit advances of $10,000,000 and incurred transaction cost of $325,183 relating to the Commitment Letter. The Term Credit under the Commitment Letter is amortized at an effective interest rate of 10.18% following the transaction cost recognized.
On September 12, 2022, the Company entered into an amendment to commitment letter (the “Amended Commitment Letter”) which increased the total amount of the Term Credit to a maximum amount of $20,000,000. On September 16, 2022, the Company was advanced an incremental $10,000,000 pursuant to the Amended Commitment Letter. The Company incurred transaction costs of $241,872 in connection with the Amended Commitment Letter.
As
the terms of the Amended Commitment Letter were substantially different from the terms of the Commitment Letter, the amendment is determined to be derecognition of debt in accordance with IFRS 9. A loss on derecognition of long-term debt in the amount of $482,282 is recognized in the consolidated statements of loss and comprehensive loss during the year ended December 31, 2022.
The
Term Credit under the Amended Commitment Letter is amortized at an effective interest rate of 11.08% following the transaction costs and loss on derecognition of debt recognized pursuant to the amendment.
As of December 31, 2021 and December 31, 2022, no amounts were drawn upon on the Operating Credit.
During
the year ended December 31, 2022, the Company recognized $1,199,267 (December 31, 2021 – $30,467) of interest expense and $97,586 (December 31, 2021 – $7,050) of accretion expense which are included in interest and accretion in the consolidated statements of loss and comprehensive loss.
On March 21, 2023, the Company received notice of the Bank's approval of the Company's option to extend the maturity date of the Term Credit and Operating Credit for an additional 12-month period ending December 31, 2024, see Note 28.
33
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 14. | Long-term debt (continued) |
|---|---|
| (ii) | The Term Credit and Operating Credit (continued) |
| --- | --- |
The following tables shows the movement of the Term Credit balance during the year:
Schedule of term credit balance
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | - | |
| Advances | 10,000,000 | ||
| Transaction costs | (325,183 | ) | |
| Accretion | 7,050 | ||
| Balance, December 31, 2021 | $ | 9,681,867 | |
| Advances | 10,000,000 | ||
| Repayments | (2,588,238 | ) | |
| Accretion | 97,586 | ||
| Transaction costs | (241,872 | ) | |
| Loss on derecognition of long-term debt | 482,282 | ||
| Balance, December 31, 2022 | 17,431,625 | ||
| Current portion of long-term debt | 17,431,625 | ||
| Long-term debt | $ | - |
The Amended Commitment Letter contains certain covenants that the Company must comply with, including (i) maintaining a minimum funded debt to gross profit ratio, which varies by quarter, (ii) at all times, a cash runway ratio of a minimum of 4 months, tested quarterly, until the quarter ending March 31, 2023, and then a cash runway ratio of a minimum of 6 months, tested quarterly, until the quarter ending December 31, 2023, and (iii) beginning December 31, 2023, a minimum funded debt to EBITDA ratio of no more than 4.0x, calculated based on the trailing 12 months and tested quarterly. The Company was in compliance with the applicable covenants during the year ended December 31, 2022.
| 15. | Other long-term debt |
|---|
Upon the acquisition of Addicting Games (Note 5), the Company obtained a USD $150,000 United States of America Small Business Administration loan (“SBA Loan”). The SBA Loan has a term which is thirty years from the date of the initial advance, expiring July 2, 2050. The SBA loan bears interest at 3.75% per annum, is repayable in monthly installment payments until maturity of USD $731, which includes principal and interest, the remaining outstanding principal amount will be repaid on July 2, 2050. The SBA Loan is secured by Addicting Games’ assets.
The
SBA Loan was included in Addicting Games’ identifiable net assets acquired at an initial fair value of $144,948 based on a discounted valuation using a 7.10% discount rate. The SBA Loan is being amortized at an effective interest rate of 7.10%.
The following table shows the movement of the SBA Loan during the year:
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | - | |
| Initial fair value of other long-term debt (Note 5) | 144,948 | ||
| Accretion | 3,424 | ||
| Payments | (5,561 | ) | |
| Effect of movement in exchange rates | 4,634 | ||
| Balance, December 31, 2021 | $ | 147,445 | |
| Accretion | 11,089 | ||
| Payments | (12,871 | ) | |
| Effect of movement in exchange rates | 10,072 | ||
| Balance, December 31, 2022 | 155,735 | ||
| Current portion of other long-term debt | 10,891 | ||
| Other long-term debt | $ | 144,844 |
34
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 16. | Convertible debentures |
|---|
On
November 8, 2018, Enthusiast Properties issued convertible debenture units (the “Debenture Units”) for total gross proceeds of $9,000,000.
Each Debenture Unit, issued at a price of $1,000, was comprised of one unsecured convertible debenture (each a “Debenture” and collectively, the “Debentures”), having a principal amount of $1,000 and accruing interest at 9% per annum, payable semi-annually until maturity, and 166 common share purchase warrants of the Company (each, a “Debenture Warrant”). Each Debenture was convertible into shares of the Company at a conversion price of $3.03 per common share (the “Conversion Price”), subject to acceleration in certain events. The Debentures matured on December 31, 2021. Each Debenture Warrant entitles the holder to acquire one share at a price of $3.79 per share for a period of two years, subject to acceleration in certain events. The Debentures and the Debenture Warrants contain customary anti-dilution provisions. The Company also issued 540 Debenture Units to the brokers as part of the transaction. If the brokers subscribed for the Debenture Units, 89,640 warrants would be issued. The brokers did not subscribe for the Debenture Units and they expired unexercised on November 8, 2020.
Beginning on March 9, 2019, the Company may, at its option, require the conversion of the then outstanding principal amount of the Debentures (plus accrued and unpaid interest thereon) at the Conversion Price on not less than 30 days’ notice, should the daily volume-weighted average trading price of the shares of the Company be greater than $4.55 for each of seven consecutive trading days, ending five trading days prior to the applicable date.
The Company may accelerate the expiry date of the then outstanding Debenture Warrants on not less than 30 days’ notice, should the volume-weighted average trading price of the shares be greater than $5.68 for the twenty consecutive trading days, ending five trading days prior to the applicable date.
The
fair value of the convertible debentures on the date of the acquisition of Enthusiast Properties was determined to be $6,761,663 measured using a market rate of 13.0% for a similar unsecured debt without the conversion feature. The 1,495,442 warrants issued previously were valued on the date of the acquisition of Enthusiast Properties as consideration in the amount of $2,056,130. The convertible debentures were amortized at an effective interest rate of 22.82%.
In
December 2020, debenture holders converted $400,000 of convertible debentures into 136,649 common shares of the Company. Between January 5, 2021 and January 21, 2021 debenture holders converted $2,600,000 of convertible debentures into 857,180 common shares of the Company. On January 21, 2021, the Company issued notice to the holders of the convertible debentures to exercise the Company’s option to convert the outstanding convertible debentures into common shares of the Company. Through the notice, $6,000,000 of convertible debentures were converted into 1,978,109 common shares of the Company on January 27, 2021.
During the year ended December 31, 2022, the Company recognized $Nil (December 31, 2020 - $53,051) of interest expense and $Nil (December 31, 2020 - $80,504) of accretion expense which is included in interest and accretion in the consolidated statements of loss and comprehensive loss.
The following tables shows the movement of the convertible debenture balance during the year:
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | 7,546,453 | |
| Conversion to equity | (7,626,957 | ) | |
| Accretion | 80,504 | ||
| Balance, December 31, 2021 and 2022 | $ | - |
35
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 17. | Deferred payment liability |
|---|
The deferred payment liability relates to the acquisitions of (i) Steel Media on October 3, 2019, (ii) Vedatis on May 1, 2021, (iii) GameKnot on August 30, 2021, (iv) Addicting Games on September 3, 2021, (v) Outplayed on November 22, 2021, and (vi) FFS on April 28, 2022.
| (i) | Steel Media deferred payment liability |
|---|
The
Steel Media deferred payment liability consisted of the present value of a USD $1,000,000 payment (the “Steel Media Deferred Payment”) to be paid on October 3, 2020 and the present value of the earn-out payment (the “Steel Media Earn-Out Payment”) of USD $500,000 expected to be paid based on the performance of Steel Media by April 15, 2022.
The Company had, at its option, the ability to settle the Steel Media Deferred Payment either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the five trading days immediately prior to October 3, 2020. The Company also had, at its option, the ability to settle USD $500,000 of the Steel Media Earn-Out Payment either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the five trading days immediately prior to the date that the amount of any Steel Media Earn-Out Payment was conclusively determined.
The
expected Steel Media Earn-Out Payment was calculated on a dollar-for-dollar basis to the extent the average annualized normalized gross revenue of Steel Media for the period from January 1, 2020 to December 31, 2021 exceeded USD $2,500,000. The maximum Steel Media Earn-Out Payment would not exceed USD $500,000.
The Steel Media Deferred Payment was included in Steel Media’s total purchase price consideration at an initial fair value of $1,211,818 based on a discounted valuation using a 10.00% discount rate. The Steel Media Earn-Out Payment was included in Steel Media’s total purchase price consideration at an initial fair value of $470,625 based on a discounted valuation using a 13.97% discount rate and an expectation that payment of the full earn-out of USD $500,000 is probable.
The Steel Media Deferred Payment and Steel Media Earn-Out Payment were amortized at an effective interest rate of 9.54% and 13.15% respectively.
Between
October 16 and November 2, 2020, $659,832
(USD $500,000
)
of the Steel Media Deferred Payment liability was paid by the Company. On January 20, 2021, the remaining Steel Media Deferred Payment liability of $632,800 (USD $500,000) was settled by the Company through the issuance of 429,354 common shares of the Company through the exercise of the Company’s option (Note 19).
During the year ended December 31, 2022, the Steel Media Earn-Out Payment was determined to be $461,891 (USD $369,631) resulting in gain on revaluation of deferred payment liability of $149,399 (December 31, 2021 - $Nil). On April 29, 2022, the Company settled the Steel Media Earn-Out Payment through a cash payment of $472,833 (USD $369,631).
The following table shows the movement of the Steel Media deferred payment liability during the year:
| Steel Media<br> <br>Deferred<br> <br>Payment | Steel Media<br> <br>Earn-Out<br> <br>Payment | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2021 | $ | 636,600 | $ | 529,124 | $ | 1,165,724 | |||
| Accretion | - | 77,415 | 77,415 | ||||||
| Payment – shares | (632,800 | ) | - | (632,800 | ) | ||||
| Effect of movement in exchange rates | (3,800 | ) | (6,031 | ) | (9,831 | ) | |||
| Balance, December 31, 2021 | $ | - | $ | 600,508 | $ | 600,508 | |||
| Accretion | - | 20,698 | 20,698 | ||||||
| Payment – cash | - | (472,833 | ) | (472,833 | ) | ||||
| Gain on revaluation of deferred payment liability | - | (149,399 | ) | (149,399 | ) | ||||
| Effect of movement in exchange rates | - | 1,026 | 1,026 | ||||||
| Balance, December 31, 2022 | - | - | - | ||||||
| Current portion of deferred payment liability | - | - | - | ||||||
| Long-term portion of deferred payment liability | $ | - | $ | - | $ | - |
36
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 17. | Deferred payment liability (continued) |
|---|---|
| (ii) | Vedatis deferred payment liability |
| --- | --- |
The
Vedatis deferred payment liability consists of the present value of a Euro €750,000 payment (the “Vedatis Deferred Payment”) to be paid on May 1, 2022 and the present value of the estimated earn-out payment (the “Vedatis Earn-Out Payment”) expected to be paid based on the performance of Vedatis by August 29, 2025.
The Vedatis Earn-Out Payment, subject to certain conditions, is equal to the sum of earnings before interest, taxes, depreciation and amortization for the best four consecutive quarters of the existing Vedatis business at the time of closing excluding new business generated or enhanced by the Company. The earn-out period is for four years following May 1, 2021.
The
Company had, at its option, the ability to settle the Vedatis Deferred Payment of Euro €750,000 either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the two trading days immediately prior to May 1, 2022. On June 2, 2022, the Vedatis Deferred Payment has been settled by the Company issuing 348,852 common shares of the Company through the exercise of the Company’s option (Note 19).
The Company has, at its option, the ability to settle the Vedatis Earn-Out Payment half in cash and half in common shares, the share payment portion will be settled by the allotment and issuance of such number of common shares determined by the volume weighted average price for the two trading days immediately prior to May 1, 2025.
The Company uses Monte-Carlo simulation valuation techniques to estimate the net present value of the Vedatis Earn-Out Payment. The cash portion and equity portion are present valued separately based on the outcomes of the Monte-Carlo simulation. The Vedatis Earn-Out Payment is revalued each reporting period with changes in fair value of the Vedatis Earn-Out Payment recorded in the consolidated statements of loss and comprehensive loss.
The Vedatis Deferred Payment was included in Vedatis’ total purchase price consideration at an initial fair value of $1,047,028 based on a discounted valuation using a 6% discount rate. The Vedatis Earn-Out Payment was included in Vedatis’ total purchase price consideration at an initial fair value of $1,602,902 based on a discounted valuation using an 8.16% and 0.78% discount rate for the cash settled and equity settled portion, respectively, and an expectation that a Vedatis Earn-Out Payment of $1,920,745 is probable. The Vedatis Deferred Payment, upon initial valuation, was amortized at an effective interest rate of 5.86% and the cash portion of the Vedatis Earn-Out Payment was amortized at an effective interest rate of 8.19%.
On December 31, 2022, the Vedatis Earn-Out Payment was revalued at $1,377,764 based on a discounted valuation using a 11.01% and 3.68% discount rate for the cash settled and equity settled portion, respectively, and an expectation that a Vedatis Earn-Out Payment of $1,667,515 is probable. Following the December 31, 2022 revaluation, the cash portion of the Vedatis Earn-Out Payment is amortized at an effective interest rate of 11.06% (December 31, 2021 – 9.83%).
The fair value of the Vedatis Earn-Out Payment at year end was calculated using the following inputs:
| December 31, 2022 | December<br> 31, 2021 | |
|---|---|---|
| Payment<br>date<br><br> <br>Time<br>to maturity | August29, 2025<br><br> <br>2.66years | August<br>29, 2025<br><br> <br>3.66<br>years |
| Required<br> metric risk premium | 21.75% | 21.75% |
| EBITDA<br> volatility | 15.00% | 17.00% |
| Senior<br> credit rating | B- | B- |
| Earn-out<br> payment credit rating | CCC+ | CCC+ |
| Drift<br> rate | 3.73% | 1.15% |
| Discount<br> rate (risk free rate) for equity-based payment | 3.68% | 1.16% |
| Discount<br>rate (risk adjusted rate) for cash payment<br><br> <br>Discount<br>rate for lack of marketability | 11.01%<br><br> <br>Nil% | 9.79%<br><br> <br>Nil% |
37
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 17. | Deferred payment liability (continued) |
|---|---|
| (ii) | Vedatis deferred payment liability (continued) |
| --- | --- |
The following table shows the movement of the Vedatis deferred payment liability during the year:
| Vedatis<br> <br>Deferred<br> <br>Payment | Vedatis<br> <br>Earn-Out<br> <br>Payment | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2021 | $ | - | $ | - | $ | - | |||
| Initial fair value of deferred payment liability (Note 5) | 1,047,028 | 1,602,902 | 2,649,930 | ||||||
| Accretion | 41,705 | 39,830 | 81,535 | ||||||
| Loss on revaluation of deferred payment liability | - | 181,707 | 181,707 | ||||||
| Effect of movement in exchange rates | (29,944 | ) | (50,103 | ) | (80,047 | ) | |||
| Balance, December 31, 2021 | $ | 1,058,789 | $ | 1,774,336 | $ | 2,833,125 | |||
| Accretion | 21,117 | 64,110 | 85,227 | ||||||
| Payment – shares | (1,013,400 | ) | - | (1,013,400 | ) | ||||
| Gain on revaluation of deferred payment liability | - | (472,381 | ) | (472,381 | ) | ||||
| Effect of movement in exchange rates | (66,506 | ) | 11,699 | (54,807 | ) | ||||
| Balance, December 31, 2022 | - | 1,377,764 | 1,377,764 | ||||||
| Current portion of deferred payment liability | - | - | - | ||||||
| Long-term portion of deferred payment liability | $ | - | $ | 1,377,764 | $ | 1,377,764 | |||
| (iii) | GameKnot deferred payment liability | ||||||||
| --- | --- |
The
GameKnot deferred payment liability consisted of the present value of a USD $500,000 six-month anniversary payment (the “GameKnot Deferred Payment”) to be paid on February 28, 2022.
The Company had, at its option, the ability to settle the GameKnot Deferred Payment either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the ten trading days prior to August 30, 2021. The GameKnot Deferred Payment was included in GameKnot’s total purchase price consideration at an initial fair value of $613,129 based on a discounted valuation using a 6.00% discount rate. The GameKnot Deferred Payment was amortized at an effective interest rate of 6.01%.
On
February 28, 2022, the GameKnot Deferred Payment has been settled by the Company issuing 111,267 common shares of the Company through the exercise of the Company’s option (Note 19).
The following table shows the movement of the GameKnot deferred payment liability during the year:
| GameKnot<br><br> <br>Deferred Payment | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | - | |
| Initial fair value of deferred payment liability (Note 5) | 613,129 | ||
| Accretion | 12,490 | ||
| Effect of movement in exchange rates | 2,162 | ||
| Balance, December 31, 2021 | $ | 627,781 | |
| Accretion | 6,111 | ||
| Payment – shares | (634,900 | ) | |
| Effect of movement in exchange rates | 1,008 | ||
| Balance, December 31, 2022 | - | ||
| Current portion of deferred payment liability | - | ||
| Long-term portion of deferred payment liability | $ | - |
38
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 17. | Deferred payment liability (continued) |
|---|---|
| (iv) | Addicting Games deferred payment liability |
| --- | --- |
The
Addicting Games deferred payment liability consisted of the present value of a USD $7,000,000 first anniversary payment (the “Addicting Games First Anniversary Deferred Payment”) to be paid on September 3, 2022 and the present value of a USD $3,800,000 second anniversary payment (the “Addicting Games Second Anniversary Deferred Payment”) to be paid on September 3, 2023 (collectively the “Addicting Games Deferred Payment”).
The Company had, at its option, the ability to settle the Addicting Games Deferred Payment either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the ten trading days prior to the payment due dates.
The
Addicting Games First Anniversary Deferred Payment was included in Addicting Games’ total purchase price consideration at an initial fair value of $8,181,699 based on a discounted valuation using a 7.10% discount rate. The Addicting Games Second Anniversary Deferred Payment was included in Addicting Games’ total purchase price consideration at an initial fair value of $4,147,054 based on a discounted valuation using a 7.10% discount rate.
The Addicting Games First Anniversary Deferred Payment and Addicting Games Second Anniversary Deferred Payment were amortized at an effective interest rate of 6.88% and 6.88% respectively.
On
May 25, 2022, the Company and former shareholders of Addicting Games entered into an amending agreement to the Addicting Games SPA to satisfy the settlement of the Addicting Games Deferred Payment by the Company issuing 4,320,000 common shares of the Company. On June 2, 2022, the Addicting Games Deferred Payment has been settled by the Company issuing 4,319,996 common shares of the Company (Note 19) resulting on a loss on settlement of deferred payment liability of $248,358. The common shares issued were 4 common shares less than 4,320,000 common shares to be issued due the elimination of fractional common shares.
The following table shows the movement of the Addicting Games deferred payment liability during the year:
| Addicting Games Deferred Payment | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | - | |
| Initial fair value of deferred payment liability (Note 5) | 12,328,753 | ||
| Accretion | 280,700 | ||
| Effect of movement in exchange rates | 159,266 | ||
| Balance, December 31, 2021 | $ | 12,768,719 | |
| Accretion | 372,915 | ||
| Payment - shares | (13,305,588 | ) | |
| Loss on settlement of deferred payment liability | 248,358 | ||
| Effect of movement in exchange rates | (84,404 | ) | |
| Balance, December 31, 2022 | - | ||
| Current portion of deferred payment liability | - | ||
| Long-term portion of deferred payment liability | $ | - | |
| (v) | Outplayed deferred payment liability | ||
| --- | --- |
The
Outplayed deferred payment liability consisted of the present value of a USD $8,500,000 first anniversary payment (the “Outplayed First Anniversary Deferred Payment”) to be paid on November 22, 2022, the present value of a USD $8,500,000 second anniversary payment (the “Outplayed Second Anniversary Deferred Payment”) to be paid on November 22, 2023 (collectively, the “Outplayed Deferred Payment”), the present value of the first anniversary earn-out payment USD $6,000,000 (the “Outplayed First Anniversary Earn-Out Payment”) expected to be paid based on the performance of Outplayed by December 22, 2022, and the present value of the second anniversary earn-out payment USD $6,000,000 (the “Outplayed Second Anniversary Earn-Out Payment”) expected to be paid based on the performance of Outplayed by December 22, 2023 (collectively, the “Outplayed Earn-Out Payment”).
The Outplayed Earn-Out Payment, subject to certain conditions, will be paid if certain site traffic based targets are met in the first and second years of operations. The first anniversary earn-out period is for one year from the closing date and the second anniversary earn-out period is for one year from the end of the first anniversary earn-out period.
39
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 17. | Deferred payment liability (continued) |
|---|---|
| (v) | Outplayed deferred payment liability (continued) |
| --- | --- |
The Company had, at its option, the ability to settle the Outplayed Deferred Payment either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the ten trading days two business days prior to the anniversary payment due dates. The Company had, at its option, the ability to settle the Outplayed Earn-Out Payment either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the ten trading days prior to the date the applicable earn-out is achieved.
The
Outplayed First Anniversary Deferred Payment was included in Outplayed’s total purchase price consideration at an initial fair value of $10,013,937 based on a discounted valuation using a 7.63% discount rate. The Outplayed Second Anniversary Deferred Payment was included in Outplayed’s total purchase price consideration at an initial fair value of $9,304,038 based on a discounted valuation using a 7.63% discount rate. The Outplayed First Anniversary Earn-Out Payment was included in Outplayed’s total purchase price consideration at an initial fair value of $6,272,711 based on a discounted valuation using a 19.50% discount rate with an expectation that payment of the full earn-out of USD $6,000,000 is probable. The Outplayed Second Anniversary Earn-Out Payment was included in Outplayed’s total purchase price consideration at an initial fair value of $5,249,130 based on a discounted valuation using a 19.50% discount rate with an expectation that payment of the full earn-out of USD $6,000,000 is probable.
The Outplayed First Anniversary Earn-Out Payment, the Outplayed Second Anniversary Earn-Out Payment, Outplayed First Anniversary Earn-Out Payment and the Outplayed Second Anniversary Earn-Out Payment were amortized at an effective interest rate of 7.38%, 7.38%, 17.97% and 17.96% respectively.
On
May 25, 2022, the Company and former shareholders of Outplayed entered into an amending agreement to the Outplayed MA to satisfy the settlement of the Outplayed Deferred Payment and Outplayed Earn-Out Payment by the Company issuing 11,500,000 common shares of the Company. On June 2, 2022, the Outplayed Deferred Payment and Outplayed Earn-Out Payment has been settled by the Company issuing 11,499,988 common shares of the Company (Note 19) resulting on a loss on settlement of deferred payment liability of $2,900,068. The common shares issued were 12 common shares less than 11,500,000 common shares to be issued due the elimination of fractional common shares.
The following table shows the movement of the Outplayed deferred payment liability during the year:
| Outplayed Deferred Payment | Outplayed Earn-Out Payment | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2021 | $ | - | $ | - | $ | - | |||
| Initial fair value of deferred payment liability (Note 5) | 19,317,976 | 11,521,841 | 30,839,817 | ||||||
| Accretion | 151,319 | 219,808 | 371,127 | ||||||
| Effect of movement in exchange rates | (2,147 | ) | (509 | ) | (2,656 | ) | |||
| Balance, December 31, 2021 | $ | 19,467,148 | $ | 11,741,140 | $ | 31,208,288 | |||
| Accretion | 610,138 | 912,424 | 1,522,562 | ||||||
| Payment – shares | (20,763,426 | ) | (14,656,537 | ) | (35,419,963 | ) | |||
| Loss on settlement of deferred payment liability | 815,138 | 2,084,930 | 2,900,068 | ||||||
| Effect of movement in exchange rates | (128,998 | ) | (81,957 | ) | (210,955 | ) | |||
| Balance, December 31, 2022 | - | - | - | ||||||
| Current portion of deferred payment liability | - | - | - | ||||||
| Long-term portion of deferred payment liability | $ | - | $ | - | $ | - | |||
| (vi) | FFS deferred payment liability | ||||||||
| --- | --- |
The
FFS deferred payment liability consists of the present value of a $1,609,600 (GBP £1,000,000) first anniversary payment (the “FFS First Anniversary Deferred Payment”) to be paid on April 28, 2023, the present value of a $80,480 (GBP £50,000) second anniversary payment (the “FFS Second Anniversary Payment”) to be paid April 28, 2024 (collectively, the “FFS Deferred Payment”) and the present value of the first anniversary earn-out payment of $804,800 (GBP £500,000) (the “FFS Earn-Out Payment”) expected to be on April 28, 2023.
The FFS Earn-Out Payment will be paid if the Fantasy Premier League agreement, which expired on August 1, 2022, is renewed for an additional three-year period, on substantially similar or more favourable terms.
The Fantasy Premier League agreement was renewed on August 1, 2022 for an additional three-period on substantially similar terms.
40
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 17. | Deferred payment liability (continued) |
|---|---|
| (vi) | FFS deferred payment liability (continued) |
| --- | --- |
The Company has, at its option, the ability to settle the FFS First Anniversary Deferred Payment either in cash or by the allotment and issuance of such number of common shares determined by the volume weighted average price for the ten trading days prior to the payment due date.
The
FFS First Anniversary Deferred Payment was included in FFS’ total purchase price consideration at an initial fair value of $1,497,581 based on a discounted valuation using a 7.48% discount rate. The FFS Second Anniversary Deferred Payment was included in FFS’ total purchase price consideration at an initial fair value of $69,668 based on a discounted valuation using a 7.48% discount rate. The FFS Earn-Out Payment was included in FFS’ total purchase price consideration at an initial fair value of $748,790 based on a discounted valuation using a 7.48% discount rate with an expectation that payment of the full earn-out of GBP £500,000 is probable.
The FFS First Anniversary Deferred Payment, FFS Second Anniversary Deferred Payment and FFS Earn-Out Payment are amortized at an effective interest rate of 7.23%, 7.23% and 7.23% respectively.
The following table shows the movement of the FFS deferred payment liability during the year:
| FFS Deferred Payment | FFS Earn-Out Payment | Total | ||||
|---|---|---|---|---|---|---|
| Balance, December 31, 2021 | $ | - | $ | - | $ | - |
| Initial fair value of deferred payment liability (Note 5) | 1,567,249 | 748,790 | 2,316,039 | |||
| Accretion | 76,532 | 36,567 | 113,099 | |||
| Effect of movement in exchange rates | 24,969 | 11,931 | 36,900 | |||
| Balance, December 31, 2022 | 1,668,750 | 797,288 | 2,466,038 | |||
| Current portion of deferred payment liability | 1,594,575 | 797,288 | 2,391,863 | |||
| Long-term portion of deferred payment liability | $ | 74,175 | $ | - | $ | 74,175 |
The following table shows the aggregate movement of the deferred payment liability during the year ended December 31, 2022 and year ended December 31, 2021:
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Beginning balance | $ | 48,038,421 | $ | 1,165,724 | ||
| Initial fair value of deferred payment liability | 2,316,039 | 46,431,629 | ||||
| Accretion | 2,120,612 | 823,267 | ||||
| Payment – cash | (472,833 | ) | - | |||
| Payment – shares | (50,373,851 | ) | (632,800 | ) | ||
| Loss on settlement of deferred payment liability | 3,148,426 | - | ||||
| (Gain) loss on revaluation of deferred payment liability | (621,780 | ) | 181,707 | |||
| Effect of movement in exchange rates | (311,232 | ) | 68,894 | |||
| Ending balance | 3,843,802 | 48,038,421 | ||||
| Current portion of deferred payment liability | 2,391,863 | 27,244,146 | ||||
| Long-term portion of deferred payment liability | $ | 1,451,939 | $ | 20,794,275 |
The
Company had a working capital adjustment receivable from the acquisition of Addicting Games of $154,398 which was settled as part of the amending agreement to the Addicting Games SPA and is included in the loss of settlement of deferred payment liability in the consolidated statements of loss and comprehensive loss resulting in a total loss on settlement of deferred payment liability of $3,302,824.
41
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 18. | Vendor-take-back loan |
|---|
The
vendor-take-back loan (“VTB”) arose on the acquisition of Omnia on August 30, 2020. The VTB had a principal balance of $5,750,000 and accrued interest at 9% per annum, compounded annually and payable at maturity, and matured on August 30, 2023.
The
VTB was included in Omnia’s total purchase price consideration at an initial fair value of $5,357,408 based on the present value of the cash flows using a 11.60% discount rate and a maturity date of 36 months. The VTB was amortized at an effective interest rate of 11.03%.
On
June 17, 2021, the Company settled the VTB by paying the principal balance of $5,750,000 and accrued interest of $408,329. During the year ended December 31, 2021, the Company recognized a loss on settlement of the VTB of $316,241 which is included in the consolidated statements of loss and comprehensive loss.
During the year ended December 31, 2022, the Company recognized $Nil (December 31, 2021 - $255,792) of interest expense and $Nil (December 31, 2021 - $27,046) of accretion expense in relation to the VTB which is included in interest and accretion expense in the consolidated statements of loss and comprehensive loss.
The following tables shows the movement of the VTB during the year:
| Amount | |||
|---|---|---|---|
| Balance, January 1, 2021 | $ | 5,559,250 | |
| Interest | 255,792 | ||
| Accretion | 27,046 | ||
| Repayments | (6,158,329 | ) | |
| Loss on settlement of vendor-take-back loan | 316,241 | ||
| Balance, December 31, 2021 and 2022 | $ | - | |
| 19. | Share capital | ||
| --- | --- |
Authorized:
Unlimited number of common shares
Unlimited number of preferred shares
During the year ended December 31, 2022:
| (i) | The<br> Company received proceeds of $289,034 from the exercise of 760,938 stock options. Stock<br> option proceeds of $45,538 were not received in cash but were used to settle accounts<br> payable. The fair value assigned to these stock options of $2,527,504 was reclassified<br> from contributed surplus to share capital. |
|---|---|
| (ii) | On<br> February 14, 2022, the Company issued the remaining 35,770 common shares to be issued<br> relating to the Outplayed SPA (Note 5). |
| --- | --- |
| (iii) | On<br> February 28, 2022, the Company issued 111,267 common shares to settle the GameKnot Deferred<br> Payment liability (Note 17). |
| --- | --- |
| (iv) | On<br> June 2, 2022, the Company issued 348,852 common shares to settle the Vedatis Deferred<br> Payment liability (Note 17). |
| --- | --- |
| (v) | On<br> June 2, 2022, the Company issued 4,319,996 common shares to settle the Addicting Games<br> Deferred Payment liability (Note 17). |
| --- | --- |
| (vi) | On<br> June 2, 2022, the Company issued 11,499,988 common shares to settle the Outplayed Deferred<br> Payment liability and Outplayed Earn-Out Payment liability (Note 17). |
| --- | --- |
| (vii) | On<br> July 25, 2022, the Company issued 307,692 common shares to settle accounts payable of<br> $800,000 related to annual general meeting costs. The Company recorded a gain on settlement<br> of accounts payable of $95,386 based on a share price of $2.29 per share. This gain been<br> netted against the annual general meeting legal and advisory costs in the consolidated<br> statements of loss and comprehensive loss. |
| --- | --- |
42
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 19. | Share capital |
|---|
During the year ended December 31, 2022 (continued):
| (viii) | On<br> September 19, 2022, the Company issued 790,633 common shares to settle accounts payable<br> of $1,757,396 related to annual general meeting legal and advisory costs and consulting<br> fees. The Company recorded a gain on settlement of accounts payable of $492,383 based<br> on a share price of $1.60 per share. A gain of $288,679 has been netted against the annual<br> general meeting legal and advisory costs and the remaining gain of $203,704 has been<br> netted against the consulting fees in the consolidated statements of loss and comprehensive<br> loss. |
|---|---|
| (ix) | On<br> December 14, 2022, the Company issued 42,838 common shares to settle 42,838 restricted<br> share units. The fair value assigned to these restricted share units of $306,485 was<br> reclassified from contributed surplus to share capital. |
| --- | --- |
During the year ended December 31, 2021:
| (i) | The<br> Company received proceeds of $784,431 from the exercise of 363,176 stock options. The<br> fair value assigned to these stock options of $927,292 was reclassified from contributed<br> surplus to share capital. |
|---|---|
| (ii) | The<br> Company issued 2,835,289 common shares from the conversion of convertible debentures<br> (Note 16). |
| --- | --- |
| (iii) | On<br> January 20, 2021, the Company issued 429,354 common shares to settle the remaining Steel<br> Media Deferred Payment liability (Note 17). |
| --- | --- |
| (iv) | On<br> February 10, 2021, the Company offered and sold a total of 7,383,000 common shares resulting<br> in gross proceeds of $42,452,250 (the “February Offering”). The Company incurred<br> cash share issuance cost of $2,704,571 relating to the February Offering. |
| --- | --- |
| (v) | On<br> May 4, 2021, the Company issued 226,563 common shares in connection with the closing<br> of the Vedatis SPA (Note 5). |
| --- | --- |
| (vi) | In<br> June 2021, the Company offered and sold a total of 8,600,000 common shares resulting<br> in gross proceeds of $60,137,755 (USD $49,450,000) (the “June Offering”).<br> The Company incurred cash share issuance cost of $4,739,096 relating to the June Offering. |
| --- | --- |
| (vii) | On<br> June 21, 2021, the Company issued 790,094 common shares in connection with the closing<br> of the Tabwire EPA (Note 5). |
| --- | --- |
| (viii) | On<br> August 30, 2021, the Company issued 165,425 common shares in connection with the closing<br> of the GameKnot EPA (Note 5). |
| --- | --- |
| (ix) | On<br> September 3, 2021, the Company issued 2,661,164 common shares in connection with the<br> closing of the Addicting Games SPA (Note 5). |
| --- | --- |
| (x) | On<br> December 31, 2021, the Company issued 5,164,223 common shares in connection with the<br> closing of Outplayed MA (Note 5). |
| --- | --- |
| 20. | Stock options |
| --- | --- |
On January 20, 2021, the shareholders of the Company approved and ratified the adoption of the stock option plan (the “Stock Option Plan”) which allows the Board of Directors to grant stock options to directors, officers, employees and consultants of the Company as performance incentives. The maximum number of common shares issuable under the Stock Option Plan is limited to 10% of the issued and outstanding common shares of the Company. There are also limitations on the number of common shares issuable to insiders. At the time of granting a stock option, the Board of Directors must approve: (i) the exercise price, being not less than the market value of the common shares; (ii) the vesting provisions; and (iii) the expiry date, generally being no more than ten years after the grant date.
43
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 20. | Stockoptions (continued) |
|---|
The following table reflects the continuity of stock options as of December 31, 2022 and December 31, 2021:
| December<br> 31, 2022 | December<br> 31, 2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number<br> of options | Weighted<br> average exercise price | Number<br> of options | Weighted<br> average exercise price | |||||||||
| Beginning<br> balance | 3,923,491 | $ | 3.35 | 2,734,073 | $ | 1.61 | ||||||
| Granted | 1,772,909 | 2.56 | 1,598,905 | 6.17 | ||||||||
| Exercised | (760,938 | ) | (0.44 | ) | (363,176 | ) | (2.16 | ) | ||||
| Forfeited | (993,480 | ) | (3.73 | ) | (46,311 | ) | (7.28 | ) | ||||
| Ending<br> balance | 3,941,982 | $ | 3.46 | 3,923,491 | $ | 3.35 | ||||||
| Exercisable | 1,972,929 | $ | 3.10 | 2,668,573 | $ | 1.71 |
The weighted average share price on the date of exercise is $1.10 (December 31, 2021 - $7.25).
On
January 20, 2021, following shareholder approval of the Stock Option Plan, the Company issued 743,671 stock options to directors, officers and employees, of which 679,582 were issued to directors and officers. These stock options are exercisable at $3.20, expire December 9, 2025 and vest as follows: (i) 304,709 on January 20, 2021; (ii) 247,890 on January 20, 2022; and (iii) 191,072 on January 20, 2023. These stock options were approved for issuance by the Board of Directors on December 9, 2020 and were granted upon shareholder approval of the Stock Option Plan on January 20, 2021. The fair value of the stock options issued was $4.73 per stock option, which was estimated using the Black-Scholes option pricing model using the following inputs and assumptions: stock price - $6.10; exercise price - $3.20; expected life in years – 4.89 years; expected volatility – 86.59% (based on comparable companies); expected dividend yield – Nil%; expected forfeiture rate – 2.90%; and, risk-free interest rate – 0.43%.
On
April 13, 2021, the Company issued 855,234 stock options to directors, officers, employees and consultants, of which 493,969 were issued to directors and officers. These stock options are exercisable at $8.75, expire January 1, 2026 and vest one-third on January 1, 2022, January 1, 2023 and January 1, 2024 respectively. The fair value of these stock options issued was $6.06 per stock option, which was estimated using the Black-Scholes option pricing model using the following inputs and assumptions: stock price - $8.73; exercise price - $8.75; expected life in years – 4.72 years; expected volatility – 92.89% (based on comparable companies); expected dividend yield – Nil%; expected forfeiture rate – 2.90%; and, risk-free interest rate – 0.94%.
On
April 20, 2022, the Company issued 1,560,697 stock options to directors, officers, employees and consultants, of which 902,141 were issued to directors and officers. These stock options are exercisable at $2.75, expire April 20, 2027 and vest as follows: (i) 34,000 on April 20, 2022, (ii) 503,308 on January 1, 2023, (iii) 17,000 on April 20, 2023, (iv) 503,308 on January 1, 2024, and (v) 503,351 on January 1, 2025. The fair value of these stock options issued was $2.07 per stock option, which was estimated using the Black-Scholes option pricing model using the following inputs and assumptions: stock price - $2.75; exercise price - $2.75; expected life in years – 5 years; expected volatility – 105.61% (based on comparable companies); expected dividend yield – Nil%; expected forfeiture rate – 3.55%; and, risk-free interest rate – 2.74%.
On
November 17, 2022, the Company issued 211,942 stock options to directors, officers and employees, of which 174,011 were issued to directors and officers. Stock options issued to directors and officers of 122,608 are exercisable at $1.13, expire February 16, 2027 and vest as follows: (i) 40,868 on January 1, 2023, (ii) 40,868 on January 1, 2024, and (iii) 40,872 on January 1, 2025. The fair value of these stock options issued was $0.55 per stock option, which was estimated using the Black-Scholes option pricing model using the following inputs and assumptions: stock price - $0.81; exercise price - $1.13; expected life in years – 4.25 years; expected volatility – 109.11% (based on comparable companies); expected dividend yield – Nil%; expected forfeiture rate – 4.13%; and, risk-free interest rate – 3.33%. Stock options issued to employees and officers of 89,334 are exercisable at $1.13, expire November 17, 2027 and vest as follows: (i) 12,500 on November 17, 2022 (ii) 33,944 on January 1, 2023, (iii) 21,444 on January 1, 2024, and (iv) 21,446 on January 1, 2025. The fair value of these stock options issued was $0.59 per stock option, which was estimated using the Black-Scholes option pricing model using the following inputs and assumptions: stock price - $0.81; exercise price - $1.13; expected life in years – 5 years; expected volatility – 107.44% (based on comparable companies); expected dividend yield – Nil%; expected forfeiture rate – 4.13%; and, risk-free interest rate – 3.33%.
The
Company recorded share-based compensation expense of $2,638,687 (December 31, 2021- $5,823,302) for stock options vesting during the year ended December 31, 2022.
44
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 20. | Stockoptions (continued) |
|---|
The Company has the following stock options outstanding as of December 31, 2022:
| Expiry<br> date | Number<br> of stock options outstanding | Exercise<br> price | Number<br> of stock options exercisable | Weighted<br> average remaining life (years) | ||||
|---|---|---|---|---|---|---|---|---|
| November 14, 2023 | 13,187 | 2.37 | 13,187 | 0.87 | ||||
| March 29, 2024 | 200,450 | 2.37 | 200,450 | 1.24 | ||||
| August 27, 2024 | 868,750 | 2.40 | 868,750 | 1.66 | ||||
| December 9, 2025 | 643,983 | 3.20 | 486,136 | 2.94 | ||||
| January 1, 2026 | 593,087 | 8.75 | 201,906 | 3.01 | ||||
| February 16, 2027 | 122,608 | 1.13 | - | 4.13 | ||||
| April 20, 2027 | 1,220,583 | 2.75 | - | 4.30 | ||||
| November 27, 2027 | 89,334 | 1.13 | 12,500 | 4.88 | ||||
| December<br> 12, 2028 | 190,000 | 1.00 | 190,000 | 5.95 | ||||
| 3,941,982 | 3.46 | 1,972,929 | 3.22 | |||||
| 21. | Shareunits | |||||||
| --- | --- |
On January 20, 2021, the shareholders of the Company approved and ratified the adoption of the Share Unit Plan (“SU Plan”) which allows for the issuance of restricted share units and performance share units (collectively “Share Units”) to directors, officers, employees and consultants. The Board of Directors, or a committee appointed by the Board of Directors, will establish vesting conditions of Share Units at the time of grant. The maximum number of common shares that are issuable to settle Share Units cannot exceed 4% of the aggregate number of common shares issued and outstanding and the maximum number of common shares issuable in aggregate under the SU Plan and other share-based compensation arrangements adopted by the Company cannot exceed 10% of the common shares issued and outstanding. Share Units can be settled in cash or common shares at the option of the Company.
On
January 20, 2021, following shareholder approval of the SU Plan, the Company issued 1,251,162 restricted share units to directors, officers and employees, of which 1,158,772 were issued to directors and officers. These restricted share units are expected to be settled through the issuance of 1,251,162 common shares of the Company. These restricted share units vest as follows: (i) 530,692 on January 20, 2021, (ii) 417,054 on January 20, 2022, and (iii) 303,416 on January 20, 2023. These restricted share units were approved for issuance by the Board of Directors on December 9, 2020, and were granted upon shareholder approval of the SU Plan on January 20, 2021. The fair value of these restricted share units issued was $6.10 per restricted share unit using the following inputs and assumptions: (i) quoted market price on the date of issuance - $6.10 and, (ii) expected forfeiture rate - Nil%.
On
April 13, 2021, the Company issued 1,242,577 restricted share units to directors, officers, employees and consultants, of which 636,887 were issued to directors and officers. These restricted share units are expected to be settled through the issuance of 1,242,577 common shares of the Company. These restricted share units vest one-third on January 1, 2022, January 1, 2023 and January 1, 2024 respectively. The fair value of these restricted share units issued was $8.73 per restricted share unit using the following inputs and assumptions: (i) quoted market price on the date of issuance - $8.73 and, (ii) expected forfeiture rate - Nil%.
On
July 19, 2021, the Company modified the vesting dates of 178,293 restricted share units issued to consultants on April 13, 2021. These 178,293 restricted share units were modified to vest 100% on October 31, 2021. Share-based compensation expense is recognized based on the modified vesting term.
On
April 20, 2022, the Company issued 1,922,877 restricted share units to directors, officers, employees and consultants, of which 1,531,349 were issued to directors and officers. These restricted share units are expected to be settled through issuance of 1,922,877 common shares of the Company. These restricted share units vest as follows: (i) 166,666 on April 20, 2022, (ii) 557,608 on January 1, 2023, (iii) 83,334 on April 20, 2023, (iv) 557,608 on January 1, 2024, and (v) 557,661 on January 1, 2025. The fair value of these restricted share units issued was $2.69 per restricted share unit using the following inputs and assumptions: (i) quoted market price on the date of issuance - $2.75 and, (ii) expected forfeiture rate - 2.58%.
45
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 21. | Share units (continued) |
|---|
On
November 17, 2022, the Company issued 437,636 restricted share units to directors, officers and employees, of which 401,229 were issued to directors and officers. These restricted share units are expected to be settled through issuance of 437,636 common shares of the Company. These restricted share units vest as follows: (i) 155,018 on November 17, 2022, (ii) 102,507 on January 1, 2023, (iii) 90,007 on January 1, 2024, and (iv) 90,014 on January 1, 2025. The fair value of these restricted share units issued was $0.80 per restricted share unit using the following inputs and assumptions: (i) quoted market price on the date of issuance - $0.81 and, (ii) expected forfeiture rate - 2.70%.
The
Company recorded share-based compensation expense of $5,112,683 (December 31, 2021 - $13,095,187) for restricted share units vesting during the year ended December 31, 2022.
The Company has the following restricted share units outstanding as of December 31, 2022 and December 31, 2021:
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Beginning balance | 2,455,697 | - | ||||
| Granted | 2,360,513 | 2,493,739 | ||||
| Released | (42,838 | ) | - | |||
| Forfeited | (633,918 | ) | (38,042 | ) | ||
| Ending balance | 4,139,454 | 2,455,697 | ||||
| Vested | 1,752,170 | 711,452 | ||||
| 22. | IncomeTaxes | |||||
| --- | --- |
The
reconciliation of the combined Canadian federal and provincial statutory income tax rate of 26.60% (2021 - 26.60%) to the effective tax rate for the year ended December 31, 2022 and December 31, 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Statutory income tax rate | 26.60 | % | 26.60 | % | ||
| Net loss before income taxes | $ | (78,882,069 | ) | $ | (52,986,087 | ) |
| Computed income tax recovery | (20,982,630 | ) | (14,094,299 | ) | ||
| Increase (decrease) resulting from: | ||||||
| Non-deductible expenses and other | 10,649,360 | 5,314,788 | ||||
| Differences in foreign tax rates | (721,376 | ) | (247,875 | ) | ||
| Utilization of previously unrecognized tax losses | (1,051,211 | ) | 199,180 | |||
| Origination and reversal of temporary differences | 1,708,015 | 413,197 | ||||
| Current period loss for which no benefit is recognized | 8,346,578 | 7,475,544 | ||||
| Income tax recovery | $ | (2,051,264 | ) | $ | (939,465 | ) |
The components of income tax expense (recovery) are as follows:
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Current tax expense | $ | 250,955 | $ | 194,222 | ||
| Deferred tax recovery | (2,302,219 | ) | (1,133,687 | ) | ||
| Income tax recovery | $ | (2,051,264 | ) | $ | (939,465 | ) |
46
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 22. | Income Taxes (continued) |
|---|
The table below summarizes the movement of net deferred tax assets and liabilities:
| January 1, 2022 | Recognized in net loss | Recognized in OCI | Acquisitions | December 31, 2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Deferred tax asset | |||||||||||||||
| Tax losses carried forward | $ | 3,940,741 | $ | (873,785 | ) | $ | 47,286 | $ | - | $ | 3,114,242 | ||||
| Intangible assets and other | 1,135,771 | (1,062,707 | ) | 77,056 | - | 150,120 | |||||||||
| Total deferred assets | 5,076,512 | (1,936,492 | ) | 124,342 | - | 3,264,362 | |||||||||
| Deferred tax liability | |||||||||||||||
| Intangible assets and other | $ | (30,802,501 | ) | $ | 4,238,711 | $ | (753,904 | ) | $ | (603,098 | ) | $ | (27,920,792 | ) | |
| Investments | (14,896 | ) | - | - | - | (14,896 | ) | ||||||||
| Total deferred liability | (30,817,397 | ) | 4,238,711 | (753,904 | ) | (603,098 | ) | (27,935,688 | ) | ||||||
| Net deferred tax asset (liability) | $ | (25,740,885 | ) | $ | 2,302,219 | $ | (629,562 | ) | $ | (603,098 | ) | $ | (24,671,326 | ) | |
| January 1, 2021 | Recognized in net loss | Recognized in OCI | Acquisitions | December 31, 2021 | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Deferred tax asset | |||||||||||||||
| Tax losses carried forward | $ | 5,385,629 | $ | (2,065,439 | ) | $ | - | $ | 620,551 | $ | 3,940,741 | ||||
| Financing and share issuance cost | 14,551 | (14,551 | ) | - | - | - | |||||||||
| Intangible assets and other | 702,666 | (673,525 | ) | (60,616 | ) | 1,167,246 | 1,135,771 | ||||||||
| Total deferred assets | 6,102,846 | (2,753,515 | ) | (60,616 | ) | 1,787,797 | 5,076,512 | ||||||||
| Deferred tax liability | |||||||||||||||
| Intangible assets and other | $ | (21,090,932 | ) | $ | 3,728,197 | $ | - | $ | (13,439,766 | ) | $ | (30,802,501 | ) | ||
| Investments | (173,901 | ) | 159,005 | - | - | (14,896 | ) | ||||||||
| Total deferred liability | (21,264,833 | ) | 3,887,202 | - | (13,439,766 | ) | (30,817,397 | ) | |||||||
| Net deferred tax asset (liability) | $ | (15,161,987 | ) | $ | 1,133,687 | $ | (60,616 | ) | $ | (11,651,969 | ) | $ | (25,740,885 | ) |
Deferred tax assets have not been recognized in respect of the following deductible temporary differences:
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Tax losses carried forward | $ | 114,854,099 | $ | 84,156,050 |
| Intangible assets and goodwill | 33,951,477 | 32,732,062 | ||
| Investments | 3,869,535 | 5,112,068 | ||
| Financing and share issuance costs | 6,735,102 | 9,694,771 | ||
| Other temporary differences | 818,939 | 390,249 | ||
| Deferred tax asset not recognized | $ | 160,229,152 | $ | 132,085,200 |
The
Company has Canadian net operating losses of $78,015,340 available to reduce taxable income in future years. If not utilized, these net operating losses will expire between 2033 to 2042.
The Company has USA net operating losses of $36,838,759 available to reduce taxable income in future years. If not utilized, $6,460,091 of these net operating losses will expire between 2033 and 2036 and $30,378,668 of these net operating losses will carryforward indefinitely.
Other deductible temporary differences have an unlimited carryforward period pursuant to current tax laws.
Deferred tax liabilities related to undistributed earnings from investments in subsidiaries have not been recognized as the Company controls whether the liabilities will be incurred and the Company is satisfied that the liabilities will not be incurred in the foreseeable future.
47
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 23. | Related party transactions and balances |
|---|
The Company’s key management personnel have authority and responsibility for overseeing, planning, directing and controlling the activities of the Company. Key management personnel include members of the Board of Directors, Chief Executive Officer, former Chief Operating Officer, Chief Financial Officer, Chief Corporate Officer, President, former President and Senior Vice President, Legal and General Counsel. Compensation of key management personnel may include short-term and long-term benefits. Short-term benefits include salaries and bonuses. Share-based compensation includes the fair value of stock options and restricted share units vested during the year.
Compensation provided to key management during the year ended December 31, 2022 and December 31, 2021 is as follows:
Scheduleof Compensation
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Short-term benefits | $ | 3,133,569 | $ | 2,777,723 |
| Share-based compensation | 5,332,426 | 13,810,779 | ||
| $ | 8,465,995 | $ | 16,588,502 |
A summary of other related party transactions during the year ended December 31, 2022 and December 31, 2021 is as follows:
Scheduleof Related Party Transaction
| December 31, 2022 | December 31, 2021 | ||||
|---|---|---|---|---|---|
| Total transactions during the year: | |||||
| Revenue | $ | - | $ | 839,933 | |
| Cost of Sales | - | 41,109 | |||
| Expenses | |||||
| Consulting fees | 475,916 | 938,940 | |||
| Interest and accretion | - | 282,838 | |||
| Loss on settlement of vendor-take-back loan | - | 316,241 | |||
| Share of (income) loss from investment in associates and joint ventures | (1,129,167 | ) | 266,641 |
A summary of related party balances as of December 31, 2022 and December 31, 2021 is as follows:
ScheduleOf Related Party Balances
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Balances receivable (payable): | ||||||
| Trade and other receivables | $ | 67,180 | $ | 3,734,410 | ||
| Loans receivable | - | 125,995 | ||||
| Investment in associates and joint ventures | 12,236 | 885,269 | ||||
| Accounts payable and accrued liabilities | (249,976 | ) | (382,794 | ) | ||
| Contract liabilities | - | (55,434 | ) |
On August 27, 2019, the Company entered into a Management Services Agreement (the “Management SA”) with AIG eSports LP, a former related party by nature of it being under the control or direction of the former Chairman of the Company, as well as a Master Services Agreement (the “Master SA”) with Vancouver Arena Limited Partnership, a former related party by nature of it being under the control or direction of the former Chairman of Company (collectively, the “MSAs”). The former Chairman of the Company did not seek re-election at the Company’s July 19, 2022 annual general meeting and is no longer a related party as of July 19, 2022. Pursuant to the Management SA, the Company is to provide a series of esports management services for a base compensation of $100,000 per month, plus an annual amount of USD $250,000, as well as other additional amounts receivable upon certain milestones relating to the performance of the esports teams under management. Pursuant to the Master SA, the Company receives a range of marketing and consulting services at a cost of $100,000 per month, as well as certain other costs payable upon certain milestones relating to third-party revenues generated by the Company relating to the Master SA services. The MSAs had a retroactive effective date of September 7, 2018, and contain payment-in-kind provisions whereas either party may, at its discretion, satisfy its amounts payable through the provision of its respective services. On April 1, 2021, the Management SA with AIG eSports LP and Master SA with Vancouver Arena Limited Partnership was terminated. During the period from January 1, 2022 to July 19, 2022, the Company recognized management revenue of $Nil (January 1, 2021 to December 31, 2021 - $379,125) relating to the Management SA, and recognized consulting expenses of $Nil (January 1, 2021 to December 31, 2021 - $379,125) relating to the Master SA. As of December 31, 2021, a balance of $452,730 is included in trade and other receivables.
48
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 23. | Related party transactions and balances (continued) |
|---|
On April 6, 2020, the Company entered into an Exchange of Marketing Rights and Benefits Agreement with AIG eSports LP and Surge eSports LLC, former related parties by nature of them being under the control or direction of the former Chairman of the Company. Pursuant to the Exchange of Marketing Rights and Benefits Agreement the Company is to provide media advertising for AIG eSports LP and Surge eSports LLC sponsors and AIG eSports LP and Surge eSports LLC is to provide advertising for the Company. During the period from January 1, 2022 to July 19, 2022, the Company recognized media advertising revenue of $Nil (January 1, 2021 to December 31, 2021 - $16,578) pursuant to the Exchange of Marketing Rights and Benefits Agreement. As of December 31, 2021, a balance of $55,434 is included in contract liabilities for media advertising services to be provided by the Company to AIG eSports and Surge eSports LLC.
As
of December 31, 2021 a balance of $29,952 and $24,427 is due to AIG eSports LP and Surge eSports LLC, respectively, which is included in accounts payable and accrued liabilities, relating to team sponsorship fees payable.
As
of December 31, 2021, trade and other receivables include $3,225,177 of amounts advanced to Surge eSports LLC, a former related party by nature of it being under the control or direction of the former Chairman of the Company. The Company intends to apply these advances against future share subscriptions in Surge eSports LLC. The advances are non-interest bearing and are receivable if the Company does not obtain share subscriptions in Surge eSports LLC.
On August 30, 2020, the Company completed the acquisition of Omnia from Blue Ant Media Solutions Inc. (“Blue Ant”), following the acquisition Blue Ant and its affiliated companies are related parties to the Company. As of July 19, 2021, Blue Ant held less than 10% of the issued outstanding common shares of the Company and is no longer a related party of the Company. During the period from January 1, 2021 to July 19, 2021, the Company earned media revenue of $394,373 and incurred cost of sales of $41,109 from Blue Ant and its affiliated companies. See Note 18 for information relating to the VTB loan payable to Blue Ant.
During
the year ended December 31, 2022, the Company recognized consulting expenses of $75,022 (December 31, 2021 - $75,012) to Rivonia Capital Inc., a company in which a director of the Company is a principal. As of December 31, 2022, a balance of $14,125 (December 31, 2021 - $7,063) is included in account payable and accrued liabilities.
During the year ended December 31, 2022, the Company recognized consulting expense of $Nil (December 31, 2021 - $74,253) to Franchise Agency LLC, an agency which represents a director of the Company. As of December 31, 2022, a balance of $Nil (December 31, 2021
- $55,654) is included in account payable and accrued liabilities.
During
the year ended December 31, 2022 the Company recognized $400,894 (December 31, 2021 - $410,550) in consulting fees relating to Board of Director and committee fees to certain directors. As of December 31, 2022, a balance of $235,851 (December 31, 2021 - $265,698) is included in account payable and accrued liabilities.
During the year ended December 31, 2022, the Company earned media revenue of $Nil (December 31, 2021 - $49,857) from AFK, a related party by nature of it having common management as the Company, refer to Note 8. As of December 31, 2022, a balance of $67,180 (December 31, 2021 - $56,503) is included in trade and other receivables.
As of December 31, 2022, the Company has loans receivable due from the former President and Chief Corporate Officer of $Nil (December 31, 2021 - $80,297) and $Nil (December 31, 2021 - $45,698) respectively. The loans receivable were non-interest bearing and due on demand.
See
Note 8 for information relating to an investment in associates controlled by a former related party. The investment in associates are no longer a related party as of July 19, 2022. During the period from January 1, 2021 to July 19, 2022, the Company’s share of net income from investment is associates is $1,175,841 (January 1, 2021 to December 31, 2021 – net loss of $200,550).
See Note 8 for information relating to an investment in a joint venture under common management as the Company.
See Note 20 for information relating to stock options issued to officers and directors of the Company.
See Note 21 for information relating to restricted share units issued to officers and directors of the Company.
49
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 24. | Capital<br> management |
|---|
The Company considers its capital structure to consist of shareholders’ equity, long-term debt and deferred payment liability. The Company manages its capital structure and makes adjustments to it, in order to have the funds available to support the acquisition and development of its business. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business.
The Company is dependent on external financing to fund its activities. In order to carry out the planned operations and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the size of the Company, is reasonable. There were no changes in the Company’s approach to capital management during the year ended December 31, 2022. Neither the Company nor its subsidiaries are subject to externally imposed capital requirements aside from the covenants described in Note 14.
The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern. The Company’s ability to raise future capital is subject to uncertainty and the inability to raise such capital may have an adverse impact over the Company’s ability to continue as a going concern.
| 25. | Financial<br>instruments |
|---|
Fairvalues
The fair values of cash, investments, trade and other receivables, loans receivable, accounts payable and accrued liabilities and contract liabilities approximate their carrying values due to the relatively short-term nature of these financial instruments. The fair value of long-term debt, lease liabilities, deferred payment liability and other long-term debt is based on observable market data and the calculation of discounted cash flows. Discount rates were determined based on current terms and conditions observed in the credit market.
The Company follows a three-tier categorization for its financial instruments as a framework for disclosing fair value based upon inputs used to value the Company’s investments. The hierarchy is summarized as:
| ● | Level<br>1 – quoted prices (unadjusted) in active markets for identical assets and liabilities |
|---|---|
| ● | Level<br>2 – inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices)<br>from observable market data |
| --- | --- |
| ● | Level<br>3 – inputs for assets and liabilities not based upon observable market data |
| --- | --- |
As of December 31, 2022 the Vedatis Earn-Out Payment liability is classified as a Level 3 financial instrument, see Note 17 and, as at September 3, 2021, the investment in Addicting Games is classified as a Level 3 financial instrument, see Note 7
Total interest income and interest expense for the years ended December 31, 2022 and December 31, 2021 for financial assets or financial liabilities that are not at fair value through profit or loss is as follows:
Schedule of income, expenses, gains and losses from financial instruments
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Interest income | $ | (36,252 | ) | $ | (51,529 | ) |
| Interest and accretion expense | 2,586,387 | 2,844,956 | ||||
| Net interest expense | $ | 2,550,135 | $ | 2,793,427 |
The Company examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, foreign currency risk and interest rate risk.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its obligations.
50
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 25. | Financial<br> instruments (continued) |
|---|
Creditrisk (continued)
The Company’s maximum exposure to credit risk for its trade receivables is summarized as follows:
Schedule of aging of trade receivables
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Trade receivables aging: | ||||||
| 0-30 days | $ | 26,077,091 | $ | 26,263,555 | ||
| 31-60 days | 1,455,672 | 685,112 | ||||
| 61-90 days | 1,803,214 | 868,473 | ||||
| Greater than 90 days | 2,558,113 | 2,217,521 | ||||
| 31,894,090 | 30,034,661 | |||||
| Expected credit loss provision | (300,735 | ) | (58,472 | ) | ||
| Net trade receivables | $ | 31,593,355 | $ | 29,976,189 |
The movement in the expected credit loss provision can be reconciled as follows:
| December 31, 2022 | December 31, 2021 | |||||
|---|---|---|---|---|---|---|
| Expected credit loss provision: | ||||||
| Expected credit loss provision, beginning balance | $ | (58,472 | ) | $ | (67,466 | ) |
| Increase in provision of expected credit losses | (240,603 | ) | - | |||
| Recoveries | - | 8,504 | ||||
| Effect of movement in exchange rates | (1,660 | ) | 490 | |||
| Expected credit loss provision, ending balance | $ | (300,735 | ) | $ | (58,472 | ) |
The following default rates, determined based on historical default rates based on the aging of trade receivables, are used to calculate the expected credit loss provision on trade receivables as of December 31, 2022:
| Total | Not past due | Over 30 days past due | Over 60 days past due | Over 90 days past due | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Default rates | 0.49 | % | 1.07 | % | 1.94 | % | 4.74 | % | ||||||
| Trade receivables | $ | 31,894,090 | $ | 26,077,091 | $ | 1,455,672 | $ | 1,803,214 | $ | 2,558,113 | ||||
| Expected credit loss provision | $ | 300,735 | $ | 129,060 | $ | 15,504 | $ | 34,998 | $ | 121,173 |
All of the Company’s cash is held with major financial institutions and thus the exposure to credit risk is considered insignificant. Management actively monitors the Company’s exposure to credit risk under its financial instruments.
Concentrationrisk
The
Company has one customer which makes up more than 10% of revenue. This customer accounts for approximately 30.24% (December 31, 2021 – 46.58%) of trade receivables as of December 31, 2022 and 55.83% (December 31, 2021 – 69.36%) of revenues for the year ended December 31, 2022.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company has a planning and budgeting process in place by which it anticipates and determines the funds required to support its normal operating requirements.
The Company holds sufficient cash and working capital which is maintained through stringent cash flow management to ensure sufficient liquidity is maintained. The table below summarizes the Company’s contractual obligations into relevant maturity groups at the statement of financial position date based on the expected contractual maturity date. The amounts disclosed in the table are the contractual undiscounted payments.
51
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 25. | Financial<br> instruments (continued) |
|---|
Liquidity risk (continued)
Schedule of contractual undiscounted payments
| Less than one year | One to two years | Two to three years | More than three years | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Accounts payable and accrued liabilities | $ | 32,823,320 | $ | - | $ | - | $ | - | $ | 32,823,320 |
| Contract liabilities | 5,380,378 | - | - | - | 5,380,378 | |||||
| Income tax payable | 129,485 | - | - | - | 129,485 | |||||
| Deferred payment liability | 2,448,300 | 81,610 | 1,661,998 | - | 4,191,908 | |||||
| Lease liabilities | 953,812 | 710,842 | 551,809 | 279,982 | 2,496,445 | |||||
| Long-term debt | 17,411,765 | - | - | - | 17,411,765 | |||||
| Other long-term debt | 10,891 | 11,881 | 11,881 | 378,251 | 412,904 | |||||
| $ | 59,157,951 | $ | 804,333 | $ | 2,225,688 | $ | 658,233 | $ | 62,846,205 |
Foreign currency risk
A
large portion of the Company’s transactions occur in foreign currencies (including US dollars, UK pound sterling and Euro) and, therefore, the Company is exposed to foreign currency risk at the end of the reporting period through its US dollars, UK pound sterling and Euro denominated trade and other receivables, accounts payable and accrued liabilities, deferred payment liability and cash. As of December 31, 2022, a 10% depreciation or appreciation of the US dollar, UK pound sterling and Euro against the Canadian dollar would have resulted in an approximate $247,000, $329,000 and $154,000 decrease or increase, respectively, in total net loss and comprehensive loss.
Interest rate risk
The
Company’s long-term debt bears interest at Banker’s Acceptance fee equal to CDOR rate plus 7.5%. Fluctuations in the Banker’s Acceptance fee equal to CDOR rate will result in changes to the months interest expense. A change in the annual interest rate of 0.50% would approximately result in a $74,000 change in the annual interest expense.
| 26. | Commitments |
|---|
As of December 31, 2022, the Company has the following payment commitments with respect to consulting and other contractual obligations:
| Not later than one year | $ | 745,000 |
|---|---|---|
| Later than one year and not later than five years | 863,000 | |
| $ | 1,608,000 |
Further, the Company is subject to capital commitments pursuant to its investments in AIG Canada and AIG USA, see Note 8, as well as Surge eSports LLC which is being established under a similar structure. If the Company fails to make any capital contributions, as required, it may be subject to certain actions including the loss of rights or a reduction in equity ownership in order to satisfy the capital contribution requirements.
| 27. | Segment<br> disclosure |
|---|
The Company operates in one industry segment of digital media and entertainment. The majority of the Company’s assets are located in Canada and the United States of America (“USA”). The Company sells into three major geographic centers: USA, Canada and other foreign countries. The Company has determined that it has a single reportable segment as the Company’s decision makers reviews information on a consolidated basis.
Revenues by pillar for the years ended December 31, 2022 and 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Media and content | $ | 180,765,848 | $ | 152,444,727 |
| Esports and entertainment | 7,534,936 | 5,483,444 | ||
| Subscription | 14,535,137 | 9,436,115 | ||
| Total | $ | 202,835,921 | $ | 167,364,286 |
52
EnthusiastGaming Holdings Inc.
Notesto the Consolidated Financial Statements
Forthe years ended December 31, 2022 and 2021
(Expressed in Canadian Dollars)
| 27. | Segment<br> disclosure (continued) |
|---|
Revenues, in Canadian dollars, in each of these geographic location for the years ended December 31, 2022 and 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Canada | $ | 4,314,454 | $ | 2,501,988 |
| USA | 174,674,636 | 147,761,804 | ||
| England and Wales | 9,810,393 | 6,001,954 | ||
| All other countries | 14,036,438 | 11,098,540 | ||
| $ | 202,835,921 | $ | 167,364,286 |
The non-current assets, in Canadian dollars, in each of the geographic locations as of December 31, 2022 and December 31, 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |||
|---|---|---|---|---|
| Canada | $ | 153,899,948 | $ | 169,761,447 |
| USA | 130,543,027 | 153,549,460 | ||
| France | 3,364,854 | 3,453,744 | ||
| England and Wales | 5,786,062 | 1,752,444 | ||
| $ | 293,593,891 | $ | 328,517,095 | |
| 28. | Subsequent<br> events | |||
| --- | --- | |||
| (i) | On<br> January 1, 2023, Enthusiast Gaming (TSR) Inc. amalgamated with Enthusiast Gaming Media<br> Holdings Inc. and Hexagon Games Corp. and Enthusiast Gaming Media Holdings Inc. amalgamated<br> with Enthusiast Gaming Inc. | |||
| --- | --- | |||
| (ii) | On<br> March 1, 2023, the Company appointed Nick Brien as Chief Executive Officer. In connection<br> with Mr. Brien’s appointment, Adrian Montgomery concurrently resigned as Chief<br> Executive Officer and was appointed as Chair of the Board of Directors. | |||
| --- | --- | |||
| (iii) | On<br> March 1, 2023, the Company issued 6,062,976 stock options to an officer which comprises<br> 5,305,104 stock options and 757,872 performance stock options. The 5,305,104 stock options<br> are exercisable at $0.91 per stock option, expire March 1, 2033 and vest ratably over<br> a 4-year period with 25% of the stock options vesting on March 1, 2024 and the remaining<br> 75% of the stock options vesting in 36 equal monthly installments subsequent to March<br> 1, 2024. The 757,872 performance stock options are exercisable at $0.91 per stock option,<br> expire March 1, 2033 and vest ratably over a 4-year period with 25% of the stock options<br> vesting on March 1, 2024 and the remaining 75% of the stock options vesting in 36 equal<br> monthly installments subsequent to March 1, 2024 and, in all events, are subject to the<br> Company’s common shares having an average share price of at least USD $5.00 on<br> the Nasdaq over a period of 90 consecutive days (with such threshold being subject to<br> adjustment in the event of any stock split, reverse split or other capital reorganization<br> event) subsequent to March 1, 2023. | |||
| --- | --- | |||
| (iv) | On December 31, 2022, as per the terms of the Commitment Letter, the Company provided<br>the Bank notice of the exercise of the Company's option to extend the maturity date of the Term Credit and Operating Credit<br>for an additional 12-month period ending December 31, 2024, see Note 14. On March 21, 2023, the Company received notice of<br>the Bank's approval of the Company's option to extend the maturity date. The change in the maturity date will be subsequently reflected<br>in the Commitment Letter by means of an amendment. | |||
| --- | --- |
53
99.3
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
MANAGEMENT’SDISCUSSION AND ANALYSIS
The following discussion and analysis is management’s assessment of the results and financial condition of Enthusiast Gaming Holdings Inc. (the “Company” or “Enthusiast Gaming”). The following information should be read in conjunction with the Company’s audited consolidated financial statements for the years ended December 31, 2022 and 2021 and accompanying notes, all of which are available on Enthusiast Gaming’s issuer profile on SEDAR at www.sedar.com and in the United States on EDGAR at www.sec.gov/edgar.
The date of this management’s discussion and analysis (“MD&A”) is March 27, 2023. Unless otherwise indicated, all financial data in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee. This MD&A has been prepared pursuant to the disclosure requirements under National Instrument 51-102 – ContinuousDisclosure Obligations of the Canadian Securities Administrators. Under the United States / Canada Multijurisdictional Disclosure System, the Company is permitted to prepare this MD&A in accordance with the Canadian disclosure requirements which may differ from United States disclosure requirements. All dollar amounts are stated in Canadian Dollars unless otherwise indicated.
CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING INFORMATION
This MD&A contains “forward-looking information” within the meaning of applicable Canadian securities legislation (“forward-looking information”). Such forward-looking information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made, and readers are advised to consider such forward-looking statements in light of the risks set forth below and as detailed under “risks and uncertainties” in this MD&A.
Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Forward-looking information contained herein is given as of the date of this MD&A and the Company disclaims any obligation to update any forward-looking information, whether as a result of new information, future events or results, except as may be required by applicable securities laws. There can be no assurance that forward-looking information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking information.
NON-GAAPMEASURES
There are measures included in this MD&A that do not have a standardized meaning under generally accepted accounting principles (“GAAP”) and therefore may not be comparable to similarly titled measures and metrics presented by other issuers and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. In particular, “working capital” is a non-GAAP measure. Enthusiast Gaming includes this measure because it believes certain investors use this measure and metric as a means of assessing financial performance and that such measure highlights trends in the Company’s financial performance that may not otherwise be apparent when one relies solely on GAAP measures.
The non-GAAP measure presented in the MD&A is “working capital”, which refers to current assets minus current liabilities.
Non-GAAP measures should not be considered in isolation or as a substitute for revenue, net income, cash flows generated by operating, investing or financing activities, or other financial statement data presented in accordance with GAAP, and may not be comparable to similarly titled measures used by other companies.
2
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
DESCRIPTIONOF ENTHUSIAST GAMING HOLDINGS INC.
Enthusiast Gaming is building the largest media platform for video game and esports fans to connect and engage worldwide. Through its proprietary mix of digital media and entertainment assets, Enthusiast Gaming has built a vast network of like-minded communities to deliver the ultimate fan experience. This vertically integrated media platform engages a diverse, youthful and affluent audience who are watching, reading and consuming gaming content. Approximately 70%^1^ of Enthusiast Gaming’s audience is comprised of Gen Zs and Millennials who rely on the Enthusiast Gaming platform to learn, engage, communicate, create, and share gaming related content.
Between its online digital media properties, its network of partner websites and video channels, its library of web and mobile casual games, its video gaming expo, and its esports organization (Luminosity Gaming Inc., “Luminosity Gaming” or “Luminosity”), the Company engages approximately 300 million gaming enthusiasts worldwide monthly.
Enthusiast Gaming was incorporated under the Business Corporation Act (British Columbia) on June 27, 2018. The Company is a publicly traded company listed on the Toronto Stock Exchange (“TSX”) and Nasdaq Global Select Market (“Nasdaq”) under the symbol “EGLX”. Enthusiast Gaming maintains its registered office at 510 West Georgia Street, Suite 1800, Vancouver, British Columbia, V6B 0M3 and its executive office at 90 Eglinton Avenue East, Suite 805, Toronto, Ontario, M4P 2Y3.
On May 1, 2021, the Company acquired all of the outstanding common shares of Vedatis SAS (“Vedatis”) from the owners pursuant to a share purchase agreement dated May 1, 2021 (the “Vedatis SPA”). Pursuant to the terms of the Vedatis SPA, for the exchange of all outstanding common shares, the previous owners of Vedatis will receive (i) a cash payment of Euro €3,500,000, subject to a Euro €100,000 target working capital adjustment, (ii) the issuance of Euro €1,500,000 of common shares of the Company, (iii) a cash payment of Euro €1,250,000 on the first anniversary of closing, (iv) a payment of Euro €750,000 on the first anniversary of closing, which may be paid in cash or common shares at the option of the Company, and (v) an earn-out payment based on the performance of Vedatis. The earn-out payment, subject to certain conditions, is equal to the sum of earnings before interest, taxes, depreciation, and amortization for the best four consecutive quarters of the existing Vedatis business at the time of closing excluding new business generated or enhanced by the Company. The earn-out period is for four years following May 1, 2021. The Company has, at its option, the ability to settle the earn-out payment half in cash and half in common shares. The earn-out payment is to be paid no later than 60 days from the completion of the earn-out period. The Vedatis SPA is accounted for in accordance with IFRS 3 as the operations of Vedatis constitute a business.
On June 21, 2021, the Company, through its wholly owned subsidiary, Enthusiast Gaming Media (US) Inc. (“Media US”), completed the acquisition of Tabwire LLC (“Tabwire”) pursuant to an equity purchase agreement dated April 22, 2021 (the “Tabwire EPA”). Pursuant to the terms of the Tabwire EPA, the Company acquired all of the outstanding membership interest of Tabwire in exchange for (i) a cash payment of USD $5,000,000, subject to an accounts receivable adjustment, and (ii) the issuance of USD $6,000,000 of common shares of the Company. The Tabwire EPA is accounted for in accordance with IFRS 3 as the operations of Tabwire constitute a business.
On August 30, 2021, the Company, through its wholly-owned subsidiary, Media US, acquired all of the issued and outstanding membership interest of GameKnot LLC (“GameKnot”) pursuant to an equity purchase agreement dated August 30, 2021 (the “GameKnot EPA”). Pursuant to the terms of the GameKnot EPA, the Company acquired all of the outstanding membership interest of GameKnot in exchange for i) a cash payment of USD $1,500,000, (ii) the issuance of USD $750,000 of common shares of the Company, and (iii) a payment of USD $500,000 on the six-month anniversary of closing which may be paid in cash or common shares at the option of the Company. The GameKnot EPA is accounted for in accordance with IFRS 3, as the operations of GameKnot constitute a business.
| ^1^ | Calculated based on data provided by Comscore as of December<br>2022. |
|---|
3
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
DESCRIPTIONOF ENTHUSIAST GAMING HOLDINGS INC. (Continued)
On September 3, 2021, the Company, through its wholly-owned subsidiary, Media US, acquired all of the issued and outstanding shares of Addicting Games, Inc. and TeachMe, Inc. (“TeachMe”, which together with Addicting Games, Inc., is herein referred to a “Addicting Games”) pursuant to a share purchase agreement dated September 3, 2021 (the “Addicting Games SPA”). Pursuant to the terms of the Addicting Games SPA, the Company acquired all of the outstanding common shares of Addicting Games in exchange for i) a cash payment of USD $10,000,000, subject to a working capital adjustment and other adjustments, (ii) the issuance of USD $12,000,000 of common shares of the Company, (iii) a payment of USD $7,000,000 on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, and (iv) a payment of USD $3,800,000 on the second anniversary of closing which may be paid in cash or common shares at the option of the Company. The Addicting Games SPA is accounted for in accordance with IFRS 3 as the operations of Addicting Games constitute a business.
On November 22, 2021, the Company, through its wholly-owned subsidiary, Media US, acquired all of the issued and outstanding membership interest of Outplayed, Inc. (“Outplayed”) pursuant to a merger agreement dated November 22, 2021 (the “Outplayed MA”). Pursuant to the Outplayed MA between Enthusiast Acquisition Corp. (“Acquisition Corp”), a subsidiary of Media US incorporated to facilitate this transaction, and Outplayed, Outplayed merged with and into Acquisition Corp. and Acquisition Corp. changed its name to Outplayed, Inc. Pursuant to the terms of the Outplayed MA, the Company acquired all of the outstanding membership interest of Outplayed in exchange for i) a cash payment of USD $7,500,000, subject to working capital and other adjustments, (ii) the issuance of 5,200,000 of common shares of the Company, (iii) a payment of USD $8,500,000 on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, (iv) a payment of USD $8,500,000 on the second anniversary of closing which may be paid in cash or common shares at the option of the Company, (v) a first anniversary earn-out payment of USD $6,000,000 based on the performance of Outplayed, and (vi) a second anniversary earn-out payment of USD $6,000,000 based on the performance of Outplayed. The earn-out payments, subject to certain conditions, will be paid if certain site traffic-based targets are met in the first and second years of operations. The first anniversary earn-out period is for one year from the closing date and the second anniversary earn-out period is for one year from the end of the first anniversary earn-out period. The Company has, at its option, the ability to settle the earn-out payments in common shares. The first anniversary earn-out payment is to be paid no later than 30 days from the completion of the first anniversary earn-out period and the second anniversary earn-out payment is to be paid no later than 30 days from the completion of the second anniversary earn-out period. The Outplayed MA is accounted for in accordance with IFRS 3, as the operations of Outplayed constitute a business.
On April 28, 2022, the Company, through its wholly-owned subsidiary, Steel Media Limited, acquired all of the issued and outstanding treasury shares of Fantasy Media Ltd (“FML”) and Fantasy Football Scout Limited (“FFS”, which together with “FML” is herein referred to as “FFS”), pursuant to a share purchase agreement dated April 28, 2022 (the “FFS SPA”). Pursuant to the terms of the FFS SPA, the Company acquired all of the outstanding treasury shares of FFS in exchange for (i) a cash payment of $2,937,520 (GBP £1,825,000) on closing, which includes an agreed upon cash excess amount of $523,120 (GBP £325,000), (ii) a payment of $1,609,600 (GBP £1,000,000) on the first anniversary of closing which may be paid in cash or common shares at the option of the Company, (iii) an earn-out cash payment $804,800 (GBP £500,000) on the first anniversary of closing, based on the renewal of a Fantasy Premier League agreement, subject to adjustments, and (iv) a cash payment of $80,480 (GBP £50,000) on the second anniversary of closing, subject to adjustments. The earn-out cash payment of $804,800 (GBP £500,000) will be paid if the Fantasy Premier League agreement, which expired on August 1, 2022, is renewed for an additional three-year period, on substantially similar or more favourable terms. The FFS SPA is accounted for in accordance with IFRS 3, as the operations of FFS constitute a business.
The Vedatis SPA, Tabwire EPA, GameKnot EPA, Addicting Games SPA, Outplayed MA, and the FFS SPA are collectively called the “Mergers and Acquisitions” in the consolidated financial statements and MD&A. For information relating to the accounting of the Mergers and Acquisitions refer to Note 5 of the consolidated financial statements of the Company for the years ended December 31, 2022 and 2021.
4
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
DESCRIPTIONOF ENTHUSIAST GAMING HOLDINGS INC. (Continued)
Businessoverview of Vedatis
Vedatis owns the web property, Icy Veins, which is one of the largest independent Activision Blizzard fan communities generating over 3 billion lifetime views of content and was founded in 2011. Icy Veins provides news and strategy guides for leading franchises like World of Warcraft, Diablo, Heroes of Storm, Hearthstone, and Overwatch. Enthusiast Gaming Properties Inc. (“Enthusiast Properties”) has been monetizing the Icy Veins advertising traffic since 2017.
Businessoverview of Tabwire
Tabwire is a technology and data platform company that enables gamers to create a cross-platform registered user identification profile to track and directly view their game data in real-time. In addition, it has a unique feature set including a cheater detection system that enhances fair game play by generating a player trust ranking system for its registered users. It has already built game play companion tools for Rainbow Six Siege, Escape from Tarkov, Apex Legends, and Warzone, amongst other game titles. Tabwire continues to add game titles to its player companion tools. Tabwire owns the web property TabStats. Tabstats also has in-game overlays on Overwolf, a third-party app store for the following games: Rainbow Six Siege, and Escape from Tarkov. Enthusiast Properties has been monetizing the TabStats advertising traffic since February 2021.
Businessoverview of GameKnot
GameKnot owns the web property GameKnot.com. Founded in 2000, GameKnot is a news, strategy, and community site for casual and competitive chess players, offering multiple forms of competition via chess tournaments, leagues, and ladders. With free and premium subscription offerings, the GameKnot web property also provides resources including lessons and puzzles.
Businessoverview of Addicting Games
Addicting Games is an innovator in casual gaming with a portfolio of casual games for desktop and mobile devices. Since the early 2000s, Addicting Games has helped to popularize casual gaming online, developing and distributing innovative games. Today, Addicting Games provides an extensive library of over 1,500 games to approximately 10 million gamers monthly. Addicting Games’ audience spends over 15 minutes per average visit playing on titles spanning action, sports, puzzles, and more. Addicting Games offers subscriptions and in-app purchases on many of its properties.
Games, portals, and brands included in the Addicting Games portfolio include:
| ● | Addicting<br>Games (addictinggames.com) |
|---|---|
| ● | Shockwave<br>(shockwave.com) |
| --- | --- |
| ● | TypeRacer<br>(typeracer.com) |
| --- | --- |
| ● | ioGames<br>Space (iogames.space) |
| --- | --- |
| ● | Little<br>Big Snake (littlebigsnake.com, iOS app, Android app) |
| --- | --- |
| ● | Diep.io<br>(diep.io, iOS app, Android app) |
| --- | --- |
| ● | EV.io<br>(ev.io, Windows, MacOS) |
| --- | --- |
| ● | Mope.io<br>(mope.io, iOS app, Android app) |
| --- | --- |
| ● | Math<br>Games (mathgames.com) |
| --- | --- |
| ● | TeachMe<br>(teachme.com) |
| --- | --- |
The Company deploys these games on both web and mobile platforms with a stated goal that they can be player by anyone, anywhere, on any device.
Businessoverview of Outplayed
Outplayed owns the web property, U.GG, which is one of the largest League of Legends fan communities in the world. By combining a rigorous data science approach with a proprietary user centric experience, Outplayed provides actionable, data-driven insights supporting, educating, connecting, and engaging a monthly active user base of approximately 10 million players. U.GG is featured on the official League of Legends website (www.leagueoflegends.com) as a resource for players.
5
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
DESCRIPTIONOF ENTHUSIAST GAMING HOLDINGS INC. (Continued)
Businessoverview of Fantasy Football Scout
FFS owns the web properties FantasyFootballScout.co.uk and livefpl.net. FFS provides the fantasy football community, weekly scout report newsletters, integrated live rank data, data visualizations and three player comparison tools. LiveFPL is a free service to help members track their exact fantasy Premier League rankings in real time, both overall and in their mini-leagues and understand how to move up in rankings.
BUSINESSPRODUCTS AND SERVICES
Enthusiast Gaming deploys its products and services as a single reportable segment in the digital media and entertainment industry. Enthusiast Gaming’s products and services fall into three principal pillars, which consist of Media and Content, Esports and Entertainment, and Subscription.
Mediaand Content
Enthusiast Gaming’s media and content revenue stream is comprised of over 50 websites that are wholly owned or exclusively monetized by the Company and contain news, reviews, videos, live streams, blog posts, tips, chats, message boards, other video-gaming related content and casual games. Central to Enthusiast Gaming’s ability to create valuable advertising space that can be sold on its websites, video channels and casual games (referred to as “Inventory”) is the ability to both develop content rich digital media and foster the interaction and contributions of its users to its digital media properties. Enthusiast Gaming possesses a network of full and part-time content developers to ensure regular, interesting updates are made across its digital media properties to reflect the newest developments in the world of video games, in the form of videos, articles, blog posts, and other content.
The gaming community is drawn to different aspects and forms of content on Enthusiast Gaming’s network of websites. Part of Enthusiast Gaming’s strategy is to acquire profitable video gaming websites and video properties with differentiating content from its then current portfolio, providing valuable, relevant content for any gaming enthusiast. Some of the different types of content includes: long form, short form, and documentary styles of content.
Another prevalent aspect of the media content on Enthusiast Gaming’s sites or video properties may be referred to as “video game journalism”, an aspect of the video gaming industry whereby individuals will review, critique, and provide commentary on new and old video games, particular aspects of video games, upgrades, new hardware platforms, and other aspects of video games.
Omnia Media Inc.’s (“Omnia”), a subsidiary of the Company, principal business activities include the creation, distribution, and exploitation of owned and talent-produced gaming-related video content, as well as the representation and management of underlying talent. Omnia generates advertising revenue from its external talent network, its owned and operated content, as well as through direct brand sales through delivery of targeted advertisements on YouTube and other platforms that users click on, leading to direct engagement between users and advertisers. Omnia produces and programs over 20 weekly shows across advertising-based video on demand (“AVOD”) and over-the-top (“OTT”) channels and represents over 500 gaming influencers across YouTube and Twitch. Its distribution network reaches over 90 million unique viewers and has a significant U.S. market inventory of over 1,000 channels, over 600 million subscribers and generated over 25 billion total video views in 2022. Omnia owns content brands that matter to fans who love gaming and pop culture including BCC Gaming, Arcade Cloud and Wisecrack. BCC Gaming is a leading Fortnite community channel. Arcade Cloud is a gaming channel featuring original animations. Wisecrack is a collective of comedians, academics, filmmakers, and artists. Omnia generates advertising revenue from its external talent network, its owned and operated content, as well as through direct brand sales through delivery of targeted advertisements on YouTube and other platforms that users click on, leading to direct engagement between users and advertisers.
Addicting Games has a portfolio of casual games for desktop and mobile devices. Advertising revenues generated from Inventory on Addicting Games’ casual games is included in media and content revenue.
6
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
BUSINESSPRODUCTS AND SERVICES (Continued)
Mediaand Content (Continued)
For any publishing company, the key mission is to build a dedicated following of engaged visitors and brands that are looking for high levels of engagement within a target market to run successful advertising campaigns. Enthusiast Gaming has amassed a platform of engaged, lifestyle gamers that have become a leading advertising platform for brands targeting the gamer demographic. Enthusiast Gaming’s web platform generates over two billion page views per quarter, and its video platform, operated by Omnia, generates approximately six billion video views per quarter. Each of these views produces Inventory available for sale. The majority of Enthusiast Gaming’s media and content revenue is driven by programmatic advertising across the platform. Enthusiast Gaming has built out a direct sales team to foster key relationships and drive revenue. The direct sales team is also responsible for developing long term clients looking for integrated advertising solutions across Enthusiast Gaming’s brands.
ProgrammaticMedia Value Chain
The programmatic media value chain consists of various industry players seeking to facilitate optimal purchasing of advertising from targeted publishers. Importantly, both the supply side (websites or video properties with ad space) and the demand side (brands and/or advertisers seeking ad space) have their own respective options when it comes to platforms. Supply-side Platforms (“SSPs”) and Display Side Platforms (“DSPs”) have been created in order to streamline publishing and ad-buying processes. Companies strategically use both SSPs and DSPs to facilitate optimal purchasing of advertising from targeted publishers.
A common advertising spending metric utilized in the digital publishing industry, is known as “Cost Per Thousand” (“CPM”) impressions.
CPM and other relevant metrics, allow SSPs and DSPs to navigate on a common basis whereby a more targeted marketing campaign will typically demand a higher CPM given that each ad impression can justifiably be worth more to the advertiser.
Should an advertiser or publisher decide to investigate one step deeper into the efficiency of its campaign, the metric of “Click Through Rate” serves as a percentage of people who saw the ad and subsequently clicked on it. Other methods of negotiating digital advertising and publishing transactions utilize “Cost Per Click”, wherein the advertiser pays on a per-click basis, or alternatively can pay on a more joint venture / commission basis sometimes referred to as “Cost Per Acquisition”.
Companies tend to utilize Effective Cost Per Thousand (“eCPM”) impressions in order to compare various advertising mechanisms and campaigns on a leveled basis. Essentially, eCPM inputs the earnings obtained via a certain campaign, divided by the number of actual impressions delivered. This results in a cost per impression, such that when multiplied by 1,000, will deliver an approximation for the eCPM.
Saleof Inventory
The digital media advertising revenue stream of Enthusiast Gaming’s business flows from the digital media publishing revenue stream. With content-rich digital media properties drawing billions of monthly page and video views, Enthusiast Gaming is able to sell valuable Inventory on its digital media properties. In addition to selling its own Inventory, Enthusiast Gaming acts as a representative for the sale of third-party Inventory on websites and video properties and applications that also host similarly themed content. By combining the Inventory in its own network with third-party Inventory, and in some instances, acting as an exclusive provider of advertising to third parties, Enthusiast Gaming gets access to exclusive ad auctions and sales opportunities through which it is able to command higher advertising revenues and negotiate favorable profit-sharing arrangements.
Online advertising revenue is determined by a number of metrics. Advertising revenues may factor in the number of individuals who view particular web pages or video properties in Enthusiast Gaming’s network of digital media properties, how often the web pages or videos are viewed, and how much time a user spends on a website or video property during each visit. Revenue can be accorded based on the number of advertising impressions, the “Click-through Rate” (“CTR”), and the rate at which advertisements lead to sales. The functioning of the advertisements themselves can have a significant effect on achieving key advertising metrics.
7
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
BUSINESSPRODUCTS AND SERVICES (Continued)
Mediaand Content (Continued)
Saleof Inventory (Continued)
Enthusiast Gaming developed proprietary optimization tools which it utilizes to sell ads. The optimization tool allows Enthusiast Gaming to set strategic parameters for the sale of Inventory in real time auctions that occur in milliseconds and are all executed by computer programs. Additionally, the programmatic optimization tools enable Enthusiast Gaming to target specific advertisers at specific times in order to receive the highest value for its Inventory.
The Inventory or advertising space can be found in a variety of locations throughout the websites and video properties. New advertising impressions are generally created when a user opens a website or navigates to a different page, or when they watch a video. They can take on the form of pre-roll video advertisements, banner advertisements, ad-words, “skins” or background advertisements, in-application ads, or other forms of ad units as may be applicable to the respective property.
Enthusiast Gaming derives part of its total revenue from direct advertising campaigns. When a client opts for a direct campaign, Enthusiast Gaming will prepare a marketing plan with the client, consisting of the length of the campaign and set parameters which will define how the ad will be displayed such as, specific countries where the ad will be displayed, on desktop or mobile, whether the ad will click through to another site, etc. Additionally, depending on the campaign, Enthusiast Gaming may guarantee a certain amount of impressions or CTR. Additionally, Enthusiast Gaming may produce custom campaigns that involve activations by talent including conducting contests, livestreams, and social media posts to increase brand awareness.
Enthusiast Gaming’s media and content revenue is primarily derived from the sales of ad inventory on its network of digital media properties. Enthusiast Gaming has steadily grown its network of digital media properties and has experienced a corresponding growth in revenue. Due to the steady growth, the fluctuation of spending in the advertising industry has not been obvious from Enthusiast Gaming’s operating results. Ad inventory derives its value from a number of factors, including supply and demand. In preparation for retail-oriented holidays, retail sector advertisers may increase their advertising budgets, thus reducing the availability of ad inventory and increasing its value. Similarly, advertisers in the technology industry may correlate their ad campaigns to the launch of new products.
Online advertisements can be sold in a variety of ways. Enthusiast Gaming enters into agreements with online advertising exchanges, through which advertisers will bid on space and time in Enthusiast Gaming Inventory and the Inventory of companies Enthusiast Gaming represents.
Under its affiliate agreements, Enthusiast Gaming provides advertising sales as a third-party representative, to digital media publishers. Generally, Enthusiast Gaming will receive the right to market and sell all available advertising space within the digital media publisher’s website or video property for the duration of the agreement. In exchange for the opportunity to monetize the digital media publisher’s property, Enthusiast Gaming will compensate the digital media publisher, either in the form of fixed monthly payments subject to page views, or a percentage of ad revenue, or a combination of the two.
The advertising technology space is ever evolving, but like most industries, the race tends to be toward optimal efficiency. Enthusiast Gaming therefore believes, as do many industry experts, that original content production, curation, and publishing will continue to thrive and generate more value given its importance to target consumers. Conversely, as better efficiency is pursued, middle-firms currently exacting fees in between advertisers and publishers, should see their revenues and margins decline. Large advertisers are interested in widely distributed publishers like Enthusiast Gaming, and firms in between will become more secondary.
Esportsand Entertainment
The Company’s esports division, Luminosity Gaming, is a professional esports organization based in Toronto, Canada. It currently has fully-owned teams competing in Apex Legends, Rocket League, World of Warcraft, Call of Duty: Mobile, Rainbow Six Siege, PlayerUnknown’s Battlegrounds (“PUBG”), and Call of Duty: Warzone, Super Smash Bros: Melee, Super Smash Bros: Ultimate. Luminosity Gaming’s teams compete globally and Luminosity positions itself as a significant contender at the highest level of competition in all games in which it fields teams. In addition to its competitive esports teams, Luminosity also has a team of content creators on YouTube, Twitch, and TikTok.
8
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
BUSINESSPRODUCTS AND SERVICES (Continued)
Esportsand Entertainment (Continued)
The Company holds a non-controlling interest in the Vancouver Titans of the Overwatch League and the Seattle Surge of the Call of Duty^®^ esports league. Enthusiast Gaming assists in the management of the Vancouver Titans and the Seattle Surge.
Enthusiast Gaming’s enterprise is made up of interrelated operations intended to derive revenue from assets acquired by Enthusiast Gaming across the esports value chain. Enthusiast Gaming leverages its esports operations to build content and develop an audience and fan base to facilitate merchandising and subscriptions, pursuant to direct sponsorships, endorsement deals, product placement deals, advertising sales and advertising.
The branding of Enthusiast Gaming and Luminosity Gaming is particularly important to its marketing initiatives and its ability to gain traction in the industry and engage marketing partners such as sponsors. The outcome of any contest, competition, or tournament for the teams and players that Enthusiast Gaming intends to manage and provide services to may affect the ability for Enthusiast Gaming to strengthen its brand. Enthusiast Gaming believes its business depends on identifiable intangible properties such as brand names.
Esports entities that rely on marketing initiatives as a source of revenue will need to have a large following in order to enable marketing partners to generate revenue by leveraging this following. To that end, Enthusiast Gaming has retained a management team that has business acumen, sports and entertainment experience and industry connections. Enthusiast Gaming leverages its direct sales team to not only sell advertising inventory, but to also sell sponsorships for its esports assets.
The Company previously operated a B2C live event named “EGLX”. In 2018, approximately 55,000 people attended two EGLX events and the Company continues to explore opportunities to grow its entertainment division to coincide with the significant growth of its platform online. Following the success of the two events in 2018, EGLX 2019 was brought back to the Metro Toronto Convention Centre with double the floor space. The 2019 EGLX event had in excess of 30,000 attendees and featured over 150 exhibitors, panels, cosplay, free play, the Artist Alley, an Indie Corner and a Family Zone.
As a response to the COVID-19 pandemic, in November 2020 the Company held a virtual version of EGLX, which was live streamed from November 10-13, 2020 on eglx.com and on Twitch at twitch.tv/lgloyal. Supported by key sponsors, including SpiderTech, G FUEL, and TikTok, the event featured world premieres, unique performances, and a number of gaming competitions. Featured talent and performances included: Muselk, NickEh30, Fresh, Anomaly, XQC, NFL superstars Richard Sherman and Darius Slay, and musicians ZHU and Goldlink.
The Company did not host a virtual version of EGLX in 2021 or 2022. The Company is exploring possible dates and locations for a future return of EGLX to a live event.
The Company’s entertainment division is also the operator of over 25 video game networking events across 11 countries, including key markets such as the US and UK. The Company is an industry leader in B2B and consumer mobile gaming events. It owns and operates numerous successful networking events around the world with registered industry attendees and key sponsors and partners. As part of its B2B events, the Company hosts Pocket Gamer Party, Top 50 Developer Guide, Mobile Mixers, the Mobile Games Awards, and a feature event, Pocket Gamer Connects, the largest B2B mobile games conference series, with both virtual events and live events in locations such as London, San Francisco, Helsinki, and Seattle. In November 2021, the Company hosted two new digital conference series, being Pocket Gamer Connects Digital NEXT and Beyond Games, from November 15 – November 19, 2021. These two events focus on topics relevant to the gaming space including non-fungible tokens (“NFTs”), blockchain gaming, and the metaverse. In February 2022, the Company hosted its first major live event in nearly 2 years, Pocket Gamer Connects London, with approximately 1,900 registered attendees, from February 14-15, 2022. In May 2022, the Company hosted Pocket Gamer Connects Seattle, with approximately 900 registered attendees, from May 9-10, 2022. In July 2022, the Company hosted the inaugural Pocket Gamer Connects Toronto, with approximately 800 registered attendees, from July 6-7, 2022. In September 2022, the Company hosted the Pocket Gamer Connects Helsinki, with approximately 1,550 registered attendees, from September 27-28, 2022. In November 2022, the Company hosted Pocket Gamer Connects Jordan, with approximately 1,400 registered attendees, from November 12-13, 2022. In addition, the Company hosted a brand-new event, Pocket Game Connect Leaders Summit in Riyadh, Saudi Arabia from November 30 to December 1, 2022, attended by approximately 120 attendees.
9
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
BUSINESSPRODUCTS AND SERVICES (Continued)
Subscription
The Sims Resource (“TSR”) operates a subscription-based model and has a current subscriber base of over 200,000 monthly subscribers. TSR’s subscribers pay on average approximately USD$4 per month to access its VIP features.
In May 2021, the Company acquired Vedatis, which owns the web property, Icy Veins, and offers premium subscriptions to the Icy Veins website.
In June 2021, the Company acquired Tabwire, which offers monthly premium membership subscriptions to the Tabstats website as well as the Tabwire Twitch channel.
In August 2021, the Company acquired GameKnot, which offers monthly and yearly premium membership subscriptions to the GameKnot website.
In September 2021, the Company acquired Addicting Games, which offers premium membership subscriptions to certain Addicting Games properties including Addicting Games, Shockwave, TeachMe, TypeRacer, and Little Big Snake.
In November 2021, the Company acquired Outplayed, which offers membership subscriptions to the U.GG website.
In April 2022, the Company acquired FFS, which offers membership subscriptions to the FFS and LiveFPL websites.
The Company plans to continue to expand its subscription offerings across its networks of web and video properties.
GROWTHSTRATEGIES
Enthusiast Gaming has a complementary organic and M&A growth strategy. M&A has been an important growth lever, having helped the Company grow and serve approximately 300 million monthly active viewers. The Company believes it has a clear path to further monetize the viewership base through multiple organic growth initiatives including: optimizing CPMs, increasing direct sales, growing subscribers, and deploying digital products to its audience (such as casual games).
OptimizeCPMs
Enthusiast Gaming is focused on utilizing programmatic optimization tools to target specific viewers and delivering high value advertising. The Company built its adtech and programmatic optimization platform, through internally developed technology and third-party software. Enthusiast Gaming continues to enter into new SSPs relationships that contribute to increased sell through rates and revenue performance. The Company also invests in new adtech tools and expertise and expects to be able to achieve further revenue optimization on the Company’s web platforms.
IncreaseDirect Sales
Selling high-impact advertising inventory directly to brands creates additional margin accretion as marketers are charged a higher price than traditional programmatic sales. Direct selling specifically relates to contracting directly with brands to produce custom content and campaigns and is typically supplemented with paid media for customer activations. Direct sales included in revenue for Q4 2022 was $12.8 million as compared to approximately $8.8 million in Q4 2021. Enthusiast Gaming’s direct sales efforts began in Q1 2020 and continue to see increased success with larger client activations. The Company now has advertising sales and fulfillment professionals in major city centers including New York, Los Angeles, Chicago, Detroit, Toronto, and London.
GrowSubscribers
The Company has more than tripled the number of paid subscribers for its properties from approximately 61,000 in March 2019 to approximately 262,000 in December 2022. In 2021, approximately 48,000 paid subscribers were added through the Mergers and Acquisitions of Vedatis, Tabwire, GameKnot, Addicting Games, and Outplayed. In 2022, approximately 26,000 paid subscribers were added through the Mergers and Acquisitions of FFS. Enthusiast Gaming continues to look for opportunities to grow existing subscription offerings, launch new subscription offerings, and is in the early stages of developing an Enthusiast Gaming platform wide subscription model available to web, video, and esports audiences of the Company.
10
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
GROWTHSTRATEGIES (Continued)
NFLTuesday Night Gaming
In September 2022, the Company partnered with the National Football League (the “NFL”) to launch a first-of-its-kind gaming collaboration bringing together NFL players and Legends with top gaming content creators from marquee gaming organizations including Luminosity Gaming. This multi-year partnership resulted in the launch of NFL Tuesday Night Gaming (“NFL TNG”). NFL TNG debuted September 13, 2022, on YouTube in the United States and Canada, and airs Tuesdays during the 2022-2023 NFL regular season. The show consists of a rotating roster of NFL players and legends, competing with gaming creators across multiple game titles each week.
Season 1 of NFL Tuesday Night Gaming saw many impactful, viral moments for fans, including camaraderie between NFL Stars and gaming creators playing side-by-side, wholesome family moments on Family Game Night, and epic gaming moments. NFL TNG had approximately 48 million impressions across livestream and social content in Q4 2022.
In addition to the weekly live streamed gameplay, this partnership will also produce daily, always-on content throughout the season, including, pre-and post-game analysis, highlights, plays of the week, and more, leveraging the scale of the NFL and Enthusiast Gaming’s network of gaming assets. For more information on NFL TNG, visit nfltuesdaynightgaming.com.
ContentLicensing
The Company is pursuing opportunities to license its library of content and owned and operated brands to distributors. Enthusiast Gaming already has established partnerships with TikTok and Snapchat.
StrategicAcquisitions
The Company’s growth is enhanced by a targeted acquisition strategy. Enthusiast Gaming (including Enthusiast Properties) has successfully acquired or made significant investments in and integrated 24 companies. The Company continues to be disciplined in pursuing value-enhancing, highly-strategic acquisitions. A significant number of independent gaming web and video properties can benefit from Enthusiast Gaming’s viewership base, data and analytics platform, and CPM optimization strategy. Management maintains regular dialogue with these entities resulting in a strong M&A pipeline of highly accretive targets.
MARKET
GamingMarket
The robust global gaming market is rapidly expanding and represents one of the fastest growing segments within the broader media and entertainment ecosystem. Due to, among other things, increased engagement, technology adoption and shared experiences the global gaming market is expected to have reached USD$184.4 billion in 2022.^2^ According to Newzoo, the industry is expected to grow to USD$211.2 billion by 2025.^2^ The proliferation of high-speed internet, accessible technology, and publishers using enhanced live operations and other tools have further accelerated the gaming market. Gaming has amassed a diverse audience who rely on the industry as a form of entertainment and social connection. Increasingly, younger generations are immersing themselves in gaming ecosystems and now choose gaming as their primary form of entertainment.
Newzoo expected there will be nearly 3.2 billion global gamers, who engage with interactive entertainment using PC, console, mobile device or cloud gaming service in 2022.^2^ It is expected that gamers will surpass 3.5 billion by 2025.^3^ Enhanced technology and high-fidelity content has allowed live concerts, movie screenings and birthday parties to take place within gaming ecosystems driving further engagement and excitement among young and old.
The industry is still in an early stage as developers and publishers continue to create new content, with better monetization and communication capabilities. Additionally, technology companies are fueling the rise of gaming by enhancing content through better platforms i.e., larger mobile phones, new consoles and cloud gaming, which allow gamers to play anytime, anywhere using any platform. As the industry continues to grow, dedicated fans are engaging with gaming related content even after they put their devices down. Video games have led to the rise of esports, streaming, dedicated news and fan sites as well as celebrities all of which accelerate the global excitement around gaming.
| ^2^ | Based on Newzoo’s article: “Latest games<br>Market estimates and forecasts” published on January 20, 2023. |
|---|---|
| ^3^ | Based on data provide by Newzoo’s 2022 Global Games<br>Market Report |
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11
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
MARKET(Continued)**
DigitalMedia
Over the past two decades, the proliferation of the internet and mobile devices has shifted the way consumers engage with media and content, amplifying the digital media industry. According to eMarketer, consumers in the U.S. spent an average of 181 minutes accessing digital media in 2010.^4^ In 2020, this figure increased to 470 minutes a day, representing 160% growth. Due to, among other things, the shift in media consumption from traditional to digital and increased time consumers are spending online, advertisers have adjusted the way in which they allocate their advertising budgets.^5^ According to eMarketer, USD$90 billion was spent globally on digital advertising in 2012.^6^ This spend increased to USD$378 billion in 2020, representing growth of 319%. Digital advertising is expected to grow to USD$766 billion by 2025, which will be around 71% of the total global media and spending. ^7^
Specifically, with regards to gaming, digital media has become an increasingly important component of the industry. Gamers are now allocating significant time to gaming outside of playing their favorite titles, choosing to watch gaming video content, following esports teams and joining forums / blogs. According to Nielsen, 77% and 71% of Gen Z and Millennial gamers also consume Gaming Video Content, respectively.^8^ According to YouTube, viewers watched an approximately 50 billion hours of Gaming Video Content on its platform in 2018, doubling to approximately 100 billion in 2020.^9^ Additionally, the number of gaming-related tweets increased from approximately 218 million in 2017 to over 2 billion in 2020, according to Twitter.^10^ Gamers are spending time on gaming websites containing news, reviews, videos, blog posts, tips, chats, message boards, and other content. Furthermore, NewZoo points out that 9 in 10 Gen Alpha and Gen Z are game enthusiasts, among them 50% is willing to spend money on gaming, such as unlocking content, virtual goods, in-game currencies and gear.^11^
Viewers of Enthusiast Gaming’s network of digital media properties are both men and women ages 13 to 65+ with the majority of its users spending, on average, more than 15+ hours gaming per week. These individuals represent a highly sought-after demographic in a number of key advertising categories.
Esports
Esports, or electronic sports, is the evolution of video gaming. “Esports” typically refers to competitive gaming whereby gamers can, individually or in teams, compete against one another. Spectators can typically observe these competitions via different platforms online or in person at live events. The advent of online platforms, such as Twitch, has allowed more and more spectators to watch competitions globally from anywhere in the world and has contributed to the growth in the popularity of esports. Competitive gamers can now participate in regulated leagues, tournaments or other competitions and matches, for various different games on different entertainment systems. Further, competitive gamers, teams, team managers, streamers, game developers, viewing platforms and other participants in the esports industry are able to monetize the attention through different means, including through viewer subscriptions and marketing sponsorships.
Esports is an important component of online video gaming content. Most notably, esports turns competitive video-gaming into a spectator sport. Thousands of viewers will attend live events to watch professional video game players compete in tournaments. Additionally, these tournaments are often streamed online, with viewers logging on to watch from their computers, tablets or mobile devices.
| ^4^ | Based on data provided by eMarketer as of January 2021. |
|---|---|
| ^5^ | Based on data provided by Statista as of January 2023. |
| --- | --- |
| ^6^ | Based on data provided by eMarketer as of March 2021. |
| --- | --- |
| ^7^ | Based on data provided by eMarketer as of January 2023. |
| --- | --- |
| ^8^ | Based on Nielsen’s 2019 Millennials on Millennials:<br>Gaming Media Consumption Report. |
| --- | --- |
| ^9^ | Based on an article published by The Verge on December<br>8 2020 titled “YouTube Gaming had its best year ever with more than 100 billion hours watched” and an article published<br>by YouTube on December 8 2020 titled “2020 is YouTube Gaming’s biggest year ever: 100B watch time hours”. |
| --- | --- |
| ^10^ | Based on articles published by Twitter on February 15<br>2018 and January 11 2021 titled “Gaming and esports are happening on Twitter” and “Over 2 Billion Gaming Tweets<br>in 2020!”, respectively. |
| --- | --- |
| ^11^ | Based on Newzoo’s Gamer Insights: Gen Alpha &<br>Gen Z, the Future of Gaming, published in September 2022. |
| --- | --- |
12
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
MARKET(Continued)**
Esports(Continued)**
According to Newzoo, by 2022, esports is set to generate nearly USD$1.8 billion in revenues while the global esports audience is reach to 532 million.^12^ In January 2023, Technavio published a report on esports market that esports is set to generate nearly USD$3.52 billion in revenues from 2022 to 2027, growing at a compound annual growth rate of 21.8% during the forecast period, driven by more branding through esports, rising esports events and new platform launches.^13^
SIGNIFICANTANNOUNCEMENTS DURING AND SUBSEQUENT TO THE YEAR ENDED DECEMBER 31, 2022
| Date | Description |
|---|---|
| January<br> 11, 2022 | The<br> Company announced the new season of “Rising Stars,” a competition series that searches for the next great content<br> creators. This season, e.l.f. Cosmetics (NYSE: ELF) will co-create the series with Enthusiast Gaming, to discover the next<br> gaming superstars from colleges across the United States and Canada. |
| January<br> 17, 2022 | The<br> Company provided an update on its most recent acquisition, League of Legends’ fan community U.GG, which was completed<br> in November 2021. Since the beginning of the new League of Legends season on January 7, 2022, U.GG achieved a peak high of<br> 600,000 daily active users, with 1.1 million users visiting on the first weekend of the new season, from January 7 –<br> January 9, 2022. In addition, U.GG’s recently launched desktop app has been downloaded over 300,000 times since its<br> launch in November 2021. |
| January<br> 31, 2022 | The<br> Company announced that its digital media property reached a record 51.8 million unique visitors in the United States in December<br> 2021, based on recent digital media ratings from Comscore (Comscore Media Metrix^®^, Desktop 2+ Mobile 13+, December<br> 2021, U.S.). Enthusiast Gaming is joined by Twitch and Roblox as the only gaming companies to rank as Top 100 Internet Properties<br> in 2021 (Comscore Media Metrix^®^, Desktop 2+ Mobile 13+, December 2021, U.S.). |
| February<br> 15, 2022 | The<br> Company announced the results of its latest custom study with Nielsen, to measure the total social reach and Twitch viewership<br> of the Company’s Luminosity Gaming esports audience. The results of the latest custom Nielsen study for January 2022<br> show that Luminosity Gaming’s total social following is now over 145 million globally, having grown 13% since the last<br> study in October 2021. In addition, the hours watched for Luminosity Gaming’s esports team on Twitch surpassed 32 million<br> globally in January, an increase of 34% since the last study. The results mean that Luminosity Gaming has significantly increased<br> its margin as the world’s most watched esports team on Twitch, with hours watched now 50% greater than the nearest esports<br> competitor. |
| ^12^ | Based on an article published by eMarketer “Esports<br>Ecosystem in 2023: Key industry companies, viewership growth trends, and market revenue stats” published on January 1, 2023 |
| --- | --- |
| ^13^ | Based on an article published by Technavio “Esports<br>Market by Revenue Stream, Genre and Geography - Forecast and Analysis 2023-2027” published in January 2023 |
| --- | --- |
13
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
| March<br> 2, 2022 | The<br> Company announced a multi-year partnership with Hut 8 Mining Corp. (NASDAQ: HUT; TSX: HUT) (“Hut 8”), one of North<br> America’s largest innovation-focused digital asset mining pioneers, supporting open and decentralized systems since<br> 2018. The partnership marks the first time Hut 8 has come together with a gaming and esports organization, and Enthusiast<br> Gaming’s first partnership with a digital asset miner. As ambitious leaders at the intersection of gaming and digital<br> asset mining, Enthusiast Gaming and Hut 8 will collaborate on new experiences and content within mobile and blockchain gaming,<br> Web 3.0, NFTs, and cryptocurrency. To kick off the partnership, Enthusiast Gaming will release a significant update to its<br> first-person shooter game EV.IO, featuring Hut 8 as a presenting sponsor. Hut 8 will also become a sponsor of Luminosity Gaming,<br> the top esports organization on Twitch with a social following of more than 145 million globally. |
|---|---|
| March<br> 15, 2022 | The<br> Company announced a partnership with Fractal, an NFT marketplace co-founded by Justin Kan, co-founder of Twitch. The<br> partnership marks Enthusiast Gaming’s first with an NFT marketplace, and will see NFTs integrated into one of the Company’s<br> HTML5-based games for the first time. |
| March<br> 22, 2022 | The<br> Company announced that its digital media property ranked as the largest property in the Games category in the United Kingdom<br> and Canada, based on recent digital media ratings from Comscore, a leading third-party media measurement firm. |
| March<br> 24, 2022 | The<br> Company announced a renewed partnership deal with ExitLag. ExitLag will continue to leverage the Company’s extensive<br> Gen Z and Millennial reach, as the Latin America software developer builds its customer base in the United States, with its<br> proprietary technology to improve routing connections for gamers. |
| April<br> 19, 2022 | The<br> Company announced that it will host its next live event under its Pocket Gamer Connects (“PGC”) brand in Seattle,<br> Washington from May 9-10, 2022. More than 120 industry speakers across 17 themed tracks will share insight and knowledge on<br> topics including User Acquisition, Mastering Multiplayer, The Art of Publishing, Ad Insights, Building on Blockchain, Mapping<br> the Metaverse, Incredible Indies, CFO Insider, NFT Know-How, and more. Speakers and sponsors include Xbox, a16z, Fandom, Netflix<br> Games, Addicting Games, Riot Games, InMobi, AppLovin, Xsolla, and more. Running in parallel to PGC Seattle will be the Blockchain<br> Games Next Summit, a series of speaker panels and content focusing on the next wave of Web3.0 games technology including blockchain<br> games, NFTs, and the metaverse. |
| April<br> 27, 2022 | The<br> Company announced that its digital media property surpassed one billion total views per month in the United States, based<br> on recent digital media ratings from Comscore, an independent third-party media measurement firm. Total Views to the Company’s<br> property in the U.S reached 1.1 billion in March 2022, representing a 44% increase versus March 2021 (Comscore Media Metrix^®^,<br> Desktop 2+ Mobile 13+, March 2022 and March 2021, U.S.). The growth aligned with the highly-anticipated release of Elden Ring<br> by Bandai Namco Entertainment, with a high volume of reviews, guides, forums, and videos delivered across the Company’s<br> platform of video game fan communities. Enthusiast Gaming remains a Top 100 Property in the U.S. based on Unique Visitors,<br> currently ranked #85. Based on Total Views, Enthusiast Gaming ranks even higher among the Top 100 Properties at #39. The Company<br> joins the ranks of Twitter, Netflix, Hulu, and USA Today Network as digital media properties that are also ranked in the 30s<br> for Total Views (Comscore Media Metrix^®^, Desktop 2+ Mobile 13+, Top 100 Properties, March 2022, U.S.). |
| May<br> 24, 2022 | The<br> Company issued a statement addressing the misleading and baseless letter to the Company’s board of directors (the “Board”)<br> sent by activist investor Greywood Investments, LLC (“Greywood”). Enthusiast Gaming’s exceptionally skilled<br> Board includes highly qualified and actively engaged directors, all of whom know the Company well and are leaders in their<br> respective fields. Under their guidance, and the focused leadership of management, the Company is well positioned for continued<br> growth. |
14
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
| June<br> 3, 2022 | The<br> Company announced that on June 2, 2022, the Company settled certain deferred and earn-out payments in connection with its<br> acquisitions of Addicting Games, Outplayed, and Vedatis, through the issuance of an aggregate of 16,168,836 common shares<br> at an implied weighted average value of US$2.47 per share. |
|---|---|
| June<br> 13, 2022 | The<br> Company announced its director nominees for election to the Board at the Company’s upcoming Annual General Meeting (“AGM”).<br> Norton Rose Fulbright Canada LLP is acting as legal counsel to the Company. Canaccord Genuity Corp. is acting as exclusive<br> financial advisor to the Company. Kingsdale Advisors is acting as strategic shareholder advisor and strategic communications<br> advisor to the Company. |
| June<br> 30, 2022 | The<br> Company issued a letter to shareholders ahead of its upcoming AGM scheduled to be held on July 19, 2022. The letter details<br> the Company’s strong growth and achievements under the current leadership. The Company is keen to move past the distraction<br> caused by dissident shareholder Greywood. In this regard, the Company has extended an open offer to Greywood to appoint a<br> nominee of its choosing to join the Board immediately. |
| July<br> 7, 2022 | The<br> Company announced that David Goldhill and Janny Lee, two nominees of Greywood, will join the Company’s Board and stand<br> for election at the Company’s AGM. Greywood has withdrawn its alternative slate of directors and has agreed to fully<br> endorse and vote for the nominees put forward at the AGM by the Company. |
| July<br> 14, 2022 | The<br> Company announced that, further to its press release dated July 7, 2022, it has filed a supplement to its management information<br> circular dated June 16, 2022, which identifies the revised director slate and the names of the 10 director nominees that will<br> stand for election at the Company’s AGM. |
| July<br> 19, 2022 | The<br> Company announced the voting results for the election of its Board which took place at the Company’s AGM of Shareholders.<br> All nominees as set forth in the Company’s supplement were elected as directors of the Company at the AGM. |
| August<br> 8, 2022 | The<br> Company announced updates on its senior management team and Board of Directors including (i) Adrian Montgomery will remain<br> in his role as CEO until such time that a successor is named, at which point he will transition to the Chair of the Board<br> of Directors, (ii) Bill Karamouzis has been appointed as President of the Company, and (iii) John Albright has been appointed<br> Chair of the Board of Directors. |
| August<br> 23, 2022 | The<br> Company announced that its newest Web3 game, EV.IO, has sold out its latest NFT drop. The limited edition drop of 2,500 tokens<br> sold out in six hours on the Magic Eden marketplace. |
| August<br> 24, 2022 | The<br> Company announced the launch of a new inclusivity campaign, Raise Your Game (“RYG”), which was created to support<br> women in gaming and raise awareness for this frequently overlooked, and very powerful, audience segment. |
| August<br> 31, 2022 | The<br> Company and the NFL announced a first-of-its-kind gaming collaboration bringing together NFL players and Legends with top<br> gaming content creators from marquee gaming organizations including Luminosity Gaming. This multi-year partnership will see<br> the launch of NFL TNG, where teams will compete head-to-head across popular video game titles. |
| September<br> 8, 2022 | The<br> Company announced a collaboration with Coinbase Global Inc. (“Coinbase”) (NASDAQ:COIN), one of the world’s<br> largest cryptocurrency platforms and a trusted leader in the Web3 space. The announcement introduces Coinbase as the preferred<br> infrastructure provider to power the Company’s portfolio of Web3-enabled games. |
| September<br> 12, 2022 | The<br> Company announced it has signed a media sponsorship deal with Hulu + Live TV, as the first official media sponsor of NFL TNG. |
| September<br> 13, 2022 | The<br> Company announced the opening week lineup for NFL TNG. A rotating roster of 12 NFL players or Legends and six gaming creators<br> will be split into six teams of three. Teams will compete head-to-head across three game titles each night, including EA SPORTS™<br> Madden NFL, Fall Guys, Fortnite, Rocket League, and other titles to be announced. |
| September<br> 19, 2022 | The<br> Company announced that it has secured an expansion of its existing term credit facility by way of amendment, increasing the<br> size of the facility from $10 million to $20 million. |
| September<br> 26, 2022 | The<br> Company announced it will host its next live event under its PGC brand in Helsinki, Finland from September 27-28. |
15
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
| September<br> 29, 2022 | The<br> Company announced the sale of certain video game editorial websites (the “Website Assets”) for a purchase price<br> of approximately $6.8 million, representing a multiple of approximately 4.5x associated revenue. Among the Website<br> Assets included as part of the sale are Destructoid.com, Siliconera.com, Upcomer.com, PCInvasion.com, Operationsports.com<br> and EscapistMagazine.com, together with their respective social media handles and the Company’s rights to certain legacy<br> domains and related content such as NintendoEnthusiast.com. |
|---|---|
| October<br> 24, 2022 | The<br> Company and NFL announced the debut of NFL Family Game Night, a new three-part special series of NFL TNG designed as<br> a platform for families and younger fans to play alongside their favorite players and gamers in a fun and entertaining format.<br> With the support of key new media sponsorships from Nickelodeon and Universal Pictures, alongside existing sponsor Hulu +<br> Live TV, NFL Family Game Night aims to deliver excitement for the entire family. |
| November<br> 4, 2022 | The<br>Company disclosed the receipt of a notice (the “Notice”) on November 3, 2022 from the Nasdaq that the Company is not<br>currently in compliance with the USD$1.00 minimum bid price requirement for continued listing of the Company’s common shares<br>on the Nasdaq Global Select Market, as set forth in Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”).<br>The Notice indicated that, consistent with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days, or until May<br>2, 2023 (the “Compliance Deadline”), to regain compliance with the Minimum Bid Price Requirement by having the closing<br>bid price of the common shares meet or exceed USD$1.00 per common share for at least ten consecutive business days.<br><br> <br><br><br> <br>The<br> common shares will continue to trade on the Nasdaq global Select Market at this time, and neither the Company’s<br> operations nor the Company’s TSX listing are affected by the receipt of the Notice. The Company intends to monitor<br> the closing bid price of the common shares and may, if appropriate, consider implementing available options to regain<br> compliance with the Minimum Bid Price Requirement. In the event the Company does not regain compliance by the Compliance<br> Deadline, the Company may be eligible for an extension to the Compliance Deadline, provided the Company meets any conditions<br> to such extension imposed by Nasdaq in connection therewith. If the Company does not regain compliance within the allotted<br> compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the common<br> shares will be subject to delisting, subject to the right of the Company to appeal any such determination to a Nasdaq<br> hearings panel. |
| December<br> 1, 2022 | The<br> Company announced its content partnership with Netflix, the global leader in subscription streaming service and production<br> company, to launch and support the Geeked:Toon-in live stream weekly on Netflix’s Twitch account and the Geeked<br> TikTok account every Thursday, through December. |
| December<br> 6, 2022 | The<br> Company announced that its PGC live events series drew record attendees in 2022. Across six PGC events in 2022 in London,<br> Seattle, Toronto, Helsinki, Jordan, and Riyadh, Saudi Arabia, a record 6,700+ industry attendees and nearly 1,000 gaming industry<br> speakers and thought leaders connected and shared insights on a wide range of relevant topics including User Acquisition,<br> Mastering Multiplayer, The Art of Publishing, Ad Insights, Blockchain Gaming, Developer Toolkit, CFO Insider, and more. Featured<br> sponsors of PGC events in 2022 included Meta, Google, Unity, Agora, Appsflyer, Digital Turbine, Transperfect Jam City, Xsolla,<br> AppLovin, Unity, and more. Companies represented by featured speakers and panelists included, Electronic Arts, Humble Bundle,<br> Miniclip, King, Supercell, Jam City, Square Enix, Tencent, and more |
| December<br> 7, 2022 | The<br> Company announced it has signed a media sponsorship deal with Verizon and Xbox to become co-presenting sponsors for NFL TNG<br> Championship Week. |
| January<br> 23, 2023 | The<br> Company announced a partnership with Mondelēz International’s SOUR PATCH KIDS^®^ (NASDAQ: MDLX) to<br> launch the SOUR PATCH KIDS Fruit Fight Tournament, which will be hosted on NFL TNG’s channels beginning in February<br> 2023. The tournament is a collaboration among Enthusiast Gaming, SOUR PATCH KIDS, and media agency Spark Foundry to amplify<br> the SOUR PATCH KIDS Fruit Fight campaign among the gaming community |
16
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
| January<br> 24, 2023 | The<br> Company announced it has signed a new media sponsorship with Campbell Company of Canada for Campbell’s^®^<br> Chunky^®^ Soup to be the presenting sponsor for NFL TNG’s Chunky Soup Showdown. |
|---|---|
| January<br> 31, 2023 | The<br> Company announced that its most recent event, PGC London, drew record attendees. This show marked the 37^th^ installment<br> over 10 years of PGC events across the globe and surpassed all previous shows on a number of key metrics. At PGC London, a<br> record 2,600 attendees representing more than 1,200 companies from 65 countries and six continents connected on various topics<br> from across the gaming industry. |
| February<br> 2, 2023 | The<br> Company announced that its browser-based, first-person shooter game, EV.IO, continues to attract industry accolades as a pre-eminent<br> web3 gaming offering, including recently winning FPS Game of the Year and Esports Game of the Year at the Web3 Gam3rs Choice<br> Awards earlier this week, following wins in the categories of best esports title and best multiplayer title at the Polkastarter<br> GAM3 Awards in December. |
| February<br> 7, 2023 | The<br> Company announced that it has renewed its partnership with Xbox as a media sponsor for the upcoming NFL TNG All-Star Game. |
| February<br> 22, 2023 | The<br> Company announced that it has been ranked as the #1 gaming property for unique visitor traffic in the United States, based<br> on the latest digital media ratings from Comscore, a leading independent media measurement firm (Comscore Media Metrix^®^,<br> Games, January 2023, U.S.). |
| March<br> 1, 2023 | The<br> Company announced that Nick Brien has been appointed as CEO to lead its global operations. Nick Brien will be based in Los<br> Angeles. Most recently, Nick Brien was the CEO of Amobee, one of the world’s leading ad tech companies. Adrian Montgomery,<br> who has served as CEO of Enthusiast Gaming since 2019, will move to Chair the Board of Directors as part of a previously announced<br> transition plan. |
OVERALLPERFORMANCE
The comparative three months ended December 31, 2021, results below were prior to the Mergers and Acquisitions of FFS and include the results of Outplayed from its respective date of acquisition. Outplayed was acquired on November 22, 2021, and FFS was acquired on April 27, 2022. The operating results of these acquired entities have been included in the Company’s consolidated financial statements from the date of their respective acquisition.
Summaryof Financial and Operating Results
Forthe Three Months Ended December 31, 2022 and 2021
Selected financial information for the Company for the indicated period is provided below:
| **** | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 |
|---|---|---|
| $ | $ | |
| Total<br> revenue | 53,970,597 | 56,942,443 |
| Cost<br> of sales | 35,901,209 | 43,243,618 |
| Gross<br> profit | 18,069,388 | 13,698,825 |
| Interest<br> income | (28,274) | (983) |
| Operating<br> expenses | 30,259,158 | 25,679,125 |
| Net<br> loss and comprehensive loss for the period | (12,484,952) | (12,861,272) |
| Net<br> loss per share – basic and diluted | (0.08) | (0.10) |
Revenue for the three months ended December 31, 2022, and 2021, was $53,970,597, and $56,942,443 respectively. The table below provides a breakdown of the revenue for the indicated period:
| **** | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 |
|---|---|---|
| $ | $ | |
| Media<br> and content (a) | 49,012,984 | 53,299,626 |
| Esports<br> and entertainment (b) | 1,113,595 | 595,759 |
| Subscriptions<br> (c) | 3,844,018 | 3,047,058 |
| Total revenue | 53,970,597 | 56,942,443 |
17
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
OVERALLPERFORMANCE (Continued)
Summaryof Financial and Operating Results (Continued)
Forthe Three Months Ended December 31, 2022 and 2021 (Continued)
Notes:
| (a) | Media<br> and content revenue predominantly consists of advertising revenue on the Company’s<br> web, video, and casual gaming platforms, and content licensing revenue. Q4 2022 media<br> and content revenue attributable to the video platform is $31.1 million, which decreased<br> $5.3 million compared to $36.4 million in Q4 2021. The decrease in media and content<br> revenue for Q4 2022, relating to the video platform, is mainly attributable to a decrease<br> in video views of 11% in Q4 2022 compared to Q4 2021 and a revenue per thousand impressions<br> (“RPM”) for the video platform which was 12% lower in Q4 2022 compared to<br> Q4 2021 due to a decrease in spending from DSPs in Q4 2022 compared to Q4 2021 as observed<br> in the broader programmatic market. Q4 2022 media and content revenue, excluding the<br> video platform, is $17.9 million, which increased $1.0 million compared to $16.9 million<br> in Q4 2021. The increase in media and content revenue for Q4 2022, when excluding the<br> video platform, is mainly due to an increase in direct sales attributable to the web<br> platform in Q4 2022 and an increase in web pageviews of 31%. The increase in media and<br> content revenue, excluding the video platform, was offset by a web RPM which was 38%<br> lower in Q4 2022 compared to Q4 2021, due to a decrease in spending from DSPs in Q4 2022<br> compared to Q4 2021 as observed in the broader programmatic market. |
|---|
The increase in direct sales is a significant driver for the increase in gross profit as a percent of total revenue from 24.1% in Q4 2021 to 33.5% in Q4 2022. Video views were 6.0 billion in Q4 2022, compared to 6.7 billion in Q4 2021 (see Select OperatingMetrics). In Q2 2022 certain large partner channels left the video network, which the Company elected for in order to reduce operating costs relating to these channels. In Q4 2022, the impact of the easing of COVID-19 restrictions from Q3 2021 on video views was offset by the Company deploying new content to TikTok. Web pageviews were 3.8 billion in Q4 2022 compared to 2.9 billion in Q4 2021 (see Select Operating Metrics). The increase in web pageviews was mainly driven by The Sims being made available as a free-to-play title in Q4 2022, resulting in increased traffic to TSR, and an increase in traffic for Icy Veins due to new releases related to World of Warcraft in Q4 2022.
| (b) | Esports<br> revenue is generated through sponsorships, brand advertising, prize money, merchandise<br> sales, and other esports related sources. Entertainment revenue mainly relates to PGC<br> mobile gaming events which occur throughout each year. Entertainment revenue increased<br> to $0.4 million in Q4 2022 compared to $0.2 million in Q4 2021, an increase of $0.2 million.<br> The increase in entertainment revenue is mainly attributable to PGC Jordan which was<br> a live event held from November 12-13, 2022, and the inaugural PGC Leaders Summit in<br> Riyadh, Saudi Arabia from November 30 to December 1, 2022, whereas in Q4 2021, PGC Digital<br> Next from November 15-17, 2021 and Beyond Games from November 18-19, 2021 were both held<br> as virtual events, which typically have lower associated revenue. Esports revenue increased<br> to $0.7 million in Q4 2022 compared to $0.4 million in Q4 2021, an increase of $0.3 million.<br> The increase in esports revenue is mainly attributable to an increase in sponsorship<br> revenue and brand advertising revenue. |
|---|---|
| (c) | Subscription<br> revenue is generated from paid subscribers (see Select Operating Metrics) on the<br> Company’s web properties including TSR, Icy Veins, Tabstats, GameKnot, Addicting<br> Games, Shockwave, TeachMe, TypeRacer, Little Big Snake, U.GG, and FFS. As of December<br> 31, 2022, the Company has approximately 262,000 paid subscribers, compared to approximately<br> 220,000 paid subscribers as of December 31, 2021. The increase in subscription revenue<br> is primarily attributable to an increase in paid subscribers on TSR and the acquisition<br> of FFS. TSR’s subscribers pay on average approximately USD$4 per month to access<br> its VIP features. The cost of sales attributable to subscription revenue is nominal. |
| --- | --- |
18
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
OVERALLPERFORMANCE (Continued)
Summaryof Financial and Operating Results (Continued)
Forthe Three Months Ended December 31, 2022 and 2021 (Continued)
Operating expenses for the three months ended December 31, 2022 and 2021, were $30,259,158 and $25,679,125 respectively. The table below provides a breakdown of operating expenses for the indicated period:
| **** | Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 |
|---|---|---|
| $ | $ | |
| Professional<br> fees (a) | 332,589 | 687,493 |
| Consulting<br> fees (b) | 1,196,070 | 1,479,927 |
| Advertising<br> and promotion (c) | 1,265,340 | 581,620 |
| Office<br> and general (d) | 2,300,740 | 2,135,639 |
| Salaries<br> and wages (e) | 9,358,074 | 8,371,476 |
| Technology<br> support, web development and content (f) | 8,549,067 | 3,400,188 |
| Esports<br> player, team and game expenses (g) | 733,389 | 887,187 |
| Foreign<br> exchange loss (h) | 659,105 | 57,205 |
| Share-based<br> compensation (i) | 2,414,753 | 4,228,195 |
| Amortization<br> and depreciation (j) | 3,450,031 | 3,850,195 |
| Total operating expenses | 30,259,158 | 25,679,125 |
Notes:
| (a) | Professional<br> fees relate to corporate activities and are mainly comprised of legal, audit, tax and<br> accounting fees. Professional fees decreased $0.4 million in Q4 2022 as compared to Q4<br> 2021 due to decreased corporate activity. |
|---|---|
| (b) | Consulting<br> fees include management consultants, investor relations services, and technology and<br> data evaluation services. Consulting fees decreased by $0.3 million in Q4 2022 as compared<br> to Q4 2021 largely due to reduced consulting fees relating to advisory services. |
| --- | --- |
| (c) | Advertising<br> and promotion expense relates to corporate marketing, brand marketing, and brand ambassadors.<br> Advertising and promotion expenses increased by $0.7 million in Q4 2022 as compared to<br> Q4 2021 due to increased brand and product marketing initiatives, including amounts relating<br> to NFL TNG. |
| --- | --- |
| (d) | Office<br> and general costs increased by $0.2 million in Q4 2022 as compared to Q4 2021 mainly<br> due to the Mergers and Acquisitions. The Company maintains two offices in Toronto, Ontario,<br> two offices in Los Angeles, California, and one office in Austin, Texas. Two of these<br> offices were added during 2021 as part of the Mergers and Acquisitions. Occupancy costs<br> are included in office and general. |
| --- | --- |
| (e) | The<br> Company has a staff of approximately 210 employees as of December 31, 2022, compared<br> to a staff of approximately 200 employees as of December 31, 2021. The increase in staffing<br> levels is attributable to the hiring of sales employees, sales support employees, and<br> the Mergers and Acquisitions. Salaries and wages also include commissions on direct sales.<br> Increased direct sales contributed to the increase in salaries and wages as direct sales<br> were $12.8 million in Q4 2022 compared to $8.8 million in Q4 2021. |
| --- | --- |
| (f) | Technology<br> support, web development and content costs relate to Media and Content and Esports and<br> Entertainment. Technology support, web development and content costs increased by $5.1<br> million in Q4 2022 as compared to Q4 2021 due to an increase in content and design costs<br> incurred on new and existing properties including NFL TNG and the integration of the<br> Mergers and Acquisitions. This increase in technology support, web development and content<br> costs is offset from savings realized from the sale of Website Assets in Q3 2022 (see<br> Significant Announcements During the Year and Subsequent to Year Ended December 31, 2022). Technology support, web development and content costs include $5.3 million<br> of expenses relating to NFL TNG in Q4 2022, as compared to $nil in Q4 2021. |
| --- | --- |
19
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
OVERALLPERFORMANCE (Continued)
Summaryof Financial and Operating Results (Continued)
Forthe Three Months Ended December 31, 2022 and 2021 (Continued)
Notes:(Continued)
| (g) | Esports<br> player, team, and game expenses primarily relate to Luminosity Gaming, including but<br> not limited to esports player and influencer salaries, team housing, and team travel.<br> Esports player, team and games expense decreased $0.2 million in Q4 2022 compared to<br> Q4 2021, mainly due to lower average salary, which was offset by a higher number of esports<br> players and influencers. Luminosity Gaming had approximately 60 esports players and influencers<br> as of December 31, 2022, compared to approximately 40 esports players and influencers<br> as of December 31, 2021. |
|---|---|
| (h) | The<br> Company and its subsidiaries commonly transact and carry assets and liabilities in currencies<br> other than respective functional currencies. Foreign exchange gains or losses are caused<br> by movements in exchange rates. The Company expects continued gains and losses due to<br> fluctuating exchange rates. |
| --- | --- |
| (i) | Share-based<br> compensation is a non-cash expense which relates to options and restricted share units<br> granted to directors, officers, employees, and consultants of the Company, which are<br> expensed over their respective vesting periods. Share-based compensation expense decreased<br> by $1.8 million in Q4 2022 as compared to Q4 2021 largely due to forfeitures, but also<br> driven by vesting periods, and black-scholes option pricing model inputs. In January<br> 2021, the Company issued 743,671 options and 1,251,162 restricted share units. In April<br> 2021, the Company issued 855,234 options and 1,242,577 restricted share units. In April<br> 2022, the Company issued 1,560,697 options and 1,922,877 restricted share units. In November<br> 2022, the Company issued 211,942 options and 437,636 restricted share units. |
| --- | --- |
| (j) | Amortization<br> and depreciation are significantly comprised of amortization of intangible assets arising<br> from the Mergers and Acquisitions. Amortization and depreciation expense decreased by<br> $0.4 million in Q4 2022 as compared to Q4 2021 mainly due to the amortization of intangible<br> assets recognized upon the acquisitions of Vedatis and Tabwire in Q2 2021, GameKnot and<br> Addicting Games in Q3 2021, Outplayed in Q4 2021, and FFS in Q2 2022. Certain intangible<br> assets recognized from the Mergers and Acquisitions are amortized over periods of one<br> year or less, resulting in certain intangible assets becoming fully amortized in Q4 2022<br> or prior to Q4 2022. |
| --- | --- |
Forthe Years Ended December 31, 2022, 2021, and 2020
The comparative year ended December 30, 2021, results below were prior to the Mergers and Acquisitions of FFS and include the results of Vedatis, Tabwire, GameKnot, Addicting Games and Outplayed from their respective date of acquisition. Vedatis was acquired on May 1, 2021, Tabwire was acquired on June 21, 2021, GameKnot was acquired on August 30, 2021, Addicting Games was acquired on September 3, 2021, Outplayed was acquired on November 22, 2021, and FFS was acquired on April 27, 2022. The operating results of these acquired entities have been included in the Company’s consolidated financial statements from the date of their respective acquisition.
Selected financial information for the Company for the indicated year is provided below:
| **** | YearEnded<br><br> <br>December31, 2022 | YearEnded<br><br> <br>December31, 2021 | YearEnded<br><br> <br>December31, 2020 |
|---|---|---|---|
| $ | $ | $ | |
| Total<br> revenue | 202,835,921 | 167,364,286 | 72,963,481 |
| Cost<br> of sales | 139,371,400 | 129,589,540 | 54,294,967 |
| Gross<br> profit | 63,464,521 | 37,774,746 | 18,668,514 |
| Interest<br> income | (36,252) | (51,529) | (102,158) |
| Operating<br> expenses | 110,799,531 | 85,319,083 | 35,520,104 |
| Net<br> loss and comprehensive loss for the year | (68,728,123) | (51,564,884) | (26,896,982) |
| Net<br> loss per share – basic and diluted | (0.54) | (0.43) | (0.32) |
20
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
OVERALLPERFORMANCE (Continued)
Summaryof Financial and Operating Results (Continued)
Forthe Years Ended December 31, 2022, 2021 and 2020 (Continued)
Revenue for the years ended December 31, 2022, 2021, and 2020 was $202,835,921, $167,364,286, and $72,963,481 respectively. The table below provides a breakdown of revenue for the indicated year:
| **** | Year Ended<br><br> <br>December 31, 2022 | Year Ended<br><br> <br>December 31, 2021 | YearEnded<br><br> <br>December31, 2020 |
|---|---|---|---|
| $ | $ | $ | |
| Media<br> and content (a) | 180,765,848 | 152,444,727 | 60,887,990 |
| Esports<br> and entertainment (b) | 7,534,936 | 5,483,444 | 5,906,613 |
| Subscriptions<br> (c) | 14,535,137 | 9,436,115 | 6,168,878 |
| Total revenue | 202,835,921 | 167,364,286 | 72,963,481 |
Notes:
| (a) | Media and content revenue predominantly consists of advertising revenue<br>on the Company’s web, video and casual gaming platforms, and content licensing revenue. For the year ended December 31, 2022,<br>media and content revenue attributable to the video platform is $113.4 million compared to $113.4 million for the year ended December<br>30, 2021. The media and content revenue for the year ended December 31, 2022, relating to the video platform, remained consistent<br>with the year ended December 31, 2021 mainly due to RPM which was 10% higher in the year ended December 31, 2022 compared to December<br>31, 2021. The increase in video RPM was offset by a decrease in total video views of 13% for the year end December 31, 2022 compared<br>to December 31, 2021 (see Select Operating Metrics). For the year ended December 31, 2022, media and content revenue, excluding<br>the video platform, is $67.4 million, which increased $28.3 million compared to $39.1 million for the year ended December 31, 2021.<br>The increase in media and content revenue for the year ended December 31, 2022, when excluding the video platform, is mainly due<br>to an increase in direct sales attributable to the web platform in the year ended December 31, 2022, compared to December 31, 2021,<br>an increase in web pageviews of 47% in the year ended December 31, 2022, compared to December 31, 2021, and the Mergers and Acquisitions<br>which contributed $12.4 million to media and content revenue in the year ended December 31, 2022. The web RPM was 1% lower in the<br>year ended December 30, 2022, compared to December 30, 2021 due to a decrease in spending from DSPs in the year ended December<br>31, 2022 compared to the year ended December 31, 2021 as observed in the broader programmatic market. |
|---|
The increase in direct sales and the Mergers and Acquisitions are the main drivers for the increase in gross profit as a percent of total revenue from 22.6% for the year ended December 31, 2021 to 31.3% for the year ended December 31, 2022. Video views (see Select Operating Metrics) were 25 billion in the year ended December 31, 2022, compared to 29.1 billion in the year ended December 31, 2021, the decrease in video views offset the higher RPM on the video platform. Video views for the year ended December 31, 2021, were noticeably higher which the Company attributes to the COVID-19 pandemic and the related stay-at-home orders being enacted by governments worldwide, combined with the closing of schools in most jurisdictions. In addition, in the year ended December 31, 2022, certain large partner channels left the video network, which the Company elected for to reduce operating costs relating to these channels. Web pageviews were 15.6 billion in the year ended December 31, 2022 compared to 10.6 billion in the year ended December 31, 2021 (see Select Operating Metrics), the increase was mainly driven by the release of Elden Ring in February 2022 and the Mergers and Acquisitions.
21
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
OVERALLPERFORMANCE (Continued)
Summaryof Financial and Operating Results (Continued)
Forthe Years Ended December 31, 2022, 2021 and 2020 (Continued)
Notes:(Continued)
| (b) | Esports<br> revenue is generated through the provision of management services to other esports entities,<br> sponsorships, brand advertising, prize money, merchandise sales, and other esports related<br> sources. Entertainment revenue mainly relates to PGC mobile gaming events which occur<br> throughout each year. The increase in esports and entertainment revenue was caused by<br> entertainment revenue increasing from $1.7 million for the year ended December 31, 2021,<br> to $4.0 million for the year ended December 31, 2022, an increase of $2.3 million. This<br> increase in entertainment revenue is mainly attributable to PGC London, Seattle, Helsinki,<br> Jordan, which were live events in 2022 compared to virtual events in 2021, and the debut<br> of PGC Toronto, held in July 2022, and the PGC Leaders Summit Riyadh, held from November<br> 30 to December 1, 2022. Live events result in significantly more revenue and cost of<br> sales compared to virtual events. Esports revenue decreased to $3.5 million in the year<br> ended December 31, 2022 compared to $3.8 million in the year ended December 31, 2021,<br> a decrease of $0.3 million. This decrease in esports revenue is primarily driven by the<br> termination of the CSE management agreement on April 1, 2021. |
|---|---|
| (c) | Subscription<br> revenue is generated from paid subscribers (see Select Operating Metrics) on the<br> Company’s web properties TSR, Icy Veins, Tabstats, GameKnot, Addicting Games, Shockwave,<br> TeachMe, TypeRacer, Little Big Snake, U.GG and FFS. As of December 31, 2022, the Company<br> has approximately 262,000 paid subscribers, compared to approximately 220,000 paid subscribers<br> as of December 31, 2021. The increase in subscription revenue is primarily attributable<br> to an increase in paid subscribers on TSR and the Merger and Acquisitions. TSR’s<br> subscribers pay on average approximately USD$4 per month to access its VIP features.<br> The cost of sales attributable to subscription revenue is nominal. |
| --- | --- |
Operating expenses for the years ended December 31, 2022, 2021 and 2020 were $110,799,531, $85,319,083, and $35,520,104 respectively. The table below provides a breakdown of operating expenses for the indicated period:
| **** | YearEnded<br><br> <br>December31, 2022 | YearEnded<br><br> <br>December31, 2021 | YearEnded<br><br> <br>December31, 2020 |
|---|---|---|---|
| $ | $ | $ | |
| Professional<br> fees (a) | 2,691,148 | 3,073,330 | 2,273,088 |
| Consulting<br> fees (b) | 5,789,576 | 4,591,688 | 5,805,134 |
| Advertising<br> and promotion (c) | 2,682,684 | 3,047,149 | 1,409,084 |
| Office<br> and general (d) | 9,533,291 | 6,972,055 | 2,878,813 |
| Annual<br> general meeting legal and advisory costs (e) | 3,386,596 | - | - |
| Salaries<br> and wages (f) | 36,493,089 | 25,140,326 | 9,131,447 |
| Technology<br> support, web development and content (g) | 21,858,408 | 10,640,184 | 4,734,548 |
| Esports<br> player, team and game expenses (h) | 4,352,150 | 5,497,165 | 3,446,652 |
| Foreign<br> exchange gain (i) | (446,625) | (2,079,774) | (13,832) |
| Share-based<br> compensation (j) | 7,751,370 | 18,918,489 | 818,383 |
| Amortization<br> and depreciation (k) | 16,707,844 | 9,518,471 | 5,036,787 |
| Total operating expenses | 110,799,531 | 85,319,083 | 35,520,104 |
Notes:
| (a) | Professional<br> fees relate to corporate activities and are mainly comprised of legal, audit, tax and<br> accounting fees. Professional fees decreased $0.4 million in in the year ended December<br> 31, 2022, as compared to the year ended December 31, 2022, due to a decrease corporate<br> activity. |
|---|
22
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
OVERALLPERFORMANCE (Continued)
Summaryof Financial and Operating Results (Continued)
Forthe Years Ended December 31, 2022, 2021 and 2020 (Continued)
Notes:(Continued)
| (b) | Consulting<br> fees include management consultants, investor relations services, and technology and<br> data evaluation services, as well as fees pursuant to the Master Services Agreement with<br> the Vancouver Arena Limited Partnership (see Related Party Transactions). Consulting<br> fees increased by $1.2 million in the year ended December 31, 2022, as compared to the<br> year ended December 31, 2021, mainly due to additional consulting fees for technology<br> development, the Mergers and Acquisition and fees incurred relating to the settlement<br> of the deferred payment liability with Addicting Games and Outplayed. This increase was<br> offset by the termination of the Master Services Agreement with Vancouver Arena Limited<br> Partnership on April 1, 2021. |
|---|---|
| (c) | Advertising<br> and promotion expense relates to corporate marketing, brand marketing, and brand ambassadors.<br> Advertising and promotion expense decreased by $0.4 million in the year ended December<br> 31, 2022, as compared to the year ended December 31, 2021, due to a decrease in corporate<br> and brand marketing initiatives in the year ended December 31, 2022, as compared to the<br> year ended December 31, 2021. |
| --- | --- |
| (d) | Office<br> and general costs increased by $2.6 million in the year ended December 31, 2022, as compared<br> to the year ended December 31, 2021, mainly due to substantial increases in insurance<br> expense relating to the listing of the Company’s common shares on the Nasdaq in<br> April 2021 and the Mergers and Acquisitions. The Company also incurred listing and sustaining<br> fees as a result of the Nasdaq listing which are recognized in office and general costs.<br> These expenses commenced in April 2021 and are expected to continue to be incurred. The<br> Company maintains two offices in Toronto, Ontario, two offices in Los Angeles, California,<br> and one office in Austin, Texas. Two of these offices were added in 2021 as part of the<br> Mergers and Acquisitions. Occupancy costs are included in office and general. |
| --- | --- |
| (e) | Annual<br> general meeting legal and advisory costs relate to non-recurring legal, advisory, and<br> other expenses incurred in relation to the Company’s contested 2022 AGM (see Significant Announcements During the Year and Subsequent to Year Ended December 31, 2022). |
| --- | --- |
| (f) | The<br> Company has a staff of approximately 210 employees as of December 31, 2022, compared<br> to a staff of approximately 200 employees as of December 30, 2021. A significant portion<br> of the increase in staffing levels is attributable to the hiring of content, sales, sales<br> support employees, and the Mergers and Acquisitions. Furthermore, the increase was contributed<br> to from the Company adding a number of senior level roles in 2021. Salaries and wages<br> also include commissions on direct sales. Increased direct sales contributed to the increase<br> in salaries and wages as direct sales were $37.4 million in the year ended December 31,<br> 2022, compared to $22.2 million in the year ended December 31, 2021. |
| --- | --- |
| (g) | Technology<br> support, web development and content costs relate to Media and Content and Esports and<br> Entertainment. Technology support, web development and content costs increased by $11.2<br> million in the year ended December 31, 2022, as compared to the year ended December 31,<br> 2021, due to an increase in content and design costs incurred on new and existing properties<br> such as NFL TNG and TSR and the integration of the Mergers and Acquisitions. Technology<br> support, web development and content costs include $7.3 million of expenses relating<br> to NFL TNG for the year ended December 31, 2022, as compared to $Nil for the year ended<br> December 31, 2021, which is the majority of the increase. |
| --- | --- |
| (h) | Esports<br> player, team and game expenses relate to primarily to Luminosity Gaming, including but<br> not limited to esports player and influencer salaries, team housing, and team travel.<br> The decrease of $1.1 million in the year ended December 31, 2022, as compared to the<br> year ended December 31, 2021, is mainly due to lower average salary, which was offset<br> by a higher number of esports players and influencers. Luminosity Gaming had approximately<br> 60 esports players and influencers as of December 31, 2022, compared to approximately<br> 40 esports players and influencers as of December 31, 2021. Additionally, channel partner<br> bonuses have decreased in the year ended December 31, 2022, due to less new channel partners<br> with signing bonus being added in the year as compared to the year ended December 31,<br> 2021. |
| --- | --- |
23
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
OVERALLPERFORMANCE (Continued)
Summaryof Financial and Operating Results (Continued)
Forthe Years Ended December 31, 2022, 2021 and 2020 (Continued)
Notes:(Continued)
| (i) | The<br> Company and its subsidiaries commonly transact and carry assets and liabilities in currencies<br> other than respective functional currencies. Foreign exchange gains or losses are caused<br> by movements in exchange rates. The Company expects continued gains and losses due to<br> fluctuating exchange rates. |
|---|---|
| (j) | Share-based<br> compensation is a non-cash expense which relates to options and restricted share units<br> granted to directors, officers, employees, and consultants of the Company, which are<br> expensed over their respective vesting periods. Share-based compensation expense decreased<br> by $11.2 million in the year ended December 31, 2022, as compared to the year ended December<br> 31, 2021, largely due to forfeitures, but also driven by vesting periods, and black-scholes<br> option pricing model inputs. In January 2021, the Company issued 743,671 options and<br> 1,251,162 restricted share units. In April 2021, the Company issued 855,234 options and<br> 1,242,577 restricted share units. In April 2022, the Company issued 1,560,697 options<br> and 1,922,877 restricted share units. In November 2022, the Company issued 211,942 options<br> and 437,636 restricted share units. |
| --- | --- |
| (k) | Amortization<br> and depreciation are significantly comprised of amortization of intangible assets arising<br> from the Mergers and Acquisitions. Amortization and depreciation expense increased by<br> $7.2 million in the year ended December 31, 2022, as compared to the year ended December<br> 31, 2021, mainly due to the amortization of intangible assets recognized upon the acquisitions<br> of Vedatis and Tabwire in Q2 2021, GameKnot and Addicting Games in Q3 2021, Outplayed<br> in Q4 2021, and FFS in Q2 2022. |
| --- | --- |
SELECTOPERATING METRICS
Financial results include the results of the Mergers and Acquisitions from the respective closing date of the acquisition transaction. Paid subscribers for Vedatis and Tabwire are included beginning in Q2 2021, paid subscribers for GameKnot and Addicting Games are included beginning in Q3 2021, paid subscribers for U.GG are included beginning in Q4 2021, and paid subscribers for FFS are included beginning in Q2 2022. The figures below do not include pro forma adjustments for Vedatis, Tabwire, GameKnot, Addicting Games, Outplayed and FFS.
| Quarterly Select Operating Metrics | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 |
| Total views (millions) | 9,896 | 10,395 | 9,825 | 9,576 | 11,251 | 10,048 | 9,729 | 9,755 |
| Web pageviews | 2,596 | 2,516 | 2,606 | 2,866 | 4,137 | 4,074 | 3,617 | 3,753 |
| Video views | 7,300 | 7,879 | 7,219 | 6,710 | 7,114 | 5,974 | 6,112 | 6,002 |
| Paid subscribers (thousands – as of end of period) | 137 | 155 | 207 | 220 | 233 | 258 | 260 | 262 |
Web pageviews relate historically to Enthusiast Properties. The Company seeks to grow existing properties, create new properties, and add new partner properties to the web platform. The web pageviews remained relatively consistent from Q1 2021 to Q3 2021. Web pageviews began to rise in Q4 2021 and increased 44% in Q1 2022 compared to Q4 2021. Management attributes this increase to organic growth in traffic driven by content related to new game releases on both owned-and-operated and represented web properties, such as the Elden Ring game released in February 2022, as well as launch of desktop app for U.GG. Web pageviews decreased 11.2% in Q3 2022 compared to Q2 2022, which management attributes to a decrease in traffic relating to the Elden Ring game following its initial surge upon launch. Web pageviews increased 3.8% in Q4 2022 compared to Q3 2022, which management attributes to an increase in traffic for TSR due to The Sims being made available as a free-to-play title in Q4 2022, and an increase in traffic for Icy Veins due to new releases related to World of Warcraft in Q4 2022.
24
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
SELECTOPERATING METRICS (Continued)
Video views increased to 7.9 billion in Q2 2021, due to increased traffic to the Company’s Arcade Cloud video properties, a number of new Snapchat channels being launched by the Company in Q2 2021 (including Livestream Fails and Blox Buddies), and from additional partner channels being added to the Company’s video platform in Q1 and Q2 2021. Video views decreased to 7.2 billion in Q3 2021, which the Company attributed to students returning back to school in Q3 2021. Video views remained relatively consistent from Q3 2021 through Q1 2022. Video views decreased to 5.9 billion in Q2 2022, or 16.0% decrease from Q1 2022. This decrease specifically relates to certain large partner channels leaving the video network, which the Company elected for in order to reduce operating costs relating to these channels. Management also attributes the decrease to the reduction in the gaming category views across YouTube primarily driven from relaxed COVID-19 restrictions. Video views increased to 6.1 billion in Q3 2022, or 2.3% increase from Q2 2022, primarily driven from new content on TikTok in Q3 2022 and launch of NFL TNG in September 2022. Video views decreased to 6.0 billion in Q4 2022, a 1.8% decrease from Q3 2022, which management attributes to optimization of gaming channels under the YouTube content reuse policy.
Paid subscribers relate primarily to TSR. TSR was acquired by Enthusiast Properties in Q1 2019. In Q4 2019 the Company began initiatives to increase the numbers of paid subscribers, including pricing analysis, promotional events, and marketing initiatives. In Q3 and Q4 2020 the Company established a team of employees focused exclusively on subscription efforts, and the Company attributes the additional increase in the number of paid subscribers observed in the table above primarily to these initiatives as well as the Mergers and Acquisitions. Across 2021 and 2022, approximately 74,000 paid subscribers were added from the Mergers and Acquisitions, with the remaining subscription growth being organic.
QUARTERLYRESULTS OF OPERATIONS
| **** | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 |
|---|---|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | $ | $ | |
| Total<br> revenue | 30,022,335 | 37,057,601 | 43,341,907 | 56,942,443 | 47,167,538 | 51,119,028 | 50,578,758 | 53,970,597 |
| Interest<br> income | 18,320 | 22,911 | 9,315 | 983 | 1,401 | 1,320 | 5,257 | 28,274 |
| Operating<br> expenses | 18,734,942 | 19,550,684 | 21,354,332 | 25,679,125 | 24,822,370 | 29,117,767 | 26,600,236 | 30,259,158 |
| Net<br> loss and comprehensive loss | (13,565,128) | (12,835,513) | (12,302,971) | (12,861,272) | (12,241,359) | (13,811,933) | (30,189,879) | (12,484,952) |
| Loss<br> per share – basic and diluted | (0.12) | (0.11) | (0.10) | (0.10) | (0.08) | (0.12) | (0.25) | (0.08) |
The Company has been expanding its operations since the acquisition of Omnia in Q3 2020, which is the primary driver of the increase in total revenue and operating expenses from Q1 2021 through Q4 2022. The Mergers and Acquisitions contributed to the increase in total revenue and operating expenses observed in Q2 2021 through Q4 2022. In Q3 2022, the Company recognized a goodwill impairment charge on the Omnia cash-generating unit (“CGU”) and Addicting Games CGU which caused a significant increase in net loss and comprehensive loss observed in Q3 2022, see Goodwill Impairment.
For the closing dates of the Mergers and Acquisitions, see Description of Enthusiast Gaming Holdings.
Period-to-period results are also impacted by certain operating metrics (see Select Operating Metrics) and seasonality (see Seasonality).
SEASONALITY
The Company’s media and content division is impacted by seasonality which is linked to advertiser spend and consumer events. Advertising seasonality is driven by two main factors, RPM and traffic, which are interlinked factors that are tied to seasonal periods of time throughout the year. These seasonal periods of time are linked to cultural holidays, commercial holidays, or ad hoc events (e.g., election years).
25
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
SEASONALITY(Continued)**
Advertiser spend is impacted by their annual budgets, financial year-end date, cultural holidays, commercial holidays, ad hoc events, new brands, new campaigns and new products. Advertiser spend normally increases significantly for consumer spending events such as Black Friday, Christmas, Back to School, Valentine’s Day, and Easter which result in a corresponding increase in RPM. Advertiser spend typically increases substantially in Q4 as Black Friday and the December holiday season approaches. Advertiser spend can differ from consumer spend as consumers have different spending patterns and important events.
Q1 is typically the slowest part of the year historically, as most media spending occurs in Q4. As a result, Q1 normally reports the lowest media and content revenue and Q4 the highest media and content revenue. Q2 and Q3 media and content revenue varies depending on an advertiser’s financial year end, budgeted advertiser spends remaining and new brands, campaigns, and products being promoted.
Due to seasonality, the results of operations for any quarter are not necessarily indicative of the results of operations for the fiscal year.
GOODWILLIMPAIRMENT
The Company performs its annual impairment tests at December 31 or at an interim date when events or changes in the business environment (triggering events) would more likely than not reduce the fair value of a CGU below its carrying value. During the year ended December 31, 2022, the Company concluded that there were triggering events requiring an impairment assessment as of September 30, 2022 and December 31, 2022 due to overall macroeconomic conditions including but not limited to increasing interest rates, high inflation, and softening of digital advertisement demand and spending due to uncertain economic outlooks. In addition, there was a decline in the Company’s share price resulting in market capital being lower than the net assets of the Company. The Company performed impairment testing as of September 30, 2022, and determined that impairment charges were necessary for the Omnia CGU of $14,082,162 (December 31, 2021 - $Nil) and the Addicting Games CGU of $17,199,124 (December 31, 2021 - $Nil) due to the overall macroeconomic conditions. The Company performed impairment testing as of December 31, 2022, and determined that no further impairment charges were necessary. The Company’s analysis showed the value of the Enthusiast Properties, TSR, Luminosity, Steel Media and Outplayed CGUs exceeds their carrying amount, ranging between 18% to 447% of recoverable amount compared to the carrying amount of the net assets. For key assumptions used to determine the recoverable amount of goodwill based on each CGU’s value-in-use refer to Note 11 of the Company’s consolidated financial statements for the year ended December 31, 2022, and 2021.
FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cashflow for the Year Ended December 31, 2022
Net cash used in operating activities for the year ended December 31, 2022, was $26,640,355 (December 31, 2021 – $23,678,663). This was predominately due to the net loss of $76,830,805 and was decreased by items not affecting cash such as goodwill impairment of $31,281,286, amortization and depreciation of $16,707,844, share-based compensation of $7,751,370, interest and accretion of $2,334,783, a loss on settlement of deferred payment liability of $3,302,824, and loss on derecognition of long-term debt of $482,282, and increased by items not affecting cash such as deferred tax recovery of $2,302,219, foreign exchange gain of $775,004, a gain on player buyouts of $518,581, a gain on revaluation of deferred payment liability $621,780, share of income from investment in associates and joint ventures $1,241,684, gain on settlement of accounts payable of $587,769, and gain on sale of intangible assets of $4,876,659. These non-cash items for the year ended December 31, 2022, were offset by changes in working capital including an increase in trade and other receivables of $3,328,743, an increase in accounts payable and accrued liabilities of $944,457 and an increase in contract liabilities of $1,142,087. For the year ended December 31, 2021, net cash used in operating activities was $23,678,663. This was predominately due to the net loss of $52,046,622, and was decreased by items not affecting cash such as amortization and depreciation of $9,518,471, share-based compensation of $18,918,489, interest and accretion of $1,294,774, a loss on the change in the fair value of investments of $444,764, and a loss on settlement of vendor-take-back loan of $316,241, and increased by items not affecting cash such as deferred tax recovery of $1,133,687. These non-cash items for the year ended December 31, 2021, were collectively offset by changes in working capital including an increase in trade and other receivables of $8,322,247, an increase in prepaid expenses of $1,599,739, an increase in accounts payable and accrued liabilities of $7,687,368, and an increase in contract liabilities of $1,284,406.
26
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES (Continued)
Cashflow for the Year Ended December 31, 2022 (Continued)
Net cash provided by financing activities for the year ended December 31, 2022, was $6,498,013 (December 31, 2021 – $76,014,636). This was predominantly attributable to proceeds from the long-term debt, net of transaction costs of $9,758,128, offset by repayment of long-term debt of $2,588,238, and lease payments of $948,040. For the year ended December 31, 2021, net cash provided by financing activities was predominately attributable to proceeds from the issuance of shares for offerings, net of transaction costs of $95,146,338, proceeds from the exercise of options of $784,431, and proceeds from long-term debt, net of transaction cost of $10,823,240, which were collectively offset by repayments of long-term debt of $23,773,470, repayment of the vendor-take- back loan of $6,158,329, and lease payments of $802,013.
Net cash from investing activities for the year ended December 31, 2022, was $4,313,376 (December 31, 2021 – cash used of $33,944,320). This was predominately attributable to cash paid for mergers and acquisitions of $2,937,520, repayment of deferred payment liability of $472,833, which were collectively offset by cash acquired from mergers and acquisitions of $1,748,602, proceeds from sale of intangible assets of $5,460,959, and proceeds from player buyouts, net of transaction costs, of $518,581. Net cash used in investing activities for the year ended December 31, 2021, was $33,944,320, which was predominately attributable to cash paid for acquisitions of $36,222,278 offset by cash acquired through mergers and acquisition of $2,406,356.
For the year ended December 31, 2022, and 2021, the Company had a net decrease in cash of $15,238,746 and a net increase in cash of $18,330,439, respectively. As a result, the Company had a cash balance as of December 31, 2022, and 2021, of $7,415,516 and $22,654,262, respectively.
Liquidity
Selected financial information about the Company’s financial position as of the indicated dates is provided below:
| **** | December 31, 2022 | December 31, 2021 |
|---|---|---|
| $ | $ | |
| Cash | 7,415,516 | 22,654,262 |
| Total<br> assets | 341,437,545 | 387,783,170 |
| Total<br> liabilities | 86,786,538 | 125,014,849 |
| Share<br> capital, contributed surplus and accumulated other comprehensive income | 481,813,966 | 413,100,475 |
| Retained<br> earnings (deficit) | (227,162,959) | (150,332,154) |
| Working<br> capital (deficiency) | (11,196,337) | (9,181,911) |
Total liabilities at each reporting date are broken down as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Accounts<br> payable and accrued liabilities | 32,823,320 | 34,391,221 |
| Contract<br> liabilities | 5,380,378 | 3,890,569 |
| Income<br> tax payable | 129,485 | 114,094 |
| Current<br> portion of long-term debt | 17,431,625 | 2,000,000 |
| Current<br> portion of deferred payment liability | 2,391,863 | 27,244,146 |
| Current<br> portion of lease liabilities | 872,429 | 796,835 |
| Current<br> portion of other long-term debt | 10,891 | 11,121 |
| Long-term<br> debt | - | 7,681,867 |
| Long-term<br> lease liabilities | 1,451,939 | 20,794,275 |
| Long-term<br>portion of deferred payment liability | 1,478,438 | 2,213,512 |
| Other<br>long-term debt | 144,844 | 136,324 |
| Deferred<br> tax liability | 24,671,326 | 25,740,885 |
| Total liabilities | 86,786,538 | 125,014,849 |
27
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES (Continued)
Liquidity(Continued)**
During the year ended December 31, 2022, the Company incurred a net loss and comprehensive loss of $68,728,123 (December 31, 2021 – $51,564,884) and, as of that date, the Company had accumulated a deficit of $227,162,959 (December 31, 2021 – $150,332,154) and negative cash flows from operations of $26,640,355 (December 31, 2021 – $23,678,663). Whether and when the Company can attain profitability and positive cash flows from operations is uncertain.
The Company has not yet realized profitable operations and has mainly relied on non-operational sources of financing to fund operations. Management has been able to raise sufficient funds to finance the Company’s operations, growth, and mergers and acquisitions in the past and may need to continue to do so to fund these activities in the future.
As of December 31, 2022, the Company has current assets of $47,843,654 (December 31, 2021 - $59,266,075) and current liabilities of $59,039,991 (December 31, 2021 - $68,447,986) resulting in a working capital deficiency of $11,196,337 (December 31, 2021 – working capital deficiency of $9,181,911).
As of December 31, 2022, the Company’s working capital of $11,196,337 includes (i) contract liabilities of $5,380,378, (ii) the current portion of long-term debt of $17,431,625, of which $4,352,940 is the current portion of long-term debt as of the date of this MD&A (see Subsequent Events) and, (iii) the current portion of deferred payment liability of $2,391,863, of which $1,594,575 can be settled through issuance of common shares at Company’s option. The working capital will be used to finance operations and growth over the next 12 months. The Company also has other cash commitments of $745,000 (see Commitments) over the next 12 months. After considering these items, Management believes that the existing working capital is sufficient to meet the Company’s requirements over the next 12 months. To the extent that further working capital is required in the next 12 months, the Company has an operating credit consisting of an authorized amount of up to $5 million available to draw upon. As of December 31, 2022, the balance on this operating credit is $Nil. For details on the operating credit see Note 14 of the consolidated financial statements for the year ended December 31, 2022. The Company has not identified any legal or practical restrictions on its ability to meet its obligations.
CapitalManagement
The Company considers its capital structure to consist of shareholders’ equity, long-term debt, and deferred payment liability. The Company manages its capital structure and makes adjustments to it in order to have the funds available to support the acquisition and development of its business. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business.
The Company is dependent on external financing to fund its activities. In order to carry out the planned operations and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the size of the Company, is reasonable. There were no changes in the Company’s approach to capital management during the year ended December 31, 2022. Neither the Company nor its subsidiaries are subject to externally imposed capital requirements aside from the covenants described in Note 14 of the consolidated financial statements for the year ended December 31, 2022.
The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern. The Company’s ability to raise future capital is subject to uncertainty and the inability to raise such capital may have an adverse impact over the Company’s ability to continue as a going concern.
Refer to Significant Announcements During the year and Subsequent to year ended 2022 for a Notice received from the Nasdaq that the Company is not currently in compliance with the USD$1.00 minimum bid price requirement for continued listing of the Company’s common shares on the Nasdaq Global Select Market and the Company’s planned course of action regarding the Notice.
28
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES (Continued)
ShareCapital
Authorized:
Unlimited number of common shares
Unlimited number of preferred shares
During the year ended December 31, 2022:
| (i) | The<br> Company received proceeds of $289,034 from the exercise of 760,938 stock options. Stock<br> option proceeds of $45,538 were not received in cash but were used to settle accounts<br> payable. The fair value assigned to these stock options of $2,527,504 was reclassified<br> from contributed surplus to share capital. |
|---|---|
| (ii) | On<br> February 14, 2022, the Company issued the remaining 35,770 common shares to be issued<br> relating to the Outplayed SPA (see Note 5 of the consolidated financial statements for<br> the year ended December 31, 2022). |
| --- | --- |
| (iii) | On<br> February 28, 2022, the Company issued 111,267 common shares to settle the GameKnot Deferred<br> Payment liability (see Note 17 of the consolidated financial statements for the year<br> ended December 31, 2022). |
| --- | --- |
| (iv) | On<br> June 2, 2022, the Company issued 348,852 common shares to settle the Vedatis Deferred<br> Payment liability (see Note 17 of the consolidated financial statements for the year<br> ended December 31, 2022). |
| --- | --- |
| (v) | On<br> June 2, 2022, the Company issued 4,319,996 common shares to settle the Addicting Games<br> Deferred Payment liability (see Note 17 of the consolidated financial statements for<br> the year ended December 31, 2022). |
| --- | --- |
| (vi) | On<br> June 2, 2022, the Company issued 11,499,998 common shares to settle the Outplayed Deferred<br> Payment liability and Outplayed Earn-Out Payment liability (see Note 15 of the consolidated<br> financial statements for the year ended December 31, 2022). |
| --- | --- |
| (vii) | On<br> July 25, 2022 the Company issued 307,692 common shares to settle accounts payable of<br> $800,000 related to annual general meeting costs. The Company recorded a gain on settlement<br> of accounts payable of $95,386 based on a share price of $2.29 per share. This gain been<br> netted against the annual general meeting legal and advisory costs in the consolidated<br> statements of loss and comprehensive loss. |
| --- | --- |
| (viii) | On<br> September 19, 2022 the Company issued 790,633 common shares to settle accounts payable<br> of $1,757,396 related to annual general meeting legal and advisory costs and consulting<br> fees. The Company recorded a gain on settlement of accounts payable of $492,383 based<br> on a share price of $1.60 per share. A gain of $288,679 has been netted against the annual<br> general meeting legal and advisory costs and the remaining gain of $203,704 has been<br> netted against the consulting fees in the consolidated statements of loss and comprehensive<br> loss. |
| --- | --- |
| (ix) | On<br> December 14, 2022, the Company issued 42,838 common shares to settle 42,838 restricted<br> share units. The fair value assigned to these restricted share units of $306,485 was<br> reclassified from contributed surplus to share capital. |
| --- | --- |
During the year ended December 31, 2021:
| (i) | The<br> Company received proceeds of $784,431 from the exercise of 363,176 stock options. The<br> fair value assigned to these stock options of $927,292 was reclassified from contributed<br> surplus to share capital. |
|---|---|
| (ii) | The<br> Company issued 2,835,289 common shares from the conversion of convertible debentures<br> (see Note 16 of the consolidated financial statements for the year ended December 30,<br> 2021). |
| --- | --- |
| (iii) | On<br> January 20, 2021, the Company issued 429,354 common shares to settle the remaining Steel<br> Media deferred payment liability (see Note 17 of the consolidated financial statements<br> for the year ended December 30, 2021). |
| --- | --- |
| (iv) | On<br> February 10, 2021, the Company offered and sold a total of 7,383,000 common shares resulting<br> in gross proceeds of $42,452,250 (the “February Offering”). The Company incurred<br> cash share issuance cost of $2,704,571 relating to the February Offering. |
| --- | --- |
| (v) | On<br> May 4, 2021, the Company issued 226,563 common shares in connection with the closing<br> of the Vedatis SPA (see Note 5 of the consolidated financial statements for the year<br> ended December 30, 2021). |
| --- | --- |
29
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES (Continued)
ShareCapital (Continued)
During the year ended December 31, 2021 (Continued):
| (vi) | In<br> June 2021, the Company offered and sold a total of 8,600,000 common shares resulting<br> in gross proceeds of $60,137,755 (USD $49,450,000) (the “June Offering”).<br> The Company incurred cash share issuance cost of $4,739,096 relating to the June Offering. |
|---|---|
| (vii) | On<br> June 21, 2021, the Company issued 790,094 common shares in connection with the closing<br> of the Tabwire EPA. (see Note 5 of the consolidated financial statements for the year<br> ended December 30, 2021). |
| --- | --- |
| (viii) | On<br> August 30, 2021, the Company issued 165,425 common shares in connection with the closing<br> of the GameKnot EPA (see Note 5 of the consolidated financial statements for the year<br> ended December 30, 2021). |
| --- | --- |
| (ix) | On<br> September 3, 2021, the Company issued 2,661,164 common shares in connection with the<br> closing of the Addicting Games SPA (see Note 5 of the consolidated financial statements<br> for the year ended December 30, 2021). |
| --- | --- |
| (x) | On<br> December 31, 2021, the Company issued 5,164,223 common shares in connection with the<br> closing of Outplayed MA (see Note 5 of the consolidated financial statements for the<br> year ended December 30, 2021). |
| --- | --- |
DISCLOSUREOF OUTSTANDING SHARE DATA
The Company had the following shares and securities convertible into shares outstanding as of the following dates:
| March 27, 2023 | December 31, 2022 | December 31, 2021 | |
|---|---|---|---|
| Common<br> shares | 151,767,243 | 151,767,243 | 133,549,269 |
| Options,<br> convertible into common shares | 9,982,628 | 3,941,982 | 3,923,491 |
| Restricted<br> share units | 4,133,266 | 4,139,454 | 2,455,697 |
| Total | 165,883,137 | 159,848,679 | 139,928,457 |
RELATEDPARTY TRANSACTIONS
The Company’s key management personnel have authority and responsibility for overseeing, planning, directing and controlling the activities of the Company. Key management personnel include members of the Board of Directors, Chief Executive Officer, Chief Financial Officer, former Chief Corporate Officer, Chief Corporate Officer, President, former President and Senior Vice President, Legal and General Counsel. Compensation of key management personnel may include short-term and long-term benefits. Short-term benefits include salaries and bonuses. Share-based compensation includes the fair value of stock options and restricted share units vested during the year.
Compensation provided to key management during the years ended December 31, 2022 and 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Short-term<br>benefits | 3,133,569 | 2,777,723 |
| Share-based<br> compensation | 5,332,426 | 13,810,779 |
| Total | 8,465,995 | 16,588,502 |
30
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
RELATEDPARTY TRANSACTIONS (Continued)
A summary of other related party transactions during the years ended December 31, 2022 and 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Total<br> transactions during the year: | ||
| Revenue | - | 839,933 |
| Cost<br> of Sales | - | 41,109 |
| Expenses | ||
| Consulting<br> fees | 475,916 | 938,940 |
| Interest<br> and accretion | - | 282,838 |
| Loss<br> on settlement of vendor-take-back loan | - | 316,241 |
| Share<br> of (income) loss from investment in associates and joint ventures | (1,129,167) | 266,641 |
A summary of related party balances as of December 31, 2022, and 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Balances<br> receivable (payable): | ||
| Trade<br> and other receivables | 67,180 | 3,734,410 |
| Loans<br> receivable | - | 125,995 |
| Investment<br> in associates and joint ventures | 12,236 | 885,269 |
| Accounts<br> payable and accrued liabilities | (249,976) | (382,794) |
| Contract<br> liabilities | - | (55,434) |
On August 27, 2019, the Company entered into a Management Services Agreement (the “Management SA”) with AIG eSports LP, a former related party by nature of it being under the control or direction of the former Chairman of the Company, as well as a Master Services Agreement (the “Master SA”) with Vancouver Arena Limited Partnership, a former related party by nature of it being under the control or direction of the former Chairman of Company (collectively, the “MSAs”). The former Chairman of the Company did not seek re-election at the Company’s July 19, 2022 annual general meeting and is no longer a related party as of July 19, 2022. Pursuant to the Management SA, the Company is to provide a series of esports management services for a base compensation of $100,000 per month, plus an annual amount of USD $250,000, as well as other additional amounts receivable upon certain milestones relating to the performance of the esports teams under management. Pursuant to the Master SA, the Company receives a range of marketing and consulting services at a cost of $100,000 per month, as well as certain other costs payable upon certain milestones relating to third-party revenues generated by the Company relating to the Master SA services. The MSAs had a retroactive effective date of September 7, 2018, and contain payment-in-kind provisions whereas either party may, at its discretion, satisfy its amounts payable through the provision of its respective services. On April 1, 2021, the Management SA with AIG eSports LP and Master SA with Vancouver Arena Limited Partnership was terminated. During the period from January 1, 2022 to July 19, 2022, the Company recognized management revenue of $Nil (January 1, 2021 to December 31, 2021 - $379,125) relating to the Management SA, and recognized consulting expenses of $Nil (January 1, 2021 to December 31, 2021 - $379,125) relating to the Master SA. As of December 31, 2021, a balance of $452,730 is included in trade and other receivables.
31
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
RELATEDPARTY TRANSACTIONS (Continued)
On April 6, 2020, the Company entered into an Exchange of Marketing Rights and Benefits Agreement with AIG eSports LP and Surge eSports LLC, former related parties by nature of them being under the control or direction of the former Chairman of the Company. Pursuant to the Exchange of Marketing Rights and Benefits Agreement the Company is to provide media advertising for AIG eSports LP and Surge eSports LLC sponsors and AIG eSports LP and Surge eSports LLC is to provide advertising for the Company. During the period from January 1, 2022 to July 19, 2022, the Company recognized media advertising revenue of $Nil (January 1, 2021 to December 31, 2021 - $16,578) pursuant to the Exchange of Marketing Rights and Benefits Agreement. As of December 31, 2021, a balance of $55,434 is included in contract liabilities for media advertising services to be provided by the Company to AIG eSports and Surge eSports LLC.
As of December 31, 2021 a balance of $29,952 and $24,427 is due to AIG eSports LP and Surge eSports LLC, respectively, which is included in accounts payable and accrued liabilities, relating to team sponsorship fees payable.
As of December 31, 2021, trade and other receivables include $3,225,177 of amounts advanced to Surge eSports LLC, a former related party by nature of it being under the control or direction of the former Chairman of the Company. The Company intends to apply these advances against future share subscriptions in Surge eSports LLC. The advances are non-interest bearing and are receivable if the Company does not obtain share subscriptions in Surge eSports LLC.
On August 30, 2020, the Company completed the acquisition of Omnia from Blue Ant Media Solutions Inc. (“Blue Ant”), following the acquisition Blue Ant and its affiliated companies are related parties to the Company. As of July 19, 2021, Blue Ant held less than 10% of the issued outstanding common shares of the Company and is no longer a related party of the Company. During the period from January 1, 2021 to July 19, 2021, the Company earned media revenue of $394,373 and incurred cost of sales of $41,109 from Blue Ant and its affiliated companies. See Note 18 for information relating to the VTB loan payable to Blue Ant.
During the year ended December 31, 2022, the Company recognized consulting expenses of $75,022 (December 31, 2021 - $75,012) to Rivonia Capital Inc., a company in which a director of the Company is a principal. As of December 31, 2022, a balance of $14,125 (December 31, 2021 - $7,063) is included in account payable and accrued liabilities.
During the year ended December 31, 2022, the Company recognized consulting expense of $Nil (December 31, 2021 - $74,253) to Franchise Agency LLC, an agency which represents a director of the Company. As of December 31, 2022, a balance of $Nil (December 31, 2021
- $55,654) is included in account payable and accrued liabilities.
During the year ended December 31, 2022 the Company recognized $400,894 (December 31, 2021 - $410,550) in consulting fees relating to Board of Director and committee fees to certain directors. As of December 31, 2022, a balance of $235,851 (December 31, 2021 - $265,698) is included in account payable and accrued liabilities.
During the year ended December 31, 2022, the Company earned media revenue of $Nil (December 31, 2021 - $49,857) from AFK, a related party by nature of it having common management as the Company, refer to Note 8 of h consolidated financial statement for the year ended December 31, 2022. As of December 31, 2022, a balance of $67,180 (December 31, 2021 - $56,503) is included in trade and other receivables.
As of December 31, 2022, the Company has loans receivable due from the former President and Chief Corporate Officer of $Nil (December 31, 2021 - $80,297) and $Nil (December 31, 2021 - $45,698) respectively. The loans receivable were non-interest bearing and due on demand.
See Note 8 of the consolidated financial statements for the years ended December 31, 2022 and 2021 for information relating to an investment in associates controlled by a former related party. The investment in associates are no longer a related party as of July 19, 2022. During the period from January 1, 2021 to July 19, 2022, the Company’s share of net income from investment is associates is $1,175,841 (January 1, 2021 to December 31, 2021 – net loss of $200,550).
See Note 8 of the consolidated financial statements for the years ended December 31, 2022 and 2021 for information relating to an investment in a joint venture under common management as the Company.
See Note 20 of the consolidated financial statements for the years ended December 31, 2022 and 2021 for information relating to stock options issued to officers and directors of the Company.
32
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
RELATEDPARTY TRANSACTIONS (Continued)
See Note 21 of the consolidated financial statements for the years ended December 31, 2022, and 2021 for information relating to restricted share units issued to officers and directors of the Company.
SUBSEQUENTEVENTS
| (i) | On<br> January 1, 2023, Enthusiast Gaming (TSR) Inc. amalgamated with Enthusiast Gaming Media<br> Holdings Inc. and Hexagon Games Corp. and Enthusiast Gaming Media Holdings Inc. amalgamated<br> with Enthusiast Gaming Inc. |
|---|---|
| (ii) | On<br> March 1, 2023, the Company appointed Nick Brien as Chief Executive Officer. In connection<br> with Mr. Brien’s appointment, Adrian Montgomery concurrently resigned as Chief<br> Executive Officer and was appointed as Chair of the Board of Directors. |
| --- | --- |
| (iii) | On<br> March 1, 2023, the Company issued 6,062,976 stock options to an officer which comprises<br> 5,305,104 stock options and 757,872 performance stock options. The 5,305,104 stock options<br> are exercisable at $0.91 per stock option, expire March 1, 2033, and vest ratably over<br> a 4-year period with 25% of the stock options vesting on March 1, 2024, and the remaining<br> 75% of the stock options vesting in 36 equal monthly installments subsequent to March<br> 1, 2024. The 757,872 performance stock options are exercisable at $0.91 per stock option,<br> expire March 1, 2033, and vest ratably over a 4-year period with 25% of the stock options<br> vesting on March 1, 2024, and the remaining 75% of the stock options vesting in 36 equal<br> monthly installments subsequent to March 1, 2024, and, in all events, are subject to<br> the Company’s common shares having an average share price of at least USD $5.00<br> on the Nasdaq over a period of 90 consecutive days (with such threshold being subject<br> to adjustment in the event of any stock split, reverse split or other capital reorganization<br> event) subsequent to March 1, 2023. |
| --- | --- |
| (iv) | On December 31, 2022, as per the terms of the Commitment Letter, the Company provided<br>the Bank notice of the exercise of the Company's option to extend the maturity date of the Term Credit and Operating Credit<br>for an additional 12-month period ending December 31, 2024, see Note 14 of the consolidated financial statements for the years<br>ended December 31, 2022 and 2021. On March 21, 2023, the Company received notice of the Bank's approval of the Company's<br>option to extend the maturity date. The change in the maturity date will be subsequently reflected in the Commitment Letter by<br>means of an amendment. |
| --- | --- |
OFF-BALANCESHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company.
SEGMENTEDINFORMATION
The Company operates in one industry segment of digital media and entertainment. The majority of the Company’s assets are located in Canada and the United States of America (“USA”). The Company sells into three major geographic centers: USA, Canada and other foreign countries. The Company has determined that it has a single reportable segment as the Company’s decision makers reviews information on a consolidated basis.
Revenues by pillar for the years ended December 31, 2022 and 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Media<br> and content | 180,765,848 | 152,444,727 |
| Esports<br> and entertainment | 7,534,936 | 5,483,444 |
| Subscription | 14,535,137 | 9,436,115 |
| Total | 202,835,921 | 167,364,286 |
Revenue, in Canadian dollars, in each of these geographic locations for the years ended December 31, 2022 and 2021 is as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Canada | 4,314,454 | 2,501,988 |
| USA | 174,674,636 | 147,761,804 |
| England<br> and Wales | 9,810,393 | 6,001,954 |
| All<br> other countries | 14,036,438 | 11,098,540 |
| Total | 202,835,921 | 167,364,286 |
33
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
SEGMENTEDINFORMATION (Continued)
The non-current assets, in Canadian dollars, in each of the geographic locations as of December 31, 2022 and 2021, is as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Canada | 153,899,948 | 169,761,447 |
| USA | 130,543,027 | 153,549,460 |
| France | 3,364,854 | 3,453,744 |
| England<br> and Wales | 5,786,062 | 1,752,444 |
| Total | 293,593,891 | 328,517,095 |
ADOPTIONOF NEW OR AMENDED IFRS ACCOUNTING STANDARDS
No new IFRS accounting standards, interpretations or amendments were adopted during the years ended December 31, 2022 and 2021.
SIGNIFICANTACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes to the consolidated financial statements. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to the accounting estimates are recognized in the period in which the estimates are revised. Significant areas requiring the Company to make estimates include goodwill impairment testing and recoverability of assets, identification and valuation of intangible assets acquired in business combinations, estimated useful life of long-lived assets, income taxes, the fair value of share-based payments, provisions for expected credit losses, fair value measurement of an investment not quoted in an active market, recognition of revenue on a gross versus net basis and functional currency. These estimates and judgments are further discussed below:
| (a) | Goodwill impairment testing and recoverability of assets |
|---|
In evaluating impairment, the Company determines the recoverable amount based on an assessment of value-in-use using a discounted cash flow approach. In determining the estimated recoverable amount, the Company’s significant assumptions include expected future cash flows, terminal growth rates and discount rates. The approach uses cash flow projections based upon a financial forecast approved by management, covering a five-year period. Cash flows for the years thereafter are extrapolated using the estimated terminal growth rate. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ or change quickly, depending on economic conditions and other events.
| (b) | Identification and valuation of intangible assets acquired in business combinations |
|---|
In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values. One of the most significant estimates relates to the determination of the fair value of intangible assets. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, management with assistance from an independent valuation expert develops the fair value using appropriate valuation techniques which are based on a forecast of the total expected future net cash flows. In determining the fair value of the intangible assets at the acquisition date, the Company’s significant assumptions include the future net cash flows, royalty rates, attrition rates and the discount rate applied.
Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last for one year from the acquisition date.
34
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
SIGNIFICANTACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
| (c) | Estimated useful lives of long-lived assets |
|---|
Management reviews the useful lives of depreciable assets at each reporting date. Management assesses that the useful lives represent the expected utilization in terms of duration of the assets to the Company. Actual utilization, however, may vary due to technical obsolescence, particularly relating to website content and application and technology development.
| (d) | Income taxes |
|---|
At the end of each reporting period, the Company assesses whether the realization of deferred tax benefits is sufficiently probable to recognize deferred tax assets. This assessment requires the exercise of judgment on the part of management with respect to, among other things, benefits that could be realized from available income tax strategies and future taxable income, as well as other positive and negative factors. The recorded amount of total deferred tax assets could be reduced if estimates of projected future taxable income and benefits from available income tax strategies are lowered, or if changes in current income tax regulations are enacted that impose restrictions on the timing or extent of the Company’s ability to utilize deferred tax benefits.
The Company’s effective income tax rate can vary significantly quarter-to-quarter for various reasons, including the mix and volume of business in lower income tax jurisdictions and in jurisdictions for which no deferred income tax assets have been recognized because management believed it was not probable that future taxable profit would be available against which income tax losses and deductible temporary differences could be utilized. The Company’s effective income tax rate can also vary due to the impact of foreign exchange fluctuations.
| (e) | Share-based payments |
|---|
The fair value of all share-based payments granted are determined using the Black-Scholes option pricing model which incorporates assumptions regarding risk-free interest rates, dividend yield, expected volatility, estimated forfeitures, and the expected life of options. The Company has a significant number of options outstanding and expects to continue to make option grants.
| (f) | Provision for expected credit losses (“ECLs”) |
|---|
The Company performs impairment testing annually for trade receivables in accordance with IFRS 9. The ECL model requires considerable judgment, including consideration of how changes in economic factors affect ECLs, which are determined on a probability-weighted basis. IFRS 9 outlines a three-stage approach to recognizing ECLs which is intended to reflect the increase in credit risks of a financial instrument based on i) 12-month ECLs, or ii) lifetime ECLs. The Company measures provision for ECLs at an amount equal to lifetime ECLs.
The Company applies the simplified approach to determine ECLs on trade receivables by using a provision matrix based on historical credit loss experiences. The historical results are used to calculate the run rates of default which are then applied over the expected life of the trade receivables, adjusted for forward looking estimates.
| (g) | Recognition of revenue on a gross versus net basis |
|---|
The Company follows the guidance provided in IFRS 15, Revenue from Contracts with Customers, for determining whether the Company is the principal or an agent in arrangements with customers that involve another party that contributes to providing a specified service to a customer. In these instances, the Company determines whether it controls the promised specified service itself (as principal) or arranges for the specified service to be provided by another party (as an agent). This determination depends on the facts and circumstances of each arrangement and, in some instances, involves significant judgment. The most significant factors to consider include whether the Company controls the good or service immediately before it is transferred to the customer, is primarily responsible for fulfilling the promise to provide the specified good or service, has inventory risk before transferring the specified good or service, and has discretion in establishing prices for the specified good or service.
35
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
SIGNIFICANTACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
| (h) | Functional currency |
|---|
The functional currency of the Company and each of its subsidiaries is the currency of the primary economic environment in which the entities operate. The Company has determined that the functional currency for the Company is Canadian dollars while the functional currencies of subsidiaries are United States dollars, UK pound Sterling or Euro. Assessment of functional currency involves certain judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions which determined the primary economic environment.
STANDARDS,AMENDMENTS AND INTERPRETATIONS ISSUED BUT NOT YET APPLIED
The following amendments have been recently issued by the IASB. The Company intends to adopt these amendments when they become effective. Standards and amendments that are irrelevant or not expected to have a significant impact to the company have been excluded.
| (a) | IAS<br> 1 – Presentation of Financial Statements (“IAS 1”) |
|---|
In February 2021, the IASB issued amendments to IAS 1 to assist entities in determining which accounting policies to disclose in the financial statements. The amendments to IAS 1 require that an entity disclose its material accounting policies, instead of its significant accounting policies. The amendments apply to annual reporting periods beginning on or after January 1, 2023. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
In January 2020, IAS 1 was amended to provide a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. The amendments clarify that the classification of liabilities as current or non-current is based solely on a company’s right to defer settlement at the reporting date. The right needs to be unconditional and must have substance. The amendments also clarify that the transfer of a company’s own equity instruments is regarded as settlement of a liability, unless it results from the exercise of a conversion option meeting the definition of an equity instrument. The amendments are effective for annual periods beginning on January 1, 2023 and are to be applied retrospectively. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
| (b) | IAS<br> 8 – Accounting Policies, Changes in Accounting Estimates and Errors (“IAS<br> 8”) |
|---|
In February 2021, the IASB issued “Definition of Accounting Estimates”, which amends IAS 8. The amendment replaces the definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty.” The amendment provides clarification to help entities to distinguish between accounting policies and accounting estimates. The amendments are effective for annual periods beginning on or after January 1, 2023. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
36
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
STANDARDS, AMENDMENTS AND INTERPRETATIONSISSUED BUT NOT YET APPLIED (Continued)
| (c) | IAS<br> 8 – Income Taxes (“IAS 12”) |
|---|
In May 2021, the IASB issued “Deferred Tax related to Assets and Liabilities arising from a Single Transaction”, which amends IAS 12. The amendment narrows the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offset temporary differences. As a result, companies will need to recognize a deferred tax asset and deferred tax liability for temporary differences arising on initial recognition of transactions such as leases and decommissioning obligations. The amendments are effective for annual periods beginning on or after January 1, 2023 and are to be applied retrospectively. No impact is expected from the adoption this amendment on the Company’s consolidated financial statements.
FINANCIALINSTRUMENTS AND RISK MANAGEMENT
Fairvalues
The fair values of cash, investments, trade and other receivables, loans receivable, accounts payable and accrued liabilities and contract liabilities approximate their carrying values due to the relatively short-term nature of these financial instruments. The fair value of long-term debt, lease liabilities, deferred payment liability and other long-term debt loan is based on observable market data and the calculation of discounted cash flows. Discount rates were determined based on current terms and conditions observed in the credit market.
The Company follows a three-tier categorization for its financial instruments as a framework for disclosing fair value based upon inputs used to value the Company’s investments. The hierarchy is summarized as:
| ● | Level<br> 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities |
|---|---|
| ● | Level<br> 2 – inputs that are observable for the asset or liability, either directly (prices)<br> or indirectly (derived from prices) from observable market data |
| --- | --- |
| ● | Level<br> 3 – inputs for assets and liabilities not based upon observable market data |
| --- | --- |
As of December 31, 2022, the Vedatis Earn-Out Payment liability is classified as a Level 3 financial instrument (see Note 17 of the consolidated financial statements for the years ended December 31, 2022 and 2021) and at September 3, 2021, the investment in Addicting Games is classified as a Level 3 financial instrument (see Note 7 of the consolidated financial statements for the years ended December 31, 2022 and 2021).
Total interest income and interest expense for the years ended December 31, 2022 and 2021 for financial assets or financial liabilities that are not at fair value through profit or loss can be summarized as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Interest<br> income | (36,252) | (51,529) |
| Interest<br> and accretion expense | 2,586,387 | 2,844,956 |
| Net interest expense | 2,550,135 | 2,793,427 |
The Company examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, foreign currency risk and interest rate risk.
Creditrisk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its obligations.
37
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
FINANCIALINSTRUMENTS AND RISK MANAGEMENT (Continued)
Creditrisk (Continued)
The Company’s maximum exposure to credit risk for its trade receivables is summarized as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Trade<br> receivables aging: | ||
| 0-30<br> days | 26,077,091 | 26,263,555 |
| 31-60<br> days | 1,455,672 | 685,112 |
| 61-90<br> days | 1,803,214 | 868,473 |
| Greater<br> than 90 days | 2,558,113 | 2,217,521 |
| Total trade receivables | 31,894,090 | 30,034,661 |
| Expected<br> credit loss provision | (300,735) | (58,472) |
| Net trade receivables | 31,593,355 | 29,976,189 |
The movement in the expected credit loss provision can be reconciled as follows:
| December 31, 2022 | December 31, 2021 | |
|---|---|---|
| $ | $ | |
| Expected<br> credit loss provision: | ||
| Expected<br> credit loss provision, beginning balance | (58,472) | (67,466) |
| Increase<br> in provision for expected credit loss | (240,603) | |
| Recoveries | - | 8,504 |
| Effect<br> of movement in exchange rates | (1,660) | 490 |
| Expected credit loss provision, ending balance | (300,735) | (58,472) |
The following default rates, determined based on historical default rates based on the aging of trade receivables, are used to calculate the expected credit loss provision on trade receivables as of December 31, 2022:
| Total | Not past due | Over 30 days past due | Over 60 days past due | Over 90 days past due | |
|---|---|---|---|---|---|
| Default<br> rates | 0.49% | 1.07% | 1.94% | 4.74% | |
| Trade<br> receivables | 31,894,090 | 26,077,091 | 1,455,672 | 1,803,214 | 2,558,113 |
| Expected<br> credit loss provision | 300,735 | 129,060 | 15,504 | 34,998 | 121,173 |
All of the Company’s cash is held with major financial institutions and thus the exposure to credit risk is considered insignificant. Management actively monitors the Company’s exposure to credit risk under its financial instruments.
Concentrationrisk
The Company has one customer which makes up more than 10% of revenue. This customer accounts for approximately 30.24% (December 31, 2021 – 46.58%) of trade receivables as of December 31, 2022, 55.83% (December 31, 2021 – 69.36%) of revenues for the year ended December 31, 2022.
LiquidityRisk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with financial liabilities. The Company has a planning and budgeting process in place by which it anticipates and determines the funds required to support its normal operating requirements.
The Company holds sufficient cash and working capital which is maintained through stringent cash flow management to ensure sufficient liquidity is maintained. The table below summarizes the Company’s contractual obligations into relevant maturity groups at the statement of financial position date based on the expected contractual maturity date. The amounts disclosed in the table are the contractual undiscounted payments.
38
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
FINANCIALINSTRUMENTS AND RISK MANAGEMENT (Continued)
Liquidityrisk (Continued)
| Less than<br><br> <br>one year | One to<br><br> <br>two years | Two to<br><br> <br>three years | More than<br><br> <br>three years | Total | |
|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | |
| Accounts<br> payable and accrued liabilities | 32,823,320 | - | - | - | 32,823,320 |
| Contract<br> liabilities | 5,380,378 | - | - | - | 5,380,378 |
| Income<br> tax payable | 129,485 | - | - | - | 129,485 |
| Deferred<br> payment liability ^(1)^ | 2,448,300 | 81,610 | 1,661,998 | - | 4,191,908 |
| Lease<br> liabilities | 953,812 | 710,842 | 551,809 | 279,982 | 2,496,445 |
| Long-term<br> debt | 17,411,765 | - | - | - | 17,411,765 |
| Other<br> Long-term debt | 10,891 | 11,881 | 11,881 | 378,251 | 412,904 |
| Total | 59,157,951 | 804,333 | 2,225,688 | 658,233 | 62,846,205 |
Notes:
| (1) | The<br> Company has, at its option, the ability to settle $1,632,200 of the deferred payment<br> liability amounts due in less than one year either in cash or common shares. The Company<br> has, at its option, the ability to settle the deferred payment liability amounts due<br> in two to three years half in cash and half in common shares. |
|---|
Foreigncurrency risk
A large portion of the Company’s transactions occur in foreign currencies (including US dollars, UK pound sterling, and Euro) and, therefore, the Company is exposed to foreign currency risk at the end of the reporting period through its US dollars, UK pound sterling, and Euro denominated trade and other receivables, accounts payable and accrued liabilities, deferred payment liability and cash. As of December 31, 2022, a 10% depreciation or appreciation of the US dollar, UK pound sterling, and Euro against the Canadian dollar would have resulted in an approximate $247,000, $329,000 and $154,000 decrease or increase, respectively, in total net loss and comprehensive loss.
Interestrate risk
The Company’s long-term debt bears interest at Banker’s Acceptance fee equal to CDOR rate plus 7.5%. Fluctuations in the Banker’s Acceptance fee equal to CDOR rate will result in changes to the months interest expense. A change in the annual interest rate of 0.50% would approximately result in a $74,000 change in the annual interest expense.
COMMITMENTS
In addition to the financial liabilities summarized above, as of December 31, 2022, the Company has the following payment commitments with respect to consulting and other contractual obligations:
| $ | |
|---|---|
| Not<br> later than one year | 745,000 |
| Later<br> than one year and not later than five years | 863,000 |
| Total | 1,608,000 |
Further, the Company is subject to capital commitments pursuant to its investments in AIG Canada and AIG USA, see Note 8 of the consolidated financial statements for the years ended December 31, 2022 and 2021, as well as Surge eSports LLC which is being established under a similar structure. If the Company fails to make any capital contributions, as required, it may be subject to certain actions including the loss of rights or a reduction in equity ownership in order to satisfy the capital contribution requirements.
39
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
CONTROLSAND PROCEDURES
DisclosureControls and Procedures
Management is responsible for the design and effectiveness of disclosure controls and procedures to provide reasonable assurance that material information related to the Company, including its consolidated subsidiaries, which is required to be disclosed by the Company in its filings or required to be submitted by the Company under securities legislation is recorded, processed, and summarized and reported within specified time periods. The Company’s Chief Executive Officer and Chief Financial Officer believe its disclosure controls and procedures are appropriately designed and have certified on the operating effective of internal controls as of December 31, 2022.
InternalControls over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with IFRS. The control framework used to design the Company’s internal control over financial reporting is based on the Internal Control – Independent Framework (2013), published by the Committee of Sponsoring Organizations of the Treadway Commission. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Based on a review of the Company’s internal control procedures, the Company’s Chief Executive Officer and Chief Financial Officer believe its internal controls and procedures are appropriately designed and have certified on the operating effectiveness of internal controls as at December 31, 2022.
Changesin Internal Control Over Financial Reporting
There have been no material changes in the Company’s internal control over financial reporting during the year ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
RISKSAND UNCERTAINTIES
The securities of Enthusiast Gaming should be considered highly speculative due to the nature of the Company’s businesses and the current stage of its development. Risks and uncertainties are discussed in great detail in the Company’s Annual Information Form available on SEDAR at www.sedar.com.
The risks presented in the Annual Information Form may not be all of the risks that the Company may face. It is believed that these are the factors that could cause actual results to be different from expected and historical results. Other sections of this MD&A and the consolidated financial statements for the years ended December 31, 2022 and 2021, each of which are available on SEDAR, and other filings the Company has made and may make in the future with the applicable securities authorities, include additional factors that could have an effect on the business and financial performance of the Company’s business. The market in which the Company competes is very competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results.
40
Enthusiast Gaming Holdings Inc.
Management Discussion and Analysis
For the Year Ended December 31, 2022
MANAGEMENT’SRESPONSIBILITY FOR FINANCIAL STATEMENTS
The information provided in this report, is the responsibility of management. During the preparation of financial statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgments and have been properly reflected in the accompanying financial statements.
Management maintains a system of internal controls to provide reasonable assurance that the Company’s assets are safeguarded and to facilitate the preparation of relevant and timely information.
The Company’s Board of Directors follows recommended corporate governance guidelines for public companies to ensure transparency and accountability to shareholders. The Company’s Audit Committee meets with management quarterly to review the financial statement results, including the MD&A, and to discuss other financial, operating, and internal control matters. The Audit Committee receives a report from the independent auditors quarterly and is free to meet with them throughout the year.
ADDITIONALINFORMATION
Additional information relating to the Company is available in the consolidated financial statements of the Company for the years ended December 31, 2022 and 2021. Additional information can also be found in the investors section of the Company’s website at www.enthusiastgaming.com or on the Company’s SEDAR profile at www.sedar.com including the most recently filed Annual Information Form and Management Information Circular.
41
99.4
CERTIFICATION
I, Nick Brien, certify that:
| 1. | I<br> have reviewed this annual report on Form 40-F of Enthusiast Gaming Holdings, Inc.; |
|---|---|
| 2. | Based<br> on my knowledge, this report does not contain any untrue statement of a material fact<br> or omit to state a material fact necessary to make the statements made, in light of the<br> circumstances under which such statements were made, not misleading with respect to the<br> period covered by this report; |
| --- | --- |
| 3. | Based<br> on my knowledge, the financial statements, and other financial information included in<br> this report, fairly present in all material respects the financial condition, results<br> of operations and cash flows of the issuer as of, and for, the periods presented in this<br> report; |
| --- | --- |
| 4. | The<br> issuer’s other certifying officer(s) and I are responsible for establishing and<br> maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)<br> and 15d-15(e)) and internal control over financial reporting (as defined in Exchange<br> Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: |
| --- | --- |
| a. | Designed<br> such disclosure controls and procedures, or caused such disclosure controls and procedures<br> to be designed under our supervision, to ensure that material information relating to<br> the issuer, including its consolidated subsidiaries, is made known to us by others within<br> those entities, particularly during the period in which this report is being prepared; |
| --- | --- |
| b. | Designed<br> such internal control over financial reporting, or caused such internal control over<br> financial reporting to be designed under our supervision, to provide reasonable assurance<br> regarding the reliability of financial reporting and the preparation of financial statements<br> for external purposes in accordance with generally accepted accounting principles; |
| --- | --- |
| c. | Evaluated<br> the effectiveness of the issuer’s disclosure controls and procedures and presented<br> in this report our conclusions about the effectiveness of the disclosure controls and<br> procedures, as of the end of the period covered by this report based on such evaluation;<br> and |
| --- | --- |
| d. | Disclosed<br> in this report any change in the issuer’s internal control over financial reporting<br> that occurred during the period covered by the annual report that has materially affected,<br> or is reasonably likely to materially affect, the issuer’s internal control over<br> financial reporting; and |
| --- | --- |
| 5. | The<br> issuer’s other certifying officer(s) and I have disclosed, based on our most recent<br> evaluation of internal control over financial reporting, to the issuer’s auditors<br> and the audit committee of the issuer’s board of directors (or persons performing<br> the equivalent functions): |
| --- | --- |
| a. | All<br> significant deficiencies and material weaknesses in the design or operation of internal<br> control over financial reporting which are reasonably likely to adversely affect the<br> issuer’s ability to record, process, summarize and report financial information;<br> and |
| --- | --- |
| b. | Any<br> fraud, whether or not material, that involves management or other employees who have<br> a significant role in the issuer’s internal control over financial reporting. |
| --- | --- |
Date: March 27, 2023
/s/ Nick Brien
Nick Brien
Chief Executive Officer
99.5
CERTIFICATION
I, Alex Macdonald, certify that:
| 1. | I<br> have reviewed this annual report on Form 40-F of Enthusiast Gaming Holdings, Inc.; |
|---|---|
| 2. | Based<br> on my knowledge, this report does not contain any untrue statement of a material fact<br> or omit to state a material fact necessary to make the statements made, in light of the<br> circumstances under which such statements were made, not misleading with respect to the<br> period covered by this report; |
| --- | --- |
| 3. | Based<br> on my knowledge, the financial statements, and other financial information included in<br> this report, fairly present in all material respects the financial condition, results<br> of operations and cash flows of the issuer as of, and for, the periods presented in this<br> report; |
| --- | --- |
| 4. | The<br> issuer’s other certifying officer(s) and I are responsible for establishing and<br> maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)<br> and 15d-15(e)) and internal control over financial reporting (as defined in Exchange<br> Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: |
| --- | --- |
| a. | Designed<br> such disclosure controls and procedures, or caused such disclosure controls and procedures<br> to be designed under our supervision, to ensure that material information relating to<br> the issuer, including its consolidated subsidiaries, is made known to us by others within<br> those entities, particularly during the period in which this report is being prepared; |
| --- | --- |
| b. | Designed<br> such internal control over financial reporting, or caused such internal control over<br> financial reporting to be designed under our supervision, to provide reasonable assurance<br> regarding the reliability of financial reporting and the preparation of financial statements<br> for external purposes in accordance with generally accepted accounting principles; |
| --- | --- |
| c. | Evaluated<br> the effectiveness of the issuer’s disclosure controls and procedures and presented<br> in this report our conclusions about the effectiveness of the disclosure controls and<br> procedures, as of the end of the period covered by this report based on such evaluation;<br> and |
| --- | --- |
| d. | Disclosed<br> in this report any change in the issuer’s internal control over financial reporting<br> that occurred during the period covered by the annual report that has materially affected,<br> or is reasonably likely to materially affect, the issuer’s internal control over<br> financial reporting; and |
| --- | --- |
| 5. | The<br> issuer’s other certifying officer(s) and I have disclosed, based on our most recent<br> evaluation of internal control over financial reporting, to the issuer’s auditors<br> and the audit committee of the issuer’s board of directors (or persons performing<br> the equivalent functions): |
| --- | --- |
| a. | All<br> significant deficiencies and material weaknesses in the design or operation of internal<br> control over financial reporting which are reasonably likely to adversely affect the<br> issuer’s ability to record, process, summarize and report financial information;<br> and |
| --- | --- |
| b. | Any<br> fraud, whether or not material, that involves management or other employees who have<br> a significant role in the issuer’s internal control over financial reporting. |
| --- | --- |
Date: March 27, 2023
/s/ Alex Macdonald
Alex Macdonald
Chief Financial Officer
99.6
CERTIFICATION
In connection with the Annual Report of Enthusiast Gaming Holdings, Inc. (the “Company”) on Form 40-F for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nick Brien, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| 1. | The<br> Report fully complies with the requirements of section 13(a) or 15(d) of the Securities<br> Exchange Act of 1934, as amended; and |
|---|---|
| 2. | The<br> information contained in the Report fairly presents, in all material respects, the financial<br> condition and results of operations of the Company. |
| --- | --- |
Date: March 27, 2023
/s/ Nick Brien
Nick Brien
Chief Executive Officer
99.7
CERTIFICATION
In connection with the Annual Report of Enthusiast Gaming Holdings, Inc. (the “Company”) on Form 40-F for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alex Macdonald, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| 1. | The<br> Report fully complies with the requirements of section 13(a) or 15(d) of the Securities<br> Exchange Act of 1934, as amended; and |
|---|---|
| 2. | The<br> information contained in the Report fairly presents, in all material respects, the financial<br> condition and results of operations of the Company. |
| --- | --- |
Date: March 27, 2023
/s/ Alex Macdonald
Alex Macdonald
Chief Financial Officer
99.8
KPMG LLP
Vaughan Metropolitan Centre
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Suite 1400
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www.kpmg.ca
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Enthusiast Gaming Holdings Inc.
We consent to the use of our report dated March 27, 2023 on the consolidated financial statements of Enthusiast Gaming Holdings Inc. (the “Entity”) which comprise the consolidated statements of financial position as of December 31, 2022 and 2021, the related consolidated statements of loss and comprehensive loss, shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively the “consolidated financial statements”) which is included in the Annual Report on Form 40-F of the Entity for the fiscal year ended December 31, 2022.
We also consent to the incorporation by reference of such report in the Registration Statement (No. 333-255725) on Form F-10 of the Entity.
KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
March 27, 2023
Vaughan, Canada
KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee.
KPMG Canada provides services to KPMG LLP.