GameSquare Holdings, Inc 6-K, filed Jul 26, 2021
GameSquare Holdings, Inc. (GAME)
About this 6-K
GameSquare Holdings, Inc filed this 6-K on July 26, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of July, 2021.
Commission File Number: 333-254709
Engine Media Holdings, Inc.
(Exact Name of Registrant as Specified in Charter)
77 King Street West, Suite 300, PO Box 95, Toronto, Ontario, Canada M5K 1G8
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F [ ] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
INCORPORATION BY REFERENCE
Exhibits 99.1 – 99.2 of this Form 6-K of Engine Media Holdings, Inc. (the “Company”) are hereby incorporated by reference into the Registration Statement on Form F-10 (File No. 333-254709) of the Company, as amended or supplemented.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENGINE MEDIA HOLDINGS, INC. | ||||
| (Registrant) | ||||
| Date: | July 26, 2021 | By: | /s/ Louis Schwartz | |
| Name: | Louis Schwartz | |||
| Title: | Chief Executive Officer and Director | |||
EXHIBIT INDEX
Exhibit 99.1
ENGINE MEDIA HOLDINGS, INC.
(formerly Torque Esports Corp.)
Interim Condensed Consolidated Financial Statements
For the Three and Nine Months Ended
May 31, 2021 and 2020
(Expressed in United States Dollars)
(Unaudited)
Engine Media Holdings, Inc. (formerly Torque Esports Corp.) |
 |
Table of Contents
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
Page 2 of 48 |
Engine Media Holdings, Inc. (formerly Torque Esports Corp.) |
|
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying unaudited interim condensed consolidated financial statements of Engine Media Holdings Inc. (formerly Torque Esports Corp.) (the “Company”) are the responsibility of management and the Board of Directors.
The unaudited interim condensed consolidated financial statements have been prepared by management, on behalf of the Board of Directors, in accordance with the accounting policies disclosed in the notes to the unaudited interim condensed consolidated financial statements. Where necessary, management has made informed judgments and estimates in accounting for transactions which were not complete at the statement of financial position date. In the opinion of management, the unaudited interim condensed consolidated financial statements have been prepared within acceptable limits of materiality and are in accordance with International Accounting Standard 34 - Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards appropriate in the circumstances.
Management has established processes, which are in place to provide it with sufficient knowledge to support management representations that it has exercised reasonable diligence in that (i) the unaudited interim condensed consolidated financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of, and for the periods presented by, the unaudited interim condensed consolidated financial statements and (ii) the unaudited interim condensed consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of the Company, as of the date of and for the periods presented by the unaudited interim condensed consolidated financial statements.
The Board of Directors are responsible for reviewing and approving the unaudited interim condensed consolidated financial statements together with other financial information of the Company and for ensuring that management fulfills its financial reporting responsibilities. The Company’s Audit Committee assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management to review the financial reporting process and the unaudited interim condensed consolidated financial statements together with other financial information of the Company. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the unaudited interim condensed consolidated financial statements together with other financial information of the Company for issuance to the shareholders.
Management recognizes its responsibility for conducting the Company’s affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
Page 3 of 48 |
|
(formerly Torque Esports Corp.) Interim Condensed Consolidated Statements of Financial Position (Unaudited) (Expressed in United States Dollars) |
|
| Note | May 31, 2021 | August 31, 2020 | ||||||||
| $ | $ | |||||||||
| ASSETS | ||||||||||
| Current | ||||||||||
| Cash and cash equivalents | 21,321,977 | 5,243,278 | ||||||||
| Restricted cash | 13 | 310,465 | 388,587 | |||||||
| Accounts and other receivables | 6 | 7,722,611 | 3,845,890 | |||||||
| Government remittances | 1,160,426 | 1,125,912 | ||||||||
| Publisher advance, current | 6 | 2,607,326 | - | |||||||
| Prepaid expenses and other | 1,206,089 | 1,571,806 | ||||||||
| 34,328,894 | 12,175,473 | |||||||||
| Publisher advance, non-current | 6 | 2,701,936 | - | |||||||
| Investment in associate | 7 | - | 2,052,008 | |||||||
| Investment at FVTPL | 7 | 2,048,039 | - | |||||||
| Property and equipment | 8 | 360,262 | 409,389 | |||||||
| Goodwill | 9 | 18,827,862 | 18,785,807 | |||||||
| Intangible assets | 10 | 12,663,780 | 19,442,322 | |||||||
| Right-of-use assets | 11 | 409,070 | 550,478 | |||||||
| 37,010,949 | 41,240,004 | |||||||||
| 71,339,843 | 53,415,477 | |||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
Page 4 of 48 |
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(formerly Torque Esports Corp.) Interim Condensed Consolidated Statements of Financial Position (Cont’d) (Unaudited) (Expressed in United States Dollars) |
|
| Note | May 31, 2021 | August 31, 2020 | ||||||||
| $ | $ | |||||||||
| LIABILITIES | ||||||||||
| Current | ||||||||||
| Accounts payable and accrued liabilities | 16,339,437 | 17,144,346 | ||||||||
| Players liability account | 13 | 310,465 | 388,587 | |||||||
| Deferred revenue | 1,561,984 | 553,395 | ||||||||
| Lease obligation, current | 12 | 190,445 | 185,671 | |||||||
| Line of credit | 14 | - | 4,919,507 | |||||||
| Long-term debt, current | 16 | 99,965 | 97,702 | |||||||
| Promissory notes payable | 14 | 903,219 | 3,818,920 | |||||||
| Deferred purchase consideration | - | 333,503 | ||||||||
| Warrant liability | 17 | 20,326,836 | 14,135,321 | |||||||
| Contingent performance share obligation, current | 23 | - | 262,067 | |||||||
| 39,732,351 | 41,839,019 | |||||||||
| Convertible debt | 15 | 10,921,492 | 10,793,459 | |||||||
| Lease obligation, non-current | 12 | 246,393 | 386,477 | |||||||
| Long-term debt, non-current | 16 | 22,719 | 133,230 | |||||||
| 11,190,604 | 11,313,166 | |||||||||
| 50,922,955 | 53,152,185 | |||||||||
| SHAREHOLDERS’ EQUITY (DEFICIENCY) | ||||||||||
| Share capital | 18 | 115,893,950 | 69,380,807 | |||||||
| Shares to be issued | - | 1,059,214 | ||||||||
| Contributed surplus | 6,355,469 | 4,034,323 | ||||||||
| Foregin currency translation reserve | (2,715,659 | ) | (2,334,275 | ) | ||||||
| Deficit | (99,274,930 | ) | (72,094,162 | ) | ||||||
| 20,258,830 | 45,907 | |||||||||
| Non-controlling interest | 158,058 | 217,385 | ||||||||
| 20,416,888 | 263,292 | |||||||||
| 71,339,843 | 53,415,477 | |||||||||
| Going concern | 1 | |||||||||
| Commitments and contingencies | 22 | |||||||||
| Subsequent events | 27 | |||||||||
| Approved on Behalf of Board: | “Larry Rutkowski” | “Lou Schwartz” | ||
| Director | Director |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
Page 5 of 48 |
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(formerly Torque Esports Corp.) Interim Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Unaudited) (Expressed in United States Dollars) |
|
| For the three months ended | For the nine months ended | |||||||||||||||||
| Note | May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | ||||||||||||||
| CONTINUING OPERATIONS | $ | $ | $ | $ | ||||||||||||||
| REVENUE | ||||||||||||||||||
| Games development | 1,416,371 | 8,590 | 2,604,799 | 968,286 | ||||||||||||||
| Sponsorship, tournament and event income | 190,469 | 147,468 | 374,243 | 174,425 | ||||||||||||||
| Platform revenue | 1,524,749 | 654,865 | 4,406,680 | 916,486 | ||||||||||||||
| Advertising revenue | 6,401,805 | 1,149,110 | 17,859,848 | 1,149,110 | ||||||||||||||
| Professional services | 76,439 | 129,288 | 218,534 | 313,257 | ||||||||||||||
| 9,609,833 | 2,089,321 | 25,464,104 | 3,521,564 | |||||||||||||||
| EXPENSES | ||||||||||||||||||
| Salaries and wages | 4,515,977 | 661,878 | 13,062,505 | 3,131,659 | ||||||||||||||
| Consulting | 804,605 | 344,100 | 2,501,028 | 1,879,851 | ||||||||||||||
| Professional fees | 843,475 | 750,277 | 1,971,382 | 1,312,330 | ||||||||||||||
| Revenue sharing expense | 5,516,757 | 824,570 | 15,125,486 | 824,570 | ||||||||||||||
| Sponsorships and tournaments | 117,108 | 223,764 | 568,584 | 259,294 | ||||||||||||||
| Advertising and promotion | 126,006 | 603,417 | 1,501,536 | 1,970,859 | ||||||||||||||
| Office and general | 866,995 | 356,121 | 2,193,868 | 1,208,826 | ||||||||||||||
| Technology expenses | 586,255 | 282,402 | 1,812,912 | 383,991 | ||||||||||||||
| Amortization and depreciation | 8, 10, 11 | 991,618 | 879,077 | 3,938,542 | 2,107,469 | |||||||||||||
| Share-based payments | 19, 20 | 680,111 | 912,040 | 2,458,744 | 928,954 | |||||||||||||
| Interest expense | 197,821 | 15,058 | 1,178,388 | 538,596 | ||||||||||||||
| (Gain) loss on foreign exchange | 706,751 | (397,496 | ) | 809,496 | (113,350 | ) | ||||||||||||
| Change in fair value of contingent consideration | - | - | - | 82,215 | ||||||||||||||
| Loss on extinguishment of debt | - | 927 | 2,428,900 | - | ||||||||||||||
| Gain on retained interest in former associate | - | - | (99,961 | ) | - | |||||||||||||
| Transaction costs | 18 | - | - | 582,333 | - | |||||||||||||
| Change in fair value of warrant liability | 17 | (11,862,656 | ) | 6,970,916 | (6,247,729 | ) | 8,102,802 | |||||||||||
| Change in fair value of convertible debt | 15 | (691,116 | ) | 33,822 | 7,172,533 | (1,209,822 | ) | |||||||||||
| 3,399,707 | 12,460,873 | 50,958,547 | 21,408,244 | |||||||||||||||
| ASSOCIATES | ||||||||||||||||||
| Share of net loss of associate | - | - | 103,930 | - | ||||||||||||||
| Net income (loss) for the period before taxes | 6,210,126 | (10,371,552 | ) | (25,598,373 | ) | (17,886,680 | ) | |||||||||||
| Deferred income taxes | - | - | - | - | ||||||||||||||
| 6,210,126 | (10,371,552 | ) | (25,598,373 | ) | (17,886,680 | ) | ||||||||||||
| DISCONTINUED OPERATIONS | ||||||||||||||||||
| Loss on disposal of Motorsports | - | - | (678,931 | ) | - | |||||||||||||
| Discontinued operations | 23 | (9,606 | ) | (1,330,096 | ) | (962,791 | ) | (4,450,739 | ) | |||||||||
| Net income (loss) for the period | 6,200,520 | (11,701,648 | ) | (27,240,095 | ) | (22,337,419 | ) | |||||||||||
| Net income (loss) attributable to non-controlling interest | (2,343 | ) | (8,677 | ) | 59,327 | 68,632 | ||||||||||||
| Net income (loss) attributable to owners of the Company | 6,198,177 | (11,710,325 | ) | (27,180,768 | ) | (22,268,787 | ) | |||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||||
| Items that may be reclassified subsequently to profit or loss | ||||||||||||||||||
| Foreign currency translation differences | (376,785 | ) | 197,311 | (381,384 | ) | (14,628 | ) | |||||||||||
| Comprehensive income (loss) for the period | 5,821,392 | (11,513,014 | ) | (27,562,152 | ) | (22,283,415 | ) | |||||||||||
| EARNINGS PER SHARE | ||||||||||||||||||
| Basic earnings per share - continuing operations | 5 | 0.43 | (3.22 | ) | (2.38 | ) | (12.69 | ) | ||||||||||
| Basic earnings per share - discontinued operations | 5 | (0.00 | ) | (0.41 | ) | (0.15 | ) | (3.17 | ) | |||||||||
| Basic earnings per share | 5 | 0.43 | (3.63 | ) | (2.53 | ) | (15.86 | ) | ||||||||||
| Weighted average number of shares outstanding - Basic | 5 | 14,402,785 | 3,225,528 | 10,748,434 | 1,403,776 | |||||||||||||
| Diluted earnings per share - continuing operations | 5 | (0.25 | ) | (3.22 | ) | (2.38 | ) | (12.69 | ) | |||||||||
| Diluted earnings per share - discontinued operations | 5 | (0.00 | ) | (0.41 | ) | (0.15 | ) | (3.17 | ) | |||||||||
| Diluted earnings per share | 5 | (0.25 | ) | (3.63 | ) | (2.53 | ) | (15.86 | ) | |||||||||
| Weighted average number of shares outstanding - Diluted | 5 | 20,665,752 | 3,225,528 | 10,748,434 | 1,403,776 | |||||||||||||
Page 6 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Interim Condensed Consolidated Statements of Shareholders’ Equity (Deficiency) | |
| (Unaudited) | |
| (Expressed in United States Dollars) |
| Share capital: Number | Share capital: Amount | Shares to be issued | Contributed surplus | Foregin currency translation reserve | Deficit | Total equity before non-controlling interest | Non-controlling interest | Total equity | ||||||||||||||||||||||||||||
| # | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Balance, as at August 31, 2019 | 156,440 | 29,613,406 | 760,216 | 2,753,037 | (1,333,172 | ) | (39,754,120 | ) | (7,960,633 | ) | 293,451 | (7,667,182 | ) | |||||||||||||||||||||||
| Share-based payments | - | - | - | 928,954 | - | - | 928,954 | - | 928,954 | |||||||||||||||||||||||||||
| Shares issued on vesting of RSUs | 26,667 | 159,895 | - | (159,895 | ) | - | - | - | - | - | ||||||||||||||||||||||||||
| Convertible debt conversion | 1,583,135 | 4,428,109 | - | - | - | - | 4,428,109 | - | 4,428,109 | |||||||||||||||||||||||||||
| Private placements, net of costs | 502,562 | 2,694,074 | - | - | - | - | 2,694,074 | - | 2,694,074 | |||||||||||||||||||||||||||
| Shares issued for debt conversion | 46,300 | 632,522 | - | - | - | - | 632,522 | - | 632,522 | |||||||||||||||||||||||||||
| Shares issued on acquisition of UMG | 288,561 | 3,965,823 | - | 51,027 | - | - | 4,016,850 | - | 4,016,850 | |||||||||||||||||||||||||||
| Shares issued on acquisition of Frankly | 2,258,216 | 12,155,000 | - | - | - | - | 12,155,000 | - | 12,155,000 | |||||||||||||||||||||||||||
| Shares issued on acquisition of Winview | 1,759,997 | 7,579,000 | - | - | - | - | 7,579,000 | - | 7,579,000 | |||||||||||||||||||||||||||
| Common shares issued on exercise of warrants | 574,880 | 6,748,283 | - | - | - | - | 6,748,283 | - | 6,748,283 | |||||||||||||||||||||||||||
| Non-controlling interest in subsidiary | - | - | - | (11,825 | ) | - | - | (11,825 | ) | - | (11,825 | ) | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | (22,268,787 | ) | (22,268,787 | ) | (68,632 | ) | (22,337,419 | ) | |||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (14,628 | ) | - | (14,628 | ) | - | (14,628 | ) | ||||||||||||||||||||||||
| Balance, as at May 31, 2020 | 7,196,758 | 67,976,112 | 760,216 | 3,561,298 | (1,347,800 | ) | (62,022,907 | ) | 8,926,919 | 224,819 | 9,151,738 | |||||||||||||||||||||||||
| Balance, as at August 31, 2020 | 7,746,136 | 69,380,807 | 1,059,214 | 4,034,323 | (2,334,275 | ) | (72,094,162 | ) | 45,907 | 217,385 | 263,292 | |||||||||||||||||||||||||
| Share-based payments | - | - | - | 2,458,744 | - | - | 2,458,744 | - | 2,458,744 | |||||||||||||||||||||||||||
| Shares issued on vesting of RSUs | 158,477 | 1,080,804 | - | (900,804 | ) | - | - | 180,000 | - | 180,000 | ||||||||||||||||||||||||||
| Convertible debt conversion | 1,728,848 | 13,704,605 | - | - | - | - | 13,704,605 | - | 13,704,605 | |||||||||||||||||||||||||||
| Common shares issued on private placement, net of costs | 4,435,433 | 24,225,901 | - | 770,563 | - | - | 24,996,464 | - | 24,996,464 | |||||||||||||||||||||||||||
| EB bonus shares | 6,666 | 54,061 | - | - | - | - | 54,061 | - | 54,061 | |||||||||||||||||||||||||||
| Shares for debt | 40,000 | 226,556 | - | - | - | - | 226,556 | - | 226,556 | |||||||||||||||||||||||||||
| Common shares issued on exercise of warrants | 747,129 | 7,221,216 | - | - | - | - | 7,221,216 | - | 7,221,216 | |||||||||||||||||||||||||||
| Disposal of Motorsports | - | - | (1,059,214 | ) | - | - | - | (1,059,214 | ) | - | (1,059,214 | ) | ||||||||||||||||||||||||
| Non-controlling interest in subsidiary | - | - | - | (7,357 | ) | - | - | (7,357 | ) | - | (7,357 | ) | ||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | (27,180,768 | ) | (27,180,768 | ) | (59,327 | ) | (27,240,095 | ) | |||||||||||||||||||||||
| Foreign currency translation differences | - | - | - | - | (381,384 | ) | - | (381,384 | ) | - | (381,384 | ) | ||||||||||||||||||||||||
| Balance, as at May 31, 2021 | 14,862,689 | 115,893,950 | - | 6,355,469 | (2,715,659 | ) | (99,274,930 | ) | 20,258,830 | 158,058 | 20,416,888 |
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
Page 7 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Interim Condensed Consolidated Statements of Cash Flows | |
| (Unaudited) | |
| (Expressed in United States Dollars) |
| For the nine months ended | ||||||||
| May 31, 2021 | May 31, 2020 | |||||||
| $ | $ | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss for the period before non-controlling interest | (27,240,095 | ) | (22,337,419 | ) | ||||
| Items not affecting cash: | ||||||||
| Amortization and depreciation | 4,139,877 | 2,152,053 | ||||||
| Loss on disposal of Motorsports | 678,931 | - | ||||||
| Loss on disposal of P&E | 9,767 | - | ||||||
| Loss on extinguishment of debt | 2,428,900 | - | ||||||
| Gain on retained interest in former associate | (99,961 | ) | - | |||||
| Transaction costs | 582,333 | - | ||||||
| Share of net loss of associate | 103,930 | - | ||||||
| Change in fair value of warrant liability | (6,247,729 | ) | 8,102,802 | |||||
| Change in fair value of convertible debt | 7,172,533 | (1,209,822 | ) | |||||
| Change in fair value of contingent consideration | - | 82,215 | ||||||
| Unrealized foreign exchange gain | - | 54,831 | ||||||
| Accretion of debt | 104,002 | - | ||||||
| Share-based payments | 2,458,744 | 928,954 | ||||||
| (15,908,768 | ) | (12,226,386 | ) | |||||
| Changes in non-cash working capital: | ||||||||
| Restricted cash | 78,122 | (38,018 | ) | |||||
| Accounts and other receivables | (3,901,989 | ) | (68,222 | ) | ||||
| Government remittances | (59,609 | ) | (369,432 | ) | ||||
| Publisher advance | (5,309,262 | ) | - | |||||
| Prepaid expenses and other | 341,604 | (205,894 | ) | |||||
| Accounts payable and accrued liabilities | 740,793 | 1,620,245 | ||||||
| Players liability account | (78,122 | ) | 38,017 | |||||
| Deferred revenue | 1,008,589 | 1,201,401 | ||||||
| (7,179,874 | ) | 2,178,097 | ||||||
| (23,088,642 | ) | (10,048,289 | ) | |||||
| INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | (107,464 | ) | (55,062 | ) | ||||
| Cash acquired on acquisition of Frankly and WinView | - | 1,600,701 | ||||||
| Bank indebtedness acquired on acquisition of UMG | - | (82,528 | ) | |||||
| Investment in Allinsports | - | 52,355 | ||||||
| Acquisition of intangible assets | - | (569,852 | ) | |||||
| Cash from disposal of Motorsports | 24,348 | - | ||||||
| (83,116 | ) | 945,614 | ||||||
| FINANCING ACTIVITIES | ||||||||
| Net proceeds from issuance of Units | 31,017,374 | 3,685,783 | ||||||
| Proceeds from issuance of convertible debentures | 4,901,393 | - | ||||||
| Net (payments) proceeds from promissory notes payable | (2,915,701 | ) | 1,801,316 | |||||
| Proceeds from exercise of warrants | 5,949,269 | 3,116,838 | ||||||
| Payments on lease financing | (164,410 | ) | - | |||||
| Payments on long-term debt | (135,457 | ) | (43,750 | ) | ||||
| Settlement of contingent liability | - | 82,214 | ||||||
| 38,652,468 | 8,642,401 | |||||||
| Impact of foreign exchange on cash | 597,989 | - | ||||||
| Change in cash and cash equivalents | 16,078,699 | (460,274 | ) | |||||
| Cash and cash equivalents, beginning of period | 5,243,278 | 2,827,014 | ||||||
| Cash and cash equivalents, end of period | 21,321,977 | 2,366,740 | ||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
Page 8 of 48 |
| 1. | Corporate information and going concern |
| (a) | Corporate information |
| The Company focuses on accelerating new, live, immersive esports and interactive gaming experiences for consumers through its partnerships with traditional and emerging media companies and providing online interactive technology and monetization services. | |
| On August 13, 2020, the Company consolidated its shares on the basis of 15 pre-consolidation shares for every 1 post-consolidation share. Current and comparative disclosure has been amended to reflect this share consolidation. | |
| Pursuant to shareholder approval at the July 15, 2020 shareholders’ meeting, effective August 13, 2020, the Company changed its name to Engine Media Holdings, Inc. The Company’s common shares trade on the TSX Venture Exchange under the trading symbol GAME.V and OTCQB under the trading symbol MLLLF. |
| (b) | Going concern |
| These interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern, and therefore be required to realize its assets and liquidate its liabilities and commitments in other than the normal course of business and at amounts different from those in the accompanying consolidated financial statements. Such adjustments could be material. It is not possible to predict whether the Company will be able to raise adequate financing or to ultimately attain profit levels of operations. | |
| The Company has not yet realized profitable operations and has incurred significant losses to date resulting in a cumulative deficit of $99,274,930 as of May 31, 2021 (August 31, 2020 – $72,094,162). The recoverability of the carrying value of the assets and the Company’s continued existence is dependent upon the achievement of profitable operations, or the ability of the Company to raise alternative financing, if necessary. While management has been historically successful in raising the necessary capital (Note 18), it cannot provide assurance that it will be able to execute on its business strategy or be successful in future financing activities. | |
| As of May 31, 2021, the Company had a working capital deficiency of $5,403,457 (August 31, 2020 – working capital deficiency of $29,663,546) which is comprised of current assets less current liabilities. Excluding non-cash warrant liability, the Company had a working capital surplus of $14,923,379 (August 31, 2020 – working capital deficiency of $15,528,225). The Company also faced uncertain future impacts from COVID-19 (Note 3(b)). | |
| These conditions indicate the existence of material uncertainties that cast significant doubt about the Company’s ability to continue as a going concern. Changes in future conditions could require material write downs of the carrying values of goodwill and other long-lived intangibles. |
Page 9 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 2. | Statement of compliance and basis of presentation |
| (a) | Statement of compliance |
| These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Accordingly, they do not include all of the information required for full annual financial statements required by International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”). | |
| These unaudited interim condensed consolidated financial statements were authorized for issuance by the Board of Directors of the Company on July 22, 2021 and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended August 31, 2020. | |
| (b) | Basis of consolidation |
| The unaudited interim condensed consolidated financial statements comprise the accounts of the Company and its controlled subsidiaries. The financial statements of subsidiaries are included in the unaudited interim condensed consolidated financial statements from the date that control commences until the date that control ceases. Unaudited interim condensed consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. | |
| The Company’s subsidiaries are as follows: |
| Name of Subsidiary | Country of Incorporation | Ownership Percentage |
Functional Currency | |||
| PGL Consulting Services Inc. | Canada | 100% | US Dollar | |||
| Pro Gaming League Inc. | Canada | 100% | US Dollar | |||
| Pro Gaming League Nevada Inc. | USA | 100% | US Dollar | |||
| Millennial Esports California Corp. | USA | 100% | US Dollar | |||
| Stream Hatchet S.L. | Spain | 100% | Euro | |||
| Eden Games S.A. | France | 96% | Euro | |||
| Frankly Media LLC | USA | 100% | US Dollar | |||
| WinView, Inc. | USA | 100% | US Dollar | |||
| UMG Media Ltd. | Canada | 100% | Canadian Dollar |
| All transactions and balances between the Company and its subsidiaries are eliminated on consolidation, including unrealized gains and losses on transactions between companies. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Company’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. | |
| Non-controlling interests are measured initially at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. |
Page 10 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 2. | Statement of compliance and basis of presentation (cont’d) |
| (c) | Basis of presentation |
These unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis, except for financial instruments which are measured at fair value. In addition, these interim condensed consolidated financial statements have been prepared using the accrual basis of accounting except for cash flow information.
In the preparation of these interim condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the period. Actual results could differ from these estimates.
| (d) | Foreign currency translation |
The functional currency of the Company is the US Dollar (“USD). The functional currencies of the Company’s subsidiaries are disclosed in Note 2(b). The presentation currency of the interim condensed consolidated financial statements is the US Dollar (“USD”).
| (e) | Expense reclassifications |
For comparability, certain amounts for the three and nine months ended May 31, 2020 have been reclassified to conform with classifications adopted for the year ended August 31, 2020. With the significant acquisitions of UMG, Media Ltd. (UMG), Frankly Inc. (Frankly) and WinView, Inc. (WinView) during fiscal 2020, many of the prior expense classifications for the three and nine months ended May 31, 2020 did not best represent the nature of the ongoing business. These reclassifications had no effect on net loss or shareholders’ equity (deficiency).
| (f) | Income taxes |
The Company had no income tax expense for the three and nine months ended May 31, 2021 and 2020. As of May 31, 2021, deferred tax assets have not been recognized because it has not been determined as probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.
| 3. | Significant judgments, estimates and assumptions |
The preparation of these interim condensed consolidated financial statements requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the interim condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as of the date of the interim condensed consolidated financial statements.
On an ongoing basis, management evaluates its judgments and estimates in relation to assets, liabilities, revenues, and expenses. Management uses historical experience and various other factors it believes to be reasonable under the given circumstances as the basis for its judgments and estimates. Actual outcomes may differ from these estimates under different assumptions and conditions. Significant estimates and judgments made by management in the preparation of these interim condensed consolidated financial statements are outlined below.
Page 11 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 3. | Significant judgments, estimates and assumptions (cont’d) |
The assessment of the Company’s ability to execute its strategy by funding future working capital requirements involves judgment. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There is a material uncertainty regarding the Company’s ability to continue as a going concern.
| (a) | Significant estimates and critical judgments |
Information about significant estimates and critical judgements in applying accounting policies that have the most significant effect on the amounts recognized in the interim condensed consolidated financial statements is included in the following notes:
| Note 1 | Going concern; | |
| Note 26 | Expected credit losses; | |
| Note 17 | Valuation of warrant liability; | |
| Notes 9 and 10 | Goodwill and intangible assets; | |
| Notes 19 and 20 | Valuation of share-based payments; | |
| Note 15 | Valuation of convertible debt; and | |
| Note 22 | Contingencies. |
| (b) | Uncertainty about the effects of COVID-19 |
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has since extensively impacted global health and the economic environment. To contain the spread of COVID-19, domestic and international governments around the world enacted various measures, including orders to close all businesses not deemed “essential,” quarantine orders for individuals to stay in their homes or places of residence, and to practice social distancing when engaging in essential activities. It is anticipated that these actions and the global health crisis caused by COVID-19 will continue to negatively impact many business activities and financial markets across the globe.
The fact that our business has increasingly shifted to digital channels, we have increased flexibility as we navigate through the uncertain environment and near-term implications of the COVID-19 pandemic. The impact of the pandemic on our business has been mixed thus far. While we have seen some increase in demand for our digital products and services, however, this demand has been more than offset by reduction in spending by our customers.
In an effort to protect the health and safety of our employees, the majority of our workforce is currently working from home and we have placed restrictions on non-essential business travel. We have implemented business continuity plans and have increased support and resources to enable our employees to work remotely and thus far our business has been able to operate with minimal disruption.
The global COVID-19 pandemic remains a rapidly evolving situation. We will continue to actively monitor the developments of the pandemic and may take further actions that could alter our business operations as may be required by federal, state, local, or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and shareholders. It is not clear what effects any such potential actions may have on our business, including the effects on our employees, players and consumers, customers, partners, development and content pipelines, our reputation, financial condition, results of operations, revenue, cash flows, liquidity or stock price.
Page 12 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 4. | Significant accounting policies |
| (a) | Future accounting pronouncements |
The following standards have not yet been adopted and are being evaluated to determine their impact on the Company:
IFRS 10 – Consolidated Financial Statements (“IFRS 10”) and
IAS 28 – Investments in Associates and Joint Ventures (“IAS 28”)
IFRS 10 and IAS 28 were amended in September 2014 to address a conflict between the requirements of IAS 28 and IFRS 10 and clarify that in a transaction involving an associate or joint venture, the extent of gain or loss recognition depends on whether the assets sold or contributed constitute a business. The effective date of these amendments is yet to be determined; however early adoption is permitted. The Company has not assessed the effect of these pronouncements on its consolidated financial statements.
Other accounting standards or amendments to existing accounting standards that have been issued but have future effective dates are either not applicable or the Company is still assessing what the impact will be to the Company’s financial statements.
| 5. | Net income (loss) per share |
Basic net income (loss) per share is calculated using the weighted-average number of common shares outstanding during each period. Diluted net income (loss) per share assumes the conversion, exercise or issuance of all potential common share equivalents unless the effect is to reduce the loss or increase the income per share. For purposes of this calculation, stock options, warrants and RSU’s are considered to be potential common shares and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive.
Due to the net loss incurred during the nine months ended May 31, 2021 and three and nine months ended May 31, 2020, all outstanding options, restricted share units convertible debt and warrants were excluded from diluted weighted-average common shares outstanding as their effect was anti-dilutive.
Basic weighted average common shares outstanding for the three and nine months ended May 31, 2021 were 14,402,785 and 10,748,434, respectively (May 31, 2020 – 3,225,528 and 1,403,776, respectively). Diluted weighted average common shares outstanding for the three months ended May 31, 2021 was 20,665,752.
Page 13 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 6. | Accounts, other receivables, and customer advance |
| (a) | Accounts and other receivables |
The Company’s accounts and other receivables are comprised of the following:
May 31, 2021 | August 31, 2020 | |||||||
| $ | $ | |||||||
| Trade accounts receivable | 8,612,398 | 4,690,922 | ||||||
| Other receivables | 53,747 | 29,406 | ||||||
| Allowance for doubtful accounts | (943,534 | ) | (874,438 | ) | ||||
| 7,722,611 | 3,845,890 | |||||||
A continuity of the Company’s allowance for doubtful accounts is as follows:
May 31, 2021 | May 31, 2020 | |||||||
| $ | $ | |||||||
| Alowance for doubtful accounts, beginning of period | (874,438 | ) | - | |||||
| Acquisition of Frankly | - | (887,763 | ) | |||||
| Provision, bad debt expense | (72,636 | ) | - | |||||
| Writeoffs | 3,540 | 13,325 | ||||||
| Alowance for doubtful accounts, end of period | (943,534 | ) | (874,438 | ) | ||||
| (b) | Publisher advance |
On February 7, 2021, the Company’s subsidiary Frankly Media LLC, amended its commercial agreement with its largest publisher, which secured a long-term extension. One of the key terms of the amended agreement required the Company to advance $6 million of revenue sharing payments to the publisher under the following schedule:
| (i) | $4 million within one day of execution of the amendment; | |
| (ii) | $1 million on or before February 28, 2021; and | |
| (iii) | $1 million on or before March 31, 2021. |
The advance is to be recouped through additional withholding on future advertising revenue share payments made to the publisher, beyond Frankly’s share, and is effective for amounts billed for periods February 1, 2021 forward.
As of May 31, 2021, $6 million had been advanced to the publisher and $690,738 had been recouped through the process explained above. As of May 31, 2021, a net amount of $5,309,262 was outstanding on the advance.
The breakout of the publisher advance into current and non-current portions is based on an estimate of advertising billings over the next twelve months and the resulting additional withholding on the related advertising revenue share payments.
Page 14 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 7. | Investment in associate and investment at FVTPL |
| Investment in associate | Investment at FVTPL | |||||||
| $ | ||||||||
| Balance, August 31, 2020 | 2,052,008 | - | ||||||
| Share of loss in One Up | (103,930 | ) | - | |||||
| Discontinue use of equity method on retained interest in former associate | (1,948,078 | ) | 2,048,039 | |||||
| Balance, May 31, 2021 | - | 2,048,039 | ||||||
On August 25, 2020, the Company acquired a 20.48% interest in One Up Group, LLC (“One Up”). One Up operates a mobile app which allows gamers to organize and play one-on-one matches with other gamers and compete for money.
The Company accounted for this investment as an investment in associate under the equity method from acquisition through January 5, 2021. The Company’s equity in the loss of One Up for the period from September 1, 2020 to January 5, 2021 amounted to $103,930.
On January 5, 2021, the Company’s interest in One Up was reduced to 18.62% as a result of One Up closing a financing round. In accordance with IAS 28, the Company discontinued the use of the equity method on January 5, 2021, the date at which its investment ceased being an associate. The difference between the fair value of the Company’s retained interest in One Up and it’s carrying value on January 5, 2021 amounted to $99,961, which is recognized as a gain on retained interest in former associate on the Company’s statement of loss and comprehensive loss.
| 8. | Property and equipment |
| Cost | Leasehold improvements | Computer equipment | Furniture and fixtures | Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2019 | 54,465 | 209,126 | 123,298 | 386,889 | ||||||||||||
| Additions | 166,193 | 99,102 | 115,921 | 381,216 | ||||||||||||
| May 31, 2020 | 220,658 | 308,228 | 239,219 | 768,105 | ||||||||||||
| August 31, 2020 | 221,653 | 486,340 | 173,091 | 881,084 | ||||||||||||
| Additions | - | 89,561 | 17,903 | 107,464 | ||||||||||||
| Disposals | - | (9,767 | ) | - | (9,767 | ) | ||||||||||
| Disposal of Motorsports | (2,631 | ) | (47,645 | ) | (18,118 | ) | (68,394 | ) | ||||||||
| Foreign exchange | 132 | 11,518 | 802 | 12,452 | ||||||||||||
| May 31, 2021 | 219,154 | 530,007 | 173,678 | 922,839 | ||||||||||||
Page 15 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 8. | Property and equipment (cont’d) |
| Accumulated depreciation | Leasehold improvements | Computer equipment | Furniture and fixtures | Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2019 | 51,847 | 181,089 | 68,700 | 301,636 | ||||||||||||
| Depreciation | 4,247 | 4,727 | 66,599 | 75,573 | ||||||||||||
| May 31, 2020 | 56,094 | 185,816 | 135,299 | 377,209 | ||||||||||||
| August 31, 2020 | 57,517 | 307,508 | 106,670 | 471,695 | ||||||||||||
| Depreciation | 4,082 | 78,421 | 19,215 | 101,718 | ||||||||||||
| Disposal of Motorsports | - | (11,068 | ) | (9,910 | ) | (20,978 | ) | |||||||||
| Foreign exchange | 183 | 9,161 | 798 | 10,142 | ||||||||||||
| May 31, 2021 | 61,782 | 384,022 | 116,773 | 562,577 | ||||||||||||
| Net book value | Leasehold improvements | Computer equipment | Furniture and fixtures | Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2020 | 164,136 | 178,832 | 66,421 | 409,389 | ||||||||||||
| May 31, 2021 | 157,372 | 145,985 | 56,905 | 360,262 | ||||||||||||
| 9. | Goodwill |
May 31, 2021 | May 31, 2020 | |||||||
| $ | $ | |||||||
| Balance, beginning of period | 18,785,807 | 651,354 | ||||||
| Acquisition of UMG | - | 3,441,021 | ||||||
| Acquisition of Frankly | - | 14,895,595 | ||||||
| Effect of foreign exchange | 42,055 | (459 | ) | |||||
| Balance, end of period | 18,827,862 | 18,987,511 | ||||||
Page 16 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 10. | Intangible assets |
| Cost | Patents | Application Platforms | Software | Brand | Customer Lists and Contracts | Total | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| August 31, 2019 | - | 760,323 | 5,055,798 | 1,662,993 | 477,592 | 7,956,706 | ||||||||||||||||||
| Acquisition of UMG | - | 846,000 | - | 288,946 | 333,704 | 1,468,650 | ||||||||||||||||||
| Acquisition of Frankly | - | - | 2,000,000 | 100,000 | 2,700,000 | 4,800,000 | ||||||||||||||||||
| Acquisition of WinView | 9,430,265 | - | - | - | - | 9,430,265 | ||||||||||||||||||
| Acquisition of WTF1 | - | - | 557,709 | - | - | 557,709 | ||||||||||||||||||
| Additions | - | - | 54,680 | - | - | 54,680 | ||||||||||||||||||
| Foreign exchange | - | 3,890 | (50,304 | ) | 3,055 | 822 | (42,537 | ) | ||||||||||||||||
| May 31, 2020 | 9,430,265 | 1,610,213 | 7,617,883 | 2,054,994 | 3,512,118 | 24,225,473 | ||||||||||||||||||
| August 31, 2020 | 9,430,265 | 1,322,802 | 10,763,975 | 2,310,475 | 3,671,954 | 27,499,471 | ||||||||||||||||||
| Disposal of Motorsports | - | - | (3,598,869 | ) | (201,627 | ) | (222,650 | ) | (4,023,146 | ) | ||||||||||||||
| Foreign exchange | - | 26,660 | 437,252 | 134,524 | 8,691 | 607,127 | ||||||||||||||||||
| May 31, 2021 | 9,430,265 | 1,349,462 | 7,602,358 | 2,243,372 | 3,457,995 | 24,083,452 | ||||||||||||||||||
| Accumulated amortization | Patents | Application Platforms | Software | Brand | Customer Lists and Contracts | Total | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| August 31, 2019 | - | 628,277 | 2,634,338 | 673,302 | 296,061 | 4,231,978 | ||||||||||||||||||
| Amortization | 157,171 | 137,630 | 1,345,505 | 247,820 | 84,940 | 1,973,066 | ||||||||||||||||||
| Foreign exchange | - | 3,214 | 13,826 | 1,237 | 510 | 18,787 | ||||||||||||||||||
| May 31, 2020 | 157,171 | 769,121 | 3,993,669 | 922,359 | 381,511 | 6,223,831 | ||||||||||||||||||
| August 31, 2020 | 628,684 | 793,041 | 4,909,000 | 1,077,491 | 648,933 | 8,057,149 | ||||||||||||||||||
| Amortization | 1,414,540 | 131,944 | 1,538,835 | 363,583 | 445,317 | 3,894,219 | ||||||||||||||||||
| Disposal of Motorsports | - | - | (532,412 | ) | (201,627 | ) | (222,650 | ) | (956,689 | ) | ||||||||||||||
| Foreign exchange | - | 23,145 | 409,553 | 69,613 | (77,318 | ) | 424,993 | |||||||||||||||||
| May 31, 2021 | 2,043,224 | 948,130 | 6,324,976 | 1,309,060 | 794,282 | 11,419,672 | ||||||||||||||||||
Page 17 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 10. | Intangible assets (cont’d) |
| Net book value | Patents | Application Platforms | Software | Brand | Customer Lists and Contracts | Total | ||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| August 31, 2020 | 8,801,581 | 529,761 | 5,854,975 | 1,232,984 | 3,023,021 | 19,442,322 | ||||||||||||||||||
| May 31, 2021 | 7,387,041 | 401,332 | 1,277,382 | 934,312 | 2,663,713 | 12,663,780 | ||||||||||||||||||
| 11. | Right-of-use assets |
May 31, 2021 | May 31, 2020 | |||||||
| $ | $ | |||||||
| Balance, beginning of period | 550,478 | - | ||||||
| Additions to right-of-use assets on adoption of IFRS 16, September 1, 2019 | - | 234,215 | ||||||
| Acquisition of UMG | - | 388,996 | ||||||
| Depreciation | (143,940 | ) | (64,566 | ) | ||||
| Effect of foreign exchange | 2,532 | - | ||||||
| Balance, end of period | 409,070 | 558,645 | ||||||
Right of use assets consist primarily of leases for corporate office facilities and are amortized on a monthly basis over the term of the lease, or useful life, if shorter.
Page 18 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 12. | Lease liabilities |
Lease liabilities are measured at the present value of the lease payments that were not paid at that date. The lease payments are discounted using an average interest rate of 7.75%, which is the Company’s estimated incremental borrowing rate. The continuity of the lease liabilities is presented in the table below:
| Equipment | Office lease | Total | ||||||||||
| $ | $ | $ | ||||||||||
| Balance, August 31, 2019 | - | - | - | |||||||||
| Additions to right-of-use assets on adoption of IFRS 16, September 1, 2019 | - | 234,215 | 234,215 | |||||||||
| Acquisition of UMG | 19,770 | 388,996 | 408,766 | |||||||||
| Interest expense | 146 | 7,060 | 7,206 | |||||||||
| Payments | (1,799 | ) | (69,197 | ) | (70,996 | ) | ||||||
| Balance, May 31, 2020 | 18,117 | 561,074 | 579,191 | |||||||||
| Equipment | Office lease | Total | ||||||||||
| $ | $ | $ | ||||||||||
| Balance, August 31, 2020 | 35,457 | 536,691 | 572,148 | |||||||||
| Acquired | - | - | - | |||||||||
| Interest expense | 1,548 | 24,844 | 26,392 | |||||||||
| Payments | (10,035 | ) | (154,375 | ) | (164,410 | ) | ||||||
| Effect of foreign exchange | - | 2,708 | 2,708 | |||||||||
| Balance, May 31, 2021 | 26,970 | 409,868 | 436,838 | |||||||||
The Company’s lease obligation is classified as follows:
| Equipment | Office lease | Total | ||||||||||
| $ | $ | $ | ||||||||||
| As of August 31, 2020: | ||||||||||||
| Less than one year | 11,409 | 174,262 | 185,671 | |||||||||
| Greater than one year | 24,048 | 362,429 | 386,477 | |||||||||
| Total lease obligation | 35,457 | 536,691 | 572,148 | |||||||||
| As of May 31, 2021: | ||||||||||||
| Less than one year | 11,977 | 178,468 | 190,445 | |||||||||
| Greater than one year | 14,993 | 231,400 | 246,393 | |||||||||
| Total lease obligation | 26,970 | 409,868 | 436,838 | |||||||||
| 13. | Players liability account |
The Players liability account consists of UMG and WinView cash deposited by players, plus any prize winnings, less any fees for match game play and withdrawal requests processed to date. As of May 31, 2021, the players liability account balance is the total amount payable if all players were to request closure of their accounts. As of May 31, 2021, the players account liability and corresponding restricted cash balances were the same.
Page 19 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 14. | Promissory notes payable and other borrowings |
| (a) | Promissory notes |
The Company has promissory notes with a balance of $200,000 (August 31, 2020 – $200,000) that are unsecured, due on demand, and bear interest at 18%. As of May 31, 2021, interest of $125,394 has been accrued (August 31, 2020 – $83,435).
The Company, through its WinView subsidiary, has a secured promissory note outstanding for amounts due for the provision of services by the noteholder. As of May 31, 2021, $577,825 was due under the note (August 31, 2020 – $1,527,582). The note is secured by the assets of WinView, bears interest at 8%, and is currently due. As of May 31, 2021, no interest is accrued on this note (August 31, 2020 – $63,612).
| (b) | Paycheck Protection Program (the “PPP”) loans |
In April and May 2020, the Company entered into promissory notes (the “Notes”) with three banks. The Notes evidence loans to the Company of $1,589,559 pursuant to the PPP of the CARES Act administered by the U.S. Small Business Administration (the “SBA”). In accordance with the requirements of the CARES Act, the Company used the proceeds from the loans exclusively for qualified expenses under the PPP, including payroll costs, rent and utility costs, as further detailed in the CARES Act and applicable guidance issued by the SBA.
Interest will accrue on the outstanding balance of the Notes at a rate of 1.00% per annum. However, the Company has applied for and expects to receive forgiveness of all amounts due under the Notes.
Subject to any forgiveness granted under the PPP, the Notes are scheduled to mature in April 2022 and require 18 equal monthly payments of principal and interest beginning November 2020. However, no principal payments are due until the SBA determines whether to forgive the amounts The Notes may be prepaid at any time prior to maturity with no prepayment penalties. The Notes provide for customary events of default, including, among others, those relating to failure to make payments, bankruptcy, breaches of representations, significant changes in ownership, and material adverse effects. The Company’s obligations under the Notes are not secured by any collateral.
Upon the receipt of the proceeds of $1,589,559 from the Notes, the Company accounted for the Notes as a grant in the form of forgivable loan and recorded the amount as a deferred income liability. The liability was reduced as the Company recognized expenses which qualified for forgiveness of the loan. As of August 31, 2020, the Company had incurred greater than $1,589,559 of qualifying expenses and therefore had a remaining deferred income liability of $nil. The Company recognized the impact of the loan forgiveness as an offset against related salaries and wages expense, in the consolidated statement of loss and comprehensive loss for the year ended August 31, 2020. As of the date of this filing, two of the three PPP loans in the amount of $1,379,684 were formally forgiven.
Page 20 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 14. | Promissory notes payable and other borrowings (cont’d) |
| (c) | Frankly line of credit |
On January 7, 2020, the Company’s Frankly Media LLC subsidiary (“Frankly Media”) entered an agreement with an arm’s length lender, EB Acquisition Company, LLC (the “Lender”), whereby the Lender agreed, subject to the terms and conditions thereof, to provide Frankly Media with a revolving term line of credit in the principal amount of up to $5 million (the “EB Loan”).
The EB Loan had a one-year term, extendable for a second year upon the mutual agreement of Lender and Frankly Media; and was secured by a security interest in Frankly Media’s assets, as well as a guarantee by the Company, secured against the Company’s assets.
On December 1, 2020, the EB Loan was amended (the “Amended EB Loan”). The amendment extended the maturity date by one year and added a conversion feature to $1 million of the $5 million principal outstanding. The conversion feature allowed the holder to convert $1 million into common shares of the Company at a conversion price of $11.25 per common share. On February 24, 2021, the Company extinguished the Amended EB Loan and issued the Lender a convertible debenture in the principal amount of $5 million (the “EB CD”). The EB CD is convertible into units of the Company at a conversion price of $10.25 per unit, with each unit comprised of one common share and one-half of a warrant, with each whole warrant exercisable into a common share at an exercise price of $15.00 per share for a period of three years from the issuance of the EB CD. The EB CD has a term of three years.
As of the date of Amended EB Loan, December 1, 2020, the Company has accounted for the loan as convertible debt at FVTPL. As such, the Amended EB Loan was recognized within convertible debt (Note 15).
The carrying value of the line of credit as of May 31, 2021 was $nil (August 31, 2020 – $4,919,507).
| 15. | Convertible debt |
The continuity of convertible debt for the nine months ended May 31, 2021 and 2020, is as follows:
2019 Series | 2020 Series | Amended EB Loan | EB CD | Total | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Balance, August 31, 2020 | 2,121,869 | 8,671,590 | - | - | 10,793,459 | |||||||||||||||
| Issuances | - | 4,282,477 | - | - | 4,282,477 | |||||||||||||||
| Exchange of EB Loan for Amended EB Loan | - | - | 5,043,103 | - | 5,043,103 | |||||||||||||||
| Exchange of Amended EB Loan for EB CD | - | - | (4,931,813 | ) | 7,394,022 | 2,462,209 | ||||||||||||||
| Conversion - common shares issued | (1,500,214 | ) | (12,204,391 | ) | - | - | (13,704,605 | ) | ||||||||||||
| Conversion - warrants issued | (1,103,661 | ) | (4,256,114 | ) | - | - | (5,359,775 | ) | ||||||||||||
| Interest expense | 47,325 | 347,773 | 138,710 | 125,000 | 658,808 | |||||||||||||||
| Accrued interest on conversion / interest payments | (101,247 | ) | (256,300 | ) | (250,000 | ) | - | (607,547 | ) | |||||||||||
| Effect of foreign exchange | 180,830 | - | - | - | 180,830 | |||||||||||||||
| Change in fair value | 1,486,061 | 5,634,688 | - | 51,784 | 7,172,533 | |||||||||||||||
| Balance, May 31, 2021 | 1,130,963 | 2,219,723 | - | 7,570,806 | 10,921,492 | |||||||||||||||
Page 21 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 15. | Convertible debt (cont’d) |
2019 Series | 2020 Series | Amended EB Loan | EB CD | Total | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Balance, August 31, 2019 | 12,532,723 | - | - | - | 12,532,723 | |||||||||||||||
| Conversion - common shares issued | (4,428,109 | ) | - | - | - | (4,428,109 | ) | |||||||||||||
| Conversion - warrants issued | (4,416,160 | ) | - | - | - | (4,416,160 | ) | |||||||||||||
| Interest expense | 322,778 | - | - | - | 322,778 | |||||||||||||||
| Accrued interest on conversion | (255,371 | ) | - | - | - | (255,371 | ) | |||||||||||||
| Effect of foreign exchange | (320,213 | ) | - | - | - | (320,213 | ) | |||||||||||||
| Change in fair value | (1,209,822 | ) | - | - | - | (1,209,822 | ) | |||||||||||||
| Balance, May 31, 2020 | 2,225,826 | - | - | - | 2,225,826 | |||||||||||||||
| (a) | Conversions during the period |
2019 Series
During the nine months ended May 31, 2021, 2019 Series convertible debentures with a principal amount of CAD$1,315,000 (2020 – CAD$11,873,510) were converted into 175,331 units (2020 – 1,583,135), and as a result, the Company issued 175,331 common shares and 175,331 warrants (2020 – 1,583,135 common shares and 1,583,135 warrants). The fair value of the convertible debentures at the time of conversion was estimated using the binomial lattice model with the below assumptions:
Share price of CAD$11.65 – $14.15 (2020 – CAD$7.05 – $18,00); term of 1.36 – 1.90 years (2020 – 2.23 and 2.52); conversion price and warrant exercise price of CAD$7.50 (2020 – CAD$7.50); interest rate of 6% (2020 – 6%); expected volatility of 98.5% – 179% (2020 – 168.65% – 181.93%); risk-free interest rate of 0.21% - 0.27% (2020 – 0.26% – 0.96%); exchange rate of 0.7651 – 0.8286 (2020 – 0.6899 – 0.7483); and an expected dividend yield of 0% (2020 – 0%). The fair value assigned to these convertible debentures was $2,603,875 (2020 – $8,844,269).
This value was split between common shares and warrants as $1,500,214 (2020 – $4,428,109) and $1,103,661 (2020 – $4,416,160), respectively.
2020 Series
During the nine months ended May 31, 2021, 2020 Series convertible debentures with a principal amount of $11,651,393 (2020 – nil) were converted or settled into 1,553,518 units, and as a result, the Company issued 1,553,518 common shares and 1,134,305 warrants. The fair value of the convertible debentures at the time of conversion or settlement was estimated using the binomial lattice model with the below assumptions:
Share price of $7.79 – $9.92; term of 1.44 – 1.77 years; conversion price of $7.50; warrant exercise price of $15.00, interest rate of 10%; expected volatility of 95% – 98.5%; risk-free interest rate of 0.09% - 0.13%; and an expected dividend yield of 0%. The fair value assigned to these convertible debentures was $16,460,505.
This value was split between common shares and warrants as $12,204,391 and $4,256,114, respectively.
Page 22 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 15. | Convertible debt (cont’d) |
| (b) | Issuances during the period |
During the nine months ended May 31, 2021, 2020 Series convertible debentures with a principal amount of $2,901,393 were issued for gross proceeds of $2,901,393. In addition, in November 2020, $2,000,000 of convertible debentures from the Company’s standby convertible debenture facility were issued along with 224,719 warrants for gross proceeds of $2,000,000 (Note 15(f)). Of the gross proceeds of $2,000,000, $1,381,084 was allocated to the convertible debt and $618,916 was allocated to the 224,719 warrants issued (Note 15(f)). The total fair value recorded to convertible debt for issuances above amounted to $4,282,477.
On December 1, 2020, the EB Loan was amended (Note 14(c)). The amendment extended the maturity date by one year and added a conversion feature to $1 million of the $5 million principal outstanding. The conversion feature allowed the holder to convert $1 million into common shares of the Company at a conversion price of $11.25 per common share. On February 24, 2021, the Company extinguished the Amended EB Loan and issued the Lender a convertible debenture in the principal amount of $5 million. The EB CD is convertible into units of the Company at a conversion price of $10.25 per unit, with each unit comprised of one common share and one-half of a warrant, with each whole warrant exercisable into a common share at an exercise price of $15.00 per share for a period of three years from the issuance of the EB CD. The EB CD has a term of three years.
The fair value of the Amended EB Loan on December 1, 2020 was $5,043,103. The carrying value of the former EB Loan on December 1, 2020, consisted of $5 million in principal and 76,412 in accrued interest, for total carrying value on the amendment date of 5,076,412. As a result, a gain on extinguishment of debt of $33,309 was recognized. The fair value of the EB CD on the date of issuance of February 24, 2021 was $7,394,022. The fair value of the Amended EB Loan on February 24, 2021 was $4,931,813. As a result, a loss on extinguishment of debt of $2,462,209 was recognized. The above two transactions resulted in a loss on extinguishment of debt in the second quarter of $2,428,900.
| (c) | 2019 Series |
As of May 31, 2021, the fair value of the 2019 Series convertible debentures was estimated using the binomial lattice model with the below assumptions:
| 2019 Series | May 31, 2021 (CA$) | August 31, 2020 (CA$) | ||||||
| Share price | 10.42 | 11.65 | ||||||
| Conversion price | 7.50 | 7.50 | ||||||
| Warrant exercise price | 7.50 | 7.50 | ||||||
| Term, in years | 1.10 - 1.19 | 1.85 - 1.94 | ||||||
| Interest rate | 6 | % | 6 | % | ||||
| Expected volatility | 90.00 | % | 179.00 | % | ||||
| Risk-free interest rate | 0.20 | % | 0.25 | % | ||||
| Exchange rate | 0.8286 | 0.7651 | ||||||
| Expected dividend yield | 0 | % | 0 | % | ||||
Page 23 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 15. | Convertible debt (cont’d) |
| (d) | 2020 Series |
The 2020 Series debentures will mature twenty-four (24) months from the date of issuance and bear interest at a rate of 5% per annum (subject to adjustment as described below), payable on maturity. At the Company’s option, interest under the 2020 Series debentures is payable in kind in common shares at an issue price which would be based on the trading price of the common shares at the time of such interest payment. The interest rate under the 2020 Series debentures will increase from 5% to 10% per annum on a prospective basis on December 19, 2020, if a public offering has not occurred by that date.
The 2020 Series debenture holders may convert all or a portion of the principal amount of the debentures into units (“Units”) of the Company at a price (the “Conversion Price”) equal to the lesser of (a) $11.25 per Unit, and (b) if such conversion occurs after a public offering of securities by the Company (the “Public Offering”), a fifteen percent (15%) discount to the public offering price, provided that such conversion price shall not be less than $7.50 per Unit.
Notwithstanding the foregoing, if by December 19, 2020, the Company has not obtained registration rights in the United States to allow sale in the United States of the common shares (“Common Shares”) of the Company and the exercise of warrants (the “Warrants”) of the Company to be issued pursuant to the conversion of the 2020 Series debentures, holders of 2020 Series debentures may convert such debentures into Units at $7.50 per Unit. As of December 19, 2020, the Company had not obtained registration rights in the United States. As such, the conversion price is $7.50 per Unit and the interest rate increased to 10% on December 19, 2020.
Each Unit is comprised of one common share and one-half of one Warrant, with each Warrant exercisable into one common share of the Company at an exercise price of $15.00 per share for a period of three years from the issuance of the 2020 Series debentures. Under certain circumstances, the Company shall be entitled to call for the exercise of any outstanding Warrants in the event that the closing trading price of the Company common shares on the NASDAQ is above $30.00 per share for fifteen (15) consecutive trading days.
In the event that the Company’s common shares are listed for trading on the NASDAQ Capital Market and the Company completes a Public Offering for an aggregate amount of at least US$30,000,000, the Company may cause the 2020 Series debentures to be converted at the Conversion Price by the Company delivering a notice to the holder not less than a minimum of 30 days and a maximum 60 days prior to the forced conversion date.
| (e) | 2020 Series - One Up |
These convertible debentures (the “2020 Series One Up” debentures) have identical terms as the 2020 Series debentures except that the minimum conversion price of $7.50 per Unit (as described above) will be US$9.50 per Unit. The 2020 Series One Up convertible debentures had a fair value at issuance of $3,078,550.
Page 24 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 15. | Convertible debt (cont’d) |
| (f) | 2020 Series – Standby |
In September 2020, the Company entered into an $8,000,000 stand-by convertible debenture facility (the “2020 Series Standby” debentures). The 2020 Series Standby Debenture has substantially similar terms as the 2020 Series debentures, except (i) the references to a minimum $7.50 conversion price (as described above) have been changed to $8.90; and (ii) the 2020 Series Standby debentures are only convertible into common shares of the Company, not units.
In November 2020, the Company issued 224,719 warrants in connection with this first draw of $2,000,000 of the Standby Debentures, with each warrant exercisable into one common share the Company at an exercise price of $15.00 per share for a period of two years, subject to the same acceleration clause as the warrants underlying the 2020 Series debentures.
The proceeds of $2,000,000 from the first draw were allocated between convertible debt and warrant liability with $1,381,084 allocated to convertible debt and $618,916 allocated to the 224,719 warrants issued. The remaining $6,000,000 of convertible debentures that are issuable under this facility have substantially similar terms as the 2020 Series debentures, including conversion into units consisting of one share and one-half warrant, provided that the conversion price of any additional convertible debentures will be based on the market price of the common shares at the time of such subscriptions and are subject to TSX-V approval.
As of May 31, 2021, the fair value of the 2020 Series convertible debentures was estimated using the binomial lattice model with the below assumptions:
| 2020 Series | May 31, 2021 (US$) | August 31, 2020 (US$) | ||||||
| Share price | 8.63 | 8.92 | ||||||
| Conversion price | 8.90 | 7.50 - 9.50 | ||||||
| Warrant exercise price | - | 15.00 | ||||||
| Term, in years | 1.47 | 1.97 - 1.98 | ||||||
| Interest rate | 10 | % | 5% and 10% | |||||
| Expected volatility | 90.00 | % | 200.00 | % | ||||
| Risk-free interest rate | 0.09 | % | 0.14 | % | ||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| (g) | EB CD |
On February 24, 2021, the Company extinguished the Amended EB Loan and issued the Lender a convertible debenture in the principal amount of $5 million (the “EB CD”). The EB CD is convertible into units of the Company at a conversion price of $10.25 per unit, with each unit comprised of one common share and one-half of a warrant, with each whole warrant exercisable into a common share at an exercise price of $15.00 per share for a period of three years from the issuance of the EB CD. The EB CD has a term of three years.
Page 25 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 15. | Convertible debt (cont’d) |
| (g) | EB CD |
As of May 31, 2021, the fair value of the EB CD convertible debenture was estimated using the binomial lattice model with the below assumptions:
| EB CD | May 31, 2021 (US$) | August 31, 2020 (US$) | ||||||
| Share price | 8.63 | - | ||||||
| Conversion price | 10.25 | - | ||||||
| Warrant exercise price | 15.00 | - | ||||||
| Term, in years | 2.74 | - | ||||||
| Interest rate | 10 | % | - | |||||
| Expected volatility | 90.00 | % | - | |||||
| Risk-free interest rate | 0.26 | % | - | |||||
| Expected dividend yield | 0 | % | - | |||||
| 16. | Long-term debt |
The Company has an unsecured, non-interest bearing loan that matures on June 30, 2022. The loan bears interest at 0% per annum. As of May 31, 2021, the present value of the loan was $122,684 (August 31, 2020 – $230,932), accretion having been charged to interest expense on the Company’s consolidated statements of loss and comprehensive loss for nine months ended May 31, 2021 of $23,509 (May 31, 2020 – $4,091). A discount rate of 10% was used (August 31, 2020 – 10%).
Scheduled repayments are: € 90,000 ($109,962) and € 22,500 ($27,491) between 0 – 12 months and 12 – 24 months, respectively, from May 31, 2021.
Page 26 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 17. | Warrant liability |
The following table reflects the continuity of the Company’s warrant liability for the nine months ended May 31, 2021 and 2020:
| Amount | ||||
| $ | ||||
| Balance at August 31, 2020 | 14,135,321 | |||
| Issued on conversion of convertible debt | 5,359,775 | |||
| Issued in private placement of convertible debentures | 618,916 | |||
| Issued in private placement of units | 6,603,243 | |||
| Exercised | (1,271,947 | ) | ||
| Change in fair value | (6,247,729 | ) | ||
| Foreign exchange | 1,129,257 | |||
| Balance, May 31, 2021 | 20,326,836 | |||
| Amount | ||||
| $ | ||||
| Balance at August 31, 2019 | 296,795 | |||
| Issued in acquisition of Frankly | 2,157,000 | |||
| Issued on conversion of convertible debt | 4,416,160 | |||
| Issued in private placement of units | 991,709 | |||
| Exercised | (3,631,445 | ) | ||
| Change in fair value | 8,102,802 | |||
| Foreign exchange | 94,916 | |||
| Balance, May 31, 2020 | 12,427,937 | |||
The following table reflects the continuity of the Company’s outstanding warrants for the nine months ended May 31, 2021 and 2020:
| Number of | Weighted-average exercise price | |||||||||||
| warrants | CAD | USD | ||||||||||
| # | $ | $ | ||||||||||
| Outstanding, August 31, 2020 | 2,405,369 | 9.60 | 7.36 | |||||||||
| Issued on conversion of convertible debt | 1,309,636 | 16.68 | 13.82 | |||||||||
| Issued in private placement of convertible debentures | 224,719 | 18.10 | 15.00 | |||||||||
| Issued in private placement of units | 2,185,885 | 18.10 | 15.00 | |||||||||
| Exercised | (747,129 | ) | 9.64 | 7.98 | ||||||||
| Expired | (222,842 | ) | 10.03 | 8.31 | ||||||||
| Oustanding as at May 31, 2021 | 5,155,638 | 15.35 | 12.72 | |||||||||
Page 27 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| Number of | Weighted-average exercise price | |||||||||||
| warrants | CAD | USD | ||||||||||
| # | $ | $ | ||||||||||
| Outstanding, August 31, 2019 | 29,317 | 448.57 | 325.36 | |||||||||
| Issued | 1,834,416 | 8.54 | 6.19 | |||||||||
| Issued on acquisition of UMG | 9,944 | 174.18 | 126.33 | |||||||||
| Issued in acquisition of Frankly | 1,055,037 | 9.69 | 7.03 | |||||||||
| Exercised | (574,880 | ) | 7.50 | 5.44 | ||||||||
| Expired | (11,145 | ) | 1,026.38 | 744.46 | ||||||||
| Oustanding as at May 31, 2020 | 2,342,689 | 10.68 | 7.74 | |||||||||
The following table reflects the warrants issued and outstanding as of May 31, 2021:
| Warrants outstanding | Warrants exercisable | |||||||||||||||||||||||||||
| Average exercise price | Average remaining | Weighted | Weighted number exercisable price | |||||||||||||||||||||||||
| Expiry date | Number outstanding | CAD | USD | contractual life (years) | number exercisable | CAD | USD | |||||||||||||||||||||
| July 11, 2021 | 3,955 | 205.20 | 170.03 | 0.11 | 3,955 | 205.20 | 170.03 | |||||||||||||||||||||
| March 13, 2022 | 123,159 | 10.50 | 8.70 | 0.78 | 123,159 | 10.50 | 8.70 | |||||||||||||||||||||
| November 20, 2022 | 224,719 | 18.10 | 15.00 | 1.47 | 224,719 | 18.10 | 15.00 | |||||||||||||||||||||
| December 20, 2022 | 29,066 | 27.00 | 22.37 | 1.56 | 29,066 | 27.00 | 22.37 | |||||||||||||||||||||
| March 20, 2023 | 27,777 | 13.50 | 11.19 | 1.80 | 27,777 | 13.50 | 11.19 | |||||||||||||||||||||
| March 30, 2023 | 46,909 | 13.50 | 11.19 | 1.83 | 46,909 | 13.50 | 11.19 | |||||||||||||||||||||
| March 31, 2023 | 17,222 | 13.50 | 11.19 | 1.83 | 17,222 | 13.50 | 11.19 | |||||||||||||||||||||
| May 27, 2023 | 130,304 | 13.50 | 11.19 | 1.99 | 130,304 | 13.50 | 11.19 | |||||||||||||||||||||
| January 8, 2024 | 1,775,366 | 18.10 | 15.00 | 2.61 | 1,775,366 | 18.10 | 15.00 | |||||||||||||||||||||
| January 22, 2024 | 476,482 | 18.10 | 15.00 | 2.65 | 476,482 | 18.10 | 15.00 | |||||||||||||||||||||
| February 24, 2024 | 1,006,677 | 18.10 | 15.00 | 2.74 | 1,006,677 | 18.10 | 15.00 | |||||||||||||||||||||
| July 8, 2024 | 445,982 | 7.50 | 6.21 | 3.11 | 445,982 | 7.50 | 6.21 | |||||||||||||||||||||
| July 25, 2024 | 450,222 | 7.50 | 6.21 | 3.15 | 450,222 | 7.50 | 6.21 | |||||||||||||||||||||
| August 8, 2024 | 336,133 | 7.50 | 6.21 | 3.19 | 336,133 | 7.50 | 6.21 | |||||||||||||||||||||
| August 19, 2024 | 49,999 | 18.10 | 15.00 | 3.22 | 49,999 | 18.10 | 15.00 | |||||||||||||||||||||
| September 15, 2024 | 11,666 | 18.10 | 15.00 | 3.30 | 11,666 | 18.10 | 15.00 | |||||||||||||||||||||
| 5,155,638 | $ | 15.35 | $ | 12.72 | 2.64 | 5,155,638 | $ | 15.35 | $ | 12.72 | ||||||||||||||||||
As of May 31, 2021, the fair value of the 5,155,638 warrants outstanding (August 31, 2020 – 2,405,369) was determined to be $20,326,836 (August 31, 2020 – $14,135,321) as calculated using the Black Scholes option pricing model with the following range of assumptions: 0.11 – 3.30 years (August 31, 2020 – 0.23 – 3.94) as expected average life; share price of CAD$10.42 (August 31, 2020 – CAD$11.65); exercise price of CAD$7.50 – CAD$205.20 (August 31, 2020 – CAD$7.50 – CAD$205.20); 70% - 90% expected volatility (August 31, 2020 – 115% - 136%); risk free interest rate of 0.19% - 0.54% (August 31, 2020 – 0.23% - 0.32%); and an expected dividend yield of 0%.
If all warrants outstanding and exercisable as of May 31, 2021 were exercised, the Company would receive cash from exercise of approximately $65.6 million.
Page 28 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| (a) | Warrants exercised during the period |
During the nine months ended May 31, 2021, the holders of 747,129 warrants exercised their right to convert the warrants into the Company’s common shares at an exercise price of CAD$7.50 - $9.75. As a result of the underlying exercise of warrants, the Company received $5,949,269 in cash proceeds and the intrinsic value of the underlying warrants at the date of exercise of $1,271,947 was transferred to share capital, for a total addition to share capital of $7,221,216.
| (b) | Warrants issued during the period |
During the nine months ended May 31, 2021, the Company issued 1,309,636 warrants (May 31, 2020 – 1,583,135) in connection with conversion of convertible debt (Note 15(a)), 224,719 warrants (May 31, 2020 – nil) in connection with the private placement of convertible debentures (Note 15(f)) and 2,377,272 warrants (May 31, 2020 – 251,281) in connection with the private placement of units (Note 18(c)), for a total number of 3,911,627 warrants issued (May 31, 2020 – 1,834,416 warrants issued, excluding warrants issued in connection with acquisitions as highlighted in the continuity above). Of the 2,377,272 warrants issued in connection with the private placement of units, 2,185,885 were issued for proceeds and recorded within warrant liability above, with the remaining 191,387 representing warrants issued as fees to finders, and consequently, recorded within contributed surplus (Note 17(e)).
| (c) | Warrants issued on conversion of convertible debt |
2019 Series
During the nine months ended May 31, 2021 the Company issued 175,331 warrants (May 31, 2020 – 1,583,135) in conjunction with the conversion of convertible debt. The fair value of the 175,331 warrants (May 31, 2020 – 1,583,135) issued was determined to be $1,103,661 (May 31, 2020 – $4,416,160) as calculated using the Black Scholes option pricing model with the following assumptions:
A 3.36 – 3.90 years as expected average life (May 31, 2020 – 4.20 to 4.91); share price of CAD$9.50 – $12.33 (May 31, 2020 – CAD$7.05 – $25.65); exercise price of CAD$7.50 (May 31, 2020 – CAD$7.50); 98.5% - 136% expected volatility (May 31, 2020 – 136%); risk free interest rate of 0.25% - 0.54% (May 31, 2020 – 0.33% and 1.71%); and an expected dividend yield of 0% (May 31, 2020 – 0%).
Volatility is calculated using a weighted approach based on the changes in the Company’s historical stock price. The final fair value allocated to the warrants on conversion of convertible debt is based on a relative fair value allocation between the common shares issued and warrants issued on conversion.
2020 Series
During the nine months ended May 31, 2021 the Company issued 1,134,305 warrants (May 31, 2020 – nil) in conjunction with the conversion of convertible debt. The fair value of the 1,134,305 warrants issued was determined to be $4,256,114 as calculated using the Black Scholes option pricing model with the following assumptions:
A 3.00 – 3.50 years as expected average life; share price of $7.79 – $11.17; exercise price of $15.00; 98.5% expected volatility; risk free interest rate of 0.29% - 0.57%; and an expected dividend yield of 0%.
Volatility is calculated using a weighted approach based on the changes in the Company’s historical stock price. The final fair value allocated to the warrants on conversion of convertible debt is based on a relative fair value allocation between the common shares issued and warrants issued on conversion.
Page 29 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 17. | Warrant liability (cont’d) |
| (d) | Warrants issued on private placement of standby convertible debentures |
During the nine months ended May 31, 2021 the Company issued 224,719 warrants in connection with the private placement of convertible debentures under its standby convertible debenture facility (Note 15(f)).
| (e) | Warrants issued on private placement of units |
During the nine months ended May 31, 2021 the Company issued 2,377,272 warrants (May 31, 2020 – 251,281) in conjunction with the private placement of units. Of the 2,377,272 warrants issued, 191,387 were issued to finders as fees for services. The fair value of warrants issued to finders are recorded within contributed surplus at fair value on the date of issuance. The remaining 2,185,885 warrants issued for proceeds are reflected within warrant liability. The fair value of the 2,377,272 warrants issued (May 31, 2020 – 251,281) was determined to be $7,373,806 (May 31, 2020 – $991,708) as calculated using the Black Scholes option pricing model with the following assumptions:
A 3.00 years as expected average life (May 31, 2020 – 3.00); share price of $7.79 – $10.00 (May 31, 2020 – CAD$8.55 – $18.45); exercise price of $15.00 (May 31, 2020 – CAD$13.50 –$27.00); 98.5% expected volatility (May 31, 2020 – 136%); risk free interest rate of 0.29% - 0.43% (May 31, 2020 – 0.32% – 1.72%); and an expected dividend yield of 0% (May 31, 2020 – 0%).
Of the $7,373,806 total fair value, $6,603,243 was the fair value of the 2,185,885 warrants issued for proceeds, and recorded within warrant liability, with $770,563 being the fair value of the 191,387 warrants issued to finders and recorded within contributed surplus.
Volatility is calculated using a weighted approach based on the changes in the Company’s historical stock price. The final fair value allocated to the warrants on the issuance of the units is based on a relative fair value allocation between the common shares issued and warrants issued.
| 18. | Share capital |
| (a) | Authorized |
The Company is authorized to issue an unlimited number of common shares and an unlimited number of preference shares.
Page 30 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| (b) | Issued and outstanding, common shares |
| Shares | Consideration | |||||||
| # | $ | |||||||
| Balance, August 31, 2020 | 7,746,136 | 69,380,807 | ||||||
| Shares issued on vesting of RSUs | 158,477 | 1,080,804 | ||||||
| Convertible debt conversion | 1,728,848 | 13,704,605 | ||||||
| Common shares issued on private placement, net of costs | 4,435,433 | 24,225,901 | ||||||
| EB bonus shares | 6,666 | 54,061 | ||||||
| Shares for debt | 40,000 | 226,556 | ||||||
| Common shares issued on exercise of warrants | 747,129 | 7,221,216 | ||||||
| Balance, May 31, 2021 | 14,862,689 | 115,893,950 | ||||||
| 18. | Share capital (cont’d) |
| (b) | Issued and outstanding, common shares (cont’d) |
| Shares | Consideration | |||||||
| # | $ | |||||||
| Balance, August 31, 2019 | 156,440 | 29,613,406 | ||||||
| Shares issued on vesting of RSUs | 26,667 | 159,895 | ||||||
| Convertible debt conversion | 1,583,135 | 4,428,109 | ||||||
| Private placements, net of costs | 502,562 | 2,694,074 | ||||||
| Shares issued for debt conversion | 46,300 | 632,522 | ||||||
| Shares issued on acquisition of UMG | 288,561 | 3,965,823 | ||||||
| Shares issued on acquisition of Frankly | 2,258,216 | 12,155,000 | ||||||
| Shares issued on acquisition of Winview | 1,759,997 | 7,579,000 | ||||||
| Common shares issued on exercise of warrants | 574,880 | 6,748,283 | ||||||
| Balance, May 31, 2020 | 7,196,758 | 67,976,112 | ||||||
| (c) | Activity for the period |
Private Placement of units
In January and February 2021, the Company closed on the issuance of 4,371,767 units (the “Units”) for gross proceeds of $32,788,253 of non-brokered private placements. Each Unit consists of one common share of the Company and one-half of one common share purchase warrant (a “Warrant”). Each whole Warrant entitles the holder to acquire one additional share of the Company at a price of $15.00 per share for a period of 3 years provided that: (i) if the common shares are listed for trading on NASDAQ, (ii) the Company completes an offering of securities under a short form prospectus for an aggregate amount of at least $30,000,000, and (iii) the closing price of the common shares on NASDAQ is $30.00 or greater for a period of 15 consecutive trading days, then the Company may accelerate the expiry date of the Warrants to the 30th day after the date written notice is provided to the holders.
The Company paid cash commissions to eligible finders under the offering of $1,681,477 and regulatory and legal fees of $89,402. Net cash proceeds from the offering amounted to $31,017,374.
Page 31 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| In addition to the cash finder’s fees discussed above, the Company issued the following securities as partial payment of commissions to finders: 63,666 Units; and, 159,554 finders warrants, with each finder warrant exercisable into a common share at an exercise price of US$15.00 per share for 3 years subject to the same acceleration terms described above. | |
| The total number of common shares issued as a result of the private placements totaled 4,435,433, which was comprised of 4,371,767 Units issued for proceeds and 63,666 Units issued as partial payment to finders. The total number of warrants issued totaled 2,377,272, which was comprised of warrants issued as part of the Units issued of 2,217,718 (50% of Units issued) and 159,554 finders warrants issued. | |
| The total amount recorded to shareholder’s equity (deficit) resulting from the private placements of Units amounted to $24,225,901. This amount is comprised of the following: (i) $26,185,009 allocated to the common shares issued of total gross proceeds of $32,788,253, with $6,603,244 being allocated to the warrants; plus (ii) $383,720 allocated to the common shares issued of total fair value of finder’s Units of $477,495, with $93,775 being allocated to the warrants; less share issue costs totaling $2,925,161 comprised of the following; (i) total fair value of finder’s Units of $477,495; plus (ii) total fair value of finder’s warrants of $676,787; plus (iii) cash finder’s fees of $1,681,477; plus (iv) regulatory and legal fees of $89,402; less (v) portion of total share issuance costs allocated to the warrants issued of $582,333. As the warrants issued are accounted for at FVTPL, these share issuance costs were recorded within transaction costs on the Statements of Loss and Comprehensive Loss. | |
| The total amount recorded to warrant liability resulting from the private placements of Units amounted to $7,373,806. This is comprised of the allocation of gross proceeds of $6,603,244, finder’s Units issued of $93,775 and fair value of finder’s warrants of $676,787. | |
| The fair value allocated between the common shares and warrants on the issuance of the Units is based on a relative fair value allocation between the common shares issued and warrants issued. Refer to warrant liability note for discussion of the key assumptions used in valuation of the warrants as part of the relative fair value allocation. |
Other activity
| During the nine months ended May 31, 2021, the Company had the following additional activity to share capital: (i) issued 158,477 common shares upon vesting of an equal number of RSUs (Note 20); (ii) issued 1,728,848 common shares in connection with conversion of convertible debt (Note 15(a)), (iii) issued 747,129 common shares in connection with the exercise of warrants (Note 17(a)); (iv) issued 40,000 common shares for cancelation of $226,556 of debt (shares for debt); and (v) issued 6,666 common shares valued at $54,061 as an amendment fee to the lender in connection with the Amended EB Loan (the “EB Bonus Shares”). In addition to the EB Bonus Shares, the Company paid the lender a cash fee of $100,000. The amendment fees were recorded within interest expense as the Amended EB Loan and subsequent EB CD is being accounted for at FVTPL. |
| 19. | Stock options |
| On July 15, 2020, the Company adopted an amended and restated equity incentive plan (“Omnibus Plan”), which amends and restates the equity incentive plan which was previously established as of October 9, 2019. Under the amendments, there were no changes in the terms of previously issued awards. Under the Omnibus Plan, the total number of common shares reserved and available for grant and issuance pursuant to awards shall not exceed 1,501,084 common shares. | |
| Options may be exercisable over periods of up to 10 years as determined by the Board of Directors of the Company and the exercise price shall not be less than the closing price of the shares on the day preceding the award date, subject to regulatory approval. |
Page 32 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 19. | Stock options (cont’d) |
| The following table reflects the continuity of stock options for the nine months ended May 31, 2021 and 2020: |
| Weighted-average | ||||||||||||||||
| Number of stock options | Exercise price | Grant-date fair value | Remaining contractual term | |||||||||||||
| # | $ | $ | (yrs.) | |||||||||||||
| Balance, August 31, 2019 | 6,971 | 169.30 | 50.79 | 5.84 | ||||||||||||
| Issued on acquisition of UMG | 16,606 | 63.30 | 2.32 | |||||||||||||
| Issued on acquisition of Frankly | 64,659 | 9.22 | 5.07 | |||||||||||||
| Granted | 169,995 | 7.91 | 4.38 | |||||||||||||
| Expired/Cancelled | (5,110 | ) | 185.97 | 55.79 | ||||||||||||
| Balance, May 31, 2020 | 253,121 | 12.73 | 4.67 | 4.56 | ||||||||||||
| Balance, August 31, 2020 | 253,121 | 12.73 | 4.39 | 4.31 | ||||||||||||
| Granted | 1,333 | 7.38 | 6.24 | |||||||||||||
| Expired/Cancelled | (16,694 | ) | 20.90 | 8.56 | ||||||||||||
| Balance, May 31, 2021 | 237,760 | 12.13 | 4.40 | 3.30 | ||||||||||||
| Vested and expected to vest, May 31, 2021 | 234,686 | 12.21 | 4.39 | 3.23 | ||||||||||||
| Exerciseable as at May 31, 2021 | 207,000 | 13.11 | 4.28 | 2.52 | ||||||||||||
Page 33 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| The following table reflects the stock options issued and outstanding as of May 31, 2021: |
| Outstanding | Weighted average exercise price | Weighted average remaining contractual term | ||||||||||||||
| Expiry date | options | CAD | USD | (Years) | ||||||||||||
| July 11, 2021 | 632 | 164.40 | 126.58 | 0.11 | ||||||||||||
| July 15, 2021 | 9,490 | 41.10 | 31.64 | 0.12 | ||||||||||||
| December 10, 2021 | 1,564 | 93.30 | 71.84 | 0.53 | ||||||||||||
| June 30, 2022 | 4,428 | 153.45 | 118.15 | 1.08 | ||||||||||||
| April 1, 2023 | 104,998 | 11.25 | 7.91 | 1.84 | ||||||||||||
| October 31, 2023 | 64,997 | 11.25 | 7.91 | 2.42 | ||||||||||||
| January 29, 2025 | 46 | 106.50 | 76.43 | 3.67 | ||||||||||||
| August 25, 2025 | 340 | 106.50 | 76.43 | 4.24 | ||||||||||||
| September 23, 2025 | 11 | 106.50 | 76.43 | 4.32 | ||||||||||||
| February 10, 2026 | 1,443 | 106.50 | 76.43 | 4.70 | ||||||||||||
| May 19, 2026 | 4 | 106.50 | 76.43 | 4.97 | ||||||||||||
| May 23, 2026 | 9 | 106.50 | 76.43 | 4.98 | ||||||||||||
| March 3, 2027 | 1,256 | 106.50 | 76.43 | 5.76 | ||||||||||||
| July 31, 2027 | 159 | 106.50 | 76.43 | 6.17 | ||||||||||||
| November 3, 2027 | 133 | 106.50 | 76.43 | 6.43 | ||||||||||||
| November 7, 2029 | 46,251 | 7.50 | 5.38 | 8.44 | ||||||||||||
| April 20, 2030 | 666 | 7.05 | 5.06 | 8.89 | ||||||||||||
| December 2, 2030 | 1,333 | 9.50 | 7.38 | 9.51 | ||||||||||||
| 237,760 | 16.65 | 12.13 | 3.30 | |||||||||||||
| Of the 237,760 options outstanding as of May 31, 2021 (August 31, 2020 – 253,121), 207,000 are exercisable as of May 31, 2021 (August 31, 2020 – 191,730). During the nine months ended May 31, 2021, share-based compensation expense for the Company’s stock options was $90,411 (May 31, 2020 – $765,167). |
| 20. | Restricted share units |
| The Omnibus Plan allows the Company to award restricted share units to officers, employees, directors and consultants of the Company and its subsidiaries upon such conditions as the board may establish, including the attainment of performance goals recommended by the Company’s compensation committee. The purchase price for common shares of the Company issuable under each Restricted Share Unit (“RSU”) award, if any, shall be established by the board at its discretion. Common shares issued pursuant to any RSU award may be made subject to vesting conditions based upon the satisfaction of service requirements, conditions, restrictions, time periods or performance goals established by the board. | |
| The TSXV requires the Company to fix the number of common shares to be issued in settlement of awards that are not options. The maximum number of common shares available for issuance pursuant to the settlement of RSUs shall be an aggregate of 750,542 common shares. |
Page 34 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| The Company’s outstanding RSUs are as follows: |
| Number | ||||
| # | ||||
| Balance, August 31, 2019 | - | |||
| Issued on acquisition of Frankly | 50,039 | |||
| Granted | 26,667 | |||
| Vested | (26,667 | ) | ||
| Cancelled | - | |||
| Balance, May 31, 2020 | 50,039 | |||
| Balance, August 31, 2020 | 402,372 | |||
| Granted | 330,896 | |||
| Vested | (158,477 | ) | ||
| Cancelled | (11,855 | ) | ||
| Balance, May 31, 2021 | 562,936 | |||
| During the nine months ending May 31, 2021, the Company granted 330,896 RSUs pursuant to the Company’s incentive plan to a former officer and key management employees. The fair value of these RSUs was estimated based on the closing price of CAD$8.85 – CAD$12.01 for a total fair value on date of grant of CAD$3,224,579. Of the 330,896 RSUs granted, 75,944 were severance compensation to a former officer. As these RSUs were issued as severance compensation, the grant date fair value of CAD$713,874 ($550,896) was recognized on the grant date. The fair value of the remaining RSUs will be recognized as stocked-based compensation expense over the vesting period, which is generally three years. | |
| During the nine months ended May 31, 2021, share-based compensation expense for the Company’s RSUs was $2,368,333. |
Page 35 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 21. | Capital management |
| The Company considers its capital to be its shareholders’ equity. | |
| As of May 31, 2021, the Company had shareholders’ equity before non-controlling interests of $20,258,830 (August 31, 2020 – $45,907). | |
| The Company’s objective when managing its capital is to seek continuous improvement in the return to its shareholders while maintaining a moderate to high tolerance for risk. The objective is achieved by prudently managing the capital generated through internal growth and profitability, through the use of lower cost capital, including raising share capital or debt when required to fund opportunities as they arise. | |
| The Company may also return capital to shareholders through the repurchase of shares, pay dividends or reduce debt where it determines any of these to be an effective method of achieving the above objective. The Company does not use ratios in the management of its capital. There have been no changes to management’s approach to managing its capital during the three and nine months ended May 31, 2021 and 2020. |
| 22. | Commitments and contingencies |
| (a) | Royalty expenses |
| Royalty expenses relate to royalties paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development or sale of the Eden Games’ products. Eden Games has royalty agreements to utilize trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development or sale of its products. Eden Games has committed to pay royalties ranging from 4% to 25% of revenues after certain thresholds have been met, in connection with the underlying license agreements. Royalty expenses were €nil for the three and nine months ended May 31, 2021 and 2020. | |
| (b) | Consulting contracts |
| Under the terms of a consulting agreement dated July 27, 2017, the Company is committed to pay to certain employees of Eden Games, nine months’ severance in the event of termination, amounting to £144,500 ($175,911). If revenue from the Eden Games mobile app exceeds specified amounts, a bonus shall be paid up to a maximum of £100,000 ($121,561) on an annual basis. As no triggering events have taken place related to the contingencies to May 31, 2021, no provision has been made in these unaudited interim condensed consolidated financial statements. | |
| (c) | Litigation and arbitration |
| In April 2020, the Company announced its renegotiation of the acquisition of Allinsports. The revised purchase agreement provides for the acquisition of 100% of Allinsports in exchange for the issuance of 966,667 common shares of the Company. The purchase agreement included the requirement of $1.2 million to be advanced against the purchase price. In September 2020, the Company advised the shareholders of Allinsports that closing conditions of the transaction, including the failure to provide audited financial statements, had not been satisfied. |
Page 36 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 22. | Commitments and contingencies (cont’d) |
| (c) | Litigation and arbitration (cont’d) |
| In response, in November 2020, the shareholders of Allinsports commenced arbitration in Alberta, Canada seeking, among other things, to compel the Company to complete the acquisition of Allinsports without the audited financial statements, and to issue 966,667 common shares of the Company to those shareholders. As alternative relief, the shareholders of Allinsports are seeking US$20,000,000 in damages. A hearing in this matter was held in May of 2021, and a ruling has not yet been issued. | |
| Separately, in April of 2021, the Company received a copy of a complaint filed by 3CI Holdings, LLP in the Circuit Court for the 11th Judicial Circuit for Miami-Dade naming Allinsports, A1 Simulation LLC (an entity purported to be a subsidiary of Allinsports), and the Company, seeking to hold the parties, including Company, responsible for unpaid rent under a lease agreement between 3CI’s predecessors in interest and A1 Simulation, and seeking damages of at least $2.89 million. On July 6, 2021, the Company filed motion to dismiss the complaint in this matter. | |
| On January 21, 2021, eight former shareholders of Winview filed a Complaint in Delaware Chancery Court against four Winview directors (David Lockton, et al. v. Thomas S. Rogers, et al.) alleging that the defendants breached their fiduciary duties in connection with the sale of Winview to Engine. The relief sought includes rescission of the sale of Winview to Engine and compensatory damages. The Company does not believe that the action has merit and neither the Company nor Winview have been named as parties to this action. Under the March 9, 2020 Business Combination Agreement pursuant to which the Company acquired Winview, the Company agreed to indemnify Winview’s directors for any claims arising out of their service as directors for Winview. | |
| On July 15, 2021, a complaint was filed against Winview Inc. by Bleacher League Entertainment, Inc. in the United States District Court for the District of Delaware, alleging that Winview had violated two if Bleacher’s patents covering an interactive themed baseball game and seeking damages and other relief. Following a preliminary review of the complaint, the Company does not believe that these claims have merit and intends to vigorously defend this matter. | |
| On July 7, 2021, Winview Inc. filed a patent infringement lawsuit against DraftKings Inc. and on July 19, 2021, Winview filed a patent infringement lawsuit against FanDuel, Inc. These actions, which are pending in the United States District Court for the District of New Jersey, allege that various gaming services provided by DraftKings and FanDuel infringe WinView’s United States Patent No. 9,878,243entitled “Methodology for Equalizing Systemic Latencies in Television Reception in Connection with Games of Skill Played in Connection with Live Television Programming” and United States Patent No. 10,721,543 entitled “Method Of and System For Managing Client Resources and Assets for Activities On Computing Devices.” These actions seek the recovery of damages and other appropriate relief. | |
| The outcomes of pending litigations in which the Company is involved are necessarily uncertain as are the Company’s expenses in prosecuting and defending these actions. From time to time the Company may modify litigation strategy and/or the terms on which it retains counsel and other professionals in connection with such actions, which may affect the outcomes of and/or the expenses incurred in connection with such actions. | |
| The Company is subject to various other claims, lawsuits and other complaints arising in the ordinary course of business. The Company records provisions for losses when claims become probable and the amounts are estimable. Although the outcome of such matters cannot be determined, it is the opinion of management that the final resolution of these matters will not have a material adverse effect on the Company’s financial condition, operations or liquidity. |
Page 37 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 23. | Discontinued operations |
| On November 3, 2020, the Company, following a detailed strategic review in connection with the merger of Torque Esports, Frankly and WinView, announced that it has completed the sale of IDEAS+CARS, The Race Media, WTF1, Driver DataDB and Lets Go Racing (collectively the “Motorsport Group”) to Ideas + Cars Holdings Limited, a third party investment group based in the UK. As a result, the Company is eliminating its funding obligations related to the cost of maintaining and growing these auto media businesses and certain accrued liabilities. Accordingly, the operational results for this group have been presented as a discontinued operation. | |
| Consideration transferred for the Motorsport Group was as follows: |
| Amount | ||||
| $ | ||||
| Consideration received or receivable: | ||||
| Accounts payable assumed | 101,322 | |||
| Deferred purchase consideration of LGR | 333,503 | |||
| Fair value of contingent consideration | 1,321,281 | |||
| Total disposal consideration | 1,756,106 | |||
| Carrying amount of net assets sold | (2,334,303 | ) | ||
| Loss on disposal before income tax and reclassification of foreign currency translation reserve | (578,197 | ) | ||
| Reclassification of foreign currency translation reserve | (100,734 | ) | ||
| Loss on disposal of Motorsports | (678,931 | ) | ||
| The net assets of the Motorsport Group as of the date of sale were as follows: |
| Amount | ||||
| $ | ||||
| Carrying amounts of assets as at the date of sale: | ||||
| Cash and cash equivalents | (24,348 | ) | ||
| Restricted cash | - | |||
| Accounts and other receivables | 126,590 | |||
| Government remittances | 25,095 | |||
| Prepaid expenses and other | 24,113 | |||
| Property and equipment | 47,416 | |||
| Intangible assets | 3,066,457 | |||
| Total assets of disposal group | 3,265,323 | |||
| Carrying amount of liabilities directly associated with assets as at the date of sale: | ||||
| Accounts payable and accrued liabilities | 931,020 | |||
| Total liabilities of disposal group | 931,020 | |||
| Net assets of disposal group | 2,334,303 | |||
Page 38 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 23. | Discontinued operations (cont’d) |
| The operating results of the Motorsports Group and PGL Nevada, (together, the “discontinued operations”) for the three and nine months ended May 31, 2021 and 2020 are presented as follows: |
| For the three months ended | For the nine months ended | |||||||||||||||
| May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenues | ||||||||||||||||
| Advertising revenue | - | 369,118 | 90,934 | 407,640 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Salaries and wages | - | 212,211 | 212,546 | 484,886 | ||||||||||||
| Consulting | - | 438,709 | 267,933 | 637,523 | ||||||||||||
| Professional fees | - | 103,334 | 22,681 | 208,001 | ||||||||||||
| Sponsorships and tournaments | - | 770,169 | 203,637 | 3,211,368 | ||||||||||||
| Advertising and promotion | - | 14,898 | 1,740 | 27,012 | ||||||||||||
| Office and general | - | 22,493 | 7,374 | 144,519 | ||||||||||||
| Technology expenses | - | 74,293 | 86,590 | 81,913 | ||||||||||||
| Amortization and depreciation | - | 40,346 | 201,335 | 44,584 | ||||||||||||
| Share-based payments | - | - | - | - | ||||||||||||
| Interest expense | - | 793 | 572 | 1,051 | ||||||||||||
| (Gain) loss on foreign exchange | 9,606 | 21,968 | 49,317 | 17,522 | ||||||||||||
| Net loss from discontinued operations | (9,606 | ) | (1,330,096 | ) | (962,791 | ) | (4,450,739 | ) | ||||||||
| The net cash flows of the discontinued operations for the three and nine months ended May 31, 2021 and 2020 are presented as follows: |
| For the three months ended | For the nine months ended | |||||||||||||||
| May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Net cash provided by (used in) operating activities | - | (17,874 | ) | (92,652 | ) | (96,942 | ) | |||||||||
| Disposal of Motorsports | - | - | 24,348 | - | ||||||||||||
| Change in cash | - | (17,874 | ) | (68,304 | ) | (96,942 | ) | |||||||||
| Cash, beginning of period | - | 485 | 68,304 | 79,553 | ||||||||||||
| Cash, end of period | - | (17,389 | ) | - | (17,389 | ) | ||||||||||
Page 39 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 24. | Segmented information |
| Information reported to the Company’s Chief Executive Officer, the Chief Operating Decision Maker (“CODM”), for the purposes of resource allocation and assessment of segment performance is focused on the category of services for each type of activity. The principal categories of services are E-Sports, Media and Advertising, and Corporate and Other. The Group’s reportable segments under IFRS 8 are therefore as follows: |
| E-Sports | - | Services related to competitive organized video gaming or sporting events; |
| Media and Advertising | - | Platform and advertising services provided to other broadcasters, primarily local TV and radio broadcasters; |
| Corporate and Other | - | Services provided to other businesses and other revenues; |
| The Corporate and Other segment primarily consists of support costs not allocated to the two other segments. | |
| The following is an analysis of the Company’s revenue and results by reportable segment for the three months ended May 31, 2021: |
| Three months ended | E-Sports | Media and Advertising | Corporate and Other | May 31, 2021 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 2,017,446 | 7,592,387 | - | 9,609,833 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (1,555,858 | ) | (2,057,830 | ) | - | (3,613,688 | ) | |||||||||
| Central administration costs | - | - | 1,825,386 | 1,825,386 | ||||||||||||
| Other gains and losses | 7,954 | (329,730 | ) | (11,525,245 | ) | (11,847,021 | ) | |||||||||
| Finance costs | (3,683 | ) | 125,470 | 76,034 | 197,821 | |||||||||||
| Loss before tax | (1,560,129 | ) | (1,853,570 | ) | 9,623,825 | 6,210,126 | ||||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Share of net loss of associate | - | - | - | - | ||||||||||||
| Discontinued operations | (9,606 | ) | - | - | (9,606 | ) | ||||||||||
| Non-controlling interest in net loss | - | - | (2,343 | ) | (2,343 | ) | ||||||||||
| Net loss | (1,569,735 | ) | (1,853,570 | ) | 9,621,482 | 6,198,177 | ||||||||||
Page 40 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 24. | Segmented information (cont’d) |
The following is an analysis of the Company’s revenue and results by reportable segment for the nine months ended May 31, 2021:
| Nine months ended | E-Sports | Media and Advertising | Corporate and Other | May 31,2021 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 3,972,861 | 21,491,243 | - | 25,464,104 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (6,347,262 | ) | (5,682,782 | ) | - | (12,030,044 | ) | |||||||||
| Central administration costs | - | - | 7,640,439 | 7,640,439 | ||||||||||||
| Other gains and losses | (5,935 | ) | 2,474,609 | 2,176,898 | 4,645,572 | |||||||||||
| Finance costs | 101,119 | 637,514 | 439,755 | 1,178,388 | ||||||||||||
| Loss before tax | (6,442,446 | ) | (8,794,905 | ) | (10,257,092 | ) | (25,494,443 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Share of net loss of associate | - | - | (103,930 | ) | (103,930 | ) | ||||||||||
| Discontinued operations | (962,791 | ) | - | (678,931 | ) | (1,641,722 | ) | |||||||||
| Non-controlling interest in net loss | - | - | 59,327 | 59,327 | ||||||||||||
| Net loss | (7,405,237 | ) | (8,794,905 | ) | (10,980,626 | ) | (27,180,768 | ) | ||||||||
The following is an analysis of the Company’s revenue and results by reportable segment for the three months ended May 31, 2020:
| Three months ended | E-Sports | Media and Advertising | Corporate and Other | May 31,2020 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 476,267 | 1,613,050 | 4 | 2,089,321 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (656,611 | ) | (428,624 | ) | 4 | (1,085,231 | ) | |||||||||
| Central administration costs | - | - | 2,663,094 | 2,663,094 | ||||||||||||
| Other gains and losses | (57,177 | ) | (2,946 | ) | 6,668,292 | 6,608,169 | ||||||||||
| Finance costs | 27,205 | 33,333 | (45,480 | ) | 15,058 | |||||||||||
| Loss before tax | (626,639 | ) | (459,011 | ) | (9,285,902 | ) | (10,371,552 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Discontinued operations | (1,330,096 | ) | - | - | (1,330,096 | ) | ||||||||||
| Non-controlling interest in net loss | - | - | (8,677 | ) | (8,677 | ) | ||||||||||
| Net loss | (1,956,735 | ) | (459,011 | ) | (9,294,579 | ) | (11,710,325 | ) | ||||||||
Page 41 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 24. | Segmented information (cont’d) |
The following is an analysis of the Company’s revenue and results by reportable segment for the nine months ended May 31, 2020:
| Nine months ended | E-Sports | Media and Advertising | Corporate and Other | May 31,2020 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 1,908,138 | 1,613,050 | 376 | 3,521,564 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (2,977,759 | ) | (428,624 | ) | 376 | (3,406,007 | ) | |||||||||
| Central administration costs | 7,080,232 | 7,080,232 | ||||||||||||||
| Other gains and losses | 24,704 | (2,946 | ) | 6,840,087 | 6,861,845 | |||||||||||
| Finance costs | 37,916 | 33,333 | 467,347 | 538,596 | ||||||||||||
| Loss before tax | (3,040,379 | ) | (459,011 | ) | (14,387,290 | ) | (17,886,680 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Discontinued operations | (4,450,739 | ) | - | - | (4,450,739 | ) | ||||||||||
| Non-controlling interest in net loss | - | - | 68,632 | 68,632 | ||||||||||||
| Net loss | (7,491,118 | ) | (459,011 | ) | (14,318,658 | ) | (22,268,787 | ) | ||||||||
Geographical breakdown
| North America | United Kingdom | European Union | Total | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| August 31, 2020 | ||||||||||||||||
| Assets | 48,230,804 | 2,896,582 | 2,288,091 | 53,415,477 | ||||||||||||
| Long-term assets | 37,664,748 | 2,507,761 | 1,067,495 | 41,240,004 | ||||||||||||
| May 31, 2021 | ||||||||||||||||
| Assets | 68,513,022 | - | 2,826,821 | 71,339,843 | ||||||||||||
| Long-term assets | 36,864,451 | - | 146,498 | 37,010,949 | ||||||||||||
Page 42 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 25. | Related party transactions and balances |
| (a) | Key management compensation |
Key management includes the Company’s directors, officers and any consultants with the authority and responsibility for planning, directing and controlling the activities of an entity, directly or indirectly. Compensation awarded to key management for the three and nine months ended May 31, 2021 and 2020 includes the following:
| For the three months ended | For the nine months ended | |||||||||||||||
| May 31,2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Total compensation paid to key management | 392,490 | 151,667 | 1,836,583 | 359,485 | ||||||||||||
| Share based payments | 323,233 | 119,923 | 1,581,037 | 136,837 | ||||||||||||
Total compensation paid to key management is recorded in consulting fees, salaries and wages and share based payments in the consolidated statement of loss and comprehensive loss.
Amounts due to related parties as of May 31, 2021 with respect to the above fees were $61,500 (August 31, 2020 – $275,502). The amounts due to related parties are recorded within accounts payable and accrued liabilities on the consolidated statement of loss and comprehensive loss. These amounts are unsecured, non-interest bearing and due on demand.
| 26. | Financial instruments and risk management |
| (a) | Financial risk management objectives and policies |
The Company’s activities expose it to a variety of financial risks including foreign currency risk, interest rate risk, credit risk, and liquidity risk. These financial instrument risks are actively managed by the Company under the policies approved by the Board of Directors. The principal financial risks are managed by the Company’s finance department, within Board approved policies and guidelines. On an ongoing basis, the finance department actively manages market conditions with a view to minimizing the exposure of the Company to changing market factors, while at the same time limiting the funding costs to the Company.
| (b) | Credit risk |
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company uses information supplied by independent rating agencies where available, and if not available, the Company uses other publicly available financial information and its own records to rate its customers.
Credit risk arises from cash and deposits with banks as well as credit exposure to outstanding receivables, the carrying amounts represent the Company’s maximum exposure to credit risk.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The Company establishes an allowance for doubtful accounts that represents its estimate of expected losses in respect of accounts receivable. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.
The Company’s accounts receivable are concentrated among customers in the media and broadcasting industry, which may be affected by adverse economic factors impacting that industry. The Company performs ongoing credit evaluations of its major customers, maintains reserves for expected credit losses, and does not require any collateral deposits.
Page 43 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
As of May 31, 2021 one customer (August 31, 2020 – one) accounted for greater than 10% of the Company’s accounts receivable balance. In total, this one customer (August 31, 2020 – one) accounted for 29% of the Company’s net trade accounts receivable balance as of May 31, 2021 (August 31, 2020 – 13%). During the nine months ended May 31, 2021, one customer represented 58% of total revenue.
The below table reflects the aging of the Company’s aging by invoice date of gross trade accounts receivable and allowance for doubtful accounts as of May 31, 2021:
| 0 - 30 | 31 - 60 | 61 - 90 | 91+ | Total | ||||||||||||||||
| Trade accounts receivable | 7,309,612 | 90,573 | 39,789 | 1,172,424 | 8,612,398 | |||||||||||||||
| Allowance for doubtful accounts | 4,500 | 1,500 | - | 937,534 | 943,534 | |||||||||||||||
| % Allowance | 0 | % | 2 | % | 0 | % | 80 | % | 11 | % | ||||||||||
| (c) | Liquidity risk |
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to liquidity risk with respect to its contractual obligations and financial liabilities. The Company manages liquidity risk by continuously monitoring forecasted and actual cash flows and matching maturity profiles of financial assets and liabilities. The Company seeks to ensure that it has sufficient capital to meet short term financial obligations after taking into account its operating obligations and cash on hand.
The Company’s policy is to seek to ensure adequate funding is available from operations and other sources, including debt and equity capital markets, as required.
| < 1 year | 1-2 years | 3-5 years | ||||||||||
| $ | $ | $ | ||||||||||
| Accounts payable and accrued liabilities | 16,339,437 | - | - | |||||||||
| Players liability account | 310,465 | - | - | |||||||||
| Lease obligation | 190,445 | 246,393 | - | |||||||||
| Long-term debt | 99,965 | 22,719 | - | |||||||||
| Promissory notes payable | 903,219 | - | - | |||||||||
| Convertible debt | - | 10,921,492 | - | |||||||||
| (d) | Interest rate risk |
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to fair value risk with respect to debt which bear interest at fixed rates.
| (e) | Foreign exchange rates |
The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to fluctuations of financial instruments related to cash, accounts and other receivables, and accounts payable denominated in Euros, as well as debt denominated in Canadian dollars.
Page 44 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| (f) | Fair value hierarchy |
The following tables combine information about:
| ● | classes of financial instruments based on their nature and characteristics; | |
| ● | the carrying amounts of financial instruments; | |
| ● | fair values of financial instruments (except financial instruments when carrying amount approximates their fair value); and | |
| ● | fair value hierarchy levels of financial assets and financial liabilities for which fair value was disclosed. |
Fair value hierarchy levels 1 to 3 are based on the degree to which the fair value is observable.
As of May 31, 2021:
| Carrying value at May 31, 2021 | FVTPL - mandatorily measured | FVOCI - mandatorily measured | FVOCI - designated | Amortized cost | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash and cash equivalents | - | - | - | 21,321,977 | ||||||||||||
| Restricted cash | - | - | - | 310,465 | ||||||||||||
| Accounts and other receivables | - | - | - | 7,722,611 | ||||||||||||
| Government remittances | - | - | - | 1,160,426 | ||||||||||||
| Publisher advance | - | - | - | 5,309,262 | ||||||||||||
| Investment at FVTPL | 2,048,039 | - | - | - | ||||||||||||
| 2,048,039 | - | - | 35,824,741 | |||||||||||||
| Carrying value at May 31, 2021 | FVTPL - mandatorily measured | FVTPL - designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 16,339,437 | |||||||||
| Players liability account | - | - | 310,465 | |||||||||
| Line of credit | - | - | - | |||||||||
| Long-term debt | - | - | 122,684 | |||||||||
| Promissory notes payable | - | - | 903,219 | |||||||||
| Deferred purchase consideration | - | - | - | |||||||||
| Convertible debt | - | 10,921,492 | - | |||||||||
| - | 10,921,492 | 17,675,805 | ||||||||||
Page 45 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
As of August 31, 2020:
| Carrying value at August 31, 2020 | FVTPL - mandatorily measured | FVOCI - mandatorily measured | FVOCI - designated | Amortized cost | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash and cash equivalents | - | - | - | 5,243,278 | ||||||||||||
| Restricted cash | - | - | - | 388,587 | ||||||||||||
| Accounts and other receivables | - | - | - | 3,845,890 | ||||||||||||
| Government remittances | - | - | - | 1,125,912 | ||||||||||||
| Publisher advance | - | - | - | - | ||||||||||||
| Investment at FVTPL | - | - | - | - | ||||||||||||
| - | - | - | 10,603,667 | |||||||||||||
| Carrying value at August 31, 2020 | FVTPL - mandatorily measured | FVTPL - designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 17,144,346 | |||||||||
| Players liability account | - | - | 388,587 | |||||||||
| Line of credit | - | - | 4,919,507 | |||||||||
| Long-term debt | - | - | 230,932 | |||||||||
| Promissory notes payable | - | - | 3,818,920 | |||||||||
| Deferred purchase consideration | - | - | 333,503 | |||||||||
| Convertible debt | - | 10,793,459 | - | |||||||||
| - | 10,793,459 | 26,835,795 | ||||||||||
A summary of instruments, with their classification in the fair value hierarchy is as follows:
| Level 1 | Level 2 | Level 3 | Fair value as of May 31,2021 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Convertible debt | - | - | 10,921,492 | 10,921,492 | ||||||||||||
| Investment at FVTPL | - | 2,048,039 | - | 2,048,039 | ||||||||||||
| - | 2,048,039 | 10,921,492 | 12,969,531 | |||||||||||||
| Level 1 | Level 2 | Level 3 | Fair value as of August 31,2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Convertible debt | - | - | 10,793,459 | 10,793,459 | ||||||||||||
| Investment at FVTPL | - | - | - | - | ||||||||||||
| - | - | 10,793,459 | 10,793,459 | |||||||||||||
Page 46 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 26. | Financial instruments and risk management (cont’d) |
| (f) | Fair value hierarchy (cont’d) |
The following table gives information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation technique and key inputs used).
Financial assets / financial liabilities |
Valuation technique | Key Inputs | Relationship and sensitivity of unobservable inputs to fair value | |||
| Convertible debt | The fair value of the convertible debentures as of May 31, 2021 has been calculated using a binomial lattice methodology. | Key observable inputs
Share price CAD$10.42 (USD $8.63)
Risk-free interest rate (0.09% to 0.26%)
Dividend yield (0%)
Key unobservable inputs Credit spread (4.89% to 8.70%)
Discount for lack of marketability (0% to 5%) |
The estimated fair value would increase (decrease) if: The share price was higher (lower) The risk-free interest rate was higher (lower) The dividend yield was lower (higher) The credit spread was lower (higher) The discount for lack of marketability was lower (higher) | |||
| Convertible debt | The fair value of the convertible debentures as of August 31, 2020 has been calculated using a binomial lattice methodology. | Key observable inputs Share price (USD $8.92)
Risk-free interest rate (0.14%)
Dividend yield (0%)
Key unobservable inputs
Credit spread (18.35%)
Discount for lack of marketability (47%) |
The estimated fair value would increase (decrease) if: The share price was higher (lower) The risk-free interest rate was higher (lower) The dividend yield was lower (higher) The credit spread was lower (higher) The discount for lack of marketability was lower (higher) |
There has been no change to the valuation technique during the year. There were no transfers between Levels 1, 2 and 3 during the three and nine months ended May 31, 2021 and 2020.
Page 47 of 48 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Notes to the Interim Condensed Consolidated Financial Statements | |
| For the three and nine months ended May 31, 2021 (Unaudited) | |
| (Expressed in United States Dollars) |
| 27. | Subsequent events |
The Company has evaluated subsequent events from the balance sheet date through July 26, 2021, the date at which the unaudited interim condensed consolidated financial statements were available to be issued, and determined there were no additional items to be disclosed except for the transactions described below.
On June 16, 2021, the Company announced a definitive agreement to acquire Sideqik, Inc., an influencer marketing platform that offers brands, direct marketers, and agencies tools to discover, connect and execute marketing campaigns with content-creating influencers.
On July 2, 2021, the Company closed the transaction and issued 410,523 common shares to the sellers and related parties, with such amount subject to adjustment at closing for cash settlement of certain transaction related expenses and other terms and conditions of the agreement.
On July 6, 2021, the Company announced the appointment of Rudolph “Rudy” Cline-Thomas and Lori Conkling to its Board of Directors, subject to customary exchange approval.
On June 17, 2021 the Company announced that a final short form base shelf prospectus (with the securities regulators in each province of Canada, except for the Province of Québec) previously filed on March 25, 2021 (the “Shelf Prospectus”), and a corresponding shelf registration statement on Form F-10 (the “Registration Statement” and, together with the Shelf Prospectus, the “Engine Shelf”) has been deemed effective by the U.S. Securities and Exchange Commission (“SEC”).
The prospectus and registration statement allows the Company to offer up to $150 million of common shares, preference shares, warrants, subscription receipts, debt securities, units, or any combination thereof (“Securities”) during the 25-month period that the shelf prospectus is effective. The specific terms of any offering of Securities, including the use of proceeds from any offering, will be set forth in a shelf prospectus supplement.
The Company also started trading on the Nasdaq Global Market (“Nasdaq”) on June 17, 2021 under the ticker symbol “GAME.” The Company will also retain its listing on the TSX Venture exchange under the symbol “GAME.”
Page 48 of 48 |
Exhibit 99.2
ENGINE MEDIA HOLDINGS, INC.
(formerly Torque Esports Corp.)
Management’s Discussion and Analysis
For the three and nine months ended
May 31, 2021 and May 31, 2020
(Expressed in United States Dollars)
| Engine Media Holdings, Inc. |  |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Introduction
The following Management’s Discussion and Analysis (“MD&A”) is provided to enable a reader to assess the results of operations and financial condition of Engine Media Holdings, Inc. for the three and nine months ended May 31, 2021 and 2020 and should be read in conjunction with the Company’s Interim Condensed Consolidated Financial Statements and accompanying notes. The words “we”, “our”, “us”, “Company”, and “Engine Media” refer to Engine Media Holdings, Inc. and its subsidiaries and/or the management and employees of the Company (as the context may require). This MD&A has taken into account information available up to and including July 26, 2021.
Cautionary note regarding forward-looking statements
This MD&A contains certain “forward-looking information” and “forward-looking statements” as defined under applicable Canadian and U.S. securities laws (collectively, “forward-looking statements”) which are based upon the Company’s current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as “expect”, “likely”, “may”, “will”, “should”, “intend”, or “anticipate”, “potential”, “proposed”, “estimate” and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussions of strategy. Forward-looking statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance or other statements that are not statements of fact. Such forward-looking statements are made as of the date of this MD&A. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to:
| ● | financial, operational and other projections and outlooks as well as statements or information concerning future operation plans, objectives, performance, revenues, growth, acquisition strategy, profits or operating expenses; |
| ● | our ability to successfully execute our business plan; |
| ● | any expectation of regulatory approval and receipt of certifications with respect to the Company’s current and proposed business transactions; |
| ● | expectations regarding existing products and plans to develop, implement or adopt new technology or products; |
| ● | expectations regarding the successful integration of recent acquisitions of WinView, Inc. (“WinView”) and Frankly Inc. (“Frankly”); |
| ● | the expectation of obtaining new customers for the Company’s products and services, as well as expectations regarding expansion and acceptance of the Company’s brand and products to new markets; |
| ● | estimates and projections regarding the industry in which the Company operates and adoption of technologies, including expectations regarding the growth and impact of esports; |
| ● | requirements for additional capital and future financing options; |
| ● | the risks inherent in international operations; |
| ● | marketing plans; |
| ● | our ability to compete with our competitors and their technologies; |
| ● | our reliance on key executives and the ability to attract and retain qualified personnel; |
| Page 2 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Cautionary note regarding forward-looking statements (cont’d)
| ● | the availability of intellectual property protection for the Company’s products, and our ability to expand and exploit our intellectual property; |
| ● | statements related to the expected or potential impact of the novel coronavirus (“COVID-19”) pandemic; |
| ● | the completion of and our use of the proceeds of any offering; and |
| ● | other expectations of the Company. |
The forward-looking statements are based on a number of key expectations and assumptions made by our management, including, but not limited to:
| ● | that the projections relating to growth and trends in the industry of the Company and adoption of the technologies underlying the Company’s products are accurate; |
| ● | assumptions and uncertainties related to the expected size of the esports market and other markets for the Company’s products and the acceptance of the Company’s product in existing and new markets; |
| ● | our ability to generate new sales and market demand for our products; |
| ● | our ability to continue to attract and retain qualified personnel; |
| ● | our ability to protect our intellectual property and to expand and exploit our intellectual property; |
| ● | the successful execution of our business plan; |
| ● | the availability of additional capital; and |
| ● | general economic and financial market conditions. |
Forward-looking statements contained in this MD&A are based on the assumptions described in this MD&A. Although management believes the expectations reflected in such forward-looking statements are reasonable, forward-looking statements are based on the opinions, assumptions and estimates of management at the date the statements are made and are subject to a variety of risks and uncertainties and other factors, both known and unknown, that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include, but are not limited to:
| ● | liquidity concerns and future financings; |
| ● | execution of business plan; |
| ● | the integration of recent acquisitions such as WinView, Frankly, and UMG Media Ltd. (“UMG”); |
| ● | the management of growth; |
| ● | reduced cash reserves from future operating losses; |
| ● | failure to compete successfully in various markets; |
| Page 3 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Cautionary note regarding forward-looking statements (cont’d)
| ● | the development of high-quality products; |
| ● | rapid technological changes; |
| ● | proprietary protection and intellectual property disputes; |
| ● | transmission of user data; |
| ● | data collection risk; |
| ● | mobile gaming and the free-to-play business model; |
| ● | the condition of the global economy; |
| ● | risks inherent in foreign/international operations; |
| ● | changing governmental regulations; |
| ● | COVID-19 related risks; and |
| ● | those risks discussed in this MD&A under the heading “Risks and Uncertainties”. |
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Although the Company has attempted to identify important factors that could cause actual results to differ materially from forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated, described or intended.
A number of factors could cause actual events, performance or results to differ materially from what is projected in forward-looking statements. The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose. You should not place undue reliance on forward-looking statements contained in this MD&A.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
We qualify all the forward-looking statements contained in this MD&A by reference herein and therein by the foregoing cautionary statements.
| Page 4 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Corporate profile
Engine Media is addressing massive market opportunities in esports, gaming, data, and streaming content distribution. The three-way merger of Torque Esports, Frankly Media and WinView Games which closed on May 8, 2020 brings together a unique combination of technology assets that include (i) a market leading video gaming competition platform – UMG; (ii) a skills-based mobile engagement platform for traditional sports and esports – WinView; (iii) a data intelligence platform – Stream Hatchet S.L. (“Stream Hatchet”); (iv) a content management and streaming video platform that supports over 1,200 news sites and engages over 100 million monthly active users across some of the top media companies in world - Frankly; and (v) a development studio that’s dedicated to making the best racing games for mobile – Eden Games. The Company is a publicly traded company listed on the TSX Venture Exchange (“TSXV”) and Nasdaq Global Market (“Nasdaq”) under the symbol “GAME”. The registered head office of the Company is 77 King Street, West, Suite 3000, P.O. Box 95, TD Centre North Tower, Toronto, Ontario, Canada M5K 1G8.
Businesses of engine
Engine is a multi-platform media group leading the charge in esports, news streaming and gaming. Following the completion of the transformational acquisition of each of Frankly and WinView, the Company now offers a unique combination of esports content, streaming technology, gaming platforms, data analytics and intellectual property.
Engine is focused on accelerating new, live, immersive esports and interactive gaming experiences for consumers through its partnerships with traditional and emerging media companies. Following the Frankly and WinView acquisitions, Engine clients include more than 1,200 television, print and radio brands including CNN, ESPN, Discovery / Eurosport, Fox, Vice, Newsweek, and Cumulus; dozens of gaming and technology companies including EA, Activision, Blizzard, Take2Interactive, Microsoft, Google, Twitch, and Ubisoft; and has connectivity into hundreds of millions of homes around the world through content, distribution, and technology.
Eden Games
Eden Games S.A. (“Eden Games”) is a game developer with market-leading competency in building mobile racing games. They are well-known in the industry for the multiple racing franchises they have created and are considered experts in the fields of licensing and racing technology. Founded in 1998 in Lyon, France, by two experienced Atari developers, Eden Games is a household name in development circles and has both a storied history of success and a strong pipeline of future engagements. Its current development deals are for the official F1 mobile game and porting its Gear.Club franchise onto the hugely successful Nintendo Switch. These two contracts provide regular revenue contracted from 3rd parties and a share of the revenue from game sales or in-app purchases.
Eden has produced the following video game titles: V-Rally (1998); V-Rally 2 (1999); Need for Speed: Porsche (2000); V-Rally 3 (2002); KYA: Dark Lineage (2003); TITEUF: Mega Compet (2004); Test Drive Unlimited (2006); Alone in the Dark (2008); Test Drive Unlimited 2 (2011); TDU2 Casino Online (2011); Gear.Club Mobile (2016 – 2020); Gear.Club Unlimited (2017); F1 Mobile (2018 – 2020); and Gear.Club Unlimited 2 (2018 – 2020).
Stream Hatchet
Stream Hatchet is a data analytics company based in Terrassa, Spain, providing intelligence for persons and entities involved in video game streaming. Stream Hatchet provides real-time data analytics and viewership information that assists in the development and marketing decisions of the Company’s initiatives. This is a service that no other publisher or esports operator owns in-house. These unique data analytic capabilities provide the Company an edge in accessing sponsorships and promotions from major brands focused on esports, as the Company has proprietary data on esports viewership, brand exposure and sponsorship valuation to quantify the value of our brand exposure on multiple streaming platforms around the globe.
| Page 5 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Businesses of engine (cont’d)
Stream Hatchet (cont’d)
Stream Hatchet, through a SaaS offering, also generates significant independent revenue for the Company as a standalone unit without infringing upon its strategic value to the Company. Stream Hatchet provides holistic data to its users, including streamers, esports organizations, video game producers, and advertising agencies. Stream Hatchet provides a clearly delineated product offering with a high degree of automation and a strong pipeline of clients and brands looking for intelligence in the esports & gaming landscape. Stream Hatchet’s innovative reporting and data analytics are unique in the industry, with services and reporting having been sold to major brands in the technology space.
UMG
The Company acquired UMG on December 31, 2019. UMG is a premier esports company in North America, offering live gaming entertainment events and online play. UMG provides online and live tournaments as well as the creation and distribution of original esports content.
UMG, through its wholly-owned subsidiary UMG Events LLC, which was founded in 2012, is actively involved in many aspects of the esports industry. UMG is deeply ingrained in the gaming community and very well established within the competitive gaming sector with approximately 2.1 million registered users and over 18 million matches played live and online through its platform.
UMG is a diversified esports company that has operations involved in:
| ● | Live tournaments | |
| ● | Online contests | |
| ● | Casino esports operations | |
| ● | Creation and distribution of original content | |
| ● | Esports tournament operations through its proprietary tournament management app |
Frankly and WinView Acquisition
On May 8, 2020, the Company completed a business combination with Frankly and WinView. It is expected that the transaction will place Engine at the forefront of esports, news streaming and sports gaming across multiple media platforms. The completion of the Frankly and WinView acquisition has resulted in a company with a unique combination of assets, ranging from esports content, streaming technology, sports gaming, data and analytics, and intellectual property.
Frankly
Through its wholly-owned subsidiary Frankly Media, LLC, Frankly provides a complete suite of solutions that give publishers a unified workflow for the creation, management, publishing, and monetization of digital content to any device while maximizing audience value and revenue.
Frankly’s products include a ground-breaking online video platform for Live, Video-on-Demand (“VOD”), and Live-to-VOD workflows, a full-featured content management system with rich storytelling capabilities, as well as native apps for iOS, Android, Apple TV, Fire TV, and Roku.
Frankly also provides comprehensive advertising products and services, including direct sales and programmatic ad support. With the release of its server-side ad insertion (“SSAI”) platform, Frankly has been positioned to help video producers take full advantage of the growing market in addressable advertising.
| Page 6 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Businesses of engine (cont’d)
WinView
WinView is a Silicon Valley-based company, pioneering second-screen interactive TV. WinView is a leading skill-based sports prediction mobile games platform. WinView plans to leverage its extensive experience in pioneering real-time interactive television games on the mobile second screen, its foundational patents, and its unique business model. The WinView app is an end-to-end two-screen TV synchronization platform for both television programming and commercials. The paid entry, skill-based WinView Games app uniquely enhances TV viewing enjoyment and rewards sports fans with prizes as they answer in-game questions while competing in real-time during live televised sports. WinView also holds the foundational patents on the synchronized second-screen experience.
Disposition of Motorsport Group
In November 2020, the Company sold IDEAS+CARS, The Race Media, WTF1, and Driver DataBase (collectively the “Motorsport Group”) to Ideas + Cars Holdings Limited, a third-party investment group based in the UK. As a result, Engine is eliminating its funding obligations related to the cost of maintaining and growing these auto media businesses and certain accrued liabilities. While reducing its cost base, Engine will maintain the ability to work with the Motorsports Group. Engine will continue to support racing as a category through its competitive gaming platform, UMG, as it expands relationships across the entire esports sector as the leading destination for tournament play. As part of the disposition of the Motorsport Group, Engine Media reorganized its leadership team by moving to a single CEO role under Lou Schwartz, with Tom Rogers remaining Executive Chairman.
Sideqik Acquisition
On June 16, 2021, the Company announced a definitive agreement to acquire Sideqik, Inc., an influencer marketing platform that offers brands, direct marketers, and agencies tools to discover, connect and execute marketing campaigns with content-creating influencers. On July 2, 2021, the Company closed the transaction and issued 410,523 common shares to the sellers and related parties, with such amount subject to adjustment at closing for cash settlement of certain transaction related expenses and other terms and conditions of the agreement.
Market opportunity
Video gaming is one of the largest and fastest-growing markets in the entertainment sector, with an estimated 2.6 billion gamers globally, with esports being the major source of growth. Esports is a term that comprises a diverse offering of competitive electronic games that gamers play against each other. One of the most significant differences between esports and video games of old is the community and spectator nature of esports, whereby competitive play against another person, either one-on-one or in teams, is a central feature of esports. Since players play against each other online, a global network of players and viewers has developed as these players compete against each other worldwide. Additionally, game developers have greatly increased the entertainment value of games, which has made the spectator aspect of gaming much more prevalent and further drives the expansion of the gaming market.
The expanded reach of broadband service and the computer technology advances in the last decade have also greatly accelerated the growth of esports. Esports has become so popular that many high schools and colleges now offer programs to support students’ interest in esports, as well as tournaments and scholarships. The best-known esports teams are receiving marquee sponsorships and are being purchased or invested in by a range of financial and strategic partners. The highest profile esports gamers have significant online audiences as they stream themselves playing against other players online and potentially can generate millions of dollars in sponsorship money and affiliate fees from their online streaming channels. It is projected that by 2023, approximately 650 million people will be watching esports globally. Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services, including Twitch.tv, Youtube.com and Facebook Gaming.
| Page 7 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Strategy for growth
Engine Media generates revenue through a combination of (i) direct-to-consumer fees (subscription, rake, advertising and sponsorship, and merchandise sales); (ii) business-to-business software-as-a-service (“SaaS”) subscription and professional service fees; and (iii) programmatic advertising sales and brand sponsorships. The Company is uniquely positioned with a base of predictable business-to-business revenues and an extensive network of media and gaming publisher relationships. These media and gaming publishers engage over one hundred (100) million monthly active users. Leveraging these relationships to efficiently create awareness for our gaming competition platform, where players and fans can play, watch and engage with other members of the esports community, is key to our long-term growth strategy.
Impact of the global COVID-19 pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has since extensively impacted global health and the economic environment. To contain the spread of COVID-19, domestic and international governments worldwide enacted various measures, including orders to close all businesses not deemed “essential,” quarantine orders for individuals to stay in their homes or places of residence to practice social distancing when engaging in essential activities. We anticipate that these actions and the global health crisis caused by COVID-19 will continue to negatively impact many business activities and financial markets across the globe.
Our business has increasingly shifted to digital channels, we have increased flexibility as we navigate through the uncertain environment and near-term implications of the COVID-19 pandemic. The impact of the pandemic on our business has been mixed thus far. We have seen an increase in demand for some of our digital products and services, this demand has been more than offset by a reduction in spending by our customers.
To protect the health and safety of our employees, the majority of our workforce is currently working from home, and we have placed restrictions on non-essential business travel. We have implemented business continuity plans and have increased support and resources to enable our employees to work remotely. Thus far, our business has been able to operate with minimal disruption.
The global COVID-19 pandemic remains a rapidly evolving situation. We will continue to monitor the developments of the pandemic actively. We may take further actions that could alter our business operations as required by federal, state, local, or foreign authorities or that we determine are in the best interests of our employees, customers, partners and shareholders. It is not clear what effects any such potential actions may have on our business, including the effects on our employees, players and consumers, customers, partners, development and content pipelines, our reputation, financial condition, results of operations, revenue, cash flows, liquidity or stock price.
We continue to monitor economic conditions, including the impact of COVID-19 pandemic, that may unfavorably affect our businesses, such as deteriorating consumer demand, delays in development, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates.
Senior management team
Engine Media has a deep and cohesive executive management team with diverse skillsets and an unparalleled understanding of the gaming industry. This experience provides a powerful competitive edge against our competitors, as it enables our team to anticipate patterns before they become trends, to identify influential shifts as they develop and to adjust strategy accordingly.
| Page 8 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Presentation of financial information
Unless otherwise specified within, financial results, including historical comparatives, contained in this MD&A are based on Engine Media’s audited consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Unless otherwise specified, amounts are in U.S. dollars, and percentage changes are calculated using whole numbers.
Key Metrics
In addition to measures of financial performance presented in our consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies.
Adjusted EBITDA
We monitor Adjusted EBITDA, a non-IFRS financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement to IFRS measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.
Adjusted EBITDA is not a recognized financial measure under IFRS and does not have a standardized meaning prescribed by IFRS. Therefore, it may not be comparable to similar financial measures presented by other issuers. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with IFRS. We calculate Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense, depreciation and amortization, further, adjusted to exclude certain non-cash charges and other items that we do not believe are reflective of our ongoing operating results.
The following unaudited table presents the reconciliation of net loss to Adjusted EBITDA for the three and nine months ended May 31, 2021 and 2020.
| For the three months ended | For the nine months ended | |||||||||||||||||
| Note | May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | ||||||||||||||
| $ | $ | $ | $ | |||||||||||||||
| Net loss attributable to owners of the Company | 6,198,177 | (11,710,325 | ) | (27,180,768 | ) | (22,268,787 | ) | |||||||||||
| Interest expense | 197,821 | 15,058 | 1,178,388 | 538,596 | ||||||||||||||
| Amortization and depreciation | (a) | 991,618 | 879,077 | 3,938,542 | 2,107,469 | |||||||||||||
| Share-based payments | (a) | 680,111 | 912,040 | 2,458,744 | 928,954 | |||||||||||||
| Loss (gain) on foreign exchange | 706,751 | (397,496 | ) | 809,496 | (113,350 | ) | ||||||||||||
| Change in fair value of contingent consideration | (a) | - | - | - | 82,215 | |||||||||||||
| Loss on extinguishment of debt | (a) | - | 927 | 2,428,900 | - | |||||||||||||
| Gain on retained interest in former associate | (a) | - | - | (99,961 | ) | - | ||||||||||||
| Transaction costs | (a) | - | - | 582,333 | - | |||||||||||||
| Change in fair value of warrant liability | (a) | (11,862,656 | ) | 6,970,916 | (6,247,729 | ) | 8,102,802 | |||||||||||
| Change in fair value of convertible debt | (a) | (691,116 | ) | 33,822 | 7,172,533 | (1,209,822 | ) | |||||||||||
| Share of net loss of associate | (a) | - | - | 103,930 | - | |||||||||||||
| Loss on disposal of Motorsports | (a) | - | - | 678,931 | - | |||||||||||||
| Discontinued operations | 9,606 | 1,330,096 | 962,791 | 4,450,739 | ||||||||||||||
| Adjusted EBITDA | (3,769,688 | ) | (1,965,885 | ) | (13,213,870 | ) | (7,381,184 | ) | ||||||||||
| Page 9 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Note a – Items are non-cash expense (income)
Limitations of Adjusted EBITDA
Adjusted EBITDA, a non-IFRS financial measure, has limitations as an analytical tool, and should not be considered in isolation from or as a substitute for measures presented in accordance with IFRS. Some of these limitations are:
| ● | Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring; | |
| ● | Adjusted EBITDA does not reflect income tax payments that would reduce cash available to us; | |
| ● | Adjusted EBITDA excludes depreciation and amortization of property and equipment and intangible assets, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and | |
| ● | Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces their usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income (loss) and our financial results presented in accordance with IFRS.
Results from operations
Selected quarterly information
| For the three months ended | For the nine months ended | |||||||||||||||
| May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||
| Operating results | ||||||||||||||||
| Total revenues | $ | 9,609,833 | $ | 2,089,321 | $ | 25,464,104 | $ | 3,521,564 | ||||||||
| Total expenses | 3,399,707 | 12,460,873 | 50,958,547 | 21,408,244 | ||||||||||||
| Total net income (loss) from continuing operations | 6,207,783 | (10,380,229 | ) | (25,539,046 | ) | (17,818,048 | ) | |||||||||
| Total net loss from discontinued operations | (9,606 | ) | (1,330,096 | ) | (1,641,722 | ) | (4,450,739 | ) | ||||||||
| Total net income (loss) from continuing operations | 6,198,177 | (11,710,325 | ) | (27,180,768 | ) | (22,268,787 | ) | |||||||||
| Comprehensive income (loss) | 5,821,392 | (11,513,014 | ) | (27,562,152 | ) | (22,283,415 | ) | |||||||||
| Income (Loss) per share – Continuing operations | ||||||||||||||||
| Basic income (loss) per share | $ | 0.43 | $ | (3.22 | ) | $ | (2.38 | ) | $ | (12.69 | ) | |||||
| Diluted loss per share | $ | (0.25 | ) | $ | (3.22 | ) | $ | (2.38 | ) | $ | (12.69 | ) | ||||
| Loss per share – Discontinued operations | ||||||||||||||||
| Basic loss per share | $ | (0.00 | ) | $ | (0.41 | ) | $ | (0.15 | ) | $ | (3.17 | ) | ||||
| Diluted loss per share | $ | (0.00 | ) | $ | (0.41 | ) | $ | (0.15 | ) | $ | (3.17 | ) | ||||
The comparison between the three and nine months ended May 31, 2021 and 2020, is impacted significantly by the acquisitions of UMG on December 31, 2019, and Frankly and WinView on May 8, 2020. Refer to our analysis as per below.
| Page 10 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Revenue
| For the three months ended | May 31 | May 31 | Increase | |||||||||
| 2021 | 2020 | (decrease) | ||||||||||
| $ | $ | $ | ||||||||||
| Games development | 1,416,371 | 8,590 | 1,407,781 | |||||||||
| Sponsorship, tournament and event income | 190,469 | 147,468 | 43,001 | |||||||||
| Platform revenue | 1,524,749 | 654,865 | 869,884 | |||||||||
| Advertising revenue | 6,401,805 | 1,149,110 | 5,252,695 | |||||||||
| Professional services | 76,439 | 129,288 | (52,849 | ) | ||||||||
| 9,609,833 | 2,089,321 | 7,520,512 | ||||||||||
For the three months ended May 31, 2021:
| ● | Games development revenue increase of $1,407,781 was due to Eden’s new contract engagement and revenue recognition timing. |
| ● | Sponsorship, tournament, and event income increase of $43,001 was due to higher UMG revenue from tournament hosting. |
| ● | Platform revenue increase of $869,884 was due to higher Stream Hatchet revenue and post-acquisition revenue of Frankly. |
| ● | Advertising revenue increase of $5,252,695 was due to the post-acquisition revenue of Frankly. |
| ● | Professional services revenue decrease of $52,849 was due to less of a focus on professional services revenue over platfrom revenue at Stream Hatchet. |
| Page 11 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Revenue
| For the nine months ended | May 31 | May 31 | Increase | |||||||||
| 2021 | 2020 | (decrease) | ||||||||||
| $ | $ | $ | ||||||||||
| Games development | 2,604,799 | 968,286 | 1,636,513 | |||||||||
| Sponsorship, tournament and event income | 374,243 | 174,425 | 199,818 | |||||||||
| Platform revenue | 4,406,680 | 916,486 | 3,490,194 | |||||||||
| Advertising revenue | 17,859,848 | 1,149,110 | 16,710,738 | |||||||||
| Professional services | 218,534 | 313,257 | (94,723 | ) | ||||||||
| 25,464,104 | 3,521,564 | 21,942,540 | ||||||||||
For the nine months ended May 31, 2021:
| ● | Games development revenue increase of $1,636,513 was due to Eden new contract engagement and revenue recognition timing. |
| ● | Sponsorship, tournament and event income increase of $199,818 was due UMG revenue from tournament hosting. |
| ● | Platform revenue increase of $3,490,194 was due to higher Stream Hatchet revenue and post-acquisition revenue of Frankly. |
| ● | Advertising revenue increase of $16,710,738 was due to post-acquisition revenue of Frankly. |
| ● | Professional services revenue decrease of $94,723 was was due to less of a focus on professional services revenue over platfrom revenue at Stream Hatchet. |
| Page 12 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Expenses
| For the three months ended | May 31 | May 31 | Increase | |||||||||
| 2021 | 2020 | (decrease) | ||||||||||
| $ | $ | $ | ||||||||||
| Salaries and wages | 4,515,977 | 661,878 | 3,854,099 | |||||||||
| Consulting | 804,605 | 344,100 | 460,505 | |||||||||
| Professional fees | 843,475 | 750,277 | 93,198 | |||||||||
| Revenue sharing expense | 5,516,757 | 824,570 | 4,692,187 | |||||||||
| Sponsorships and tournaments | 117,108 | 223,764 | (106,656 | ) | ||||||||
| Advertising and promotion | 126,006 | 603,417 | (477,411 | ) | ||||||||
| Office and general | 866,995 | 356,121 | 510,874 | |||||||||
| Technology expenses | 586,255 | 282,402 | 303,853 | |||||||||
| Amortization and depreciation | 991,618 | 879,077 | 112,541 | |||||||||
| Share-based payments | 680,111 | 912,040 | (231,929 | ) | ||||||||
| Interest expense | 197,821 | 15,058 | 182,763 | |||||||||
| (Gain) loss on foreign exchange | 706,751 | (397,496 | ) | 1,104,247 | ||||||||
| Change in fair value of contingent consideration | - | - | - | |||||||||
| Loss (Gain) on extinguishment of debt | - | 927 | (927 | ) | ||||||||
| Gain on retained interest in former associate | - | - | - | |||||||||
| Transaction costs | - | - | - | |||||||||
| Change in fair value of warrant liability | (11,862,656 | ) | 6,970,916 | (18,833,572 | ) | |||||||
| Change in fair value of convertible debt | (691,116 | ) | 33,822 | (724,938 | ) | |||||||
| 3,399,707 | 12,460,873 | (9,061,166 | ) | |||||||||
For the three months ended May 31, 2021:
| ● | Salaries and wages increase of $3,854,099 was due to post-acquisition salary and wages of Frankly, WinView, and UMG. |
| ● | Consulting increase of $460,505 was due to the post-acquistion costs of Frankly and greater of requirement of resources at Eden to cover additional contractual requirements. |
| ● | Professional fees increase of $93,198 was due to an increase in legal and professional fees to assist with listing and financing activities and patent litigation. |
| ● | Revenue sharing increase of $4,692,187 was due to post-acquisition revenue sharing of Frankly related to advertising revenue. |
| ● | Sponsorships and tournaments decrease of $106,656 was due to less reliance on event prize money for tournaments at UMG. Tournament activity was mainly conducted for publishers who provided rewards for events. |
| ● | Advertising and promotion decrease of $477,411 was due to significant promotion of the overall business in relation to the merger of Torque, Winview and Frankly in the three months ended May 31, 2020. |
| ● | Office and general expense increase of $510,874 were due to post-acquisition costs of Frankly, WinView, and UMG. |
| ● | Technology expenses increase of $303,853 was due to post-acquisition costs of Frankly, WinView, and UMG. |
| Page 13 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Expenses (cont’d)
| ● | Amortization and depreciation increase of $112,541 was mainly due to amortization of intangibles from the acquisition of Frankly, WinView, and UMG. |
| ● | Share-based payments expense decrease of $231,929 was due to the issuance of grants to key management and directors, and officers in the three months ended May 31, 2020. |
| ● | Interest expense increase of $182,763 was due to the assumption of debt with the acquisitions of Frankly, WinView, and UMG. |
| ● | (Gain) loss on foreign exchange increase of $1,104,247 was due to fluctuations in currency exchange rates between the Canadian dollar and the US dollar. The Company holds a large amount of Canadian denominated debts and payables at its holding Company whose functional currency is USD. As such, changes in foreign currency rates and its impact on these debts are recognized within loss (gain) on foreign exchange. During the period the US dollar lost value against the Canadian dollar. |
| ● | Change in fair value of warrant liability decrease (reduction of expense) of $18,833,572 was primarily due to the decerase in our share price from February 28, 2021 to May 31, 2021 as well as exercise and expiration of a large number of in-the-money warrnats in May 2021. |
| ● | Change in fair value of convertible debt decrease (reduction of expense) of $724,938 was due to the decerase in our share price from February 28, 2021 to May 31, 2021. |
| Page 14 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
| For the nine months ended | May 31 | May 31 | Increase | |||||||||
| 2021 | 2020 | (decrease) | ||||||||||
| $ | $ | $ | ||||||||||
| Salaries and wages | 13,062,505 | 3,131,659 | 9,930,846 | |||||||||
| Consulting | 2,501,028 | 1,879,851 | 621,177 | |||||||||
| Professional fees | 1,971,382 | 1,312,330 | 659,052 | |||||||||
| Revenue sharing expense | 15,125,486 | 824,570 | 14,300,916 | |||||||||
| Sponsorships and tournaments | 568,584 | 259,294 | 309,290 | |||||||||
| Advertising and promotion | 1,501,536 | 1,970,859 | (469,323 | ) | ||||||||
| Office and general | 2,193,868 | 1,208,826 | 985,042 | |||||||||
| Technology expenses | 1,812,912 | 383,991 | 1,428,921 | |||||||||
| Amortization and depreciation | 3,938,542 | 2,107,469 | 1,831,073 | |||||||||
| Share-based payments | 2,458,744 | 928,954 | 1,529,790 | |||||||||
| Interest expense | 1,178,388 | 538,596 | 639,792 | |||||||||
| (Gain) loss on foreign exchange | 809,496 | (113,350 | ) | 922,846 | ||||||||
| Change in fair value of contingent consideration | - | 82,215 | (82,215 | ) | ||||||||
| Loss (Gain) on extinguishment of debt | 2,428,900 | - | 2,428,900 | |||||||||
| Gain on retained interest in former associate | (99,961 | ) | - | (99,961 | ) | |||||||
| Transaction costs | 582,333 | - | 582,333 | |||||||||
| Change in fair value of warrant liability | (6,247,729 | ) | 8,102,802 | (14,350,531 | ) | |||||||
| Change in fair value of convertible debt | 7,172,533 | (1,209,822 | ) | 8,382,355 | ||||||||
| 50,958,547 | 21,408,244 | 29,550,303 | ||||||||||
Expenses (cont’d)
For the nine months ended May 31, 2021:
| ● | Salaries and wages increase of $9,930,846 was due to post-acquisition salary and wages of Frankly, WinView, and UMG. |
| ● | Consulting increase of $621,177 was due to the post-acquisition costs of Frankly, WinView, and UMG. |
| ● | Professional fees increase of $659,052 was due to post-acquisition professional fees of Frankly, WinView, and UMG. |
| ● | Revenue sharing increase of $14,300,916 was due to post-acquisition revenue sharing of Frankly related to advertising revenue. |
| ● | Sponsorships and tournaments increase of $309,290 was due to post-acquisition costs of UMG. |
| ● | Advertising and promotion decrease of $469,313 was due to significant promotion of the overall business in relation to the merger of Torque, Winview and Frankly in the nine months ended May 31, 2020. The company significantly reduced it’s press release in the nine month ended May 31, 2021. |
| ● | Office and general expense increase of $985,042 were due to post-acquisition costs of Frankly, WinView, and UMG. |
| ● | Technology expenses increase of $1,428,921 was due to post-acquisition costs of Frankly, WinView, and UMG. |
| ● | Amortization and depreciation increase of $1,831,073 was mainly due to amortization of intangibles from the acquisition of Frankly, WinView, and UMG. |
| Page 15 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Expenses (cont’d)
| ● | Share-based payments expense increase of $1,529,790 was due to the amount of $550,896 issued to the former Co-CEO’s as part of severance connected to the sale of the Motorsport Group and also due to the issuance of grants to key management and directors and officers. |
| ● | Interest expense increase of $639,792 was due to the average balance of outstanding convertible debentures being larger in the 2021 period as well as an assumption of debt with the acquisitions of Frankly, WinView, and UMG. |
| ● | (Gain) loss on foreign exchange increase of $922,846 was due to fluctuations in currency exchange rates between the Canadian dollar and the US dollar. The Company holds a large amount of Canadian denominated debts and payables at its holding Company whose functional currency is USD. As such, changes in foreign currency rates and its impact on these debts are recognized within (gain) loss on foreign exchange. During the period the US dollar lost value against the Canadian dollar. |
| ● | Change in fair value of contingent consideration decrease of $82,215 was due to the company longer maintaining contingent consideration. This was connected with and released upon exit of the Motorsport group. |
| ● | Loss (gain) on extinguishment of debt increase of $2,428,900 was due to modification of Frankly line of credit which occurred on December 1, 2020 and subsequent exchange of convertible debt instruments with the same holder which occurred on February 24, 2021. |
| ● | Gain on retained interest in former associate increase of $99,961. Increase is due to movement away from equity method accounting in the second quarter of 2021 resulting from our ownership percentage dropping below 20%. |
| ● | Transaction costs increase of 582,333 due to costs associated with the private placemnts that closed in the second quarter of 2021. The amount recorded to transaction costs represents the share issuance costs allocated to the warrants issued. As the warrants issued are accounted for within warrant liability at FVTPL, the share issuance costs allocated to the warrants issued are expensed. |
| ● | Change in fair value of warrant liability decrease (reduction of expense) of $14,350,531 was primarily due to the decerase in our share price from August 31, 2020 to May 31, 2021 as well as exercise and expiration of a large number of in-the-money warrnats in May 2021. |
| ● | Change in fair value of convertible debt increase of $8,382,355 was primarily driven by large convertible debt settlement which occurred in the second quarter of FY 2021 on January 8, 2021. The convertible debt settlement was on more favorable terms than the underying terms of the outstanding convertible debt. As such, the difference in fair value of the instruments at August 31, 2020 and the fair value of the instruments under revised settlement terms at the settlement date is recognized as a change in fair value loss. |
| Page 16 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Other items
| For the three months ended | May 31 | May 31 | Increase | |||||||||
| 2021 | 2020 | (decrease) | ||||||||||
| $ | $ | $ | ||||||||||
| Share of net loss of associate | - | - | - | |||||||||
| Discontinued Operations - Loss on disposal of Motorsports | - | - | - | |||||||||
| Discontinued Operations | (9,606 | ) | (1,330,096 | ) | 1,320,490 | |||||||
| Net loss attributable to non-controlling interest | (2,343 | ) | (8,677 | ) | 6,334 | |||||||
| Foreign currency translation differences | (376,785 | ) | 197,311 | (574,096 | ) | |||||||
Other items (cont’d)
For the three months ended May 31, 2021:
| ● | The discontinued operations – loss on disposal of Motorsports Group relate to entities sold in November 2020. |
| ● | The minority interest in net loss increase of $6,334 was not significant. |
| ● | Foreign currency translation differences decrease (decrease of loss) of $574,096 was due to fluctuations in trading foreign currencies against the US dollar. Primarily the Euro as our Stream Hatchet and Eden businesses have Euro functional currencies. As such, when translating into US dollars, any changes resuting from change in foreign currency exchange rates is recorded within the foreign currency translation reserve. |
| For the nine months ended | May 31 | May 31 | Increase | |||||||||
| 2021 | 2020 | (decrease) | ||||||||||
| $ | $ | $ | ||||||||||
| Share of net loss of associate | 103,930 | - | 103,930 | |||||||||
| Discontinued Operations - Loss on disposal of Motorsports | (678,931 | ) | - | (678,931 | ) | |||||||
| Discontinued Operations | (962,791 | ) | (4,450,739 | ) | 3,487,948 | |||||||
| Net loss attributable to non-controlling interest | 59,327 | 68,632 | (9,305 | ) | ||||||||
| Foreign currency translation differences | (381,384 | ) | (14,628 | ) | (366,756 | ) | ||||||
For the nine months ended May 31, 2021:
| ● | The net loss of associate relates to a 20.48% interest in One Up that was acquired in August 2020. One Up is an early-stage company which expects losses to continue as it seeks to grow its revenues. Effective January 5, 2021, we no longer account for this investment under the equity method as our ownershiop % dropped to 18.62%. |
| ● | The discontinued operations – loss on disposal of Motorsports Group relate to entities sold in November 2020. |
| ● | The minority interest in net loss decrease of $9,305 was not significant. |
| ● | Foreign currency translation differences decrease (decrease of loss) of $366,756 was due to fluctuations in trading foreign currencies against the US dollar. Primarily the Euro as our Stream Hatchet and Eden businesses have Euro functional currencies. As such, when translating into US dollars, any changes resuting from change in foreign currency exchange rates is recorded within the foreign currency translation reserve. |
| Page 17 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Segmented analysis
For the three-month period ended May 31, 2021:
| Three months ended | E-Sports | Media and Advertising | Corporate and Other | May 31, 2021 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 2,017,446 | 7,592,387 | - | 9,609,833 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (1,555,858 | ) | (2,057,830 | ) | - | (3,613,688 | ) | |||||||||
| Central administration costs | - | - | 1,825,386 | 1,825,386 | ||||||||||||
| Other gains and losses | 7,954 | (329,730 | ) | (11,525,245 | ) | (11,847,021 | ) | |||||||||
| Finance costs | (3,683 | ) | 125,470 | 76,034 | 197,821 | |||||||||||
| Loss before tax | (1,560,129 | ) | (1,853,570 | ) | 9,623,825 | 6,210,126 | ||||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Share of net loss of associate | - | - | - | - | ||||||||||||
| Discontinued operations | (9,606 | ) | - | - | (9,606 | ) | ||||||||||
| Non-controlling interest in net loss | - | - | (2,343 | ) | (2,343 | ) | ||||||||||
| Net loss | (1,569,735 | ) | (1,853,570 | ) | 9,621,482 | 6,198,177 | ||||||||||
For the three-month period ended May 31, 2020:
| Three months ended | E-Sports | Media and Advertising | Corporate and Other | May 31, 2020 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 476,267 | 1,613,050 | 4 | 2,089,321 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (656,611 | ) | (428,624 | ) | 4 | (1,085,231 | ) | |||||||||
| Central administration costs | - | - | 2,663,094 | 2,663,094 | ||||||||||||
| Other gains and losses | (57,177 | ) | (2,946 | ) | 6,668,292 | 6,608,169 | ||||||||||
| Finance costs | 27,205 | 33,333 | (45,480 | ) | 15,058 | |||||||||||
| Loss before tax | (626,639 | ) | (459,011 | ) | (9,285,902 | ) | (10,371,552 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Discontinued operations | (1,330,096 | ) | - | - | (1,330,096 | ) | ||||||||||
| Non-controlling interest in net loss | - | - | (8,677 | ) | (8,677 | ) | ||||||||||
| Net loss | (1,956,735 | ) | (459,011 | ) | (9,294,579 | ) | (11,710,325 | ) | ||||||||
| Page 18 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Segmented analysis (cont’d)
For the nine-month period ended May 31, 2021:
| Nine months ended | E-Sports | Media and Advertising | Corporate and Other | May 31, 2021 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 3,972,861 | 21,491,243 | - | 25,464,104 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (6,347,262 | ) | (5,682,782 | ) | - | (12,030,044 | ) | |||||||||
| Central administration costs | - | - | 7,640,439 | 7,640,439 | ||||||||||||
| Other gains and losses | (5,935 | ) | 2,474,609 | 2,176,898 | 4,645,572 | |||||||||||
| Finance costs | 101,119 | 637,514 | 439,755 | 1,178,388 | ||||||||||||
| Loss before tax | (6,442,446 | ) | (8,794,905 | ) | (10,257,092 | ) | (25,494,443 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Share of net loss of associate | - | - | (103,930 | ) | (103,930 | ) | ||||||||||
| Discontinued operations | (962,791 | ) | - | (678,931 | ) | (1,641,722 | ) | |||||||||
| Non-controlling interest in net loss | - | - | 59,327 | 59,327 | ||||||||||||
| Net loss | (7,405,237 | ) | (8,794,905 | ) | (10,980,626 | ) | (27,180,768 | ) | ||||||||
For the nine-month period ended May 31, 2020:
| Nine months ended | E-Sports | Media and Advertising | Corporate and Other | May 31, 2020 Total | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenue | ||||||||||||||||
| External sales | 1,908,138 | 1,613,050 | 376 | 3,521,564 | ||||||||||||
| Results | ||||||||||||||||
| Segment loss | (2,977,759 | ) | (428,624 | ) | 376 | (3,406,007 | ) | |||||||||
| Central administration costs | 7,080,232 | 7,080,232 | ||||||||||||||
| Other gains and losses | 24,704 | (2,946 | ) | 6,840,087 | 6,861,845 | |||||||||||
| Finance costs | 37,916 | 33,333 | 467,347 | 538,596 | ||||||||||||
| Loss before tax | (3,040,379 | ) | (459,011 | ) | (14,387,290 | ) | (17,886,680 | ) | ||||||||
| Income tax | - | - | - | - | ||||||||||||
| Gain (Loss) for the year from: | ||||||||||||||||
| Discontinued operations | (4,450,739 | ) | - | - | (4,450,739 | ) | ||||||||||
| Non-controlling interest in net loss | - | - | 68,632 | 68,632 | ||||||||||||
| Net loss | (7,491,118 | ) | (459,011 | ) | (14,318,658 | ) | (22,268,787 | ) | ||||||||
| Page 19 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Results from operations (cont’d)
Segmented analysis (cont’d)
| ● | E-Sports net loss for the 3 months ended May 31, 2021 was $1,569,735 in comparison to $1,956,735 for the 3 months ended May 31, 2020. The decrease of $387,000 was primarily due to the increase in e-sports revenue for the quarter. E-Sports net loss for the 9 months ended May 31, 2021, was $7,405,237 in comparison to $7,491,118 for the 9 months ended May 31, 2020. The decrease of $85,881 was not significant. |
| ● | Media and Advertising net loss for the 3 months ended May 31, 2021, was $1,853,570 in comparison to $459,011 for the 3 months ended May 31, 2020. Media and Advertising net loss for the 9 months ended May 31, 2021 was $8,794,905 in comparison to $459,011 for the 9 months ended May 31, 2020. This was due to addition on May 8, 2020 of Frankly, Inc. to the group resulting in the creation of a new segment. The net loss for the 9 months ended May 31, 2021 included $2.4 million loss on extinguishment of debt, $0.6 million of interest expense and $0.8 million of depreciation and amortization. Excluding these charges, the Media and Advertising segment generated a loss for the 9 months ended May 31, 2021 of $4.9 million. |
| ● | Corporate and Other net profit for the 3 months ended May 31, 2021, was $9,621,482 in comparison to net loss of $(9,294,579) for the year 3 months ended May 31, 2020. The increase of $18,916,061 was primarily due to other gains and losses which includes change in fair value of warrant liability and convertible debt of $18.2 million. Corporate and other net loss for the 9 months ended May 31, 2021 was $10,980,626 compared to $14,318,658 for the year 9 months ended May 31, 2020. The decrese of net loss of $3,338,032 was primarily due to other gains and losses, including change in fair value of warrant liability and convertible debt. |
Other selected quarterly information
| From continuing operations | ||||||||||||||||
| Three-month period ended | Total revenue | Total loss | Basic income (loss) per share | Total assets | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| May 31, 2021 | 9,609,833 | 6,207,783 | 0.43 | 71,339,843 | ||||||||||||
| February 28, 2021 | 8,387,880 | (27,376,542 | ) | (2.71 | ) | 70,344,899 | ||||||||||
| November 30, 2020 | 7,466,391 | (4,370,287 | ) | (0.57 | ) | 47,362,028 | ||||||||||
| August 31, 2020 | 7,024,238 | (8,661,786 | ) | (1.15 | ) | 53,415,477 | ||||||||||
| May 31, 2020 | 2,089,323 | (10,380,228 | ) | (3.22 | ) | 42,747,189 | ||||||||||
| February 29, 2020 | 623,994 | (1,413,392 | ) | (2.91 | ) | 12,664,332 | ||||||||||
| November 30, 2019 | 808,248 | (6,024,427 | ) | (36.59 | ) | 8,555,893 | ||||||||||
| August 31, 2019 | 206,129 | (8,839,957 | ) | (59.95 | ) | 10,685,697 | ||||||||||
Quarterly revenues increased from the quarter ended February 29, 2020 compared to the quarter ended May 31, 2020 and increased further in the quarter ended August 31, 2020 primarily due to inclusion of the revenues of Frankly for one month after the May 8, 2020 acquisition and for the full quarter for the quarters ended August 31, 2020, November 30, 2020, February 28, 2021 and May 31, 2021.
In the quarter ended August 31, 2019, the Company recorded a goodwill charge of $5.9 million related to the Eden Games business, and the Company also had change in fair value of convertible debt of $1.5 million. In the quarter ended November 30, 2019, the change in value of the warrant and convertible debt added $2.4 million to the loss and promotion for the World’s Fastest Gamer and other advertising was a $2.8 million increase. For the quarter ended May 31, 2020, the change in fair value of warrant liability added $7.0 million to the loss. For the quarter ended August 31, 2020, an impairment on investments and advances of $2.6 million and changes in the fair value of warrant liability and convertible debt of $1.3 million added to the quarterly loss. For the quarter ended February 28, 2021, the loss much was larger due to the change in fair value of the warrant liability and convertible debt which increased the quarter loss by $19,465,214 as compared to the quarter ended November 30, 2020. For the quarter ended May 31, 2021, the profit was much larger due to to the change in fair value of the warrant liability as compared to the quarter ended Febraury 28, 2021.
| Page 20 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Liquidity and capital resources
Liquidity and cash management
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company’s liquidity and operating results may be adversely affected if the Company’s access to the capital market is hindered, whether as a result of a downturn in stock market conditions generally or as a result of conditions specific to the Company.
The Company regularly evaluates its cash position to ensure preservation and security of capital as well as maintenance of liquidity. As the Company does not presently generate sufficient revenue to cover its costs, managing liquidity risk is dependent upon the ability to reduce its monthly operating cash outflow and secure additional financing. The recoverability of the carrying value of the assets and the Company’s continued existence depends on the ability of the Company to continue to raise financing, and ultimately the achievement of profitable operations.
As of May 31, 2021, the Company had a cash balance of $21,321,977 (August 31, 2020: $5,243,278) and current liabilities of $39,732,351 (August 31, 2020: $41,839,019). As of May 31, 2021, the Company had a working capital deficiency of $5,403,457 (August 31, 2020: deficiency of $29,663,546) which is comprised of current assets less current liabilities. Excluding non-cash warrant liability, the Company had a working capital surplus of $14,923,379 (August 31, 2020 – working capital deficiency of $15,528,225). In addition, if all warrants outstanding and exercisable as of May 31, 2021 were exercised, the Company would receive cash from exercise of approximately $65.6 million. The Company has not yet realized profitable operations and has incurred significant losses to date resulting in a cumulative deficit of $99,274,930 as of May 31, 2021 (August 31, 2020: cumulative deficit of $72,094,162).
Following the acquisitions of Frankly and WinView on May 8, 2020, the Company undertook a strategic review of the business. As a result of this review, on November 3, 2020, the Company divested its Motorsports Group. This divestiture reduced accounts payable and accrued liabilities by $0.9 million and will substantially reduce the Company’s monthly cash outflow. The Company also made targeted spending cuts to further reduce the monthly cash outflow. In January 2021, the Company completed convertible debenture settlements of an aggregate principal amount of $10,726,393 of its convertible debentures in exchange for the issuance of 1,430,186 units at a deemed price of $7.50 per unit, with each such unit consisting of a common share and three-quarters (3/4) of a warrant, with each whole warrant exercisable into a common share at an exercise price of $15 per share for a period of three years.
In January and February 2021, the Company closed on the issuance of 4,371,767 units (the “Units”) for gross proceeds of $32,788,253 of non-brokered private placements. Each Unit consists of one common share of the Company and one-half of one common share purchase warrant (a “Warrant”). Each whole Warrant entitles the holder to acquire one additional share of the Company at a price of $15.00 per share for a period of 3 years. The proceeds of the offering will be allocated to marketing and advertising of the Company’s product offerings, product development initiatives for UMG, WinView and Stream Hatchet, and general working capital purposes.
The Company believes that, based upon current business conditions and plans, the private placement gross proceeds of $32.8 million will provide sufficient liquidity for the Company in the near term. The Company has plans to raise additional funds. While management has been historically successful in raising the necessary capital, it cannot provide assurance that it will be able to execute on its business strategy or be successful in future financing activities.
| Page 21 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, our ability to raise additional funds through financing, those related to consumer demand and acceptance of our products and services, our ability to collect payments as they become due, achieving our internal forecasts and objectives, the economic conditions of the United States and abroad. These risk factors are described in risks and uncertainties section of this MD&A.
Financing
Capital management framework
The Company considers its capital to be its shareholders’ equity. As of May 31, 2021, the Company had shareholders’ equity before non-controlling interests of $20,258,830 (August 31, 2020 – $45,907).
The Company’s objective when managing its capital is to seek continuous improvement in the return to its shareholders while maintaining a moderate to high tolerance for risk. The objective is achieved by prudently managing the capital generated through internal growth and profitability, using lower cost capital, including raising share capital or debt when required to fund opportunities as they arise.
The Company may also return capital to shareholders through the repurchase of shares, pay dividends or reduce debt where it determines any of these to be an effective method of achieving the above objective. The Company does not use ratios in the management of its capital.
There have been no changes to management’s approach to managing its capital for the period ended May 31, 2021.
The proceeds of the financings disclosed below were intended to be used primarily for working capital and future operating needs. The proceeds received have been used primarily for those purposes.
Equity
Private Placement of Units
In January and February 2021, the Company closed on the issuance of 4,371,767 units (the “Units”) for gross proceeds of $32,788,253 of non-brokered private placements. Each Unit consists of one common share of the Company and one-half of one common share purchase warrant (a “Warrant”). Each whole Warrant entitles the holder to acquire one additional share of the Company at $15.00 per share for a period of 3 years provided that: (i) if the common shares are listed for trading on NASDAQ, (ii) the Company completes an offering of securities under a short form prospectus for an aggregate amount of at least $30,000,000, and (iii) the closing price of the common shares on NASDAQ is $30.00 or greater for a period of 15 consecutive trading days, then the Company may accelerate the expiry date of the Warrants to the 30th day after the date written notice is provided to the holders.
The Company paid cash commissions to eligible finders under the offering of $1,681,477 and regulatory and legal fees of $89,402. Net cash proceeds from the offering amounted to $31,017,374.
In addition to the cash finder’s fees discussed above, the Company issued the following securities as partial payment of commissions to finders: 63,666 Units; and, 159,554 finders warrants, with each finder warrant exercisable into a common share at an exercise price of US$15.00 per share for 3 years subject to the same acceleration terms described above.
The total number of common shares issued as a result of the private placements totaled 4,435,433, which was comprised of 4,371,767 Units issued for proceeds and 63,666 Units issued as partial payment to finders. The total number of warrants issued totaled 2,377,272, which was comprised of warrants issued as part of the Units issued of 2,217,718 (50% of Units issued) and 159,554 finders warrants issued.
| Page 22 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Financing (cont’d)
Equity (cont’d)
Private Placement of Units (cont’d)
The total amount recorded to shareholder’s equity (deficit) resulting from the private placements of Units amounted to $24,225,901. This amount is comprised of the following: (i) $26,185,009 allocated to the common shares issued of total gross proceeds of $32,788,253, with $6,603,244 being allocated to the warrants; plus (ii) $383,720 allocated to the common shares issued of total fair value of finder’s Units of $477,495, with $93,775 being allocated to the warrants; less share issue costs totaling $2,925,161 comprised of the following; (i) total fair value of finder’s Units of $477,495; plus (ii) total fair value of finder’s warrants of $676,787; plus (iii) cash finder’s fees of $1,681,477; plus (iv) regulatory and legal fees of $89,402; less (v) portion of total share issuance costs allocated to the warrants issued of $582,333. As the warrants issued are accounted for at FVTPL, these share issuance costs were recorded within transaction costs on the Statements of Loss and Comprehensive Loss.
The total amount recorded to warrant liability resulting from the private placements of Units amounted to $7,373,806. This is comprised of the allocation of gross proceeds of $6,603,244, finder’s Units issued of $93,775 and fair value of finder’s warrants of $676,787.
The fair value allocated between the common shares and warrants on the issuance of the Units is based on a relative fair value allocation between the common shares issued and warrants issued. Refer to warrant liability note for discussion of the key assumptions used in valuation of the warrants as part of the relative fair value allocation.
Other activity
During the nine months ended May 31, 2021, the Company had the following additional activity to share capital: (i) issued 158,477 common shares upon vesting of an equal number of RSUs; (ii) issued 1,728,848 common shares in connection with conversion of convertible debt, (iii) issued 747,129 common shares in connection with the exercise of warrants; (iv) issued 40,000 common shares for cancelation of $226,556 of debt (shares for debt); and (v) issued 6,666 common shares valued at $54,061 as an amendment fee to the lender in connection with the Amended EB Loan (the “EB Bonus Shares”). In addition to the EB Bonus Shares, the Company paid the lender a cash fee of $100,000. The amendment fees were recorded within interest expense as the Amended EB Loan and subsequent EB CD is being accounted for at FVTPL.
Debt
Promissory notes
The Company has promissory notes with a balance of $200,000 (August 31, 2020 – $200,000) that are unsecured, due on demand, and bear interest at 18%. As of May 31, 2021, interest of $125,394 has been accrued (August 31, 2020 – $83,435).
The Company, through its WinView subsidiary, has a secured promissory note outstanding for amounts due for the provision of services by the noteholder. As of May 31, 2021, $577,825 was due under the note (August 31, 2020 – $1,527,582). The note is secured by the assets of WinView, bears interest at 8%, and is currently due. As of May 31, 2021, no interest is accrued on this note (August 31, 2020 – $63,612).
| Page 23 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Debt (cont’d)
Paycheck Protection Program (“PPP”) loans
In April and May 2020, the Company entered into promissory notes (the “Notes”) with three banks. The Notes evidence loans to the Company of $1,589,559 pursuant to the PPP of the CARES Act administered by the U.S. Small Business Administration (the “SBA”). In accordance with the requirements of the CARES Act, the Company used the proceeds from the loans exclusively for qualified expenses under the PPP, including payroll costs, rent and utility costs, as further detailed in the CARES Act and applicable guidance issued by the SBA.
Interest will accrue on the outstanding balance of the Notes at a rate of 1.00% per annum. However, the Company has applied for and expects to receive forgiveness of all amounts due under the Notes.
Subject to any forgiveness granted under the PPP, the Notes are scheduled to mature in April 2022 and require 18 equal monthly payments of principal and interest beginning November 2020. However, no principal payments are due until the SBA determines whether to forgive the amounts. The Notes may be prepaid at any time before maturity with no prepayment penalties. The Notes provide for customary events of default, including, among others, those relating to failure to make payments, bankruptcy, breaches of representations, significant changes in ownership, and material adverse effects. The Company’s obligations under the Notes are not secured by any collateral.
Upon the receipt of the proceeds of $1,589,559 from the Notes, the Company accounted for the Notes as a grant in the form of forgivable loan and recorded the amount as a deferred income liability. The liability was reduced as the Company recognized expenses which qualified for forgiveness of the loan. As of August 31, 2020, the Company had incurred greater than $1,589,559 of qualifying expenses and therefore had a remaining deferred income liability of $nil. The Company recognized the impact of the loan forgiveness as an offset against related salaries and wages expense, in the consolidated statement of loss and comprehensive loss for the year ended August 31, 2020. As of the date of this filing, two of the three PPP loans in the amount of $1,379,684 were formally forgiven.
Frankly line of credit
On January 7, 2020, the Company’s Frankly Media LLC subsidiary (“Frankly Media”) entered an agreement with an arm’s length lender, EB Acquisition Company, LLC (the “Lender”), whereby the Lender agreed, subject to the terms and conditions thereof, to provide Frankly Media with a revolving term line of credit in the principal amount of up to $5 million (the “EB Loan”).
The EB Loan had a one-year term, extendable for a second year upon the mutual agreement of Lender and Frankly Media; and was secured by a security interest in Frankly Media’s assets, as well as a guarantee by the Company, secured against the Company’s assets.
On December 1, 2020, the EB Loan was amended (the “Amended EB Loan”). The amendment extended the maturity date by one year and added a conversion feature to $1 million of the $5 million principal outstanding. The conversion feature allowed the holder to convert $1 million into common shares of the Company at a conversion price of $11.25 per common share. On February 24, 2021, the Company extinguished the Amended EB Loan and issued the Lender a convertible debenture in the principal amount of $5 million (the “EB CD”). The EB CD is convertible into units of the Company at a conversion price of $10.25 per unit, with each unit comprised of one common share and one-half of a warrant, with each whole warrant exercisable into a common share at an exercise price of $15.00 per share for a period of three years from the issuance of the EB CD. The EB CD has a term of three years.
As of the date of Amended EB Loan, December 1, 2020, the Company has accounted for the loan as convertible debt at FVTPL. As such, the Amended EB Loan was recognized within convertible debt.
The carrying value of the line of credit as of May 31, 2021 was $nil (August 31, 2020 – $4,919,507).
| Page 24 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Convertible debentures
The continuity of convertible debt for the nine months ended May 31, 2021 and May 31, 2020, is as follows:
2019 Series | 2020 Series | Amended EB Loan | EB CD | Total | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Balance, August 31, 2020 | 2,121,869 | 8,671,590 | - | - | 10,793,459 | |||||||||||||||
| Issuances | - | 4,282,477 | - | - | 4,282,477 | |||||||||||||||
| Exchange of EB Loan for Amended EB Loan | - | - | 5,043,103 | - | 5,043,103 | |||||||||||||||
| Exchange of Amended EB Loan for EB CD | - | - | (4,931,813 | ) | 7,394,022 | 2,462,209 | ||||||||||||||
| Conversion - common shares issued | (1,500,214 | ) | (12,204,391 | ) | - | - | (13,704,605 | ) | ||||||||||||
| Conversion - warrants issued | (1,103,661 | ) | (4,256,114 | ) | - | - | (5,359,775 | ) | ||||||||||||
| Interest expense | 47,325 | 347,773 | 138,710 | 125,000 | 658,808 | |||||||||||||||
| Accrued interest on conversion / interest payments | (101,247 | ) | (256,300 | ) | (250,000 | ) | - | (607,547 | ) | |||||||||||
| Effect of foreign exchange | 180,830 | - | - | - | 180,830 | |||||||||||||||
| Change in fair value | 1,486,061 | 5,634,688 | - | 51,784 | 7,172,533 | |||||||||||||||
| Balance, May 31, 2021 | 1,130,963 | 2,219,723 | - | 7,570,806 | 10,921,492 | |||||||||||||||
| 2019 Series | 2020 Series | Amended EB Loan | EB CD | Total | ||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| Balance, August 31, 2019 | 12,532,723 | - | - | - | 12,532,723 | |||||||||||||||
| Conversion - common shares issued | (4,428,109 | ) | - | - | - | (4,428,109 | ) | |||||||||||||
| Conversion - warrants issued | (4,416,160 | ) | - | - | - | (4,416,160 | ) | |||||||||||||
| Interest expense | 322,778 | - | - | - | 322,778 | |||||||||||||||
| Accrued interest on conversion | (255,371 | ) | - | - | - | (255,371 | ) | |||||||||||||
| Effect of foreign exchange | (320,213 | ) | - | - | - | (320,213 | ) | |||||||||||||
| Change in fair value | (1,209,822 | ) | - | - | - | (1,209,822 | ) | |||||||||||||
| Balance, May 31, 2020 | 2,225,826 | - | - | - | 2,225,826 | |||||||||||||||
Conversions during the period
2019 Series
During the nine months ended May 31, 2021, 2019 Series convertible debentures with a principal amount of CAD$1,315,000 (2020 – CAD$11,873,510) were converted into 175,331 units (2020 – 1,583,135), and as a result, the Company issued 175,331 common shares and 175,331 warrants (2020 – 1,583,135 common shares and 1,583,135 warrants). The fair value of the convertible debentures at the time of conversion was estimated using the binomial lattice model with the below assumptions:
Share price of CAD$11.65 – $14.15 (2020 – CAD$7.05 – $18,00); term of 1.36 – 1.90 years (2020 – 2.23 and 2.52); conversion price and warrant exercise price of CAD$7.50 (2020 – CAD$7.50); interest rate of 6% (2020 – 6%); expected volatility of 98.5% – 179% (2020 – 168.65% – 181.93%); risk-free interest rate of 0.21% - 0.27% (2020 – 0.26% – 0.96%); exchange rate of 0.7651 – 0.8286 (2020 – 0.6899 – 0.7483); and an expected dividend yield of 0% (2020 – 0%). The fair value assigned to these convertible debentures was $2,603,875 (2020 – $8,844,269).
This value was split between common shares and warrants as $1,500,214 (2020 – $4,428,109) and $1,103,661 (2020 – $4,416,160), respectively.
| Page 25 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
2020 Series
During the nine months ended May 31, 2021, 2020 Series convertible debentures with a principal amount of $11,651,393 (2020 – nil) were converted or settled into 1,553,518 units, and as a result, the Company issued 1,553,518 common shares and 1,134,305 warrants. The fair value of the convertible debentures at the time of conversion or settlement was estimated using the binomial lattice model with the below assumptions:
Share price of $7.79 – $9.92; term of 1.44 – 1.77 years; conversion price of $7.50; warrant exercise price of $15.00, interest rate of 10%; expected volatility of 95% – 98.5%; risk-free interest rate of 0.09% - 0.13%; and an expected dividend yield of 0%. The fair value assigned to these convertible debentures was $16,460,505.
This value was split between common shares and warrants as $12,204,391 and $4,256,114, respectively.
Issuances during the period
During the nine months ended May 31, 2021, 2020 Series convertible debentures with a principal amount of $2,901,393 were issued for gross proceeds of $2,901,393. In addition, in November 2020, $2,000,000 of convertible debentures from the Company’s standby convertible debenture facility were issued along with 224,719 warrants for gross proceeds of $2,000,000. Of the gross proceeds of $2,000,000, $1,381,084 was allocated to the convertible debt and $618,916 was allocated to the 224,719 warrants issued. The total fair value recorded to convertible debt for issuances above amounted to $4,282,477.
On December 1, 2020, the EB Loan was amended. The amendment extended the maturity date by one year and added a conversion feature to $1 million of the $5 million principal outstanding. The conversion feature allowed the holder to convert $1 million into common shares of the Company at a conversion price of $11.25 per common share. On February 24, 2021, the Company extinguished the Amended EB Loan and issued the Lender a convertible debenture in the principal amount of $5 million. The EB CD is convertible into units of the Company at a conversion price of $10.25 per unit, with each unit comprised of one common share and one-half of a warrant, with each whole warrant exercisable into a common share at an exercise price of $15.00 per share for a period of three years from the issuance of the EB CD. The EB CD has a term of three years.
The fair value of the Amended EB Loan on December 1, 2020 was $5,043,103. The carrying value of the former EB Loan on December 1, 2020, consisted of $5 million in principal and 76,412 in accrued interest, for total carrying value on the amendment date of 5,076,412. As a result, a gain on extinguishment of debt of $33,309 was recognized. The fair value of the EB CD on the date of issuance of February 24, 2021 was $7,394,022. The fair value of the Amended EB Loan on February 24, 2021 was $4,931,813. As a result, a loss on extinguishment of debt of $2,462,209 was recognized. The above two transactions resulted in a loss on extinguishment of debt in the second quarter of $2,428,900.
| Page 26 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
2019 Series
As of May 31, 2021, the fair value of the 2019 Series convertible debentures was estimated using the binomial lattice model with the below assumptions:
| 2019 Series | May 31, 2021 (CA$) | August 31, 2020 (CA$) | ||||||
| Share price | 10.42 | 11.65 | ||||||
| Conversion price | 7.50 | 7.50 | ||||||
| Warrant exercise price | 7.50 | 7.50 | ||||||
| Term, in years | 1.10 - 1.19 | 1.85 - 1.94 | ||||||
| Interest rate | 6 | % | 6 | % | ||||
| Expected volatility | 90.00 | % | 179.00 | % | ||||
| Risk-free interest rate | 0.20 | % | 0.25 | % | ||||
| Exchange rate | 0.8286 | 0.7651 | ||||||
| Expected dividend yield | 0 | % | 0 | % | ||||
2020 Series
The 2020 Series debentures will mature twenty-four (24) months from the date of issuance and bear interest at a rate of 5% per annum (subject to adjustment as described below), payable on maturity. At the Company’s option, interest under the 2020 Series debentures is payable in kind in common shares at an issue price which would be based on the trading price of the common shares at the time of such interest payment. The interest rate under the 2020 Series debentures will increase from 5% to 10% per annum on a prospective basis on December 19, 2020, if a public offering has not occurred by that date.
The 2020 Series debenture holders may convert all or a portion of the principal amount of the debentures into units (“Units”) of the Company at a price (the “Conversion Price”) equal to the lesser of (a) $11.25 per Unit, and (b) if such conversion occurs after a public offering of securities by the Company (the “Public Offering”), a fifteen percent (15%) discount to the public offering price, provided that such conversion price shall not be less than $7.50 per Unit.
Notwithstanding the foregoing, if by December 19, 2020, the Company has not obtained registration rights in the United States to allow sale in the United States of the common shares (“Common Shares”) of the Company and the exercise of warrants (the “Warrants”) of the Company to be issued pursuant to the conversion of the 2020 Series debentures, holders of 2020 Series debentures may convert such debentures into Units at $7.50 per Unit. As of December 19, 2020, the Company had not obtained registration rights in the United States. As such, the conversion price is $7.50 per Unit and the interest rate increased to 10% on December 19, 2020.
Each Unit is comprised of one common share and one-half of one Warrant, with each Warrant exercisable into one common share of the Company at an exercise price of $15.00 per share for a period of three years from the issuance of the 2020 Series debentures. Under certain circumstances, the Company shall be entitled to call for the exercise of any outstanding Warrants in the event that the closing trading price of the Company common shares on the NASDAQ is above $30.00 per share for fifteen (15) consecutive trading days.
In the event that the Company’s common shares are listed for trading on the NASDAQ Capital Market and the Company completes a Public Offering for an aggregate amount of at least US$30,000,000, the Company may cause the 2020 Series debentures to be converted at the Conversion Price by the Company delivering a notice to the holder not less than a minimum of 30 days and a maximum 60 days prior to the forced conversion date.
| Page 27 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
2020 Series - One Up
These convertible debentures (the “2020 Series One Up” debentures) have identical terms as the 2020 Series debentures except that the minimum conversion price of $7.50 per Unit (as described above) will be US$9.50 per Unit. The 2020 Series One Up convertible debentures had a fair value at issuance of $3,078,550.
2020 Series – Standby
In September 2020, the Company entered into an $8,000,000 stand-by convertible debenture facility (the “2020 Series Standby” debentures). The 2020 Series Standby Debenture has substantially similar terms as the 2020 Series debentures, except (i) the references to a minimum $7.50 conversion price (as described above) have been changed to $8.90; and (ii) the 2020 Series Standby debentures are only convertible into common shares of the Company, not units.
In November 2020, the Company issued 224,719 warrants in connection with this first draw of $2,000,000 of the Standby Debentures, with each warrant exercisable into one common share the Company at an exercise price of $15.00 per share for a period of two years, subject to the same acceleration clause as the warrants underlying the 2020 Series debentures.
The proceeds of $2,000,000 from the first draw were allocated between convertible debt and warrant liability with $1,381,084 allocated to convertible debt and $618,916 allocated to the 224,719 warrants issued. The remaining $6,000,000 of convertible debentures that are issuable under this facility have substantially similar terms as the 2020 Series debentures, including conversion into units consisting of one share and one-half warrant, provided that the conversion price of any additional convertible debentures will be based on the market price of the common shares at the time of such subscriptions and are subject to TSX-V approval.
As of May 31, 2021, the fair value of the 2020 Series convertible debentures was estimated using the binomial lattice model with the below assumptions:
| 2020 Series | May 31, 2021 (US$) | August 31, 2020 (US$) | ||||||
| Share price | 8.63 | 8.92 | ||||||
| Conversion price | 8.90 | 7.50 - 9.50 | ||||||
| Warrant exercise price | - | 15.00 | ||||||
| Term, in years | 1.47 | 1.97 - 1.98 | ||||||
| Interest rate | 10 | % | 5% and 10% | |||||
| Expected volatility | 90.00 | % | 200.00 | % | ||||
| Risk-free interest rate | 0.09 | % | 0.14 | % | ||||
| Expected dividend yield | 0 | % | 0 | % | ||||
EB CD
On February 24, 2021, the Company extinguished the Amended EB Loan and issued the Lender a convertible debenture in the principal amount of $5 million (the “EB CD”). The EB CD is convertible into units of the Company at a conversion price of $10.25 per unit, with each unit comprised of one common share and one-half of a warrant, with each whole warrant exercisable into a common share at an exercise price of $15.00 per share for a period of three years from the issuance of the EB CD. The EB CD has a term of three years.
| Page 28 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
As of May 31, 2021, the fair value of the EB CD convertible debenture was estimated using the binomial lattice model with the below assumptions:
| EB CD | May 31, 2021 (US$) | August 31, 2020 (US$) | ||||||
| Share price | 8.63 | - | ||||||
| Conversion price | 10.25 | - | ||||||
| Warrant exercise price | 15.00 | - | ||||||
| Term, in years | 2.74 | - | ||||||
| Interest rate | 10 | % | - | |||||
| Expected volatility | 90.00 | % | - | |||||
| Risk-free interest rate | 0.26 | % | - | |||||
| Expected dividend yield | 0 | % | - | |||||
Commitments and contingencies
Royalty expenses
Royalty expenses relate to royalties paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development or sale of the Eden Games’ products. Eden Games has royalty agreements to utilize trademarks, copyrights, software, technology, or other intellectual property or proprietary rights to develop or sell its products. Eden Games has committed to pay royalties ranging from 4% to 25% of revenues after certain thresholds have been met, in connection with the underlying license agreements. Royalty expenses were €nil for the three and nine months ended May 31, 2021 and 2020.
Consulting contracts
Under the terms of a consulting agreement dated July 27, 2017, the Company is committed to pay to certain employees of Eden Games, nine months’ severance in the event of termination, amounting to £144,500 ($175,911). If revenue from the Eden Games mobile app exceeds specified amounts, a bonus shall be paid up to a maximum of £100,000 ($121,561) on an annual basis. As no triggering events have taken place related to the contingencies to May 31, 2021, no provision has been made in these unaudited interim condensed consolidated financial statements.
| Page 29 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Commitments and contingencies (cont’d)
Litigation and arbitration
In April 2020, the Company announced its renegotiation of the acquisition of Allinsports. The revised purchase agreement provides for the acquisition of 100% of Allinsports in exchange for the issuance of 966,667 common shares of the Company. The purchase agreement included the requirement of $1.2 million to be advanced against the purchase price. In September 2020, the Company advised the shareholders of Allinsports that closing conditions of the transaction, including the failure to provide audited financial statements, had not been satisfied.
In response, in November 2020, the shareholders of Allinsports commenced arbitration in Alberta, Canada seeking, among other things, to compel the Company to complete the acquisition of Allinsports without the audited financial statements, and to issue 966,667 common shares of the Company to those shareholders. As alternative relief, the shareholders of Allinsports are seeking US$20,000,000 in damages. A hearing in this matter was held in May of 2021, and a ruling has not yet been issued.
Separately, in April of 2021, the Company received a copy of a complaint filed by 3CI Holdings, LLP in the Circuit Court for the 11th Judicial Circuit for Miami-Dade naming Allinsports, A1 Simulation LLC (an entity purported to be a subsidiary of Allinsports), and the Company, seeking to hold the parties, including Company, responsible for unpaid rent under a lease agreement between 3CI’s predecessors in interest and A1 Simulation, and seeking damages of at least $2.89 million. On July 6, 2021, the Company filed motion to dismiss the complaint in this matter.
On January 21, 2021, eight former shareholders of Winview filed a Complaint in Delaware Chancery Court against four Winview directors (David Lockton, et al. v. Thomas S. Rogers, et al.) alleging that the defendants breached their fiduciary duties in connection with the sale of Winview to Engine. The relief sought includes rescission of the sale of Winview to Engine and compensatory damages. The Company does not believe that the action has merit and neither the Company nor Winview have been named as parties to this action. Under the March 9, 2020 Business Combination Agreement pursuant to which the Company acquired Winview, the Company agreed to indemnify Winview’s directors for any claims arising out of their service as directors for Winview.
On July 15, 2021, a complaint was filed against Winview Inc. by Bleacher League Entertainment, Inc. in the United States District Court for the District of Delaware, alleging that Winview had violated two if Bleacher’s patents covering an interactive themed baseball game and seeking damages and other relief. Following a preliminary review of the complaint, the Company does not believe that these claims have merit and intends to vigorously defend this matter.
On July 7, 2021, Winview Inc. filed a patent infringement lawsuit against DraftKings Inc. and on July 19, 2021, Winview filed a patent infringement lawsuit against FanDuel, Inc. These actions, which are pending in the United States District Court for the District of New Jersey, allege that various gaming services provided by DraftKings and FanDuel infringe WinView’s United States Patent No. 9,878,243entitled “Methodology for Equalizing Systemic Latencies in Television Reception in Connection with Games of Skill Played in Connection with Live Television Programming” and United States Patent No. 10,721,543 entitled “Method Of and System For Managing Client Resources and Assets for Activities On Computing Devices.” These actions seek the recovery of damages and other appropriate relief.
The outcomes of pending litigations in which the Company is involved are necessarily uncertain as are the Company’s expenses in prosecuting and defending these actions. From time to time the Company may modify litigation strategy and/or the terms on which it retains counsel and other professionals in connection with such actions, which may affect the outcomes of and/or the expenses incurred in connection with such actions.
The Company is subject to various other claims, lawsuits and other complaints arising in the ordinary course of business. The Company records provisions for losses when claims become probable and the amounts are estimable. Although the outcome of such matters cannot be determined, it is the opinion of management that the final resolution of these matters will not have a material adverse effect on the Company’s financial condition, operations or liquidity.
| Page 30 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Discontinued operations
On November 3, 2020, the Company, following a detailed strategic review in connection with the merger of Torque Esports, Frankly and WinView, announced that it has completed the sale of IDEAS+CARS, The Race Media, WTF1, Driver DataDB and Lets Go Racing (collectively the “Motorsport Group”) to Ideas + Cars Holdings Limited, a third party investment group based in the UK.
As a result, the Company is eliminating its funding obligations related to the cost of maintaining and growing these auto media businesses and certain accrued liabilities. Accordingly, the operational results for this group have been presented as a discontinued operation.
Consideration transferred for the Motorsport Group was as follows:
| Amount | ||||
| $ | ||||
| Consideration received or receivable: | ||||
| Accounts payable assumed | 101,322 | |||
| Deferred purchase consideration of LGR | 333,503 | |||
| Fair value of contingent consideration | 1,321,281 | |||
| Total disposal consideration | 1,756,106 | |||
| Carrying amount of net assets sold | (2,334,303 | ) | ||
| Loss on disposal before income tax and reclassification of foreign currency translation reserve | (578,197 | ) | ||
| Reclassification of foreign currency translation reserve | (100,734 | ) | ||
| Loss on disposal of Motorsports | (678,931 | ) | ||
The net assets of the Motorsport Group as of the date of sale were as follows:
| Amount | ||||
| $ | ||||
| Carrying amounts of assets as at the date of sale: | ||||
| Cash and cash equivalents | (24,348 | ) | ||
| Restricted cash | - | |||
| Accounts and other receivables | 126,590 | |||
| Government remittances | 25,095 | |||
| Prepaid expenses and other | 24,113 | |||
| Property and equipment | 47,416 | |||
| Intangible assets | 3,066,457 | |||
| Total assets of disposal group | 3,265,323 | |||
| Carrying amount of liabilities directly associated with assets as at the date of sale: | ||||
| Accounts payable and accrued liabilities | 931,020 | |||
| Total liabilities of disposal group | 931,020 | |||
| Net assets of disposal group | 2,334,303 | |||
| Page 31 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Discontinued operations (cont’d)
The operating results and net cash flows of the Motorsports Group and PGL Nevada, (together, the “discontinued operations”) for the three and nine months ended May 31, 2021 and 2020, are presented as discontinued operations as follows:
| For the three months ended | For the nine months ended | |||||||||||||||
| May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Revenues | ||||||||||||||||
| Advertising revenue | - | 369,118 | 90,934 | 407,640 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Salaries and wages | - | 212,211 | 212,546 | 484,886 | ||||||||||||
| Consulting | - | 438,709 | 267,933 | 637,523 | ||||||||||||
| Professional fees | - | 103,334 | 22,681 | 208,001 | ||||||||||||
| Sponsorships and tournaments | - | 770,169 | 203,637 | 3,211,368 | ||||||||||||
| Advertising and promotion | - | 14,898 | 1,740 | 27,012 | ||||||||||||
| Office and general | - | 22,493 | 7,374 | 144,519 | ||||||||||||
| Technology expenses | - | 74,293 | 86,590 | 81,913 | ||||||||||||
| Amortization and depreciation | - | 40,346 | 201,335 | 44,584 | ||||||||||||
| Share-based payments | - | - | - | - | ||||||||||||
| Interest expense | - | 793 | 572 | 1,051 | ||||||||||||
| (Gain) loss on foreign exchange | 9,606 | 21,968 | 49,317 | 17,522 | ||||||||||||
| Net loss from discontinued operations | (9,606 | ) | (1,330,096 | ) | (962,791 | ) | (4,450,739 | ) | ||||||||
| For the three months ended | For the nine months ended | |||||||||||||||
| May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Net cash provided by (used in) operating activities | - | (17,874 | ) | (92,652 | ) | (96,942 | ) | |||||||||
| Disposal of Motorsports | - | - | 24,348 | - | ||||||||||||
| Change in cash | - | (17,874 | ) | (68,304 | ) | (96,942 | ) | |||||||||
| Cash, beginning of period | - | 485 | 68,304 | 79,553 | ||||||||||||
| Cash, end of period | - | (17,389 | ) | - | (17,389 | ) | ||||||||||
Financial instruments and financial risk management
Financial risk management objectives and policies
The Company’s activities expose it to a variety of financial risks including foreign currency risk, interest rate risk, credit risk, and liquidity risk. The Company actively manages these financial instrument risks under the policies approved by the Board of Directors. The Company’s finance department manages the principal financial risks, within Board-approved policies and guidelines. On an ongoing basis, the finance department actively manages market conditions intending to minimize the exposure of the Company to changing market factors while at the same time limiting the funding costs to the Company.
| Page 32 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Financial instruments and financial risk management (cont’d)
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company uses information supplied by independent rating agencies where available, and if not available, the Company uses other publicly available financial information and its own records to rate its customers.
Credit risk arises from cash and deposits with banks as well as credit exposure to outstanding receivables, the carrying amounts represent the Company’s maximum exposure to credit risk.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The Company establishes an allowance for doubtful accounts that represents its estimate of expected losses in respect of accounts receivable. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.
The Company’s accounts receivable are concentrated among customers in the media and broadcasting industry, which may be affected by adverse economic factors impacting that industry. The Company performs ongoing credit evaluations of its major customers, maintains reserves for expected credit losses, and does not require any collateral deposits.
As of May 31, 2021 one customer (August 31, 2020 – one) accounted for greater than 10% of the Company’s accounts receivable balance. In total, this one customer (August 31, 2020 – one) accounted for 29% of the Company’s net trade accounts receivable balance as of May 31, 2021 (August 31, 2020 – 13%). During the nine months ended May 31, 2021, one customer represented 58% of total revenue.
The below table reflects the aging of the Company’s aging by invoice date of gross trade accounts receivable and allowance for doubtful accounts as of May 31, 2021:
| 0 - 30 | 31 - 60 | 61 - 90 | 91+ | Total | ||||||||||||||||
| Trade accounts receivable | 7,309,612 | 90,573 | 39,789 | 1,172,424 | 8,612,398 | |||||||||||||||
| Allowance for doubtful accounts | 4,500 | 1,500 | - | 937,534 | 943,534 | |||||||||||||||
| % Allowance | 0 | % | 2 | % | 0 | % | 80 | % | 11 | % | ||||||||||
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to liquidity risk with respect to its contractual obligations and financial liabilities. The Company manages liquidity risk by continuously monitoring forecasted and actual cash flows and matching maturity profiles of financial assets and liabilities. The Company seeks to ensure that it has sufficient capital to meet short-term financial obligations after taking into account its operating obligations and cash on hand.
The Company’s policy is to seek to ensure adequate funding is available from operations and other sources, including debt and equity capital markets, as required.
| Page 33 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Financial instruments and financial risk management (cont’d)
Liquidity risk (cont’d)
| < 1 year | 1-2 years | 3-5 years | ||||||||||
| $ | $ | $ | ||||||||||
| Accounts payable and accrued liabilities | 16,339,437 | - | - | |||||||||
| Players liability account | 310,465 | - | - | |||||||||
| Lease obligation | 190,445 | 246,393 | - | |||||||||
| Long-term debt | 99,965 | 22,719 | - | |||||||||
| Promissory notes payable | 903,219 | - | - | |||||||||
| Convertible debt | - | 10,921,492 | - | |||||||||
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to fair value risk with respect to debt which bear interest at fixed rates.
Foreign exchange rates
The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to fluctuations of financial instruments related to cash, accounts and other receivables, and accounts payable denominated in Euros, as well as debt denominated in Canadian dollars.
Fair value hierarchy
The following tables combine information about:
| ● | classes of financial instruments based on their nature and characteristics; |
| ● | the carrying amounts of financial instruments; |
| ● | fair values of financial instruments (except financial instruments when carrying amount approximates their fair value); and |
| ● | fair value hierarchy levels of financial assets and financial liabilities for which fair value was disclosed. |
Fair value hierarchy levels 1 to 3 are based on the degree to which the fair value is observable.
| Page 34 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Financial instruments and financial risk management (cont’d)
Fair value hierarchy (cont’d)
As of May 31, 2021:
| Carrying value at May 31, 2021 | FVTPL - mandatorily measured | FVOCI - mandatorily measured | FVOCI - designated | Amortized cost | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash and cash equivalents | - | - | - | 21,321,977 | ||||||||||||
| Restricted cash | - | - | - | 310,465 | ||||||||||||
| Accounts and other receivables | - | - | - | 7,722,611 | ||||||||||||
| Government remittances | - | - | - | 1,160,426 | ||||||||||||
| Publisher advance | - | - | - | 5,309,262 | ||||||||||||
| Investment at FVTPL | 2,048,039 | - | - | - | ||||||||||||
| 2,048,039 | - | - | 35,824,741 | |||||||||||||
| Carrying value at May 31, 2021 | FVTPL - mandatorily measured | FVTPL - designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 16,339,437 | |||||||||
| Players liability account | - | - | 310,465 | |||||||||
| Line of credit | - | - | - | |||||||||
| Long-term debt | - | - | 122,684 | |||||||||
| Promissory notes payable | - | - | 903,219 | |||||||||
| Deferred purchase consideration | - | - | - | |||||||||
| Convertible debt | - | 10,921,492 | - | |||||||||
| - | 10,921,492 | 17,675,805 | ||||||||||
As of August 31, 2020:
| Carrying value at August 31, 2020 | FVTPL - mandatorily measured | FVOCI - mandatorily measured | FVOCI - designated | Amortized cost | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash and cash equivalents | - | - | - | 5,243,278 | ||||||||||||
| Restricted cash | - | - | - | 388,587 | ||||||||||||
| Accounts and other receivables | - | - | - | 3,845,890 | ||||||||||||
| Government remittances | - | - | - | 1,125,912 | ||||||||||||
| Publisher advance | - | - | - | - | ||||||||||||
| Investment at FVTPL | - | - | - | - | ||||||||||||
| - | - | - | 10,603,667 | |||||||||||||
| Page 35 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Financial instruments and financial risk management (cont’d)
Fair value hierarchy (cont’d)
| Carrying value at August 31, 2020 | FVTPL - mandatorily measured | FVTPL - designated | Amortized cost | |||||||||
| $ | $ | $ | ||||||||||
| Financial liabilities: | ||||||||||||
| Accounts payable and accrued liabilities | - | - | 17,144,346 | |||||||||
| Players liability account | - | - | 388,587 | |||||||||
| Line of credit | - | - | 4,919,507 | |||||||||
| Long-term debt | - | - | 230,932 | |||||||||
| Promissory notes payable | - | - | 3,818,920 | |||||||||
| Deferred purchase consideration | - | - | 333,503 | |||||||||
| Convertible debt | - | 10,793,459 | - | |||||||||
| - | 10,793,459 | 26,835,795 | ||||||||||
A summary of instruments, with their classification in the fair value hierarchy is as follows:
| Level 1 | Level 2 | Level 3 | Fair value as of May 31, 2021 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Convertible debt | - | - | 10,921,492 | 10,921,492 | ||||||||||||
| Investment at FVTPL | - | 2,048,039 | - | 2,048,039 | ||||||||||||
| - | 2,048,039 | 10,921,492 | 12,969,531 | |||||||||||||
| Level 1 | Level 2 | Level 3 | Fair value as of August 31, 2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Convertible debt | - | - | 10,793,459 | 10,793,459 | ||||||||||||
| Investment at FVTPL | - | - | - | - | ||||||||||||
| - | - | 10,793,459 | 10,793,459 | |||||||||||||
| Page 36 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Financial instruments and financial risk management (cont’d)
Fair value hierarchy (cont’d)
The following table gives information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation technique and key inputs used).
Financial assets / financial liabilities |
Valuation technique | Key Inputs | Relationship and sensitivity of unobservable inputs to fair value | |||
| Convertible debt | The fair value of the convertible debentures as of May 31, 2021 has been calculated using a binomial lattice methodology. | Key observable inputs
Share price CAD$10.42 (USD $8.63)
Risk-free interest rate (0.09% to 0.26%)
Dividend yield (0%)
Key unobservable inputs Credit spread (4.89% to 8.70%)
Discount for lack of marketability (0% to 5%) |
The estimated fair value would increase (decrease) if: The share price was higher (lower) The risk-free interest rate was higher (lower) The dividend yield was lower (higher) The credit spread was lower (higher) The discount for lack of marketability was lower (higher) | |||
| Convertible debt | The fair value of the convertible debentures as of August 31, 2020 has been calculated using a binomial lattice methodology. | Key observable inputs Share price (USD $8.92)
Risk-free interest rate (0.14%)
Dividend yield (0%)
Key unobservable inputs
Credit spread (18.35%)
Discount for lack of marketability (47%) |
The estimated fair value would increase (decrease) if: The share price was higher (lower) The risk-free interest rate was higher (lower) The dividend yield was lower (higher) The credit spread was lower (higher) The discount for lack of marketability was lower (higher) |
There has been no change to the valuation technique during the year. There were no transfers between Levels 1, 2, and 3 during the three and nine months ended May 31, 2021 and 2020.
Off-balance sheet arrangements
As of the date of this MD&A, the Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the results of operations or financial condition of the Company including, without limitation, such considerations as liquidity and capital resources.
| Page 37 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Related party transactions and balances
Related party transactions policy
Our Board of Directors has adopted a policy that describes the procedures used to process, evaluate, and if necessary, disclose transactions between the Company and its directors, officers, or greater than 5% beneficial owners. We review any transaction or series of transactions in which any related person has a direct or indirect interest. Once a transaction has been identified, senior management and the audit committee will review the transaction and ensure appropriate disclosure in the Company’s interim financial statements and interim management’s discussion and analysis.
Key management transactions
Key management includes the Company’s directors, officers, and consultants with the authority and responsibility for planning, directing, and controlling the activities of an entity, directly or indirectly. Compensation awarded to key management for the three and nine months ended May 31, 2021 and 2020, includes the following:
| For the three months ended | For the nine months ended | |||||||||||||||
| May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Total compensation paid to key management | 392,490 | 151,667 | 1,836,583 | 359,485 | ||||||||||||
| Share based payments | 323,233 | 119,923 | 1,581,037 | 136,837 | ||||||||||||
Total compensation paid to key management is recorded in consulting fees, salaries, and wages and share-based payments in the consolidated statement of loss and comprehensive loss.
Amounts due to related parties as of May 31,2021, with respect to the above fees were $61,500 (August 31, 2020 – $275,502). The amounts due to related parties are recorded within accounts payable and accrued liabilities on the consolidated statement of loss and comprehensive loss. These amounts are unsecured, non-interest bearing and due on demand.
Changes in accounting policies
Certain pronouncements have been issued by the IASB that are not yet effective. There are currently no such pronouncements that are expected to have a significant impact on the Company’s interim condensed consolidated financial statements upon adoption.
Risks and uncertainties
Liquidity concerns and future financings
Although we have been successful in the past in financing our activities, there can be no assurance that we will be able to obtain additional financing as and when needed in the future to execute our business plan and future operations. Our ability to arrange such financing in the future will depend in part upon the prevailing capital market conditions as well as our business performance. It may be difficult or impossible for us to obtain financing on commercially acceptable terms. This may be further complicated by the limited market liquidity for shares of smaller companies such as us, restricting access to some institutional investors. There is a risk that interest rates will increase given the current historical low level of interest rates. An increase in interest rates could result in a significant increase in the amount that we pay to service future debt incurred by us and affect our ability to fund ongoing operations.
| Page 38 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Risks and uncertainties (cont’d)
Liquidity concerns and future financings (cont’d)
Failure to obtain additional financing on a timely basis could also result in delay or indefinite postponement of further development of its products. Such delay would have a material and adverse effect on our business, financial condition and results of operations.
We may not be able to successfully execute our business plan
The execution of our business plan poses many challenges and is based on a number of assumptions. We may not be able to successfully execute our business plan. If our business plan is more costly than we anticipate or we have significant cost overruns, certain products and development activities may be delayed or eliminated or we may be compelled to secure additional funding (which may or may not be available) to execute our business plan. We cannot predict with certainty our future revenues or results from our operations. If the assumptions on which our revenue or expenditure forecasts are based change, the benefits of our business plan may change as well. In addition, we may consider expanding our business beyond what is currently contemplated in our business plan. Depending on the financing requirements of a potential acquisition or new product opportunity, we may be required to raise additional capital through the issuance of equity or debt. If we are unable to raise additional capital on acceptable terms, we may be unable to pursue a potential acquisition or new product opportunity.
Difficulties integrating acquisitions and strategic investments
We have acquired businesses, personnel and technologies in the past and we expect to continue to pursue acquisitions, such as the completed acquisitions of Frankly, WinView, UMG, Eden Games, Stream Hatchet and other investments that are complementary to our existing business and expanding our employee base and the breadth of our offerings. Our ability to grow through future acquisitions will depend on the availability of suitable acquisition and investment candidates at an acceptable cost, the ability to compete effectively to attract these candidates and the availability of financing to complete larger acquisitions. Since we expect the esports industry to consolidate in the future, we may face significant competition in executing our 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 our financial condition and results of operations. The benefits of an acquisition or investment may also take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce the intended benefits.
The above risks and difficulties, if they materialize, could disrupt our ongoing business, distract management, result in the loss of key personnel, increase expenses and otherwise have a material adverse effect on our business, results of operations and financial performance.
Management of growth
We have grown rapidly since our inception and we plan to continue to grow at a rapid pace. This growth has put significant demands on our processes, systems and personnel. We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. Our ability to manage growth effectively will require us to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base. Managing our growth will require significant expenditures and allocation of valuable management resources. Our inability to deal with this growth may have a material adverse effect on our business, financial condition, results of operations and prospects.
| Page 39 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Risks and uncertainties (cont’d)
We may continue to have reduced cash reserves
We expect our cash reserves will be reduced due to future operating losses, working capital requirements, capital expenditures, and potential acquisitions and other investments by our business, and we cannot provide certainty as to how long our cash reserves will last or that we will be able to access additional capital when necessary.
We expect to incur continued losses and generate negative cash flow until we can produce sufficient revenues to cover our costs. We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. For the reasons discussed in more detail below, there are substantial uncertainties associated with our achieving and sustaining profitability. We expect our cash reserves will be reduced due to future operating losses, and working capital requirements, and we cannot provide certainty as to how long our cash reserves will last or that we will be able to access additional capital if and when necessary.
Competition
Our potential failure to compete successfully in the various markets we participate in could have a material adverse effect on our business, financial condition and results of operations. The market for the various types of product and service offerings we provide is very competitive and rapidly changing. We face competition from other esports businesses, many of which are larger and better funded than us. There can be no guarantee that our current and future competitors will not develop similar or superior services to our products and services which may render us uncompetitive. Increasing competition could result in fewer future customers, reduced revenue, reduced sales margins and loss of market share, any one of which could harm our business.
Players in the current market face a vast array of entertainment choices. Other forms of entertainment, such as offline, traditional online, personal computer and console games, television, movies, sports and the internet are much larger and more well- established markets and may be perceived by our customers to offer greater variety, affordability, interactivity and enjoyment. These other forms of entertainment compete for the discretionary time and income of our customers. If we are unable to sustain sufficient interest in our games in comparison to other forms of entertainment, including new forms, our business model may no longer be viable.
The development of high-quality products requires substantial up-front expenditures
Consumer preferences for games are usually cyclical and difficult to predict, and even the most successful titles remain popular for only limited periods of time, unless refreshed with new content or otherwise enhanced. In order to remain competitive, we must continuously develop new products or enhancements to existing products. The amount of lead time and cost involved in the development of high-quality products is increasing, and the longer the lead time involved in developing a product and the greater the allocation of financial resources to such product, the more critical it is that we accurately predict consumer demand for such product. If its future products do not achieve expected consumer acceptance or generate sufficient revenues upon introduction, we may not be able to recover the substantial development and marketing costs associated with those products.
Rapid technological changes
Rapid technological changes may increase competition and render our technologies, products or services obsolete or cause us to lose market share. The online gaming software industry is subject to rapid and significant changes in technology, frequent new service introductions and evolving industry standards. Such changes may adversely affect our revenue. There can be no assurance that we can improve the features, functionality, reliability and responsiveness of infrastructure. Similarly, the technologies that we employ may become obsolete or subject to intense competition from new technologies in the future. If we fail to develop, or obtain timely access to, new technologies, or if we fail to obtain the necessary licenses
| Page 40 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Risks and uncertainties (cont’d)
Rapid technological changes (cont’d)
for the provision of services using these new technologies, we may lose market share, and our results of operations would be adversely affected.
Proprietary protection and intellectual property disputes
Protection of our trade secrets, copyrights, trademarks, domain names and other product rights are important to our success. We protect our intellectual property rights by relying on trademark protection, common law rights as well as contractual restrictions. However, many of our proprietary technologies are currently unpatented nor have we made any applications for such intellectual property registrations. We have no present intention to do so in the near future. As such, the current steps that it takes to protect our intellectual property, including contractual arrangements, may not be sufficient to prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others. Should we decide to register our intellectual property in one or more jurisdictions, it will be an expensive and time-consuming process. There is no assurance that we will be successful in any or all of such jurisdictions. The absence of registered intellectual property rights, or the failure to obtain such registrations in the future, may result in us being unable to successfully prevent our competitors from imitating our solutions or using some or all of our processes. Even if patents and other registered intellectual property rights were to be issued to us, our intellectual property rights may not be sufficiently comprehensive to prevent our competitors from developing similar competitive products and technologies.
With our acquisition of WinView, we acquired WinView’s intellectual property portfolio. WinView’s patent portfolio is an important asset to us and we intend to further develop and protect it and our technologies. Litigation may be necessary to enforce our intellectual property rights. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. Moreover, due to the differences in foreign patent, trademark, copyright and other laws concerning proprietary rights, our intellectual property may not receive the same degree of protection in foreign countries as it would in Canada or the United States. Our failure to possess, obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition. We are taking further steps to enforce the intellectual property rights of patents in the WinView portfolio. In connection with that process, we are reviewing and restructuring, as appropriate, the terms of agreements with third parties we have retained in connection with such enforcement and may retain other additional parties to assist us in the enforcement process. Among the goals of such review and restructuring is to increase the upside participation in potential future patent revenues.
We may also face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors and former employers of our personnel. Whether a product infringes a patent or other intellectual property right involves complex legal and factual issues, the determination of which is often uncertain. As the result of any court judgment or settlement, we may be obligated to cancel the launch of a new game or product offering, cease offering a game or certain features of a game, pay royalties or significant settlement costs, purchase licenses or modify our software and features, or develop substitutes. We have already had communication from trademark trolls in this respect. Currently management believes these are not a quantifiable business risk.
In addition, we use open source software in our games and we expect to continue to use open source software in the future. From time to time, we may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our games, any of which would have a negative effect on our business and operating results.
| Page 41 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Risks and uncertainties (cont’d)
Transmission of user data
In connection with our operations, we transmit and store data. We are subject to legislation and regulations on the collection, storage, retention, transmission and use of user-data that we collect. Our efforts to protect the personal information of our 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 our data, our users’ data, our partners’ data or our 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 our terms of service or policies could damage our reputation and brands and diminish our competitive position.
Moreover, affected users, clients or governmental authorities could initiate legal or regulatory action against us in connection with such incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our 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 our prospects, businesses, financial condition or results of operations.
Data collection risks
We partially rely on data captured by Stream Hatchet for our revenues and for assessing the performance of some of our brands. Capturing accurate data is subject to various limitations. For example, Stream Hatchet may need to collect certain data from mobile carriers or other third parties such as various viewing platforms, which limits its ability to verify the reliability of such data. Further, Stream Hatchet may not be able to collect any data from third parties at all. Failure to capture accurate data or an incorrect assessment of this data may materially harm business and operating results.
Mobile gaming and the free-to-play business model
Eden Games is partially reliant on the free-to-play business model where monetization is through in-app purchases. The risks of that business model include the dependence on a relatively small number of consumers for a significant portion of revenues and profits from any given game, including the current title, Gear.Club. If we increase our reliance on the free-to-play model, we may be exposed to increased risk. For example, we may invest in the development of new free-to-play interactive entertainment products that do not achieve significant commercial success, in which case our revenues from those products likely will be lower than anticipated and we may not recover our development costs. Further, if: (1) we fail to offer monetization features that appeal to our consumers; (2) these consumers do not continue to play our free-to-play games or purchase virtual items at the same rate; (3) our platform providers make it more difficult or expensive for players to purchase our virtual currency; or (4) we cannot encourage significant additional consumers to purchase virtual items in our free-to-play games, our business may be negatively impacted.
Retention and acquisition of new CMS platform customers
Our financial performance and operations are dependent in part on retaining our current CMS platform customers and acquiring new CMS platform customers. We currently serve a large number of customers with our CMS platform and a typical customer contract runs for multiple years. However, we compete with the other technology providers in the market and increasing competition may affect our ability to retain current and acquire new customers. Any number of factors could potentially negatively affect our customer retention or acquisition. For example, a current customer may request products or services that we currently do not provide and may be unwilling to wait until we can develop or source such additional features. Other factors that affect our ability to retain or acquire new CMS platform customers include:
| Page 42 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Risks and uncertainties (cont’d)
Retention and acquisition of new CMS platform customers (cont’d)
| ● | customers increasingly use competing products or services; |
| ● | we fail to introduce new and improved products or if we introduce new products or services that are not favorably received; |
| ● | we are unable to continue to develop new products and services that work with a variety of mobile operating systems and networks and/or that have a high level of market acceptance; |
| ● | there are changes in customer preference; |
| ● | there is consolidation or vertical integration of our customers; |
| ● | there are changes in customer sentiment about the quality or usefulness of our products and services; |
| ● | there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees; |
| ● | technical or other problems prevent us from delivering our products in a rapid and reliable manner; |
| ● | we fail to provide adequate customer service to our customers; or |
| ● | we, our software developers, or other companies in our industry are the subject of adverse media reports or other negative publicity. |
Exposure to advertising marketplace
A significant portion of our projected revenue is generated from the sale of national and local online advertising inventory, which is dependent on available advertising inventory and market demand and prices for such inventory. A decline in available supply of advertising inventory, general demand for advertising inventory and general economic conditions may materially and adversely affect our advertising revenue.
A significant portion of our projected revenue is generated from the sale of national and local online advertising inventory, the majority of which we sell on an automated basis through real-time bidding. We also sell a small portion of our inventory to premium direct advertising customers to whom we provide guaranteed advertisement inventory. Our advertising revenue is dependent on the amount of advertising inventory that is available to us to sell and market demand and prices for such inventory.
The amount of advertising inventory available for us to sell is affected by many variables including but not limited to:
| ● | the negotiated amount of inventory we receive from our current CMS customers; |
| ● | the amount of additional inventory our current CMS customers permit us to sell on their behalf; |
| ● | our ability to acquire inventory to sell on behalf of parties that are not customers of our CMS; |
| ● | the amount of inventory available on our owned and operated properties; |
| ● | the amount of end-user traffic to our customers’ and our online properties; and |
| ● | the specific type of advertising to be sold, such as display, video or mobile advertising. |
While we endeavor to maximize the amount of inventory we are able to sell, some of the foregoing variables, and by extension the amount of inventory we may sell, are affected by market forces and other contingencies that we do not control.
The other principal component of gross advertising revenue is the price at which advertising inventory may be sold. To a large extent, the prices we can achieve for our advertising inventory are a product of the market supply and demand, which may vary based on several factors including ad size, ad type, geographic region and time of year. At a macro level, advertising spending is also sensitive to overall economic conditions, and our advertising revenues will be adversely affected if advertisers respond to weak and uncertain economic conditions, for example as a result of disruptions from COVID-19, by reducing their budgets or changing their spending patterns. There are limitations on the amount that we can compensate for fluctuations in the prevailing market prices for advertising inventory. Any reduction in spending by existing or potential advertisers and a decline in available advertising inventory or demand for such inventory would negatively affect our advertising revenue and could affect our ability to grow our advertising customer base.
| Page 43 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Risks and uncertainties (cont’d)
Global economy
Our business is subject to general economic conditions. Adverse changes in general economic and market conditions could adversely impact demand for our products, prices, revenue, operating costs, results of financing efforts, and the timing and extent of capital expenditures.
Foreign operational risks
A significant portion of our business and operations is conducted in foreign jurisdictions, including the United States, Spain and France. As such, our business and operations may be adversely affected by changes in foreign government policies and legislation or social instability and other factors which are not within our control, including, but not limited to, renegotiation or nullification of existing contracts or licenses, changes in policies, regulatory requirements or the personnel administering them, economic sanctions, risk of terrorist activities, revolution, border disputes, implementation of tariffs and other trade barriers and protectionist practices, volatility of financial markets, labour disputes and other risks arising out of foreign governmental sovereignty over the areas in which our business is conducted. Our operations may also be adversely affected by laws and policies of such foreign jurisdictions affecting foreign trade, taxation and investment.
If our operations are disrupted and/or the economic integrity of our contracts is threatened for unexpected reasons, our business may be harmed. In the event of a dispute arising in connection with our operations in a foreign jurisdiction where we conduct or will conduct our business, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of the courts of Canada or enforcing Canadian judgments in such other jurisdictions. We may also be hindered or prevented from enforcing our rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly, our activities in foreign jurisdictions could be substantially affected by factors beyond our control, any of which could have a material adverse effect on our business. We believe that our management is sufficiently experienced to manage these risks.
Regulation
We are subject to general business regulations and laws as well as regulations and laws specifically governing the internet, gaming, e-commerce and electronic devices. Existing and future laws and regulations may impede our growth or strategy. These regulations and laws cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, consumer protection, web services, wagering, the provision of online payment services, websites and the characteristics and quality or products and services. Unfavorable changes in regulations and laws could decrease demand for our events, online offering and merchandise, increase our cost of doing business or otherwise have a material adverse effect on our reputation, popularity, results of operations and financial condition.
Share price fluctuations
The market price of our shares may be subject to wide fluctuations in response to many factors, including variations in the operating results of our and our subsidiaries, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, changes in the business prospects of our and our subsidiaries, trading activities of market participants, including short sellers, general economic conditions, legislative changes, and other events and factors outside of our control. 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 our shares.
| Page 44 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Risks and uncertainties (cont’d)
Limited market for Securities
There can be no assurance that an active and liquid market for our shares will be maintained and an investor may find it difficult to resell our shares.
Volatility of Revenues and Expenses
We may experience wide fluctuations in reported revenue and earnings from one period to another due to seasonality in revenue streams, short-term nature of some customer agreements and engagements, gain or loss of customer agreements, one-time other non-recurring revenues and expenses. Additionally, we may experience wide-fluctuations in revenues and expenses due to required accounting treatment of certain non-cash items, including the accounting treatment of the liability for our outstanding warrants and convertible debt. Because of the nascent nature and stage of some of our assets, investments, and intangibles, and difficulty in assessing their valuation, we may be required from time to time to impair, write down or otherwise adjust the carrying value of these assets, investments and intangibles, and such impairments and write-downs may have a material impact on our reported earnings.
Emerging diseases, like COVID-19, may adversely affect our operations, our suppliers, or our customers
Emerging diseases, like COVID-19, and government actions to address them, may adversely affect our operations, our suppliers, or our customers. The COVID-19 pandemic continues to evolve rapidly and, as a result, it is difficult to assess its continued magnitude, outcome and duration accurately, but it could:
| ● | worsen economic conditions, which could negatively impact access to capital; |
| ● | reduce consumer spending; |
Emerging diseases, like COVID-19, may adversely affect our operations, our suppliers, or our customers (cont’d)
| ● | limit our employees from travelling which could affect the execution of our business plan given the Company is multi- jurisdictional; or |
| ● | result in governmental regulation adversely impacting our business |
all of which could have a material adverse effect on our business, financial condition and results of operations, which could be rapid and unexpected.
Cybersecurity threats
A cyber incident is an intentional or unintentional event that could threatens the integrity, confidentiality or availability of the Company’s information resources. These events include, but are not limited to, unauthorized access to information systems, a disruption to our information systems, or loss of confidential information. Real’s primary risks that could result directly from the occurrence of a cyber incident include operational interruption, damage to our public image and reputation, and/or potentially impact the relationships with our customers.
We have implemented processes, procedures and controls to mitigate these risks, including, but not limited to, firewalls and antivirus programs and training and awareness programs on the risks of cyber incidents. These procedures and controls do not guarantee that the financial results may not be negatively impacted by such an incident.
| Page 45 of 46 |
| Engine Media Holdings, Inc. | |
| (formerly Torque Esports Corp.) | |
| Management’s Discussion and Analysis | |
| (Expressed in United States Dollars) |
Subsequent events
The Company has evaluated subsequent events from the balance sheet date through July 26, 2021, the date at which the unaudited interim condensed consolidated financial statements were available to be issued, and determined there were no additional items to be disclosed except for the transactions described below.
On June 16, 2021, the Company announced a definitive agreement to acquire Sideqik, Inc., an influencer marketing platform that offers brands, direct marketers, and agencies tools to discover, connect and execute marketing campaigns with content-creating influencers.
On July 2, 2021, the Company closed the transaction and issued 410,523 common shares to the sellers and related parties, with such amount subject to adjustment at closing for cash settlement of certain transaction related expenses and other terms and conditions of the agreement.
On July 6, 2021, the Company announced the appointment of Rudolph “Rudy” Cline-Thomas and Lori Conkling to its Board of Directors, subject to customary exchange approval.
On June 17, 2021 the Company announced that a final short form base shelf prospectus (with the securities regulators in each province of Canada, except for the Province of Québec) previously filed on March 25, 2021 (the “Shelf Prospectus”), and a corresponding shelf registration statement on Form F-10 (the “Registration Statement” and, together with the Shelf Prospectus, the “Engine Shelf”) has been deemed effective by the U.S. Securities and Exchange Commission (“SEC”).
The prospectus and registration statement allows the Company to offer up to $150 million of common shares, preference shares, warrants, subscription receipts, debt securities, units, or any combination thereof (“Securities”) during the 25-month period that the shelf prospectus is effective. The specific terms of any offering of Securities, including the use of proceeds from any offering, will be set forth in a shelf prospectus supplement.
The Company also started trading on the Nasdaq Global Market (“Nasdaq”) on June 17, 2021 under the ticker symbol “GAME.” The Company will also retain its listing on the TSX Venture exchange under the symbol “GAME.”
Additional information
This MD&A, as well as additional information regarding Engine Media, has been filed electronically with the Canadian securities regulators through the System for Electronic Document Analysis and Retrieval (“SEDAR”) and may be accessed through SEDAR’s website at www.sedar.com.
| Page 46 of 46 |
Exhibit 99.3
FORM 52-109FV2
CERTIFICATION OF INTERIM FILINGS
VENTURE ISSUER BASIC CERTIFICATE
I, Louis Schwartz, Chief Executive Officer of Engine Media Holdings, Inc., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Engine Media Holdings, Inc. (the “issuer”) for the interim period ended May 31, 2021. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| Date: | July 26, 2021 |
| ‘Louis Schwartz’ | |
| Louis Schwartz | |
| Chief Executive Officer |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
| i) | controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| ii) | a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Exhibit 99.4
FORM 52-109FV2
CERTIFICATION OF INTERIM FILINGS
VENTURE ISSUER BASIC CERTIFICATE
I, Michael Munoz, Chief Financial Officer of Engine Media Holdings, Inc., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Engine Media Holdings, Inc. (the “issuer”) for the interim period ended May 31, 2021. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| Date: | July 26, 2021 |
| ‘Michael Munoz’ | |
Michael Munoz |
|
| Chief Financial Officer |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
| i) | controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| ii) | a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.